I had the privilege of bringing the Prime Source Forum in Hong Kong (April 1-2, 2008) to a close.  As in the previous year, the Forum had senior executives from companies based in the Americas, Europe, and Asia, as well as government officials and highly respected academics. The discussions covered wide-ranging topics, and with the variety of people on the panels, there was also some amount of difference in opinion.

8 issues came to my mind as key themes for the global industry, as I was preparing my closing speech, and I thought that those who were not present at the event may also be interested in these. Some of these are views expressed in the panel discussions, others are just my musings. Hopefully thinking through these 8 things can improve the fortunes of the industry around the world (8 being a lucky number in China). 

1. Costs vs Prices – Rising costs were a big theme, running through the various panels.  Chinese labour costs, power costs, the increasing costs of fuel, new costs of doing business (compliance) – more cost heads were discussed than I can possibly remember.

Once upon a time prices used to go up when costs went up. But that has not been the case for at least the last couple of decades. Even as costs have climbed, retail prices and FOBs have remained steady or even declined. Clearly, the question is whether this is a sustainable situation – though consumers and retailers have been winners so far, how long can factories and labour be squeezed without impacting the very survival of the business?

The interesting contrast is luxury goods, where production costs have come down due to outsourcing and manufacturing in low labour cost countries. (So even in that area, prices and costs don’t show a correlation!)

2. Where next? – Dr. William Fung (Li & Fung) clearly struck a note with most of the audience in his opening keynote address, as he tackled the BIG question: with costs significantly rising in China, and the risks of a concentrated sourcing basket, which other countries could companies look to. According to him, “within the next 3 years, the follow-up country to China is…China”.

After all, which other country’s industry has poured billions of dollars in up-to-date manufacturing capacity and supply chain infrastructure? So even while the Chinese government’s move to push factories to the north and west of China may be producing results as quickly as they may have hoped, buyers clearly have limited options on the table.

Certainly, other countries such as India and its neighbours, as well as Indonesia, Vietnam etc. are an option, but a lot more needs to be pushed through.  According to Dr. Fung, India shows higher product differentiation and development skills that make it a logical place for buyers to invest time and energy.

I believe that what buyers did in China 15-20 years ago, is probably what is needed in South Asia and other supply bases now.  At that time, China had neither the production capacity nor the supply chain and other infrastructure that it has now. But intrepid buyers opened the Chinese frontier and created the demand pipeline which pulled the supply base up. Would retailers have a similar focus on the other supply bases today, to balance their exposure in China? This is not a new question – in fact, in the last few years it has come up several times when there has been a hurdle or barrier to cross with China (quotas, SARS etc.).  But now, with the Chinese government also wanting to turn the industry’s focus away from low-value products such as clothing and textiles, could this be the opportunity for buyers to push their initiatives in other countries ahead?

3. Fashion is about change…but are we prepared for change? – Speed to market is not just about producing quickly and shipping fast, it is about responding to change in the market. The very nature of the fashion business is “change”.

Though benchmarks of 2-week turnaround and even 2-day turnaround exist, by and large the industry works over a lead time of months rather than weeks. We know that it is humanly impossible for even the best buyer to predict with 100% accuracy as to what will sell 6-12 months in the future.

So the answer, especially in these uncertain market conditions, is to take product decisions closer to the sell-date, rather than try and forecast accurately. The only way to reduce the risk is to respond to market needs, rather than to try and predict what the market will need in the future.

4. Neither free nor fair! – There was enormous debate (although mostly in polite terms), about whether free trade and fair trade meant anything.  

What is very clear is that trade barriers continue to exist. Even as import tariffs fall, non-tariff barriers remain in place. While thousands and tens of thousands of people around the world are actively working to bring trade barriers down in all countries, within their own markets there are others who are actively lobbying to keep trade barriers up, or to erect new ones.  A very interesting perspective shared by one of the panelists was that to a protectionist, “protectionism” isn’t a dirty word! Such a person will have a clear justification for keeping or putting up trade barriers.

So while the vision is that of free trade between nations, we are probably some way off from that.

5. CSR & compliance pressures – “Compliance pressures” are here to stay. Yet, even after years of debate and discussion, it is evident that there are wide gaps between the perceptions of the various players.

Ever since the industrial revolution in the 1800s, talk of more humane conditions in factories has been prevalent. It took European and American companies decades (at the very least) to move up health & safety and labour standards. However, the industries in the current supply countries do not have that luxury any more, since the pressure on prominent brands and the risk to their image is too high – whether you like it or not, compliance standards are being and will be pushed through aggressively.

The key is to understand how to do it most efficiently, and a critical element in getting there would be to have a set of common standards and database of audits and certifications.

However, let’s not underestimate the challenge in getting diverse interests and competitors to agree to sign on to common standards, and to share information about their suppliers.

6. Consolidation (?) – Consolidation may be a model among mature retailers and mature suppliers, but there is enough organic growth in the market to attract and sustain smaller companies, especially in the case of the “emerging economies”.

Developing markets are breeding grounds for new businesses, each of which feels that they can be the next big thing, and in such an environment, being acquired by another company is the farthest thought from the management’s mind.

Another factor against consolidation on the supply end, comes from the inherent development-oriented nature of fashion products – excellent and innovative product development is not the privilege of large companies, and the cost of entry remains low. So we should question the logic of viewing consolidation as an unstoppable juggernaut.

7. Vertical Integration / Control (between suppliers, brands and retailers) – When companies sit across the negotiating table, they are clearly vying to gain the most margin. Retailers are closest to the consumer, and they have the most margin. The downside is that they also bear the most risk or markdown. So when manufacturers look at becoming brands, and brands look at becoming retailers, they need to keep in mind, there is a cost to moving downstream, even with the extra margin being available.

Over the last few decades retailers have also tried to grow their private label to gain extra margin (in effect, to replace some of their suppliers) – but there is a cost to doing that as well. It is not as simple as just stripping out an intermediary’s cost, since the product development and sourcing operation still needs to be managed.

Vertical integration is the holy grail – perfect vertical integration is what people wish for, but it’s impossible to achieve. The best one can hope for is as much vertical control as possible over the chain from raw material to consumer.

8. Victims of our own success – We treat globalisation as a new phenomenon – the fact is that many thousands of years ago, the Egyptian civilization was trading with the Indus Valley civilization, the Chinese and the Romans had discovered each other way before US department store buyers landed in Hong Kong and Korea.

As Nayan Chanda describes in his excellent book – Bound Together – traders, preachers, adventurers and warriors have created bridges across continents for tens of thousands of years. So retailers and importers in the west, are only following in the footsteps of those pioneers, albeit helped by the communications and travel revolution in the last 30 years.

However, lately, companies’ business models are victims of their own success.

Too much has been outsourced too far. Where earlier, buyer and supplier were next to each other, today there is a physical and cultural distances between them, that sometimes seems impossible to bridge. Where earlier, a buyer and designer could pop around the corner to the pattern room to check the fit, and discuss the quality with the factory, today they sit at opposite ends of the earth, and work in a phase difference of day and night.

The costs related to bringing the skills back certainly are prohibitively high. But clearly bridges do need to be built.

Recreating or transferring the skills that have been lost, or are being lost in the US and Europe is absolutely vital for the industry to survive profitably.

Through training & education, through more frequent travel, through internships and gaining work experience in each other’s environment, or through technology, buyers and suppliers need to invest in reaching something of the sort of understanding and close collaboration that used to exist when buyers and suppliers lived in the same city.

A lot to chew on, and many unanswered questions, which I am sure will bring hundreds of industry executives together again next April at Prime Source Forum 2009 in Hong Kong.

Prime Source Forum (Hong Kong) has become the ‘must attend’ annual event for the apparel industry, offering senior executives from all over the world the chance to meet and discuss current challenges and opportunities with their peers, providing also a meeting place where competitors speak freely to each other in the knowledge that many major issues can be resolved only through mutual understanding and common solutions. More than 50 senior executives from 14 countries will lead the discussions ranging over the challenges and opportunities confronting the industry in today’s changing economic and political environment.

The event will be prefaced on 31 March with industry workshops.

The main event will be opened by the Keynote address – “The World May Be Flat But the Terrain is Rough: Global Sourcing in The Next Three Years” – by Dr William Fung, Group Managing Director, Li & Fung Limited.

Devangshu Dutta, chief executive of Third Eyesight, will be moderating the panel on the emergence of brands as retailers in their own right, and the change this is creating in developed and developing markets. The panel will include

• Shuman Chatterjee, CEO, Levi Strauss (India) Pvt Ltd

• Edward A Gribbin, President, Alvanon Consulting Group, Alvanon, Inc

• So Hee Kim, Editor in Chief, Malcom Bridge, Korea

• Carlo Rivetti, Member of the Board of SMI-ATI, President, Sportswear Company, Italy

• Fernando Urrea, President, Leonisa S.A., Columbia

• Fritz Winans, Senior Vice President – Corporate, Global Manufacturing/ Sourcing, Liz Claiborne Inc

Devangshu Dutta will also deliver the closing summary at the event.

For more details on the event, including registration information, please visit the event website: http://www.primesourceforum.com/

Many people I know treat shopping centres or malls as a new phenomenon, a progressive development of recent times or a modern blot on the traditional cityscape (depending on your point of view).

However, Grand Bazaar (Istanbul, Turkey) is the earliest known mall, with the original structures built in 1464, with additions and embellishments later.

In India, if one were to include open arcades, Chandni Chowk in Delhi is reported to have opened around 1650, with its speciality shopping streets. (Of course, more traditional bazaars have been around many thousands of years around the world.)

But even if one were to get more “traditional” about the definition of a mall, possibly India’s first mall was founded in the hottest city in the country then, Kolkata (New Market) in 1874.

In more recent history, Delhi’s municipal pride, the air-conditioned underground Palika Bazar was a novelty in the mid-1980s, while Bangalore’s Brigade Road saw several early pioneers with their shopping arcades in the late 1980s.

Then came the mall-mania beginning with Ansal Plaza in Delhi and Crossroads in Mumbai. Everyone started looking at malls as the new goldmine, being pushed ahead by a “retail boom”.

The early stage of any such gold rush usually has several experiments missing their mark, which is what has happened with the hundreds of mall-experiments that have been launched in the last 7-8 years.

Some of the significant and common issues are starting to be addressed, but many others remain.

Catchment-Based Planning is Needed

The top-most issue in my mind is “oversupply”. While this may sound absurd to many people, given the low figures quoted for modern retail, I am referring to the over-concentration of malls in a small geography. If 8-10 malls open 4-5 million sq. ft. of shopping in a catchment that can only support 1 million sq. ft., everyone knows that some of the malls will fail. But everyone also believes that their mall will succeed (otherwise, they would obviously not have invested in the mall).

What happens to the malls that fail? Depending on the design of the building, many of them can be repurposed into office space – another area where a lot of investment is still needed. So in the end, actually, most people win, one way or the other. Yet, there will be some losers. Does anyone “plan” on being one?

The second key issue in my mind has been that mall developers have been thinking as “property developers” rather than retail space managers. The successful shopping centre operators worldwide (now also in India), are actually as concerned about what and who is occupying that space as a retailer would be. They are concerned about the composition of the catchment, the shopping patterns, the volume of sales, the shopping experience. Therefore, the tenant mixes as well as adjacencies are factored into the earliest stages of planning the shopping centres.

In fact, if I were to identify the most critical operational problem for many of the malls, it is the lack of relevance to catchment and, therefore, the low conversion of footfall into sales for the tenants other than the food-courts. Customer flow planning within the mall is another factor that can make a tremendous impact on the success and failure of the tenant stores.

Once you start looking at these factors during the planning of a mall, another obvious aspect that jumps out is “differentiation”. Currently, there is little to choose from between malls (other than possibly the anchor store). However, with more clarity in terms of the target audience, the potential strategies for differentiation also become clearer. The visitors also become segmented accordingly, and there is a natural benefit to the tenants occupying the mall.

If, as a mall operator, you want to be in business for long, and also develop other properties in the future, the success of your tenants is probably the most critical driving factor for your business.

Integration into the Urbanscape

When we gauge malls from the perspective of integrating within the urban landscape, there are obviously some glaring errors being made. Instead of aesthetic design that reflects the heritage and culture of the location and its surroundings, or some other inspirational source for the architect, most malls that have come up are concrete and glass boxes.

Beyond the looks, some of the malls are a victim of their own success. They attract more crowds during the peak than they have planned for. Not only does the parking prove to be inadequate, there is no holding capacity for cars entering or exiting the mall. The result is a traffic nightmare – not just for general public, but even for the visitors to the mall. Someone who has spent 45 minutes stuck in a jam waiting to get into the parking of a mall will certainly not be in the best frame of mind to buy merchandise at the stores occupying the mall.

Some of the problems lie outside the mall-developer’s control – for instance land costs are a major driver of the cost of the project (and, therefore, the lease costs to the tenants), and land is a commodity which is independent. Real estate is available within the cities as brown-field sites (former industrial locations), but the regulations are convoluted and the strings are in the hands of too many different departments of the government (city, state and central). This needs joint creative thinking on the part of developers, the government and the public, if our cities are to develop in a more sane fashion than they have in the past.

Similarly, land deals are still not clean enough for foreign investors to be comfortable participating in many developments. This obviously is holding back a tremendous source of capital and domain expertise that could contribute to the growth of this sector.

Many other operational issues exist – manpower, systems, health & safety – some of them can be managed or controlled by the mall developers, and it is a question of time (and of their gaining experience). Other issues are more in the domain of the government, and need a visionary push to make “urban renewal” a true mission.

New Life for the Cities

In my opinion, one of the most interesting areas which would be in the joint interest of almost all parties (that I can think of) is the possibility of revitalizing the high streets and community markets, and reinventing them as the true centres of shopping.

Many of our markets are rotting (a strong word, but let me say it anyway). The individual stores are owned by individual owners who are not all equally capable of maintaining the same look and feel throughout. The infrastructure in and around the markets are owned or managed by several different agencies. To make matters worse, there is often no cohesiveness and no synergy in the interests of most of the members of the market association. None of these individually have the power or the mandate to recreate the shopping centre. But what if they could get together and take the help of a re-developer?

If an example is needed, New Delhi’s Connaught Place provides the example of one stage of redevelopment. Connaught Place had lost its pre-eminent position as a shopping centre, due to the spread of Delhi’s population and the new local markets that had come up. Further disruption was caused by the construction by Delhi Metro. But DMRC has reconstructed an “improved” centre, and the Metro connectivity has made the customers come back into CP, as it is affectionately known in Delhi.

There are clearly many such opportunities around India’s cities. These need to be looked at as a commercial opportunity for all concerned (revenue for the redeveloper, better sales for the store owners / tenants, more tax revenue for the government from additional sales and consumption). But it is also a broader social opportunity to breathe a new life into our cities, and to make them proud beacons of a growing India.

It would be a mission that would truly prove the worth of shopping centre developers, urban planners, regulators and the retailers themselves.
Any takers?

It’s quite amazing that “store productivity” doesn’t grab the attention of most people in the retail trade in India, despite the fact that real estate costs are riding an all-time high. It’s become quite typical for rentals to range 20-25% of sales, and in many cases even higher than that. (In those instances, a retailer could only hope to make money out of illegitimate activity or illegal merchandise, which is not part of the business plan of anyone I know!)

Many brands will (and possibly can) justify paying absurdly high rentals with the rationale that in the store portfolio, some locations will never make money, but are needed as marquee locations for “must-have” visibility. This can work if you do have a balanced store portfolio. The question is whether the low-rent locations actually have the capability to generate enough margin to support the unprofitable locations.

While some of the rentals are comparable to expensive real estate in the developed markets, gross margins in India are typically thinner than in Europe, USA etc., reducing the spread a retailer has for its operational expenses. Add to the mix over-estimation of consumer demand, and the scenario looks even gloomier.

In this context, to my mind, each store needs to be made as productive as it can be. There needs to be fairly sharp focus on store performance and category performance data.

However, in the last 18-months or so, conversations with Indian and international brands and retailers operating in the Indian market, showed that topline (sales) growth and new store openings were the focus for most retailers (even till a few weeks ago).  Most branded suppliers have also shown unprecedented sales growth on the back of new store openings – their own exclusive stores, as well as new sites being added by department store chains carrying their brand.

For instance, in March 2007, one (new) brand said that their business plan called for 50 stores by the end of 2007, and 100 by the end of 2008.

When sales growth can be achieved just by opening more new boxes (stores), productivity and efficiency don’t appear to be important.

I believe 2008 will see a change in management priorities. I don’t think the unnamed brand above will open its 100 stores. It is very likely that they will want their already opened stores to work harder.

Productivity is obviously linked to store operations (people, process, technology) – when the merchandise and the customer are both in the store, you need to make sure the two are matched quickly and effectively, and that there is a focus on conversion, average transaction values and efficient inventory management. But that is only one part of the story.

Support functions, such as marketing, supply chain, buying and merchandising have a huge role to play as well.

Category management, efficient and responsive supply chains, optimising store-footprint and catchment to ensure maximum walk-ins … these are some of the issues I believe top management needs to look at carefully in the coming 24 months.

If you are in a senior management position in a retail business, what are your priorities this year?

From a simple tower to human-sized figures of cartoon characters – we’ve seen a whole range of creative expression using a simple plastic brick. (Well, to be accurate, a wide variety of plastic bricks – but all developed around the same principle.)

An icon in a child’s world, the LEGO ® brick has just turned 50-years young.

According to the company, “there are actually more than 900 million different ways of combining six eight-stud bricks of the same colour.” Ample room for creativity!

The company itself is about 75 years old, and was named LEGO after the founder Ole Kirk Christiansen put two Danish words together – “Leg godt” – meaning “play well”.

The company has had its ups and downs, the brand has been extended to include other product / service offerings, and the group also includes other brands today. But the power of the simple LEGO brick lives on, even in this wired (or increasingly wireless) world.

The time the brand has been around just re-emphasised the point about consistency and time being very important building blocks for brands.

“Play Well!”