CBI Channels and Segments: Footwear Sector

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1 CBI Channels and Segments: Footwear Sector CBI Market Intelligence Product Factsheet Cloves in Germany 1

2 Introduction The European footwear sector is showing signs of stabilisation. The market appears to regrouping itself after several years of recession. The emerging overall picture is different than it was before. Price and turnover times still tend to be leading, but quality and durability, sustainability and responsible production are gaining ground. Outsourcing is being replaced by re-sourcing. Traditional sales channels are on shifting sand. The Internet is becoming an important sales channel for footwear. Traditional retailers failing to keep in step with this change are losing market share. Pressure on payment terms is another development affecting the whole chain. These market conditions offer developing country exporters exciting opportunities, but the line between profit and risk is thin. Footwear Market Channels Figure 1 offers an overview of the market channels on the EU/EFTA market for footwear. Figure 1: EU footwear market channels Developing country European market Market segment Factory Asia trader EU trader Consumer high level Retailer/ Brand Consumer mid level Consumer low level The thickness of the arrow indicates the importance of trade flow for exporters from DCs: Low High Two major trends affecting the market channels 1. Developing direct business Some suppliers are stepping forward in the supply chain The Internet is making the world a lot smaller. Supply chain transparency is increasing and profit margins are open to both suppliers and buyers. Buyers tend to want to control profits and efficiency up and down the supply chain. On the other hand, however, manufacturers are increasingly taking things into their own hands by developing direct business. While some (European) buyers are opening retail stores in Asia, Asia-based factories are developing their own business outlets in EU countries. They are creating and distributing new brands and opening their own stores. Selling directly to consumers means they can take the full profit margin. An added advantage of this differentiation is that these suppliers are spreading their risk. Rather than depending entirely on production, they are moving into sales and distribution. In the process, they are developing a greater sensitivity to market developments in the process, which means they can recognise trends at an earlier stage and incorporate them in their production. This development also introduces some complications. One is that relationships with buyers can become strained: a buyer who has actively helped a supplier develop business may not appreciate that supplier setting up his own outlets in Europe. CBI Market Intelligence CBI Channels and Segments for Footwear 2

3 2. Reducing production time & labour Efficiency and new technology In today s footwear market, the ability to minimise the time you need to produce an entire order is a clear USP. Your ability as a supplier to accelerate your product s journey up the supply chain means your buyers can respond to trends and developments more rapidly. There are several ways in which you can do this as a developing country exporter: Optimise the efficiency in your manufacturing process; Integrate new technologies in your manufacturing process. Efficiency measures Efficiency can make the difference between profit and loss; poor efficiency, ultimately, can threaten your continuity. As a producer, you must always view your own production processes with a critical eye. Also, you must stay in touch with new developments in efficiency enhancement. Here are a few examples of both non-technological and technological means of improvements: More and more manufacturers are replacing traditional, linear production lines with U-shaped production lines. Among other advantages, this approach allows you to deploy your staff more flexibly, for instance, in response to volume changes. Many producers have been amazed at the efficiency improvements they achieved with simple measures, such as regulating staff use of mobile phones and maintaining higher levels of hygiene and order in the workplace. New technology Numerous new technologies are cutting production times, such as laser pattern cutting machines, operated either manually or fully automatically. Rising wages and a growing shortage of trained workers means reducing labour in the production process is good for your business. There is also a disadvantage: the new technologies needed for these changes require substantial investments. Tips: We have already looked at some of the ways in which you can reduce your manufacturing time and get your product to buyers more quickly. There are, of course, many other measures you might consider. Here are some more examples: Improve your inventory control systems, for instance by forecasting order demand more accurately. Facilitate data communication with your buyers by implementing electronic data interchange. Implement web-based product order facilities, so buyers can check the status of their orders. Implement Radio frequency identification (RFID) together with Electronic Product Codes (EPCs) to optimise the logistic processes in your supply chain. If you have improved your processes, remember to let your buyers know. CBI Market Intelligence CBI Channels and Segments for Footwear 3

4 Developing new outsoles at your own risk & expense As we have seen, every penny you can save in your production process either through technical changes or improved efficiency can make the difference between landing an order or losing it. The focus of buyers on minimum cost and risk levels has other implications, too. One is that buyers are always on the lookout for manufacturers capable and willing to develop new outsoles at their own expense and risk. If you can do this on a regular basis, customers will be more likely to want to work with you. Making this USP will offer you an opportunity as a supplier to change your role in the supply chain. Against this backdrop, it is important to be aware of the different ways in which footwear can be manufactured. There are two basic components: the outsole; and the upper. The outsole In the footwear industry, the outsole of a shoe is considered its main characteristic. This means buyers are always looking for new outsole variations. Outsoles are commonly divided into three categories: 1. Cemented soles, made of rubber, thermoplastic rubber (TPR) or Phylon (foam) 2. Injected soles, made of polyurethane (PU) or plastic polyvinyl chloride (PVC) 3. Vulcanised soles, made of rubber The cost of a new outsole series Opening a new footwear series will cost a manufacturer an average of 20,000 USD, depending on the number of different sizes the series is to contain. This means that in order to recover the cost, a manufacturer producing a new sole always requires a minimum order number. Example of a vulcanised sole The upper The basic pattern for an upper can be made either from synthetic or natural materials (leather, cotton, canvas). In order to produce a new upper, a manufacturer also requires a minimum order number. However, once the upper has been produced it can be matched with different soles and sold in varying quantities. For a single upper model, a manufacturer will usually require a minimum order number of 1,000. CBI Market Intelligence CBI Channels and Segments for Footwear 4

5 Footwear Market Segments From the point of view of the end consumer, the European footwear market can be divided into the following five segments, each with its own characteristics: Figure 2: Footwear market segmentation HAUTE COUTURE (Dolce & Gabana, Prada, Dior etc) Fashion footwear, leather Specialty stores Emphasis on leather footwear and personal service Small, local retail outlets LUXURY BRANDS (Van Lier, Nike and Adidas high-performance gear a.o.) MIDDLE MARKET (Invito a.o.) MASS MARKET (Deichmann, Scapino a.o.) VOLUME MARKET (Lidl, Primark a.o.) Fashion footwear, emphasis on leather Mid- to high-level casual footwear retailers Price range: medium to high Sports retail, emphasis on sports shoes used for sports and casual wear Footwear combined with clothing to create a total look Examples: Invito, Ziengs, also Nike, Adidas a.o. Examples of mid-level brands: Le coq sportive, Umbro Examples of high-level brands: Nike, Adidas, Puma Sneakers, sandals, slippers, wellingtons, moonboots etc. Low-budget international retailers with aggressive pricing & large volumes Price range: low Examples (among many others): Scapino, Deichmann Many non-footwear outlets sell footwear usually cheap as a byproduct Examples: fuel stations, supermarkets, DIY stores Delivery and order models Footwear fashion is slower to change than apparel The table below shows the most common delivery and order models in the footwear industry. Generally speaking, footwear fashion is slower to change than apparel fashion. Footwear consumer behaviour is characterised by a limited number of buying moments, with a focus on winter and summer footwear. The garment sector has more buying moments, shorter turnover and delivery times and a more rapid and flexible response to new trends. European footwear buyers who wish to follow fast fashion trends do have an option, though: several southern European countries, such as Portugal and Italy, combine good manufacturing with short lead times. The obvious disadvantage is that their prices are higher than those offered by Asia s developing countries, mainly as a result of wage differences. Against the backdrop of the economic recession, therefore, the push towards fast(er) fashion in footwear is limited. As a result of this restriction, the footwear branch tends to be less creative and experimental than the garment sector. The small retailers selling shoes are often multi-brand stores, who cope with trend changes by purchasing little and often : working with easily replaceable low-volume stocks is their way of keeping step with what is fashionable. Table 1: Orders and delivery models in the footwear supply chain Type of retailer Type of product Delivery strategy Medium to large retailers & brands Basic product (with little or no variation in price, look or quality) Continual production & supply Low production cost, high volumes, maximum margins Fashion items Lower volumes More frequent buying moments per year (often 4 moments, with 2 main collections and 2 interim collections) Rapid trend response is often based on short delivery times from southern EU countries (Portugal, Spain, Italy) Small retailers Basic branded product Product range based on a brand whose popularity generates high volumes & multi-brand stores Fashion items Pre-orders consisting of existing collections are placed twice a year Seasonal items can be added throughout the year CBI Market Intelligence CBI Channels and Segments for Footwear 5

6 Choose your market and define your strategy carefully As a developing country supplier seeking to distinguish yourself from other suppliers, you can choose from several strategies. First and foremost, you must determine which market to focus on and which trends and developments characterise it. With this information, you can draw up a profile of your target customer and outline your business strategy. As you can see in Table 1, each of the different segments in the footwear market calls for a different approach to both production and sales. Below we will take a closer look at these differences. Large retailers Large footwear retailers, such as Deichmann, Reno and Humanic, like to have maximum control over the supply chain. This means their strategies usually involve avoiding intermediary players and cutting cost as rigorously as possible. They tend to be heavily involved in the production processes of their suppliers. Add to that their large order volumes and you will understand that these players largely determine the margins of their producers. Their suppliers, in return, tend to be quite dependent on them for business. The advantage is that these retailers are well equipped to effectively manage margins, quality and profits for their suppliers. Also, they can more or less guarantee business. The big disadvantage for suppliers is that their profits are minimised. As far as USPs are concerned: design and fabric sourcing are virtually irrelevant to these buyers they are more interested in efficiency and (production) innovation. Medium-sized retailers Medium-sized retailers do not tend to commit themselves to the kind of volumes that will bind suppliers or facilitate supply chain control. Their main focus is on the link in the supply chain nearest to themselves: the producer of the finished product. In this setup, suppliers are less loyal and the potential for profits is greater. Also, these buyers rely on supplier input in terms of design, development and fabric sourcing. Brands and wholesalers operating in this segment will usually require sample support. This means that as a supplier you must have a sample room in which you can manufacture samples for these customers. Small retailers Small, independent footwear retailers in Europe usually lack the volume needed for placing direct orders in Asia. Service levels are also different in this segment. The right of return, consignment agreements and extended payment terms are fairly common this segment. The upside is that the profit potential is greater here than in any other segment. Suppliers in this segment are often importers who stock these smaller buyers under an independent brand. Tips: If you are a developing country exporter seeking to export to Europe, there are many ways in which you can strengthen your position in the value chain. Here are some suggestions: Before anything, determine your market and define your strategy. Every customer group has its own approach. Make sure you carefully consider the balance between margin and risk. Develop a supply chain that can provide the service levels common to the segment you have chosen and adapt your USP to the segment s demands. Keep close tabs on local and international trends so that you will be able to respond to changing product or service level demands. Team up with another company higher in the value chain to be able to offer varied services. Make your production and distribution processes as transparent as possible. Make your products CR-compliant and give them a story (for instance, about where and how they are made). Update yourself on trade statistics and Unique Selling Points (USPs) of your country. Inform your buyers of the latest fabric and production developments in your country. Inform your buyers of your country s performance and potential in the international arena. Produce footwear for FOB business or offer FOB services. Focus on refining your pre-production services. CBI Market Intelligence CBI Channels and Segments for Footwear 6

7 Annex 1 Text for pop-up sheets Figure 1 Agents/trading companies In footwear, an agent is a player who operates on behalf of a buyer. He is made responsible for selecting manufacturers and supervising the production process. Usually, the buyer will offer him a fixed fee for his involvement. Sometimes the agent also receives payment from the manufacturer (for landing an order). Importers/wholesalers/distributors Importers and wholesalers sell your product to retailers in their own country or region. Importers and wholesalers take ownership and responsibility of the products they buy from you. Their emphasis tends to be on converting trends into collections, developing collections and on the whole process of production, import and delivery. Distributors are a type of intermediary that will purchase products from manufacturers, providing complete marketing services. European manufacturers, or producers A company based in Europe that makes footwear products. A manufacturer may design and manufacture the product himself or be commissioned by a European brand or retailer. Retailers Retailers are the sales channels through which your products reach the end customer, or consumer. Multi-branded concept stores These stores predominantly purchase from preferred suppliers, such as import companies & brands. Smaller multi-brand stores do not have private labels; they do not own production facilities or subcontract production to manufacturers. However, some bigger multi-brand stores have a private brand and sell it alongside the other brands, which they purchase externally. Specialty shops These are shops that follow a certain philosophy and have influence on design and branding. They specialise in a certain product or product line. An example is the Eco/sustainable shop, which sells products that are made from eco materials and/or are made in a sustainable manner. This is a niche. These players always buy from brands/import companies. Private label footwear chains and brands These are specialised chains that sell their own branded footwear, produced by contracted manufacturers or at their own manufacturing sites. This footwear is offered under a private or brand label. Time is a key component for these vertically integrated companies. They can get their products from design to shop in about three months. Also, they benefit from more transparent supply chains and lowers costs. As a supplier, you have to understand footwear trends and be able to produce collections at relatively high speed in order to successfully supply this channel. Single brand footwear Single brand footwear companies, like Nike, Adidas and Puma, have established brand labels at average to very high quality and price levels in the market. Similarities with the private label approaches in their supply chain processes can be found. The brand fashion players who work with average prices are especially flexible in terms of their numbers of collections, lead times and replenishment strategies. The complete responsibility of design, cut and, marketing activities for their brands is also characteristic. For very highlevel footwear, which requires high quality and production flexibility, these players often source mainly in Europe. Department stores Department stores usually sell footwear, offering private branded collections as well as brand-manufactured collections. Some department stores, like Kaufhof in Germany and Galeries Lafayette in France, work primarily with contracted manufacturers and sub-contractors. These are characterised by a wide range of both basic and fashionable footwear at different price and quality levels. Their lead times and logistic processes are often less efficient than those of vertically integrated chains due to their broad assortments. Fast fashion product categories are likely to have processes comparable to those of vertically integrated companies. Hypermarkets and supermarkets CBI Market Intelligence CBI Channels and Segments for Footwear 7

8 Hyper- and supermarkets, such as Carrefour and Intermarché in France and Tesco in the UK, usually offer specific product ranges, such as kids or sports footwear. They tend to offer more basic products. They get their supplies either by purchasing finished products or by sub-contracting a private label. The fashion factor is relatively low in this segment and store deliveries are less frequent than they are in more specialised chains. These players view footwear as a by-product and tend to present it in the context of special, one-off offers. Factory outlets/discounters There is a trend emerging in which leftover supplies are sold in outlet stores. Sometimes, sales take off so well that the outlet stores start doing their own buying. Mail-order companies These online stores that list their products for sale in catalogues or websites for consumers to buy via order forms, telephone or internet order. Examples include Otto, Wehkamp and Quelle. Web shops Web shops also known as online shops or stores, e-shops, e-stores, Internet shop or web stores are shops that sell their products on the Internet. A web shop is a virtual store offering visitors the possibility to browse through its inventory, acquire information about product price, quality and features, select items for buying, pay online through a secure payment processor and provide the data needed for the purchased product to be shipped to the visitor s door. Web shops are gaining ground both in business to consumer (B2C) and business to business (B2B) processes. Street markets These are public markets with individual stalls that sell all sorts of products. Normally they are set up outdoors on certain days of the week, mostly in a street or a market square. Distribution channels Direct channel: The company that manufactures a product sells it directly to the consumer or end user. Example: mail-order companies. Retailer channel: The producer sells to the retailer, and the retailer sells to the consumer. Wholesaler channel: A manufacturer sells to a wholesaler, who sells to a retailer, who sells to the consumer. Often, intermediaries play an active role in this channel. Agent or broker channel: This channel is the most common channel for products imported from developing countries to Europe. The developing country exporter sells to an agent, who sells to a wholesaler or retailer, who finally sells to the consumer or end user. Multiple channel: Two or more channels used to sell products to different types of customers. CBI Market Intelligence CBI Channels and Segments for Footwear 8

9 Annex 2 Text for pop-up sheets Figure 2 High-end /Haute couture Haute couture is (footwear) fashion designed by the world s top designers and made-to-order for private clients, with only one or more fittings. High-end / Prêt-à-porter These are product lines designed by haute couture designers but made available in more sizes and at lower prices than haute couture products. Upper middle Upper middle footwear consists of products designed by lesser known designers and sold in independent specialty shops and luxury department stores. Middle This category consists of single-brand fashion products sold by independent shops, footwear chains, department stores and mail-order companies. Middle-low This segment is made up of mainly private labels sold by clothing chains, independent retailers, department stores and mail-order companies. Low This is the segment for low-price products sold through factory outlets, discounters or hyper- and supermarkets. CBI Market Intelligence CBI Channels and Segments for Footwear 9

10 CBI Market Intelligence P.O. Box AC The Hague The Netherlands This survey was produced for the CBI by Giovanni Beatrice and Stephen Teeuwen with input from various (EU market) Sources, including Scapino, Pwh and Jente Hageman of New World China. Disclaimer CBI market information tools: August 2014

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