«'Globalisation of the German Apparel Value Chain: Retailers, Manufacturers and Agents' Michael Wortmann Research Center for Social Sciences (WZB) ...»
Paper for the Conference
Organisational Configurations and Locational Choices of Firms:
responses to globalisation in different industry and institutional environments.
14-15 April 2005, organised by the Centre for Business Research, University of Cambridge/UK
'Globalisation of the German Apparel Value Chain:
Retailers, Manufacturers and Agents'
Research Center for Social Sciences (WZB)
+49-30-25491-153 firstname.lastname@example.org 1 Introduction The apparel sector has been a pioneer in globalisation: global relocation and global sourcing date back to the 1960s and 1970s, when the word ‘globalisation’ was not yet used. In the case of Germany, the apparel sector was the main focus of the concept of a ‘new international division of labour’ by Fröbel et al. (1977/80). For Fröbel et al. apparel manufacturers were the drivers of this shift: they were relocating production activities by setting up subsidiaries using subcontractors in low-wage countries.
Many years later, the international debate received a new input by Gereffi’s (1994,
1999) concept of ‘buyer-driven commodity chains’. In this concept, the drivers of globalisation are retailers and other non-manufacturing branded firms (marketers) from industrialised countries, which are sourcing their goods from manufacturers based in developing countries. The concept explicitly defines these buyer-driven chains in contrast to producer-driven chains, where (multinational) manufacturers organise global production networks.
The focus of most studies linked to the concept of buyer-driven global commodity or global value chains has been on the end of these chains in developing countries: on the chances for up-grading and development of manufacturers in these countries (Gereffi 1999; Schmitz 2003). Good chances were seen for upgrading manufacturing capabilities and for a development from cut make and trim firms (CMT) over original equipment manufacturing (OEM) to full package suppliers. But chance for upgrading into design (ODM) or even becoming branded manufacturers (OBM) were seen to be
-2very low, because these activities were considered as core activities by buyers in industrialised countries.1 Only during recent years, research has been undertaken on the buyers as the driving actors of the global chains. Most of these studies have compared buyers from different countries and have assumed that buying strategies are embedded into different national business systems by which differences in buying strategies can be explained. There is a body of literature on ‘national business systems’ (Whitley 1992), national ‘varieties of capitalism’ (Hall/Soskice 2002). In this concept, Germany is considered to be a typical ‘co-ordinated market economy’ where ‘patient capital’ allows companies to follow long-term strategies: This is supported by co-operative relationships with employees and a deeply rooted vocational training system leading to ‘diversified quality production’ in the German manufacturing sector (Sorge/Streeck 1988).
Palpacuer et al (2004; cf. also Palpacuer/Poissonnier 2003; Gibbon/Thomsen 2002) looking at samples of different types of retailers (chains, discounters, mail order companies) have found different buying patterns of retailers in the UK, France and Scandinavia. They have formulated the hypothesis of an “uneven diffusion of a ‘global model’ in various national markets” (Palpacuer et al. 2004: 427) focussing on supply base rationalisation, i.e. a concentration on large suppliers capable of assisting with a broad variety of services (full package suppliers). This development is driven by financialisation which is most advanced in the UK where most of the big retailers are stock listed companies but also spreads to France and Scandinavia.
Lane/Probert (2004) have compared Germany and the UK focussing what they call intermediaries, i.e. (former) manufacturers which have relocated most of their production abroad and have become importers. They found that German (former) manufacturers have achieved a relatively strong position in the clothing chains2 based on their traditional skills while British manufacturers had been much less successful.
The paper will present some first results from an ongoing research project entitled “Retailing and Globalization: On the governance of global value chains by German There are a few examples of developing country manufacturers that have established brands in Germany, for example: Mavi Jeans from Turkey (cf. Tokatli/Kizilgün 2004), Pearl Global Ltd. With Lerros from India; Esprit, founded in the USA, today is headquartered in Hong Kong and has its design office in Düsseldorf. The Turkish textile group Şahinler own a chain of apparel (discount) stores in Germany.
Another indicator of this strong position are relatively high German apparel exports.
-3retailers”.3 The paper will set out to analyse the changes in German apparel retailing:
different models of ‘traditional’ apparel retailing as well as new business models of the so-called verticals and of discounters, which have gained increasing market shares especially since the 1980s. The following section will take a closer look at the different sourcing strategies of the various types of retailers and on the changes of these strategies. The final section will sum up some of the results and draw theoretical some conclusions.
2 Changes in German apparel retailing
Structural change in retailing occurs on three different levels:
- Change on the level of single shops is called format change. First, one can distinguish between three basic formats of retailing: stationary, mail order and ambulant. Shops can differ in terms of size, assortment, product presentation, and service.
- On the horizontal company or group level, there are processes of concentration and filialisation (multiplication). These might occur internationally.
- Vertical change refers to changes in the value chain, like an integration of retail and wholesale or changes in the division of labour between trade and manufacturing.
There seem to be general trends that can be found in all segments of retailing, while other developments are very different in the single segments. For example, on the level of shop formats, there is a general trend towards larger units, which can be found in appliances and DIY as well as in furniture and also in food, but is not that strong in apparel retailing. The change towards self-service, which had revolutionized German grocery retailing in the 1960s, takes a different form in apparel, where overthe-counter service never had been important, but where formats with less service are gaining market share.
On the company or group level, the general process of concentration also occurs in apparel. But the five largest apparel retailers have increased their market share from 24% in 1990 to 31% in 2003 (according to BTE), while in grocery retailing the five
biggest have a market share of over 60%. Thus, apparel retailing is still a business with many small and medium sized (Mittelstand) companies.
Changes concerning vertical integration along the value chain – like the integration of retail and wholesale, co-ordination of the supply chain, private labels, design activities by retailers and retailing activities by (former) manufacturers – will be analysed in the next section.
Traditionally there were independent Mittelstand apparel retailers, mostly specialised in selling manufacturers’ branded collections, on the one hand, and mail order companies and the chain store C&A, that concentrate on private labels, on the other hand. The textile departments of the big department stores combined elements of both of these types. In recent decades, new types of retailers have emerged: on the one hand, the so-called verticals like H&M and, on the other hand, discounters – specialised textile as well as grocery hard discounters which increasingly also sell non-food products including apparel. Verticals and discounters have gained (and still are gaining) market shares, while traditional retailers have lost market shares. Many shops had to close and C&A lost half of its market share. We will now describe these changes in more detail.
2.1 The crisis of traditional apparel retailing
Traditionally, small independent and owner-run stores play an important role in German apparel retailing. Since the mid 1960s, their share in total apparel retailing dropped from around 60% to below 30% today. It has been estimated that in 2003 alone, 4500 independent textile and apparel stores had to close (BAG according to BTE 2004: 36). Between 2000 and 2003, sales of independent specialised apparel retailers dropped by 23% (IfH, taken from BTE 2004: 19), which has been the strongest decrease of all Mittelstand retail segments.
During the 1950s and 1960s, the small shopkeepers had been served by wholesalers, which ran distribution warehouses, from which retailers could buy quite flexibly.
But, buying groups were continuously gaining market share (Nieschlag 1972). Buying groups are a frequent form of organisation of independent retailers in Germany (Olesch 1998; Wortmann 2003). By combining sourcing volume, buying groups were able to realise much lower buying prices for their members. But, the success of buying groups had been limited in the apparel segment. They were not able to develop
-5into integrated systems (Systemverbünde) with strong central organisations.4 Rather, the steering capacity of group centrals always remained limited. Due to the high heterogeneity of the sector – retail members as well as suppliers – a standardisation of shop formats and assortments could not be realised. Thus, buying groups lack the conditions to achieve similarly big buying volumes as the big multiples in the sector.
Since the 1980s, many of the buying groups ran into severe problems. This trend continued until the last years, when groups such as Sütex and KMT Rheintextil had to apply for insolvency. Only a small group of buying groups remained in the industry.
The by far biggest group, Katag has more than 400 members with nearly 900 stores, with combined sales of about 3 billion Euro. Its typical members are relatively large independent retailers, but these organise the smallest part of their sourcing through the groups central.
Many of the traditional larger apparel specialists ran into severe problems in the 1990s. Recently Hettlage and Boecker applied for insolvency. The formerly biggest apparel retailer in Germany, C&A, has lost half of its market share since the early 1990s. The market share of department stores, where the textile department usually accounts for about one third of total turnover, also is decreasing since the mid 1970s (cf. table 1).
Bigger apparel specialists as well as department stores today follow different strategies to escape from this crisis: They intensify their co-operation with branded suppliers by establishing shop-in-shops, concessions etc. At the same time they try to broaden and up-grade their private label assortment. Others have set up youngfashion departments imitating some of the verticals (cf. below), still others reserve some of their sales space for discounting.
2.2 New successful formats: discounters and verticals
Next to the so-called verticals (cf. below) many discounters show above average growth rates. Common features of discounters are the absence of service and fancy product display, and their stores cannot be found in expensive locations. Discounters frequently use of unskilled personnel and part-time workers.5 All this allows discountFollowing such integration strategies, the Systemverbünde Edeka and Rewe are very successful in the grocery segment. These groups have many similarities with centrally governed franchise groups, and from the outside, they are difficult to distinguish from multiples.
On the working conditions at Lidl cf. the critical study by Hamann/Giese (2004) prepared for the trade union Verdi.
-6ers to operate with margins clearly below average. Discounters concentrate on fastmoving strong-selling products. In the apparel sector, this means for example a concentration on the main sizes.
Looking at discounters, one has to distinguish between specialised apparel discounters and the grocery hard discounters. It was the company Aldi which developed the grocery discount model in the 1950s (Brandes 1998). In the 1970s, the discount chains Plus (part of Tengelmann group), Penny (today part of Rewe), Lidl (Schwarz group) and others entered the market, and since then the format has steadily increased its market share in grocery retailing. Today, their 14.000 shops in Germany have a market share of around 40% in grocery retailing.