la fashion report summary final 020116

CIT Group and CFA P a g e | 1 Fashion Industry Profile 2016

Industries that serve consumers get grouped

into two categories. The first group they call

“consumer staples.” This includes everyday

spending on essentials – food, beverages,

soaps and cosmetics.

Apparel is NOT included in staples!

Clothing design, and the industries that

manufacture or distribute it, end up in a

second category called “consumer

discretionary.”

In this group, industries that serve consumers

rely upon the discretionary, or extra, income

earned by consumers. The reason for apparel’s place as a

discretionary purchase, and not a staple, is that apparel is

considered an aspirational commodity. Other products in the

discretionary goods group include automobiles, home

furnishings, and consumer electronics.


Clothes are cheaper; financing is not

necessary! Knowledge of fabric design and the

assembly involved in fashion creations are

easier to master and move than are the large,

fixed capital expenditures involved in an auto

plant, or making sectional sofas, or assembling

HDTVs. Manufacturing processes for apparel

require smaller machines.

This allows the location of apparel

manufacturing to be footloose. In other words,

apparel manufacturers feel free to find the

most convenient place on the globe to move,

where labor costs are in line for the producer,

where speed-to-market is a benefit, and

where there is a “cluster” of industry

participants.

People buy clothing to express their unique tastes, to show others their aspirations in life.

Clothing outgrew its essential demands long, long ago.


Many “trendsetters” live and work in the Los

Angeles area. These include our celebrities,

models, actors and actresses, notable

executives, and designers. Online social media

is a core tool trendsetters use to touch others

globally. People tap into this “aspiration” mode

every day. It is global in its reach, but

entrenched in Southern California.


Extended chains of apparel manufacturing production lift developing economies by introducing machines, assembly floors, and organized training to the unexposed masses. The more skilled create an extended value chain of contractors and sub-contractors.

In the 19th century, organized apparel making was introduced in England. In the 1870s, it moved west to capitalize on the U.S. immigrant pool on the East Coast.1 A century later, apparel manufacturing shifted to the West Coast, and then moved across the Pacific to employing the masses in China. Today, supply chains can extend to all corners of the globe; such as Bangladesh, Nicaragua, Vietnam, and the Dominican Republic.

Los Angeles, with its proximity to lower-cost Mexico and the Pacific Rim countries, all with a migrating pool of skilled workers, has always been a natural fit for textile making and cut-and-sew manufacturing; a distinction it holds to this day.

1During the 1870s, the value of garments produced in New York City increased six-fold. By 1880, New York produced more garments than its four closest urban competitors combined. In 1900, the value and output of the clothing trade was three times that of the city's second-largest industry, sugar refining. New York's function as America's culture and fashion center also helped the garment industry by providing constantly changing styles and new demand. In 1910, 70% of the nation's women's clothing and 40% of the men's was produced in the City. – Lower East Side Tenement Museum, Tenement Encyclopedia, Chapter Six: Garment Industry


The twin ports of Los Angeles and Long Beach,

and the major air and sea and trucking lanes,

form this region’s essential commercial

backbone. Trade and transport logistics tie the

global aspiration-setting process in L.A. to its

affordable global clothing supply chains.

The synergy of online aspiration setting, a

footloose manufacturing mix, and

international trade logistics in one place—

these three lock the Los Angeles region in as

an enduring fashion design center. This Pacific

coastal region will remain a dominant apparel

manufacturing and fashion aspiration center

in the United States and beyond.

This 2016 Los Angeles area fashion report shows you how it happens.


Creativity

• An extraordinary L.A. creative cluster sits

atop all other industries. The creativity in

the region results from having 12 times

more film and video editors than the

national average; 12 times the media and

communication workers; 12 times the

makeup artists and theatrical performers;

more than 10 times the fabric and

apparel patternmakers; and nearly eight

times the fashion designers. (Bureau of

Labor Statistics, May 2014).

• Constant sun and easy living inspire the

enduring popularity of L.A.-based design.

This “L.A. Style” is propagated by the media’s obsession with Hollywood.

Numbers

• L.A. brands and a constant influx of new designer names command a premium. A

“Designed in L.A.” or “Made in the U.S.A.” label commands a prestige factor. 75% of U.S.

consumers would pay up to a 9% premium for it (Harris Interactive Survey, March 2014).


• L.A., with deep strength in entertainment and design, can maintain its competitive

advantage in product design and marketing through global licensing. This is an important

revenue-generating tactic, with an average royalty rate of 5% of sales (LIMA, 2014).

• E-commerce and social media swiftly reshaped global aspiration-setting. The shift to e-

commerce is 7.2% for the U.S. overall, but in apparel the shift has been faster, reaching 15%

of retail sales or more.

Dynamics

• In L.A., Internet-only apparel retail is already common. Another movement is underway

called “Clicks-to-Bricks.”

• Computer technology also helps L.A.’s designers and manufacturers stay competitive by

shortening product cycles and reducing costs. 3D fitting, 3D printing, and virtual reality are

here.

• The L.A. textile industry’s advantage? – There is great design, the ability to diversify product

lines, and vertical operations, all in one area. Profitable L.A.-based textile processes involve

many layers of expertise, speed, and a willingness to try new things.


Geography and a marketable fashion

statement are a powerful combination. $43B+

in apparel imports enters our ports. Local

companies capture $17.8B in revenues. $6.9B

(1/3) flows to local workers. (From USA Trade

Online, Hoover’s, and estimates we develop

inside this report.)

Front-end job growth looks solid. In May 2014,

4,130 fashion designers were employed in L.A.

with another 520 working in Orange County.

Two years prior, 3,770 fashion designers

worked in L.A. That’s fashion designer growth

around 9% over two years (+4.5 a year)

(Bureau of Labor Statistics, Occupational

Employment Statistics).

In this up cycle, L.A. added the most establishments and jobs at operating wholesale firms.

Wholesaling apparel wages remain a strong spot at $24 an hour, though earnings have settled

back the last couple years, tracking along with apparel import prices. This global industry has

sustainable reasons for a permanent place in the region, with a well-paid employment base.


From 2012 to 2013, apparel manufacturing added 3,596 net jobs (42,483 to 46,439; a 7.7%

rise). Cut-and-sew apparel jobs offer $12.50 to $14.50 an hour. This is above current California

and federal minimum wage rates (Bureau of Labor Statistics).

L.A. back-end fashion businesses are doing better (+6.3% y/y) than national trends. Catching

the data is difficult because apparel-related jobs fall outside the data “catch-all” of

manufacturing, textiles, and wholesalers.

Location quotient data show L.A. women’s clothing manufacturers scored an incredible 17.2 LQ

(location quotient – meaning this sub-industry has 17 times the usual concentration in L.A. vs.

the nation). Apparel contractors scored a 13.3; wholesale apparel had a 5.1; textile and fabric

finishing had a 4.1 (Clustermapping.us).

Sophisticated L.A. assembly operations work closely with designers and fill low-volume, quick-

turn orders. These command much higher prices. Hence, higher profit margins are in place.

Sending such orders to offshore factories is not economical, in terms of time and operational

procedures.

The L.A. apparel industry of today has greatly improved working conditions from the apparel

industry of 10 years ago through self- and government monitoring. In contrast, the “second

migration” to low-wage countries – from China to places like Cambodia or Bangladesh –

created a backlash from the consumer due to a lack of worker safeguards.

Entrepreneurs can start a business in the L.A. region – easily and quickly. All they need is

capital.

Total L.A. fashion back-end employment impact sums to 212,923 jobs. That’s a cluster!


Textile and Apparel Five-County Metro • L.A. Customs District Imports $43+ billion • Company Revenues $17.8+ billion • Worker Incomes $6.9+ billion

L.A. Pay • Fashion Designers $35 an hour • Wholesalers (Importers) $23 to $24 an hour • Apparel and Textile Workers $12 to $15 an hour

Job Counts Apparel, Textile & Wholesale (2013) • SoCal Workers 102,311 (2013 +6.3% y/y) • L.A. Metro Workers (includes Anaheim) 99,230 • N.Y.C. Workers 69,555 • SoCal Wholesalers 48,842 • Apparel Mfg. 46,439 • Textile Mfg. 6,799

Independents 8,995 • Fashion Designers 4,130 in L.A., 520 in OC (May 2014, +4.5% y/y) • Cosmetics Workers 5,917 • Jewelry Workers 8,810 • Footwear Workers 5,117 • L.A. Knitting Machines 2,000 • Centers for Higher Education 20 • SoCal Establishments 11,000 • Overall Fashion Jobs 135,800 • Apparel Direct & Indirect Jobs 213,923

Proportion of U.S. Jobs Located in Southland in 2013 • Apparel Manufacturing 42% • Wholesaling (Importers) 24% • Textile Mills 6%

L.A. County Companies with $1 Million or More in Revenues in 2015 • Textile Mills & Apparel Manufacturing 640 • Wholesaling (Importers) 892


72.2%

35.2% 25.9% 22.2%

13.0% 11.1% 9.3%

0%10%20%30%40%50%60%70%80%

Women’s Juniors Men’s Children’s Activewear Other Denim

What Is Your Product Category?

In October 2015, the California Fashion Association (CFA) and CIT Group jointly launched the

inaugural L.A. apparel industry survey. It garnered 54 responses to 17 questions.

Background

Prominent L.A.-based apparel manufacturers spoke.

They selected women’s apparel (72%) as their prominent product category, followed by juniors

(35%), men’s (26%), and children’s (22%). Denim and activewear products came in around 10%

each.

The size of companies varied from over 1000 employees to one-employee sole proprietors. The

statistical mode – 18 responses – fell between 20 and 50 employees.


It’s a battle-hardened group of firms.

In terms of years in business, 16 responses fell between 20 and 30 years.

The majority of companies (32 of 54) have more than 20 years of experience. One has been in

business in L.A. for 62 years. Another just opened its doors last year.

Hard-earned lessons from the point of view of senior executives get shared.

Their firms have survived a huge variety of adverse market environments: the NAFTA Free

Trade Agreement of 1994 and the financial crisis of 2008 among them.

Then, they positioned operations for the current period of social media-led growth.

0-4 Years, 6%

5-9 Years, 15%

10-14 Years, 6%

15-19 Years, 15%

20+ Years, 59%

How Many Years Has Your Company Been in Business?


When asked where their goods are manufactured, 83% (4 out of 5) said internationally (48%) or

in combination with domestic production (35%). Sole domestic sourcing tallied 17%.

Half of firms heavily depend on global licensing. 37% described themselves as branded apparel

licensors/owners of trademarks. 11% said they were licensees. 22% were private-label

manufacturers.

Domestically 17%

International 48%

Combination of the two

35%

Where Are Your Goods Manufactured?


Compelling Obstacles and Successful Strategies

Retail consolidation (31%) and wages (24%) top the list of the biggest obstacles to revenue

expansion in 2016 and 2017, followed by consumer apathy (17%). Logistics (7%) and regulations

(6%) didn’t resonate. A substantial 15% chose “other.”

Below are some comments from the respondents:

� Combination of wages and regulations � None. Opportunity only. � Stores closing � Soft retail � Combo of retail consolidation and buying patterns changing

When asked what they saw as the most innovative technology for the future of the apparel industry, a whopping 54% said “social media.” This is followed by 24% that said integrated systems between manufacturers and retailers, and 13% that said either 3D fitting or 3D printing.

Retail Consolidation, 31%

Wages, 24% Consumer Apathy,

17%

Other (please specify),

15%

Logistics Challenges, 7%

Regulations, 6% Media Attention, 0%

Industry-wide, What is the Biggest Obstacle to Revenue Expansion for L.A. Apparel Companies in 2016 and 2017?


Industry-wide, what is the biggest growth opportunity for LA apparel companies in 2016 and

2017?

The Internet played a role in over half of responses. Online/Offline “Clicks-to-Bricks” business

models garnered 35% of responses. Online-only got 22%. New entrepreneurial concepts (19%)

came in a close third place. Export opportunities (11%) and off-price retailing (7%) wrap it up.

When asked about the most important step these executives will take to make their L.A. fashion

business more profitable in 2016 and 2017, 35% cited that they will broaden their product lines.

Social Media, 54%

Integrated Systems Between

Manufacturer and Retailer,

24%

3D Fitting, 9%

Other (Please Specify), 5%

3D Printing, 4% Universal

Measurement for Tech Pack Development,

4%

What Is the Most Innovative Technology for the Future of the Apparel Industry?

Online/Offline 35%

Online only 22%

New Entrepreneurial

Concepts 19%

Export Opportunities

11%

Off-price Retailing 7%

Other (Please Specify)

6%

Industry-wide, What is the Biggest Growth Opportunity for L.A. Apparel Companies in 2016 and 2017?


22% will re-evaluate sourcing opportunities. 20% will change their business models. A very high

19% chose “other.”

Below are some of their responses:

� A combination of sourcing, changes to one of our divisions, continuing to expand � e-commerce, and controlling MD$ (marketing dollars) � Advertising and marketing � Re-evaluate sourcing opportunity and broaden the product line � We are moving out of state due to wages and regulations � Increase marketing � Do more profitable business � Control costs, expand high-margin divisions, and build drop-ship abilities � Pursue retail opportunities � Increase sales

Which factors would negatively impact your businesses in 2016 and 2017?

47% said the cost of doing business. 43% said retail consolidation. 34% said product viability at

retail/competition concerned them. Consumer apathy garnered 25%.

The Value of L.A.

What keeps their fashion business in the L.A. area?

47% answered access to L.A. ports. 37% said access to fashion designers. 31% said fast fashion.

20% said access to local suppliers. A whopping 35% chose “other,” many of which may be

reflected in comments about having a preference for living in the area.


Here are some of their responses:

� Too old to move to a better business climate. � Employees. � Customers like American-made, and we can turn clothes quickly. We like to oversee and

control production. But minimum wage threatens our ability to compete. � Production. QC is best done in person. � Infrastructure, vertical setup. � It’s home. � Fast to market and control of quality. � We are very flexible in a specialty market. � It’s the best place to live. � No desire to relocate. � Personal preference.

¾ Surprise! —2% (just 1 responder) chose “Access to Hollywood Celebrities”.

When asked how the apparel and textile industries benefit from being in L.A., 53% said the

Pacific Rim location mattered, and an equal 53% said L.A. industry cluster advantages.

Other often-cited responses included 39% said L.A.’s image (39%) and entrepreneurial

opportunities (33%) mattered.


Which of the following proposed policy decisions would help operations the most?

� 47% would create tax incentives for job creation of “new hires”. � 27% would raise the small-business tax exemption from $500K to $1M. � 18% would eliminate the gross receipts tax. � 8% would include a three-month “training wage” level, to encourage businesses to hire

inexperienced workers.

47% for tax incentives for “new hires” versus 8% for a 3-month “training wage”? That suggests

an important insight. Keep starting wages higher for new workers. But directly compensate

apparel-manufacturing businesses for training them.

27% in favor of a small-business tax exemption over 18% in favor of eliminating the gross

receipts tax shares? That’s another insight. Target small businesses under the most financial

stress. That may work better. The diffuse revenue tax breaks that benefit firms regardless of

size, and outside this industry, may be less effective to get growth.


What countries will apparel and textile producers source from in 2016 and 2017?

Perhaps unsurprisingly, China leads the field (37%), followed by Vietnam (15%) and India.

Mexico and the United States each got 9%.

Italy, Peru, Indonesia, Cambodia, Burma, and Bangladesh came next, in that order.

1 1 1 1 1 1 1 1 1 1

2 2

3 3 3

4 9 9

12 15

37

0 10 20 30 40

CanadaHonduras

PhilippinesSouth Korea

TaiwanThailandAll OverEurope

NicaraguaNot Sure

BangladeshBurma

CambodiaIndonesia

PeruItaly

MexicoUSA

IndiaVietnam

China

From Which Countries Do You Plan to Source Apparel and Textile Production in 2016 and 2017? (List the Top Three)


While fewer people answered this question, China’s lead shrinks, but it’s still dominant, with 29

responses. Vietnam and the United States got seven. Mexico and India got two. Nicaragua and

Cambodia got one vote.

1

1

1

1

2

2

2

2

7

7

29

0 5 10 15 20 25 30

Asia

Cambodia

Nicaragua

No idea…

At Some Point N. Africa, Africa

Mexico

India

Not Sure

USA

Vietnam

China

What Country Will Be the Most Important Source of Production for the Apparel and Textile Industries

in 2017 and Beyond?


Shifting to marketing, respondents were asked what “Designed in L.A.” marketing strategy

would work best. A whopping 55% said “social media.” 22% chose “none of the above.” 12%

chose traditional advertising. 6% chose trade shows.

Conclusion—What New Marketing Innovations Will Have the Greatest Impact on the L.A.

Fashion Industry?

That answer couldn’t be more clear—social media by a mile!

Think blogger-sponsored e-commerce, social media in its next phase, social media buzz and

direct-to-market, Snapchat, selling on the Internet, possible fashion blogs, and digital

technology.

Other ideas – Pay attention to new lines and L.A.-based manufacturers. Collaboration for Omni-

channel partners with retailers looks promising. Innovative product designs help.

Famous brands, events like trade shows, and managing L.A. perceptions matter, too.

Social media 55% None of the

above 23%

Advertising 12%

Trade shows 6%

Other (please specify)

4%

Which “Designed in L.A.” Marketing Strategy Would Best Work for Your Company?


Written by John J. Blank PhD, Chief Equity Strategist at Zacks

John Blank earned a PhD in economics from MIT. Currently, Dr. Blank is the editor of “The

International Trader” at Zacks and Chief Equity Strategist. He was the author and lead

economist for the 2011 and 2014 Los Angeles Area Fashion Industry Profiles. The first was done

while serving as Deputy Chief Economist of the Los Angeles Economic Development Corp. This

2016 report is a two-year update of the 2014 report. He lives near the beach in Los Angeles, CA

and wrote this report there.

The California Fashion Association (CFA) is a non-profit organization established to provide

information for business expansion and growth to the apparel and textile industry of California.

The international mission of the CFA is to define the industry’s economic impact, and to outline

it global opportunities.

CIT Commercial Services

CIT Commercial Services is one of the nation's leading providers of factoring and

financing to the apparel industry. CIT tailors financial solutions that help companies

of all sizes increase sales, improve cash flow, reduce operating expenses, and

eliminate customer credit losses. CIT serves apparel companies ranging in size from

$2 million to $1 billion in annual sales that sell to a broad range of public and private

retailers, wholesalers and distributors across the nation and abroad. CIT's internet-

based platform provides clients with real-time credit approvals and comprehensive

accounts receivable information.

To learn more, visit cit.com/commercialservices.

http://www.cit.com/products-and-services/trade-finance/index.htm


The California Fashion Association (CFA)

The California Fashion Association was organized in 1995, as a non-profit public

benefit 501(c)(6) Corporation. 20 years ago, the CFA was established to provide information for

the expansion and growth to the apparel and textile industry in California. The CFA is the forum

organized to address the issues of concern to our industry. Manufacturers, suppliers,

educational institutions, allied associations, and all apparel-related businesses benefit.

To learn more, visit www.calfashion.org.

Disclaimer: The opinions, statement, and information that appear in this report are solely those

of Dr. John J. Blank. They do not necessarily reflect the views or outlook of CIT. CIT does not

endorse or certify the accuracy of such opinions, statements, and information. This report is

also not to be construed as investment advice provided by Zacks Investment Research.

To pass on any comments or media inquiries, please contact us at [email protected] and 213-

688-6290 or [email protected] and 213-248-5899.

http://www.calfashion.org/

mailto:[email protected]

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