Industry risk was front and centre for most of 2020 and is likely to continue well into 2021. With the impact of COVID-19 affecting everything from industry growth rates and international trade policies to the role of technology for remaining competitive, apparel companies have had to adapt to the impact and prepare themselves for a future that is promising to look very different from how it does today.
To understand industry risk, you need to look at the big picture. For companies in the apparel industry, this means reviewing worldwide performance and trying to locate those changes in the operating environment that will lead to new risks. In this article, we will review the types of industry risk and how to identify and begin managing them.
Industry risk differs from other types of risk – for example, operational risk – in that it looks across your entire industry instead of just within or in direct proximity to your specific company. You are looking for trends that are affecting all businesses in your industry as a way of proactively taking action against how they might impact your own. There are three main categories of industry risk:
Structural risk concerns an industry’s operating conditions and the elements that determine it, such as its barriers to entry, level of competition, volume of international trade, degree of government assistance and life cycle. Keeping a pulse on these factors is key to remaining aware of how the environment outside your business is changing and proactively taking action to stem risks from materialising.
Growth risk is revenue-related and acts as a kind of industry health-check. If the industry has a high growth rate, risks will generally be lower given there is strong demand and more opportunities for expansion. If an industry is growing slowly or not at all, the risks will be higher as it will be harder to find and win new business.
Sensitivity risk is determined by analysing the macroeconomic variables relevant to an industry, in this case apparel. These include factors like demographic and consumption changes, adjustments to the global prices for goods and developments in governmental and legislative policy. A high sensitivity indicates the likelihood of instability should the underlying conditions change; whereas a low sensitivity means an industry is stable and resilient and changes may not immediately produce adverse impacts.
Managing industry risk effectively is largely a matter of knowing first where to look, and second what to look for. Let’s review six areas where industry risks might be identified:
As indicated, growth risks can materialise if your industry is showing slow growth or a poor economic outlook. Knowing the sources of the slowdown, say, via industry reports or other reliable research, can help you take appropriate mitigating action. For example, Coface, a trade credit insurance and risk management firm, found that the textile-clothing sector has been struggling with demand being highly sensitive to price fluctuations, the devastating impact of COVID-19 and a pricing structure that is very reactive to changes in commodity costs; information that is important to know for those in the business of producing and selling clothes. Download the full report here.
It is helpful to know the negotiating power of the buyers and suppliers that make up your supply chain. How consolidated is your supply chain? Is there a risk of being taken advantage of or otherwise being disadvantaged when doing business with vendors? This intelligence is important because you want to operate a supply chain where one or another player does not have an inordinate amount of power or influence over others. Taking a few minutes to get a company report on, or check the financial status of your trade partners could go a long way in identifying and mitigating imbalances in negotiating power.
Understanding the apparel industry’s competitive landscape relative to your business is critical for positioning yourself appropriately. For example, you may not want to enter an industry segment that is hyper price competitive or begin operating in a region with high barriers to entry. Technology can also be a key competitive advantage (or disadvantage, if it is not strategically embraced), which we saw as the impact of COVID-19 began to be felt, where tools like 3D virtual sampling became necessary to do business in an environment with limited physical touch-points.
An industry will be considered riskier if customers have readily available and less expensive alternatives to your products. Taking care to evaluate the substitutability of your offerings can help in developing more unique products or transitioning to less generic segments. It can also help you think about other ways to differentiate yourself, say, through your commitment to social or environmental causes or the attractiveness of your branding.
Industry risks can also derive from how complex or burdensome an industry is. Factors such as the stringency of regulatory requirements, high up-front investment costs and intensive research and development can raise an industry’s risk profile. Important to note that these factors can change over time, for example due to technological developments or shifts in regulatory priorities. They can also vary across countries, which is necessary to remain aware of when operating global or even regional supply chains.
How is the apparel industry changing? What are the priorities of consumers, or investors? Staying up to date on the trends affecting the apparel industry is key to assessing their impact on your business specifically. For example, the rise of ESG concerns has made trends like sustainable fashion important strategic indicators for how apparel companies should be operating. It has also raised greater awareness about working conditions, holding manufacturers accountable to standards of excellence in how they run their factories.
The process of managing industry risks begins with understanding your industry through the lens of the areas already discussed. Then it is a matter of thinking through the macro and micro implications for your business and where adjustments can be made to mitigate or avoid the impact of industry risks.
These adjustments might be in terms of your internal processes as a way of improving your operational efficiencies and streamlining oversight. Or they may concern your overall positioning within the industry, in view of circumventing or anticipating certain risks and competing more effectively.
As we begin 2021, keeping a pulse on the factors that comprise the apparel industry’s risk profile will remain an imperative for those companies looking for ways to get or stay ahead.
If you're an apparel company looking for more efficient ways to manage your risk, Serai has recently partnered with industry-leading trade credit insurers to bring you Risk Solutions.