- Growth of the middle classes in emerging countries
- Rise of fast fashion
- Products with high price elasticity of demand
- Sector heavily impacted by the COVID-19 crisis
- Price structure very sensitive to swings in commodity prices
The textile-clothing sector is composed of two branches: textiles on the one hand and clothing on the other. Although linked, these two branches are subject to different constraints and mechanisms. Textiles provide inputs to the clothing market, mainly cotton for natural fibres and polyester for synthetic fibres.
The textile-clothing sector, which had already been in difficulty for the past decade, suffered from containment measures and the closure of non-essential stores in many countries, in an attempt to curtail the COVID-19 pandemic. Weak consumer demand has led to lower revenue for brands and stores, which have had to reduce, postpone or even withdraw clothing orders for the textile industries, impairing or cancelling imports of textile fibres such as cotton. While a pound of cotton was trading at USD 0.71 on 9 January 2020, it plummeted to USD 0.48 on 1 April, the lowest level since 2008, and then recovered to USD 0.59 on 15 June 2020. Numerous factory closures and production line incidents (as it is harder to supply inputs) occurred in China, Pakistan, India, Bangladesh and Vietnam. These countries account for 70% of world cotton consumption, according to the Australian Bureau of Agricultural and Resource Economics and Sciences (ABARES), which expects a 14% drop in world cotton consumption in 2019-2020 compared to the previous season.
This supply and demand shock has led to a deterioration in the cash flow of companies in the sector, job losses and even bankruptcies, as was the case of the British group Oasis and Warehouse in April 2020. The business consulting company McKinsey estimates that a third of the companies in the sector will not survive in the 12 to 18 months following the outbreak of the crisis.
Some trends observed before the crisis are now exacerbated because of the measures taken to counter the pandemic such as the closure of physical sales outlets. Companies that have been able to adapt by collaborating with companies specialized in online sales, or by developing this service internally for their customers, will be the least impacted by the crisis since lockdown measures have led to a significant expansion of e-commerce, which was already underway before the crisis.
In 2018, global online sales of clothing and footwear accounted for 16% of total sales, compared to 10% in 2012. The development of e-commerce has been accompanied by a shift in demand from Europe and the United States (U.S.) to Asia-Pacific, where 62.6% of online sales occur.
Sector Economic Insights
COVID-19 implications, short- and medium-term prospects
The clothing market is very sensitive to changes in economic conditions. Coface forecasts a 4.4% decline of global GDP in 2020, following global economic growth of 3.2% and 2.5% in 2018 and 2019, respectively. The main garment consuming markets, notably the advanced economies and China, will experience a very sharp slowdown of economic activity in 2020 (-6.8% vs. 1.7% in 2019 for advanced economies and 1% vs. 6.1% for China). Furthermore, despite an expected rebound of activity in 2021 in most countries, the GDP of major advanced economies would remain below 2019 levels (-2.4% for the U.S., and -2.8% for the Eurozone, according to Coface). In many countries that have taken strict containment measures against COVID-19, clothing stores have been closed, as they are not essential businesses. McKinsey expects revenues of the global apparel and footwear industry to decline by 27-30% in 2020 compared to 2019, and to increase by 2-4% in 2021 compared to 2019. Sales in the textile-clothing sector in the European Union are expected to drop by a half in 2020. In this climate of uncertainty, where consumers prefer precautionary savings and focus on essential goods, online sales have not been able to offset the losses caused by the closure of physical stores. Online sales have declined by 15-20% in China, 5-20% in Europe and 30-40% in the U.S., according to McKinsey.
The textile-clothing sector is highly globalized. Production chains have been disrupted by the crisis. The peak of the epidemic in China led to commodity (such as cotton) and input shortages because some factories supplying the sector have had to shut down, penalizing manufacturing industries worldwide, particularly in Latin America and East Africa, which are highly dependent on Chinese raw materials. Afterwards, as the epicentre moved to Europe and then to the U.S., factories in many countries were closed, to prevent the virus from circulating in the workplace.
Due to a lack of orders, many companies are unable to pay salaries to their employees and are forced to lay off employees. In Vietnam, where economic growth was one of the strongest in Asia (6.5% in 2019, according to Coface), between 400,000 and 600,000 people (out of 2.8 million) have lost their jobs in the sector according to the Vietnam Textile and Apparel association.
Cotton production and consumption forecasts, and evolution of cotton prices
Demand for fibre is unlikely to return to pre-COVID-19 levels in the short-term, as orders are declining due to the drop in consumption because of the recession, inventories of unsold goods and fibres not used by manufacturers. The Australian Bureau of Agricultural and Resource Economics and Sciences (ABARES) expects world cotton consumption to increase by 8.4% in 2020-2021, which will still be 7% below the 2018-2019 level. ABARES forecasts an average price of USD 0.63 per pound for 2020/2021, a decrease of 12% compared to the previous season.
World cotton production is expected to fall by 2.8% in 2020-2021 because of a 5.5% drop in plantations caused by the anticipation of the fall in cotton prices in recent years.
Government restrictions to block the spread of COVID-19 in many countries and the interruption of textile production entail an increase in world cotton stocks (22 million tonnes by the end of 2020-2021, up 4.7 million tonnes since the beginning of 2019-2020).
ABARES expects an increase of 3% in world cotton trade in 2020/2021, thanks to an increase in manufacturing activity in importing countries such as China, Vietnam, Bangladesh, Turkey and Indonesia.
Increase in the use of synthetic fibres compared to natural fibres
The textile-clothing sector is evolving because of various factors. First, the use of synthetic fibres (mainly polyester) is increasing, to the detriment of natural fibres such as cotton. Indeed, polyester has several advantages over cotton: its production requires less water and no pesticides. It is also easier to handle and mix with other fibres, and its production is less subject to climatic hazards. Moreover, low oil prices keep the cost of synthetic fibres low. There is an incentive to substitute cotton and wool with these synthetic fibres. Finally, the substantial development of ecological natural fibres is worth mentioning, driven by consumers’ growing environmental concerns.
Relocation of textile factories in low-cost countries
Textile manufacturing, especially low value-added manufacturing, is shifting from China (which dominates textile manufacturing worldwide) to other economies with lower production costs like Vietnam, India, Bangladesh or Ethiopia. China's share in global textile exports decreased from 38.3% to 29.1% between 2015 and 2020, according to Fitch Solutions. This trend, recently exacerbated by trade tensions between the U.S. and China, is expected to continue, as the rise in Chinese wages will increase production costs. Textile industries, which change collections very regularly, have an incentive to set up factories in countries where wages are lower. According to a New York University study, in 2019, the minimum monthly wage in Ethiopia was USD 26 compared to USD 326.
Demand is shifting from Europe and the US to Asia
As demand for clothing from Asia (mainly China) grows, the importance of Europe and North America in this sector is declining. Accordingly, sales of clothing products outside North America and Europe equalled sales in these regions in 2018, and are expected to reach 55% of total world sales of clothing products in 2025.
The Asia-Pacific region (Vietnam, Philippines, Indonesia, Malaysia, Thailand and Singapore) is very attractive for the apparel sector, especially since the share of young population - among which digital has an important and growing role - is significant. The three largest e-commerce websites in this region (Lazada, Shopee and Tokopedia) have seen the gross value of their merchandise sales increase sevenfold between 2015 and 2018. The luxury industry is also affected by the shift in activity in the sector: China generated 90% of growth in the luxury sector in 2019, accounting for 35% of purchases according to Bain & Company, the international strategy and management-consulting firm. Another important transformation in the clothing market is the growing importance of fast fashion, particularly in advanced economies and China. The term refers to a strategy used by brands, which consists in changing their clothing collections very quickly in order to stimulate and increase the frequency of consumer purchases. A direct consequence of this evolution is the shorter lifespan of clothes, which are now kept for half as long compared to ten years ago.
- Cotton crop year worldwide starts on August 1 and ends on July 31 of the following year.
- The economies defined here as "advanced" are Europe, the United States, Japan, Australia and New Zealand.
Last update : August 2020