New production cycle overtakes the footwear industry

Tirana Times
By Tirana Times April 26, 2019 13:58

New production cycle overtakes the footwear industry

Story Highlights

  • The footwear industry is entering a new production cycle as the international market trends are shifting towards practicality and online purchases. This will require costly technological updates, a more qualified staff and production costs cuts.

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TIRANA, Apr. 22- The footwear industry in our country holds 20 percent of the total Albanian exports, with a value of around 480 million euros a year. However, the expenses are getting diversified, being oriented more in entertainment and traveling, rather than purchasing shoes. For this reason the export sales of this industry fell during the first two months of 2019, and the sector is planning to enter into a new production cycle with higher variety and less quantity produced, but which might initially affect the exports and employment.

One of the paths that most people are decided to spend their money on lately is traveling. And traveling gives one more pleasure and meaningfulness than buying two or three pair of brand shoes. Avoiding luxuries, and dressing modestly and comfortably, is bringing a new trend in the basket of European consumer spending. A new lifestyle is changing the basket of expenditure towards entertainment and world exploration, and in disadvantage to the apparel industry.

This approach has paved the way for new developments in the footwear and clothing industry throughout its chain. The Albanian footwear industry has also become part of these changes, as due to instability, exchange rate fluctuations and domestic policies, it has become more fragile this year. Following a high increase in the last decade, shoe exports this year fell for the first time at 2.3 percent on an annual basis during January-February. Weaknesses began last year when exports lowered the pace. Skender Pashaj, owner to the Fital factory, one of the largest shoe manufacturing in the country, said that demand in the international market has entered a new cycle. He claimed that this situation will cause a kind of transition in the next two years in the “Made in Albania” manufacturing.

Pashaj said the markets have reduced demand and retailers have large stocks, which means less orders for new shoes. Demand is diversifying towards variety of products and in this regard Albania could benefit, but it will take at least two years to make market changes. Pashaj added that Albania could benefit from the new demand, utilizing geographical proximity to Europe and opportunities to produce small amounts and diversity.

Demand change in international markets has put the Albanian producers on the same footsteps. Donika Mici, who through the Donianna company runs the closed cycle for export, says that the apparel industry in our country and specifically the footwear sector, is ahead of a new cycle. While demand in the international market is shrinking, production costs in Albania have increased from higher wages. Mici says that the footwear sector has to cut production costs through a well management of the workforce in order to survive. On the other hand, it must produce for the demand in the middle-to-high band, for consumers with an above-average income. The process requires a change of all technology, but its renewal costs and achieving it requires some mild support from the government.

The shoe manufacturing industry is the most innovative in the sector, as it has updated more quickly with new global trends. Etleva Laro is a young entrepreneur in the sector, directing ProDyn, who has brought a new philosophy to shoe production and export. Unlike other producers that have the main Italian market destination, Laro has secured contracts with overmarket clients over the German market. In two years, the company has employed 1,000 employees and its activity is expanding rapidly.

For the time being, she is not feeling the developments in international markets as she is focused on customer selection and has a production model that provides high quality against low costs. Laro said her strong point is the efficiency of human resources through a specially crafted training bureau. The administration of internal costs and the correctness of German contractors have provided Laro with increased activity.

But manufacturers are in tune that the industry is involved in a new cycle. Mici said that the necessary changes require technology investments, and that Albanian factories should segment production for above-average consumers, as factories now have a specialized workforce for these products. Pashaj on the other hand said that regardless of the difficulties the industry is about to face, the factories should keep up with their production.

 

Dropping exports

After a systematic increase in recent years, the exports of the footwear sector declined by an annual 2 percent in the first two months. The “Made in Albania” shoe exporting generated 78.7 million euros from 81.95 million euros it made in the same period last year, reflecting a decline of 2.3 percent. At the end of 2018, the value of shoe exports reached about 486.8 million euros, rising by only 6.1 percent compared to the previous year. In recent years though, the growth rates of shoe exports were over 10 percent, and in specific years the export marked higher rates. In 2018, shoes accounted for 19.3 percent of total exports from 21.7 percent that was in 2017.

Skender Pashaj, Fital’s factory manager, said that the decline in demand for footwear in global markets is increasing the hardships, and this trend is expected to continue at least in the following year. Pashaj said that a survey showed that shoe purchases per capita have decreased. And the new lifestyle tendency consumers are approaching is practicality.

“The outfit once had a great importance and shoes showed one’s status in society, but this tendency has been fading nowadays,” said Pashaj.

These developments have led to transition across the entire industry chain, from sales to production. Because of these developments, retailers have accumulated stocks and he market is currently overwhelmed in shoes over demand. Consequently, factories have less orders. Pashaj said that this period of the industry adjusting to market demands will last for at least two years.

To cope with this shift in demand, Donika Mici from Doniana plans to reform her work at the plant in terms of productivity growth, making investments in technology. Online trade and population population are bringing new tendencies to shoe production and trading and thus a lot of investments need to be made in order to adapt. Mici said that the industry needs to produce footwear dedicated to the medium and low segment of society.

 

Market diversification is required

Over the past year, 78 percent of footwear produce was exported to the Italian market. Exports to Italy last year increased by 6.1 percent. This high export concentration towards Italy is a double risk for Albania, in case the neighboring country is involved in the crisis. The weakness of Albanian exports to the Italian market has also been criticized by international financial institutions, which recommend diversification of export trade partners from Albanian producers.

Over the past two years the ProDyn factory has been growing at a faster pace than its colleagues in the market, because its destination is Germany. During 2018, shoe exports to Germany reached about 10 million million euros, with a 166 percent increase compared to the previous year. Etleva Laro who runs the company and which destination is Germany, has not felt the crisis arising from the European market demand. She said that Romania and Bulgaria are currently less competitive than Albania, and Germany has shifted production from these countries to other low-cost ones.

“I work with strong German companies like ‘Josef Seibel’, who have no problems with liquidity. Payments are correct and well-defined, and we reflect the same correctness with our employees,” said Laro.

According to data from the Albanian Institute of Statistics (INSTAT), the main destination after Italy of the “Made in Albania” manufactured shoes is Hungary. Exports to this country fell by 12 percent in 2018. The third destination is Spain, with 21.1 million euros worth of exports, or 4 percent of the total exports. Exports to Spain increased by 13 percent last year, mainly due to expansion the company Fital undertook in this market.

 

What the new cycle requires

The new cycle where the shoe production is being introduced to, requires interference in two directions. First, productivity growth and cost reduction in the domestic market, and targeting of production for an above-average clientele. Donika Mici says this move would amortize losses that come from a lower demand. According to her the productivity can increase because Albania already has a specialized workforce ready to deliver a high quality product. She said that if in a process that previously involved seven people, now only one employee can manage to accomplish it. This new approach requires technology investments that cost at least 3 million euros for her factory.

In terms of global markets, Albania has a chance to become a beneficiary, as it best suits the new demand that requires small and fast supplies for which Asian markets are not attractive. As the demand is changing rapidly and retailers are no longer willing to keep stocks, they are not in a position to wait long for transportation from distant countries. In this regard, a shoe, albeit a bit expensive and of the same quality as China, has more interest to be taken from Albania.

Mici also added that meanwhile, Albanian producers should be prepared to offer a more specific product. To achieve this, changes in the way the factory work is managed and in technology are needed. Also, for a closed-loop business like the one she runs, which means finding her own marketplace, one must always be flexible and follow the fast-changing trends, also because of the revolution that online commerce is bringing. Traders are not inclined to keep stocks so losses can be avoided, but also fashion is rapidly changed, and online trading has increased the demand for speed in production. That takes the production cycle lasting for two months and then to no season. Previously, the orders had a six-month cycle geared to the season.

Pashaj also admitted that the Asian manufacturers are unattractive to the European-American market demands. Minority retailers are operating in small quantities and variety of models, while China produces in large quantities. The European market seeks more frequent supplies and in limited quantities, and this model is not suitable for large manufacturers. Thus, the Albanian shoe production factories can benefit, as we are geographically within Europe and the structure of our factories provides products of quantity, quality and variety in relation to the new demand. In this regard, Albania can benefit because countries like Romania and Bulgaria can not keep up the production under the new market conditions.

But a lot of money is going to be needed to update the technology of the industry and train the existing workforce. Mici said that the financial system in the country is not very friendly to businesses and it is not flexible and fast enough to meet the liquidity needs of businesses in the footwear sector. Changing technology requires ease from government fiscal policies, thus, Mici said that probisnes policy is needed, especially for the footwear manufacturing sector, which has a strong and sustainable contribution both in exports and employment.

Pashaj that the factories should catch up with the new trends and adapt to the new demand, as all changes happening to the sector are due to outward international market factors.But all this process could be easily supported by the government, or at least the internal policies should not become an obstacle. Delays in VAT reimbursement put the industry in trouble last year, and the euro depreciation also reduced the company’s profits by 6 percent.

Tirana Times
By Tirana Times April 26, 2019 13:58