By Elisa Anzolin and Silvia Aloisi

MILAN (Reuters) – Fashion brands like Benetton are increasingly turning away from globe-spanning supply chains and low-cost manufacturing hubs in Asia, in a shift that could prove a lasting legacy of the COVID-19 pandemic.

Massimo Renon (CEO) of Benetton in Italy said that the company is bringing manufacturing closer to its home. This includes boosting production in Turkey, Egypt, Turkey and Tunisia. The goal is to reduce Asia’s production by half starting in 2022.

Renon provided insight on the economic drivers of a trend that has impacted much industry. Tight supply lines have caused increased shipping costs and delays, which is undermining an established business model for over 30 years.

It’s a strategic move to be more in control of the production and transport costs.” Renon said. He also noted that more than 10% had been moved out of India, Bangladesh and Vietnam this year.

A shipping container which used to cost between $1,200 and 1,500 now costs $10,000-15,000 with no guarantees of delivery.

Renon explained that sea freight prices have risen tenfold due to the scarcity of ships, many of which were left idle during the pandemic. He also said that rebounding consumer demand and a lack of availability of shipping containers has resulted in $10,000-15,000 in increased costs. Renon is based in Europe but his company has begun shifting production to lower-wage nations since 2000.

Many companies involved in the clothing and consumer industry are facing this shipping dilemma. Hugo Boss is also looking to bring manufacturing operations closer to its markets, for example, while more immediately Lululemon, Gap and Kohl’s (NYSE:) say they’ll rely more heavily on far costlier air freight to avoid running out of stock during the holiday season.

Renon was appointed to the Benetton board last year. His task is to revive the fortunes the company that made its mark in the 1980s thanks its distinctive bold colours.

Even though production costs in Vietnam and Bangladesh were 20% less than those of the Mediterranean, this was compensated by long lead times caused by supply problems.

A typical lead time for shipments from Asia was 4-5 months. Today, we can get 7-8 months due to the shortage of ships.

Renon stated that clothes made in Egypt can take 2 to 2-1/2 months to reach European warehouses or stores. He said that it takes 4-5 weeks for wool garments which are made in Serbia and Croatia.

Benetton is planning to increase production in Tunisia and Serbia, along with Tunisia. In Egypt, Turkey, it works with suppliers.

‘MORE THINGS GO WRONG’

Strategies vary across the clothes industry, though. Market leader and fast-fashion pioneer Inditex (MC:), owner of Zara, bases 53% of its production relatively nearby – in its home market Spain, Portugal, Morocco and Turkey, according to its 2020 annual report.

By comparison, its main competitor H&M relies on Asia for about 70% of its production, according to analysts. This approach is criticised by some as it leaves the company less flexible than its more agile rivals when it comes to getting new styles into stores.

H&M declined to comment ahead of its quarterly results on Thursday, while Inditex did not reply to a request for more information about its supply chain.

If players decide to shift manufacturing closer towards their markets or “nearshoring”, it is likely that the investment involved will not reverse in the near term.

AlixPartners, an advisor firm, stated that there was a shift to more national or regional supply chains.

It stated in its report about the disruption caused COVID-19 that “the more global supply chains, the more things could and will go wrong.”

Daniel Grieder (New Hugo Boss CEO) stated that he expects more goods to be produced closer to the places they are sold. The company also has its own factory in Turkey and produces parts for shoes in Italy. Its headquarters is in Metzingen in Germany.

This (nearshoring), we will greatly expand. We can then react more quickly to new trends and less rigidly to bottlenecks. He said that this is a competitive advantage and a great way to stay ahead of the game.” Manager Magazin interviewed him.

LOOKING TO THE SKIES

In some countries like Vietnam, factory closures have added to the pressure. Nike (NYSE:), which makes about half of its footwear there, cut sales expectations last week and warned of delays during the holiday shopping season.

Lululemon stated this month that it is working to shift production from Vietnam, increase the use of air freight, and prioritize production of key holiday styles for fall. This will help reduce its supply chain problems.

Gap also says that it will be investing in air freight to address delayed inventory deliveries and factory closings due to pandemics.

It’s not cheap, though; shipping an entire ocean container load of goods by air is over eight times more expensive, while for smaller shipments it is about five to six times costlier than current ocean freight rates, said Judah Levine, head of research at global freight booking platform Freightos. 

According to data from Cargo Facts, retailers are most interested in using the air option for small and high-margin items such as clothing, accessories, and computers, and household goods.

The emergence of an Asian industry is also influenced by other factors.

The region’s rising labour costs had a negative impact on the low-cost appeal of Western brands, even before COVID-19.

Real wage growth across the world rose between 1.6% and 2.2% in the four years preceding the pandemic, with the growth in the Asia-Pacific and Eastern Europe regions outstripping those in the rest of Europe and North America, according to the International Labour Organization’s Global Wage Report 2020/21

“The cost gap has narrowed significantly,” said Lorenzo Novella, a director at AlixPartners in Milan specialising in the retail sector, adding that high turnover among factory workers in China also made the level of service there less reliable.

Renon, CEO of Benetton, stated that now customers are more concerned about quality than price.

It seems that the race for low prices is secondary among apparel businesses today. According to him, consumers value quality more and prefer garments that last for longer.

Benetton family, which is based in Italy’s northeastern Veneto, has made the shift as part of its drive to be profitable. Over 4,000 stores are part of the chain. 1,500 shops are owned by the family while the rest are franchised. The company has been losing money annually for eight years.

The pandemic has hampered attempts to turn it around, though Renon stated that the group is confident they could have a good Christmas and be back in the black within the next few years.