H&M Looks to Source Clothing From Ethiopia

Retailer Hopes African Country Will Help Keep Shelves Stocked

Clothing retailer H&M (Hennes & Mauritz) said it is looking at Ethiopia as a new place to have its fashions made as it seeks to keep the shelves of its growing number of stores stocked.

H&M doesn’t source any of its range from Africa so the move represents a change for the Swedish company, whose comparable sales fell 1% in July from a year earlier, missing estimates, according to data released Thursday.

A spokeswoman said it has placed test orders with Ethiopian suppliers and large-scale production can begin this fall.

“As a growing global company we have to look at how we guarantee that we have the capacity to deliver products to all our stores where we have a rapid pace of expansion,” H&M spokeswoman Camilla Emilsson-Falk said.

The move isn’t related to the media reports earlier this year that the company was looking for store space in South Africa, and there are no concrete plans for a store in South Africa, Ms. Emilsson-Falk said.

The company repeated its long-term commitment to Bangladesh and said that it is a growing company and is increasing sourcing in all supplier markets where it is active. It said price isn’t the only thing it looks at as it makes deals with new suppliers and it strives to work with suppliers over the long-term that can meet H&M’s code of conduct.

Ethiopia is no newcomer to the textiles and garments industry. The first garment factories were built in 1939 during the fascist Italian occupation. But according to Ms. Emilsson-Falk, potential suppliers are building factories and will have modern machines.

Ethiopia has been on a push to grow its garment industry since 2007, with the goal of using clothing manufacturing to turn a primarily agricultural economy into an industrial one. It has set targets of $500 million in textile and apparel exports next year, up from $99.3 million for the 12 months ended June, and $1 billion in exports by 2016.

Large retailers have been looking for alternatives to southern China for several years, due to the rising costs of sourcing from this area. According to the Bernstein investment-research firm, it is cheaper to make clothes in Ethiopia than in China now, but in coming years, if inflation keeps going at current rates, it will eliminate that discount.

Société Générale analyst Anne Critchlow said retailers are beginning to see advantages in sourcing closer to home due to lower shipping costs and shorter lead times, which can help to offset some of the remaining cost differential between these two sourcing areas.

“We know that Inditex sources from Morocco and Tunisia also has a garment industry. H&M has long been a market leader in procurement, including social responsibility toward the supply base. If it can play a part in supporting the development of this industry in Ethiopia, while benefiting from lower delivery costs and perhaps shorter lead times to Europe than from China, then I think, ‘why not Ethiopia?'” she said.

Ethiopia’s textile and apparel exports were up 17% from $84.6 million the previous year, said Fassil Tadesse, president of the Ethiopian Textile and Garment Manufacturers Association.

The country has much more ambitious goals: about $500 million in exports for next year and $1 billion in earning by 2016.

“It is stretch to that goal, but it is not impossible. There’s a lot in the pipeline,” Mr. Tadesse said. “Turkish companies, Indian companies and Chinese companies are coming now.”

The government has eased the process for companies wanting to establish textile manufacturing in Ethiopia by eliminating trips to multiple offices and setting aside industrial parks for the building of factories, he said. But most importantly, he said, it is a full government commitment to the industry.

“The prime minister oversees all of this himself,” Mr. Tadesse said.

H&M established an office in Addis Ababa about a year ago, and has been buying clothing from a number of manufacturers including Mr. Tadesse’s Kebire manufacturing company. He said he alone sells H&M about 150,000 garments per month. He didn’t provide a dollar figure for the sales, saying that the prices varied depending on the garments.

“They are trying to form a cluster of companies because their need is 1 million pieces per month,” Mr. Tadesse said.

Tesco and the British arm of Wal-Mart called George are also buying clothing from Ethiopian manufacturing plants, Mr. Tadesse said. He said he wasn’t aware of any American investors yet and said that while U.S. trade deals with Africa are beneficial, they are not enough on their own to develop an industry.

Wall Street Journal