2008 Retail Salmon Sales Price - PowerPoint

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					NRF Sourcing Session
Creating the Future Supplier Base
     in Today’s Environment

            Peter G Brown
              Amy Klaris
        Kurt Salmon Associates
Current Headlines

              “Retailers brace for major
               change”


              “Euro zone retail sales shrink
               for 7th month in December”


              “Saks, Macy’s Discounts Spark
               Vendor Spat After Slump”
 Crisis in Retail
            Biggest quarterly (3Q 2008) drop in consumer
(5.3%)      spending on apparel & shoes in the last 10 years1

            Consecutive quarterly decline in earnings for
  7         retailers2

            Number of store closings expected in first half of
73,000      20093

            Number of textile factory closings projected for
9,000       2009 in China4
         Source: 1. US Department of Labor, KSA analysis 2. Bloomberg.com (excluding except Wal-mart)
                 3. International Council of Shopping Centers 4. Textile Outlook International, Jul-Aug 08
Focus Areas

› Stating the Not-So-Obvious
› Global Trends
› Sourcing Strategies
› Blocking & Tackling
›Q&A
Focus Areas

› Stating the Not-So-Obvious
› Global Trends
› Sourcing Strategies
› Blocking & Tackling
›Q&A
Sources of Consumer Spending
YOY Change ($B)
$500          $446          $459
                                                        $417
                                          $388
$400
                                                 $328
                     $307          $304
    $268                                                              $281
$300

                                                               $180
$200                                                                         $140

$100


  $0
                                                                                    -$72
       1997   1998   1999   2000   2001   2002   2003   2004   2005   2006   2007   2008
($100)
                                   Personal Income Growth
($200)                             New Consumer Credit
                                   Home Equity Extractions
($300)                             Total
 Consumer Expenditure Forecast: 2009-2010
                                                                  Base     Downside
            Categories
                                                                  Case       Case

            › Most durable goods categories (e.g., new
             autos, appliances, home furnishings)
  Highly
            › Non-durable home furnishings                        (9.1%)   (23.3%)
Sensitive
            › Airline flights and other transportation services
            › Most non-durable consumer goods categories
             (e.g., apparel and shoes, non-food CPG
Sensitive    categories, auto parts)                              (3.7%)    (9.0%)
            › Stationary & writing supplies

            › Food at home
Minimally   › Health care & drugs                                 (0.1%)    (0.1%)
Sensitive   › Housing services (e.g., mortgage and rent
             payments, utilities)
               Apparel Inventories Backing Up
                                       Change in Inventory-to-Sales Ratio
                                 (3-month moving average over 10-year average)
               10%

                8%

                6%

                4%
YOY % Change




                2%

                0%

                -2%

                -4%

                -6%
                                                                                                            Department Stores
                -8%
                                                                                                            Other Clothing & Clothing
                                                                                                            Accessories
               -10%
                  1998-Oct 1999-Oct   2000-Oct 2001-Oct 2002-Oct      2003-Oct 2004-Oct 2005-Oct 2006-Oct    2007-Oct 2008-Oct



                                                 Source: Bureau of Economic Analysis, KSA analysis
Apparel Prices Experience First
Deflationary Decade Since 1930s
                Change in Apparel Consumer Price Index
7%             (10-year annual average to May each year)

5%


3%


1%


-1%1924 1930 1936 1942 1948 1954 1960 1966 1972 1978 1984 1990 1996 2002 2008


-3%


-5%


-7%


                         Source: US Department of Labor, KSA analysis
Price Deflation will Likely Continue
              U.S. Apparel Import Price (YOY % Change)
3.5%

3.0%
                                                        Knit Apparel
2.5%                                                    Woven Apparel

2.0%

1.5%

1.0%

0.5%

0.0%
        Jan   Feb   Mar   Apr   May   Jun   Jul   Aug     Sep     Oct
-0.5%

-1.0%
Apparel Imports are Declining for the First
Time Since 2001
U.S. Apparel Import Growth Rate
(2007-2008 YE OCT)       Total U.S. Imports,
                                          -2.7%

                                                                                        ASEAN, 6.1%

                                                                              CAFTA, 2.4%

                                                S. Asia, -0.4%

                                    China, -3.9%

     Mexico, -14.8%

Rest of the World, -
      15.7%

   -20.0%         -15.0%   -10.0%             -5.0%                0.0%          5.0%        10.0%

                            Source: US Census Bureau - OTEXA, KSA analysis;
                            S. Asia: India, Bangladesh, Sri Lanka, Pakistan
    Factory Closings are Effecting Suppliers of
    All Sizes
                                    Number of Active Suppliers to the U.S.
    Supplier Size                                     Oct-07        Oct-08   YOY Change

    Small
                                                      28,950        3,531       -88%
    <50 Shipments

    Medium
                                                       6,578        2,268       -66%
    50-300 Shipments

    Large
                                                         821         471        -43%
    >300 Shipments

    Total                                             22,105        6,270       -83%


Source: Panjiva Data; Active Supplier (shipped in prior 3 months)
Who’s Feeling the Pain ?

› Impact thus far driven by regulatory change:
  • Labor, environmental, lead poisoning, tax incentives
› Consumption decline in early stage
› Toys, footwear. Apparel is next
› Small vendors with little finance capability
› Large vendors who are over-committed
› Outlying factories for larger networks
Focus Areas

› Stating the Not-So-Obvious
› Global Trends
› Sourcing Strategies
› Blocking & Tackling
›Q&A
Sourcing Trends – U.S. Apparel Imports
                         U.S. Apparel Imports (Billions Units)
25

                                                                                                Rest of the World
20                                                                                                         Mexico
                                                                                                                     S. Asia
15
                                                                                                                     CAFTA

10
                                                                                                                     ASEAN

5

                                                                                                                      China
0
 1999   2000        20001           2002            2003           2004            2005           2006              2007   2008*



               Source: US Census Bureau - OTEXA, KSA analysis; 2008* - Projections based on data through Oct 2008
               S. Asia: India, Bangladesh, Sri Lanka, Pakistan
  Retailers are Consolidating Country Base
  Post Quota Era
                   U.S. Apparel Imports (in USD Volume)
                                                                                                    32%    29%
  Rest of                                                                       39%          36%
            41%    43%       44%          45%         46%          45%
the World




  Top 10                                                                                            68%    71%
            59%                                                                 61%          64%
Countries          57%       56%          55%         54%          55%




            1999   2000       2001        2002         2003         2004         2005        2006   2007   2008*
                                                                               Post Quota

                      Source: US Census Bureau - OTEXA, KSA analysis; 2008* - YTD OCT 2008
       Post Quota Era Winners and Losers
                                 Apparel Export to the U.S. (CAGR 2004-2008*)




Source: US Census Bureau - OTEXA, KSA analysis; 2008* - Projections based on data through Oct 2008
The China Question
› The key challenge for sourcing is China’s ability to remain
   globally competitive.


Currency is no longer pegged                                        Government is lowering VAT
to USD and has appreciated                                          rebates for non-strategic
by over 10% over last 2 years                                       industries, including apparel.
with more expected.
                                             Currency    VAT
                                              Labor     Utilities
Average mfg. labor cost are                                         Utilities costs are increasing,
increasing each year and                                            such as water and electricity,
have increased by over 40%                                          due to demand and
in last 4 years.*                                                   environmental protection.



*Source: China National Statistical Bureau
Vendor Base is Shifting Within China
Potential Winners
What new countries will
emerge during this economic
downturn?
› Vietnam
› Bangladesh
› Cambodia
› Indonesia
› India
› Nicaragua
Emerging Views
Geographic
›   China will maintain its dominant position
›   A few other Asian countries form the next tier
     • lower cost regions with adequate infrastructure support (Vietnam, Cambodia,
       India)
Structural
›   Expansion of manufacturing capacity slows dramatically
›   Multi-regional, multi-category major suppliers emerge as important
    strategic suppliers
›   Small suppliers remain, due to low entry barriers
›   Clusters of mill & manufacturing capabilities by product type emerge
Focus Areas

› Restating the Obvious
› Global Trends
› Sourcing Strategies
› Blocking & Tackling
›Q&A
 Strategic Sourcing Models
     Outsourcing            Strategic Sourcing            Mfg. Excellence
Utilize agents and other   Establish relationships     Establish strategic
3rd Parties to source      directly with vendor base   manufacturing
products and manage        and drive sourcing          relationship that provides
vendor base.               decisions based on          engineering and
                           performance and             production planning
                           capability.                 support.
        Rationale                 Rationale                    Rationale
Premium on price and       Direct sourcing provides    Increasing capabilities of
margin or low/diverse      significant cost savings    low cost manufacturers
volumes outweigh           and increased vendor        provides competitive
additional complexity      performance.                cost advantage while
and cost of direct                                     minimizing risk.
sourcing.
 Strategic Sourcing Models
     Outsourcing             Strategic Sourcing             Mfg. Excellence
          Pros                         Pros                        Pros
›Simplified internal        ›Focus resources on          ›Builds unique
 processes                   areas where                  capabilities to develop
›Leverage capabilities of    performance can be           vendors
 external partners           improved                    ›Lowest product costs
›Minimal investment         ›Interaction directly with   ›Strongest link directly
                             Manufacturers.               with Manufacturer
          Cons
                            ›Strong performance
                                       Cons                        Cons
                             focus
›High product cost for      ›Must balance                ›Most difficult to develop
 high volume products        investment with             ›High investment to
›Lack of transparency        developing vendor            develop capabilities
›Outsourcing capabilities    capabilities                ›Need consistent
 adequate but not                                         product categories to
 leading                                                  leverage investment
Focus Areas

› Stating the Not-So-Obvious
› Global Trends
› Sourcing Strategies
› Blocking & Tackling
›Q&A
 Vendor Base Structure
 › Vendors should be grouped into three types
% of Vendor Capacity
     70%                                          Vendor Portfolio
                Disruption Risk:                                                      Too Closed:
                compromises vendor’s                                                  mutual
     60%        market research ability                                               overdependence

                                                                         Strategic Partnerships
     50%                                                                 (2–4 Vendors)
                                                                         20%–30% of Category Volume
     40%

     30%
                                              Special Skills (2–3 Vendors)
     20%                                      7%–15% of Category Volume
                                                                                      Lack Leverage:
     10%                        Opportunistic Vendors (1–3 Vendors)                   insufficient share
                                                                                      of vendor
                                2%–10% of Category Volume
      0%
           0%                   10%                  20%            30%            40%                50%
                                                    % of Category Volume
                                                            Attractive
                       Source: KSA analysis
Vendor Monitoring
› Increased frequency
› Financial position
› Litigation
› Other key customers
Key considerations
› Access to capital
› Qualified resources
› Product categories
› Quality control
› Available capabilities (R&D, technical design)
› Technology Enablers
Keys for Sourcing
› Maintain links from Merchandising/Sales to Sourcing plans
› Consolidate to key suppliers
› Invest time in strategic relationships
› Reinforce collaborative planning with suppliers
› For Major Programs
  • Contingency plans
  • Consider dual sourcing
Focus Areas

› Stating the Not-So-Obvious
› Global Trends
› Sourcing Strategies
› Blocking & Tackling
›Q&A
For more information
Amy Klaris
› acklar@kurtsalmon.com
Peter Brown
› pgb@kurtsalmon.com

				
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