GFP First Quarter 2013 Update

Executive Summary.

Following the tepid growth in the US economy (only 2.4% in the first quarter), US shoe sales slowed in the first quarter of 2013, a downward shift after many quarters of performance better than the overall economy.

US shoe inventories are up sharply in the first quarter as imports increased by 9.4% on a pair’s basis.

The shoe sales outlook for the rest of 2013 is not encouraging as the economy will likely perform in slow motion for all of 2013, as government policies foster uncertainty and force escalating costs on the private sector, crimping job growth and discouraging consumer spending.

In the first quarter of 2013, China captured 83.7% of the US market on a pair’s basis, down from 85% in the same quarter of 2012, despite an increase in China shipments to the US of nearly 8% on a pair’s basis, and similar growth in leather shoe shipments.

Vietnam, Indonesia and Cambodia made large gains in the US, especially in the sports shoe sector, during the first quarter of 2013, while a whole host of countries upped their leather shoe shipments to the US in the quarter.

The overall market for leather items in the US grew by 6.3% on a value basis in the first quarter, led by stronger sales of leather shoes and apparel.

Full year import data for the 27 countries of the EU reveals stark weakness in the shoe sector – shoe imports fell by 10% on a pairs basis, with China down 12%, and only Indonesia (up 11%) and Cambodia (up 4%) were in the black among all supply countries. There is no good news on the horizon in Europe as nearly all countries are in recession again.

US Business January –March 2013Overview.

The US economy remains in the doldrums – GDP growth in the first quarter was 2.4%, up from 1.4 % in the last quarter of 2012, but far below the 4% or more growth rate necessary to make any dent in the 7.5% unemployment rate.

The outlook for the rest of 2013 is not too good.

The US government fiscal deficit is improving due to higher taxes and reduced spending (the so-called ‘sequestration’) -- both drags on growth—as well as to the modest GDP growth and to a mysterious slowdown in health care spending (a huge driver of federal spending).

Reduced government spending should, over time, allow more private sector investment, growth and jobs.

Despite less government spending,the continued uncertainty on taxes and mandatory private sector health care costs under ObamaCare, as well as the weak direction of the economy is holding back business investment and consumer spending (especially among middle and lower income folks who are worried about employment, retirement, etc.).

On the plus side, spending by upper income consumers remains robust, and there is a gradual improvement in housing sales.

Footwear Sales.After many quarters of the shoe business outperforming the economy, the early results for 2013 for the sector are not encouraging.

Retail was mostly sluggish with market leaders like DSW showing a 2.4% store for store decline, Genesco reporting a 2.0% decline, and Famous footwear reported a slight 1.1% plus on a same store basis. Only athletic giant, Footlocker, was able to post a respectable plus 5.2% same store result.

Nike continues its great run with a 10% increase, while rival adidas was up only 1.0% (owing mostly to the weak performance of its Reebok division). Both figures are for their global businesses but reflect only a month of 2013.

In the women’s sector, even red hot leader, Steve Madden, could muster only a 4.9% increase after many quarters of double digit performances, while Brown Shoe’s brands were in the red once again, this time by 2.9%. The all gender sports and fashion house at Sketchers bucked the trend scoring a 28% sales increase, albeit against drastically weak numbers for the same period in 2012 when it was still reeling from the ‘Shape Ups’ collapse.

As noted, businesses like the US department stores that cater to upper income customers continue to have strong sales. Industry leader, Macy’s, which accounts for about 40% of all US department store sales and which has the third largest shoe business in the US (after Footlocker and Wal-mart), reported a very respectable same store sales increase of 3.8% storewide for the quarter (department stores do not break out shoe sales separately). Nordstroms, where shoe sales are more than 20% of its total sales, was up 2.7% on a same store basis store wide for the quarter. Dillards, which caters to more middle level consumers, had only a 1.0% same store gain storewide for the first quarter.

On the mass market side, Wal-mart reported same store sales storewide down 1.4% for the first quarter, while Target was down 0.6% on the same basis. Neither breaks out shoe sales separately, but there is little doubt that they were also lackluster. Again, the pain from poor job growth, lagging business investment (like in commercial construction), and higher fuel prices, is having a negative impact on retailers catering to lower income customers.

Footwear Suppliers.

Overview.US imports of footwear in the first quarter of 2013 were ahead of the same period in 2012 by 9.4% in pairs, 10.5% in value, reflecting a 3.2% increase in average unit value.

The strong import growth no doubt reflects the confident outlook that the sector had for 2013 business when these orders were placed in 2012 – optimism that so far is not showing up at retail.

China continues to lose market share, especially in the sports sector as Vietnam, Indonesia and Cambodia reported sharp gains in the first quarter.

Most of the market share shifting is due to higher costs in China.

However, in the first quarter of 2013, China’s prices were nearly flat while those in Vietnam and Indonesia were up 2.2% and 3.9% respectively – perhaps signaling a slowdown in source shifting.

China.The largest shoe supplier to the US reported a 7.6% pair gain for the first quarter of 2013, capturing 83.7% market share (down from 85% share in the same period in 2012). Overall, it sent $4.3 billion to the US in the first quarter of 2013 up by nearly 8% over 2012, with average prices almost unchanged reflecting a 0.4% increase.

China’s shipments in pairs were more than 10 times the volume of its closest competitor, Vietnam, and more than 20 times that of it second closest rival, Indonesia.

China’s shipments of leather upper shoes to the US were up smartly in the first quarter of 2013 – up 7.2% in pairs and 7.0% in value.

China was also up in plastic footwear for the quarter.

Athletic (including outdoor items) was the one category that was down, as lower costs and large investment in production continue to drive big gains in Vietnam and Indonesia, and now also in Cambodia.

Overall economic growth in China seems fragile – GDP growth on an annual basis fell to 7.7% in the first quarter of 2013 down from 7.9% at the end of 2012.

While inflation remains tame at 2.4% this year, government seems to be running out of productive elixirs.

It is trying to stem housing inflation especially in top tier cities while pushing out more credit to avoid a stall in the economy and to encourage consumer spending and non-housing business investment.

Some might say the China government has its foot on the accelerator and the brake at the same time – rarely a successful formula.

A good bet is that growth will slow more in 2013 and that the high percentage of GDP attributable to investment – an unsustainable level of near 50% -- will likely not come down much. Investment, including that in housing, is really the only lever of growth that the government can ramp up by decree. Moreover, it is especially near to the hearts of local government all over China whose main source of revenue is land sales and leases.

It is also not likely that the plan to ‘rebalance’ the China economy by increasing the consumer segment beyond its current 35% will gain much traction. If GDP growth slides, consumers are likely to worry about employment and the future, and defer purchases.

With the uncertainty on the growth front, the sharply lower yen/dollar ratio, and increasing use of the Yuan to settle cross border transactions (and less buildup of foreign reserves), it seems that there will be very slow, if any, appreciation of the RMB vs. the US dollar for the rest of the year.

Vietnam.This sports shoe specialist, registered impressive gains in its shipments to the US in the first quarter of 2013.

Pairs were up almost 23%, while value soared up 25% with average unit value nearly flat with a 2.2% increase.

In addition to the sport shoe increases, there were also gains in plastic footwear. As noted previously, this is mostly for Payless and its one key supplier in the country and is not likely to be a trend, as the limited workforce and tight and expensive land options make shoe sector expansion a daunting challenge.

Indonesia.This is pretty much the same story as Vietnam – huge increase in sport shoes. Total pairs sent to the US were up 34%, with value up 40% and average unit value up 3.9%.

There is also increased interest in plastic footwear in this country but the level of investment in this area is still limited. China remains the leader in this sector despite its higher people costs, owing to its vastly superior shoe making and general infrastructure and its incomparable supply chain.

Others.As noted in previous reports, the big news is the diffusion of sourcing by US buyers to venues other than China, most often in sports shoes (as detailed above) but also in leather footwear. Despite shipping 7.2% more pair of leather shoes to the US in the first quarter of 2013 compared to the same period in 2012, China’s market share of leather shoes fell to 67.8% in the quarter, down from its 71% leather pair market share for all of 2012.

In short, the US market for leather shoes is growing faster than China’s leather shoe shipments to the US, as other countries take more of the growth for themselves.

Most other major leather shoe suppliers to the US reported large percentage increases in pairs of leather shoes sent to the US in the first quarter of 2013 – Vietnam up 32%, Indonesia up 35%, India up 12%, Dominican Republic up 17%, Mexico up 19%, Brazil up 7%, Spain up 36%, and Portugal up 33%.

There seems little doubt that the diversification trend in the sourcing of leather shoes by US buyers will continue for the rest of this year.

EU Footwear Suppliers.

Data for full year 2012 confirms our previous analysis – local consumption of footwear in the European Union is weak and getting weaker. With the EU now in a ‘double dip’ recession and no end in sight for its fiscal and monetary messes, it is clear that the shoe market is in for more heavy weather. With imports accounting for some 87% of all pair sold in the EU, the import figures tell the tale with real clarity.

Overall shoe imports for 2012 fell by 10.4% to 2,287.5 million pair with losses on a pair basis reported by nearly all the leaders – China down 12%, Vietnam down 0.1%, India down 14.6%, Tunisia down 13%, Brazil down 16%, Bangladesh down 9%, Bosnia down 11%, and Thailand down 28%.

The few winners on a pair’s basis for the year were Indonesia up 11% and Cambodia up 4%.

One reason why shoe sales are down in the EU is that average unit value of imports were up sharply in 2012 – overall up 15%, China up 17%, Vietnam up 15%, Indonesia up 19%, India up 4%, Cambodia up 6%, among the leaders.

One bright spot for the EU shoe sector is its exports to countries outside the EU. On a pair’s basis, exports grew in 2012 by 11% to some 217.0 million pair, led by Italy with some 43.0 million pair.

US and China Imports of Leather Goods, January-March 2013 in millions of US dollars

US Total Imports US Imports from China

Footwear.During the first quarter of 2013, US imports of leather shoes were up by nearly 11% overall on a value basis and about the same 11% on a pair’s basis.

China accounted for 69% of total leather pairs and 60% of value imported into the US in the first quarter of 2013. Again, China’s market shareswere down in the first quarter of 2013 compared to the same period in 2012 in both pairs (71.5%) and value (62.5%).

Vietnam accounted for 10.2% of the value of US imports of leather shoes in the first quarter of 2013, up from an 8.4% market share in the same quarter of 2012.

Apparel.Overall, US leather apparel imports for the first quarter of 2013 increased by 23% in value. China enjoyed a 24% increase and dominates the categorywith a 40% market share. Large gains were also registered by Pakistan, India, Turkey, and Indonesia.

Gloves.US imports of leather gloves increased by 9% in the first quarter of 2013. China maintained its domination of the sector with a 72% market share, the same as in the first quarter of 2012. It increased its shipments by 10% in 2013. India also increased its shipments in the period up 48%, capturing a 12% market share.

Other.US imports of belts, bags, etc. fell by 13% in the first quarter of 2013. China, with a 57% market share (down from its 63% market share in the same period in 2012), reported a decline of 22% in the period compared to last year. India, France and Italy had gains for the quarter in 2013.

Finished and Semi Finished Leather. Shipments here decreased by 11% in the quarter. Nearly all suppliers, including Mexico with a 72% market share, reported decreases for the period. This likely reflects a reduction in demand for leather seating in the auto sector.

Overall.The small gain of 6% for the total value of imports of leather products into the US in the first quarter of 2013 was mostly due to big gains in leather shoes and garments.

Enclosures.

1. US Footwear Imports Jan-Mar 2013

2. US Footwear Retail/Brand First Quarter 2013

3. US Department Stores First Quarter 2013

4. EU Footwear Imports 2012

Peter T. Mangione, Global Footwear Partnerships LLC, Washington, DC, May 29, 2013