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Is it possible to make money in the Ukrainian light industry

Photo: Free-Photos/Pixabay

Photo: Free-Photos/Pixabay

Light industry is one of the strategic segments of the national economy, and before the coronavirus crisis, it provided almost 5% of budget revenues and 2.6% of Ukrainian merchandise exports. This means that it has significant potential for further development.

But the pandemic has made its own adjustments to the industry: many companies have lost a significant number of orders, dismissed employees and closed their businesses. Others have adapted to the new realities and, for example, switched to government orders—have begun to sew masks. What is happening now in the Ukrainian light industry and is it really possible to make money in it after all the lockdowns?

We are 6 times behind Poland and 73 times behind Italy

Today, Ukrainian light industry exports its goods mainly to the EU, and that is 83.7% of total industry exports. Most of them are traditionally manufactured by order of well-known brands, but there is also a "net" export of Ukrainian brands of clothing and footwear.

And if before the pandemic 75% of garment manufacture in Ukraine worked on tolling schemes for the West, then later many companies lost their orders. For comparison: in 9 months of 2020, industry exports decreased by 11.4% and amounted to $788.4 million, while imports decreased by only 5.6% and amounted to $2,155.3 million.

At the same time, only 53.79% of domestic production was consumed in the domestic market of Ukraine, while import dependence in the segment of final consumption of light industry goods was 87.22%.

It is worth noting that in terms of the development of the light industry, Ukraine is still lagging behind Poland—6 times, from Germany—21 times, and from Italy—73 times.

Impact of coronavirus crisis

In 2020, the consumption of clothing in Ukraine, according to various estimates, decreased by 50-60%. And orders of foreign companies for the manufacture of clothing in Ukraine fell by 30%. For those people who make their own brands, the situation is even more complicated.

Mariya Terekhova
Mariya Terekhova
Co-owner of the X-tend Group, Managing Partner and Founder of the New Fashion Zone

In Ukraine, lockdowns hit business hard "on clothes that need to be tried on." Not everyone was able to finance the downtime, some lost their teams. Some went bankrupt and failed to reopen.

In addition, consumer demand has also changed. Now the check has decreased, people are saving money. After the New Year and the last lockdown, this is especially evident. Therefore, manufacturers go into debt to create new collections.

According to statistics, before the pandemic, over 2,300 small and medium-sized enterprises of light industry operated in Ukraine. They employed about 85,000 workers. The annual volume of their products reached 22 billion UAH. Last year alone, the industry lost approximately 20,000 jobs. Brands that have their own retail have been hit especially hard.

According to the Ukrlegprom Association, industry wages in 2020 amounted to only 57% of the average wages in industry. Note that in 2017 this indicator reached 71%—at that time the largest growth in production, exports and capital investments in the light industry was recorded.

Anatoliy Kinakh
Anatoliy Kinakh
President of the Ukrainian League of Industrialists and Entrepreneurs (ULIE)

The light industry in 2020 quickly redesigned and many manufacturers launched on their resources the production of safety products. Hoping for the promises of the state leadership to quickly agree at the state level the conditions for the supply mechanisms of personal protective equipment (PPE), volumes and clear lists of products for purchases, prices, certification requirements.

Due to this, the issue of speculative prices and social tension was quickly removed. Unfortunately, despite the significant success of Ukrainian enterprises in the development and manufacture of new protective materials and products, as well as the great demand from other countries for PPE made in Ukraine, the government traditionally preferred to bring imports last year. Moreover, with a simultaneous long-term ban on the export of similar Ukrainian goods.

Now the light industry has turned to the Cabinet of Ministers of Ukraine in order to abolish the simplified procurement procedures, according to which state funds are spent mainly on imported products (China, etc.), despite the fact that such production has long been established in Ukraine.

What is holding back the development?

The development of Ukrainian light industry is restrained by unequal competition conditions in the domestic market, the instability of tax legislation, and an outdated product safety control mechanism. And also a high dependence on imported raw materials, materials and components; low price competitiveness of products.

And also the concentration of a significant part of industries manufacturing products from raw materials supplied by the customer. After all, most Ukrainian enterprises still do not export finished national products, but only provide services for sewing clothes or shoes. Cooperation with European partners is based on individual labor-intensive operations, while purchasing, sales, design, and logistics are carried out by the customer.

Yuriy Samets
Yuriy Samets
Owner of the sewing production Sambay LLC, Head of Supervisory Board в West Ukrainian Fashion Industry Cluster

The efficiency of similar factories in Turkey and ours differs by up to 30% and not in our favor. The main reason is people. We are just learning to build motivated teams, involve people in the development of companies, and be fans of our business.

The second important factor holding back the development is the domestic market. And entering financially strong markets is much more difficult if you are not strong at home. The purchasing power of the domestic market in the mass segment is critically low. This affects the volume of production, and therefore—the cost.

An equally important factor is access to finance. The active system development is impossible without attracting external resources. New opportunities are emerging in Ukraine, but investors and donors are very careful. The main support programs today are aimed at the development of business associations, clusters and associations.

What are the profits?

The players in the light industry market are designers, tailor-made ateliers, designer brands, large fast-fashion brands, and retailers. When calculating the cost of factories' services, experienced customers clearly know the effective cost of production. Classically, the minimum rate of return is added to this figure, and this is the final price that customers voice to the performers during negotiations.

In the fashion business of Ukraine, as in any other business, it is possible to earn money. At the same time, general business statistics also apply to it: about 90% of companies close in the first year, and only about 3% of them achieve success. The usual story is to multiply the production cost by three. In world trade, it is multiplied by five. For their part, discounters close the production and sales chain on themselves—and in some cases in Ukraine they add plus 30% to the price. And they live off large volumes. But this does not allow them to scale normally, invest in marketing and promotion. Strategically, such businesses are less likely to develop.

Mariya Terekhova

Mariya Terekhova

Co-owner of the X-tend Group, Managing Partner and Founder of the New Fashion Zone

Given the high risks and very low activity of our enterprises in communication with foreign companies, orders are concentrated with intermediaries, and there may be several in a row. That is, the profit of enterprises directly depends on their activity, circle of contacts and the ability to organize the operational process.

Changing sales channels

If earlier buyers bought goods at Fashion Weeks, then due to lockdowns they had to get themselves modern digital channels and B2B platforms. And brands like Prada and Dior have even opened online showrooms. They are like a computer game where you can watch and even try on online (according to your sizes) brand collections.

Thus, according to the international report by State of Fashion, in 2020 there was a change in offline sales channels to online and social networks. 30% of companies survived, about 56% of buyers expect significant discounts, and companies have to reckon with this. And digital sales in the world have grown by 700%.

During the pandemic, the tools for marketing and promoting brands have changed in the global light industry. Thus, at the conference The Voices Business of Fashion at the end of 2020, one of the major brands said that they had reformatted the work of their company into a studio format. And from morning to evening they shoot videos for YouTube, Tik Tok, Instagram.

In Ukraine, the share of online clothing trade has also increased, however, despite the overall decline in consumption, the result is still negative. Customers are confidently buying the second item on the Internet. When buying the first item of an unfamiliar brand, and most Ukrainian brands are still young, customers still prefer tactile and visual contact.

In addition, online clothing retailers periodically hit 70% returns during peak sales periods. Therefore, Ukrainian companies are working on the technology of accurate online measurements without the use of special devices. To do this, a smartphone is needed, an application, three photos, and data from a garment factory. This is the future of online commerce.

Outlook for 2021

The main challenge for the entire industry is now considered a free trade agreement with Turkey that abolishes import duties on ready-made clothes and on imports of fabrics. According to the USAID report on the possible consequences of this agreement, one of the industries that is losing the most will be the light industry.

At the same time, experts note that here we are talking about the classic light industry and the domestic market. In addition, they advise to use this situation. For example, to get a fabric without duty, it is enough to remake it on the territory of Ukraine, obtain a certificate of origin and sell it to European countries without duties. For strong brands, this will be another benefit.

For companies that have a reserve of capacity or are able to attract investment, it is time to regroup, create new breakthrough products and establish operational processes. And also look for items that are versatile, durable and environmentally friendly.

It is worth working quickly, because, according to insider information, the containers with the Turkish light industry have already been sealed and are ready to travel to us.

According to the information from open sources, it can be assumed that the market in 2019 reached 176 billion UAH. In particular, according to my estimates, the market for only men's shirts that our company produces is more than 3.5 billion UAH per year. If we talk about women's clothing—the figure is dozens of times higher. Forecasts for 2021 are more restrained, but optimistic. When communicating with foreign partners, it is quite clear that the industry globally will begin an active recovery phase from September 2021. This is evidenced by the dates of the spring exhibitions postponement, the dates of the company representatives planned visits and the timing of the contracts renewal. This creates a spring break for Ukrainian producers. The production of personal protective equipment is increasingly being transferred to specialized companies that were created in Ukraine, that is, the need to involve third-party factories will decrease, and requests for the production of other clothing will resume no earlier than June.

Yuriy Samets

Yuriy Samets

Owner of the sewing production Sambay LLC, Head of Supervisory Board в West Ukrainian Fashion Industry Cluster

Conclusions

The crisis has highlighted all the problems brands and manufacturers had before. One of the predictions says that we will permanently be in lockdowns. Therefore, companies in the light industry market must change and work with distribution channels in a new way.

At the same time, there will certainly be a recovery in the consumption of the light industry. To this end, manufacturers and brands are actively campaigning online, and are beginning to revive exhibition activities. Foreign contracts are still mostly suspended, but communication is gradually being restored.

For its part, for general support of the development of light industry in Ukraine, it is necessary to restore the raw material supply of production. And also create competitive conditions in the domestic market, eliminate shadow trade. After all, for example, in terms of the consumption of second-hand goods, Ukraine occupies a leading position in the world.

Easing the fiscal and regulatory pressures is also needed as incentives for business. This will significantly improve the business climate and reduce the cost of finished products.

Now the industry is counting on the adoption of the draft law "On amendments to Section XI of the Customs Tariff of Ukraine on the unification of import duty rates for light industry goods" to minimize corruption risks when importing raw materials for the production of high value-added products in Ukraine, in particular, for export.

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