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Juicy domestic apparel market

Updated May 23, 2016


FACING tough competition in the overseas markets, Punjab’s textiles and clothing exporters are increasing their exposure to the buoyant domestic apparel market with a promising future — particularly for women clothing — by investing heavily in retail outlets.

Many of them expect not only to make significant profits, but also anchor the textile industry in the domestic market owing to increasing affluence of the middle-income segment of the country’s population.

Pakistan’s textile and clothing exports have dropped by 8.16pc to $9.63bn in the first three quarters of the ongoing financial year from $10.194bn a year ago.

These exports have been under pressure for the last several years because of energy shortages, especially in Punjab, and a steep rise in the cost of doing business due to a huge increase in electricity and gas prices since 2013.

A substantial amount of textile manufacturing is said to have shut down in the province because of prolonged energy shortages, surging cost of doing business, liquidity crunch caused by held-up tax refunds amounting to 5-10pc of export revenues, smuggling of Indian yarn,, and, last but not least, growing international bias for cheaper synthetic fibres and against cotton.

“Our textile industry has almost exclusively focused on exports. But the recent crisis and reduction in profitability caused by the slumping overseas sales has forced the exporters to look to the domestic market,” says S.M. Nabeel, a third generation yarn producer who has recently launched his label, BTW, to enter the lucrative domestic branded apparel market and opened his first store in Lahore.

“Local market is getting more and more attractive on the back of rising income of middle class households. Therefore, more textile producers are consciously making efforts to increase their exposure in the local retail apparel market,” he argues.

Besides, he says, no one can risk ignoring a market comprising 200m souls with two-thirds of them under 30-35.

Khurram Mukhtar, a major Faisalabad-based exporter who launched his retail chain Khas sometime ago across the country, says the local retail textiles and clothing market had expanded very rapidly in the last five years.

“It is time to introduce our own brands and go into the retail segment,” he contends. He is of the view that success in the local market will help textile manufacturers to also expand in the foreign markets, especially in countries with large population of Pakistani workers.

He agreed that the majority of textile exporters entering the local market were forced to change their strategy not only because of the high returns on domestic sales offered but also because of saturation in exports. “The overseas markets have not been very robust recently owing to economic recession. On top of that the problems like energy shortages and regionally noncompetitive cost of doing business had also compelled many to look to domestic market,” he adds.

Indeed, the textile producers now understand that success in the domestic market could increase their ability to diversify their products and compete with their regional rivals. With their domestic sales revenues helping them cover the fixed costs of exporting, they feel that they can also increase their earnings and profitability.

The size of the domestic apparel market is hard to estimate. But industry sources say the current size of the market for the stitched apparel was still very small, reflecting massive growth potential and opportunity for the textiles and garment manufacturers. In addition, the domestic textile industry holds only a little more than a quarter of share in the total local fibre consumption of 10kg per capita in the country. The rest of the demand is met through imported and smuggled fabric and apparel.

Compared to Pakistan, the Indian textile industry has the ability to absorb sudden decline in exports of textiles and clothing because 60pc of all fibres produced in India is consumed domestically.Almost all old and new labels have made China an important part of their supply chain, many because of the cost factor and others owing to unavailability of certain products in Pakistan. “If you require synthetic-rich fibre and fabric you are forced to turn to China because we do not manufacture these products here or the cost of fabrics manufactured from local man-made fibres is very high,” Khurram explained.

But he contended that the majority of companies are using locally produced fabrics and added the future lies in increasing use of synthetic-rich products as the use of cotton across the word is dropping fast. At present, the international cotton and synthetic fibre use ratio is 28:72 compared to 85:15 in Pakistan.

Zahid Iqbal Butt, who has been producing and selling women and kids clothing in the informal sector for the last 35 years, insists that the companies entering the domestic market are earning unbelievably high profits in spite of their high overhead expense.

“The margins in this business are unlimited. But at the same time investment required to launch your brand and open stores has skyrocketed over the last few years because of the entry of big players in the market with strong cash flows and power to sustain competition,” he said.

He thought not everyone had a chance to survive in the competitive market. “I think we have already started seeing some winding up their businesses because of the costs and tough competition given by the newcomers with strong financial background,” Zahid insisted as he pointed out how new entrant in the market, Sapphire, is giving a tough competition to market leader Khadi by keeping down its prices. “Many cheaper but good brands will remain in the market (in spite of increasing competition from the wealthier rivals), but their margins will squeeze over time,” he concluded.

Published in Dawn, Business & Finance weekly, March 23rd, 2016