Nearshoring has bumped right up the agenda for many US sporting brands as they look to navigate the issue of rising transport costs and shipping delays on the back of global pandemics and worker shortages. As the sportswear industry is likely to experience negative growth in 2023, a new report from McKinsey & Co explores whether nearshoring is the route to navigating this challenge.
Nearshoring makes sense, in theory at least. For example, the last few decades have seen the apparel sector rely predominantly on China and, more recently, the wider Asia region for its clothing production needs. But the last few years — covid-19, worker shortages, soaring shipping costs — have unveiled the risk embedded within that business model. So making the collection on home turf — onshoring — or at least close enough for a brand to have control over the supply chain — nearshoring — does make sense. Again, in theory.
According to McKinsey & Co’s “Sporting Goods 2023 – The need for resilience in a world in disarray” report, developed in collaboration with the World Federation of the Sporting Goods Industry (WFSGI), the sporting goods sector is about to experience a sharp downturn after rapid growth in the last two years, fuelled by consumer desire for convenience and comfort with many of them working from home.
Rising costs, the looming threat of a larger recession, low consumer confidence and continuing operational challenges are set to create headwinds and companies are looking to embed resilience into their operations by going beyond raising prices to boost productivity and finding the right balance between saving and investment.
During 2022, consumer sentiment improved; companies were placing large orders, both in anticipation of demand and to avoid the supply chain challenges of 2021, and performance in H1 was widely positive.
But with inflation picking up on the back of the Russia-Ukraine war and its impact on energy and raw material costs – thus price increases at product level – consumer sentiment slowed and discretionary spend fell.
While it gave supply chains a chance to recover, it did lead to widespread overstocking. And then in H2, the economic outlook darkened, amid rising concern over geopolitical instability and the trajectory of interest rates — which tightened constraints on both companies and household budgets. The impact of these factors was a significant weakening in industry performance compared with 2021 with a 4-8% sales decline in US in Q1-Q3 2022 versus 2021 across main categories, the report reads.
“This means that 2023 is expected to be a challenging economic environment with continuing subdued consumer sentiment. This will require a holistic approach from sporting goods companies to focus both on preserving demand and building resilience,” reads the report, which identifies four key themes that will shape the industry in 2023:
1. Brand relevance: Sporting goods companies are among the most effective brand builders in the world. As consumer expectations rise and brand relevance deepens, brand building is expected to become more important.
2. Sustainability: Accelerating decarbonisation and scaling circular business models will be key for sporting goods companies to meet their aspirational sustainability targets.
3. Nearshoring: In an era of supply chain disruption, more companies are likely to turn to nearshoring as an element of de-risking and speeding up their supply chain strategies.
4. Investments in the industry: Sporting routes to profitable growth in private investments: The success of sporting goods brands has attracted a wave of private investment. This is especially true for complementary brands, brands with an elevated digital interaction with consumers, and analytics at scale.
Nearshoring will continue to pick up steam as companies look to de-risk and speed up their supply chain strategies, the report authors predict, following an executive survey which reveals 75% of sporting goods companies plan to expand their nearshoring activities by 2025 and 8% are already doing so.
New Balance, as part of its strategy to proudly produce in the US, has committed to five factories in Maine and Massachusetts, the last one opening in March 2022. Evidence of increasing nearshored production is also found in an analysis of footwear manufacturing in the Euro-Mediterranean region, which is expected to see a more than tripling of production within five years.
In addition to being an important diversification and risk mitigation strategy, nearshoring becomes more attractive as sourcing costs from low cost hubs rise. In the US, the discussion is also informed by restrictions on imports of cotton and growth of tariffs on Chinese imports. These themes are reflected in executive cost expectations. The survey finds that in 2021, half of executives in one survey expected cost increases of more than 4%, while 20% expected rises of more than 6%.
However, the report reads: “Despite the cosmetic allure of localised production, nearshoring is not a simple proposition. Indeed, there are multiple operational and strategic challenges in making the transition. US importers shifting their sourcing to Mexico and Latin America report finding it tough to locate suppliers with the right raw materials, production quality, and networks.
“In switching production, companies may take years to match the labour capacity and supplier depth they have in Asia, experts say. In addition, there are potential challenges around culture. Another potential headwind is that automation expectations are often not fully met in the nearshored environment, or are too expensive to implement. These issues have prompted several manufacturers to reconsider their plans to focus on US-based factories and instead form partnerships with facilities in Asia.”
The report outlines some considerations around nearshoring that must be weighed ahead of making a commitment. To reduce the risk inherent in nearshoring, sporting goods companies should analyse a variety of factors at both product and country levels:
The product perspective
1. Lead times: Lead times should be considered on a product basis. For example, a never-out-of-stock product may see unpredictable demand and therefore benefit more than others from in-season replenishment.
2. Risk exposure: To what extent is the product exposed to supply shocks, trade disputes, Covid policies, or other risks to the normal conduct of business, and how dependent is it on Asian manufacturing?
3. The parameters of success: Most brands see speed and flexibility as supportive of nearshoring initiatives. Leading companies thus analyse labour costs and skills requirements, and how they may evolve.
4. Sustainability and greenhouse gas footprint: Partially shifting production to nearby locations with cleaner energy can cut CO2 emissions per unit by 11-14%. Reduced transportation needs are also a factor. Where companies are using large volumes of high-CO2 materials, such as polyester, these calculations become even more relevant
Often companies will need to assess trade-offs between metrics. For example, it may be that regional nearshoring boosts costs by up to 20% for a t-shirt, driven by labour and energy, but reduces lead times by as much as 20 days. The offsetting factors in relation to the latter include faster time to market, with the potential to reduce overstocking, wastage, and the need for promotions. The exact parameters of these judgments will depend on the products involved and relevant economics.
The nearshoring equation may play out differently depending on product characteristics. For example, a simple t-shirt may benefit from nearshoring because of its relatively low labour cost and the ability to quickly adapt to shifts in demand. However, a more complex, less automatable product would see fewer benefits because the adaptations may not be possible, and the high labour cost would make nearshoring more expensive.
Based on this analysis, companies must make nuanced decisions product-by-product on whether the nearshoring equation makes sense.
The country perspective
1. Capacity: Capacity is a function of the relative cost of production and availability of productive resources and labour (or ability to acquire them). Companies need to compare the total landed cost of production in different countries, including manufacturing and transportation of finished goods and raw materials. This will enable them to assess the potential additional cost of nearshoring and compare it with quantified benefits such as greater availability and the impact of sustainability
2. Capability: When it comes to labour, many nearshoring countries do not have the same capacities and capabilities as Asian countries. Individual nearshoring locations need to be analysed to determine whether capabilities are sufficient.
3. Raw materials: Companies should ask whether raw materials are available in the nearshoring location or if they need to be imported. Right now, raw materials are mainly sourced in Asia, so transportation costs and lead times need to be considered. If raw materials continue to be sourced from Asia, the lead time benefit of nearshored production will be reduced.
4. Regulation: Companies should review the regulatory situation and any grants or incentives that may be applicable. These could have a big impact on costs. Additionally, it is crucial to consider the trade environment. Protectionism has increased since Covid, and companies need to carefully consider the rules when assessing sourcing options.
All of these variables should be taken into account as business leaders assess whether to nearshore or not — as well as for which products and to which country. Inevitably, it will make sense to take tradeoffs into account. The report asks: does it make sense to de-risk the supply chain by switching to multi-country production rather than nearshoring or would it be better to cut lead times by nearshoring, which would also enable more accurate demand responsiveness and more streamlined operations? It explains companies that effectively balance these factors will be best placed to make nearshoring decisions for the right reasons and aligned with their strategic objectives.
Will nearshoring form a big part of the sourcing strategy of sporting goods brands in 2023?
For its report, McKinsey consulted several c-suite executives who shared their thoughts on the importance of nearshoring in their sourcing strategies.
Hoa Ly, senior vice president for global sourcing, adidas explained “nearshoring” as a term had become more important in the past three years on the back of the Covid situation, geopolitics, and fear of deglobalisation. But while it is an important element of a good sourcing strategy, Ly says it is not the only one.
“A robust sourcing strategy requires a balance of capability, quality, sustainability, and cost competitiveness. In fact, when we talk about nearshoring, raw material infrastructure and cost competitiveness become big topics.
“I believe many companies will seek to increase the share of their business nearshored, while not massively overhauling the scaled and reliable global supply network, which balances cost, capability, sustainability.”
She adds: “Nearshoring will have a role to play, but I think it needs to be a part of a company’s operating model.”
Ly points out this is a strategy that works well for fast fashion firms whose business model is founded on a belief that fashion is fleeting and the biggest risk to profit comes from discounts.
“In their case, nearshoring works because it is demand-led, starting from clear enterprise-level strategic direction and segmentation of products the consumer is willing to pay a premium for. Speed of nearshored products (albeit at a price premium) allowed fast fashion retailers to bring products to market at full price sell through and the controlled inventories (at times scarcity of products by design) significantly reduced markdowns.
“The sporting goods industry, on the other hand, with its mix of largely wholesale and DTC, first needs to transform the operating model internally, including assortment planning, product design, planning, and supply chain infrastructure (especially upstream inputs from T2 and beyond), to scale nearshoring in a sustainable and value-adding way.”
Where Adidas is concerned, Ly says it has for many years maintained nearshoring and/or local sourcing capabilities, such as China sourcing for the China market, Latin American sourcing for Latam, India for India, Turkey/EMEA sourcing for Europe, and Central Americas sourcing for North America.
“Our experience has been that when the commercial function in the market plays an active role in demand planning and is actively accountable for the nearshoring/local supply base, it generates win-win benefits. On the other hand, the speed factory concept was not successful. We learned that we did not have a strong unique selling point to justify the premium price, and we were very narrowly focused on the specific product construction, which limited the ability to scale and expand.”
On the other hand, Tim Boyle, CEO, Columbia Sportswear Company is not convinced nearshoring is as advantageous as it is claimed to be.
He stated: “Quite frankly, I think the whole nearshoring and logistical advantages are mostly a myth. Making the commercials work is almost impossible. Any advantage you find in logistics has to be so dramatic that it can overcome the cost savings in Asia. Secondly, when you’re talking specifically about outerwear, a big commodity for us, it might have 30 components. The idea that you would somehow be able to marshal those 30 components, which are frankly different in every style, in a fast way, that’s just not going to happen. I would suggest that whatever efforts would have to be put forward to nearshore a complex product category would be better expended with more thought on what the product is going to be, more investigation of market acceptance, and use of the existing established processes.
Meanwhile, Barbara Martin Coppola, CEO, Decathlon, believes it is less about nearshoring and more about right-shoring: “For us, it is about the diversification of production areas and avoidance of dependencies and monopolies. We are rethinking our entire value chain, from the material to the transportation and movement of final goods, not only to de-risk our supply chain but to optimise for sustainability – and we are doing this not alone but with our network of long-standing partners and innovative companies.”
Ultimately, the report’s authors conclude nearshoring should never be an “end in itself”.
“Rather it should be seen as a
mechanism to achieve a specific goal, such as shorter replenishment lead time
for new products where demand is uncertain. Through this focused perspective,
set against a broader supply chain strategy, companies are most likely to make
the right decisions first time.”
By Just Style