Matt Priest: the US footwear industry is resilient and agile

We have spoken to Matt Priest, who is the President & CEO of the Footwear Distributor & Retailers of America, to discuss in detail the achievement of the 100.7 billion US dollars record on consumer demand for shoes in 2021. We have also ventured into the future, going over the main concerns for the US footwear industry, such as rising inflation (7.5% in January), additional duties on Chinese consumers goods, but also the opportunities on the horizon

FDRA has announced that consumer demand for shoes stood at a record 100.7 billion US dollars in 2021. It is quite an achievement given the ongoing supply chain disruptions, the increase in prices, the higher tariffs, rising inflation. How did the US footwear industry manage to navigate so successfully amid this challenging environment?

There are two reasons behind this record result. Number one: our industry is resilient and agile, and it works really hard to provide the products that American consumers want to purchase. So, they did a lot of the right things to make sure that we had a successful year, a record year. The prior record was in 2019, 83.9 billion US dollars, which shows how much more economic activity we enjoyed in 2021.

The second variable that helped drive this success was the amount of cash in the hands of our consumers, driven predominantly by a strong economy and US government assistance. And so, one of the reasons we are seeing inflation now is that the US Government dumped so much cash into our system in response to COVID-19 that has created this inflationary pressure. But, at the same time, it helped fund our record year, as we hit that 100.7 billion record number. We were able to take advantage of the additional spending American consumers possessed by providing great products at a time when consumers were looking for great products.

You have just mentioned the Governmental assistance. How do you see the year 2022 without the same aid?

We have been concerned about the withdrawal of funding from the US Government and what the impact will be on consumers, not just for footwear, but for all different consumer categories. So, we don't think we will have the record year that we had last year, also because inflation is going to decrease the buying power of the American consumer. There is some concern there. However, I can tell you our companies are still seeing very strong orders and are still working very hard to provide fulfilment to their retail partners. Therefore, we are in a position where we may not have a record year again, but we are optimistic that it will be a good year, that consumers will continue to buy shoes, despite some of the challenges that we have already discussed.

There was a lot of unanticipated cost increases in 2021, including transportation. How do you see the US footwear industry evolving this year on this regard?

We are concerned about the rising of inflation across our supply chain. We continue to see inflationary pressure in the US that we have not seen in nearly 40 years. That is a concern. The Federal Government is attempting to raise interest rates to try tapping down inflation, so we are expecting interest rate increases over the coming weeks and months. That will be a challenge for consumers and that will be a challenge for people purchasing homes and taking out loans and all the things that the lower interest rate environment we have been in for so long has facilitated.

The question comes down to the fine line between increasing costs and having an impact on demand. Now, demand still seems pretty high. We have been for years, years and years in a promotional environment, where our companies had to

provide 40% discount just to get consumers to come in the door to purchase shoes. And over the last year, because of demand, because of all the cash in the system, our retailers have been able to sell very close to full price on average We haven't had that opportunity in a long time. The point is above and beyond the inflationary impact: we don’t know yet when that will have an impact on demand. But the challenge is not specific to footwear. It's across all consumer goods. When discretionary spending takes a hit, what will consumers prioritize? Will it be footwear, apparel over automobiles, or automobiles over washing machines, or washing machines over electronics? We just don't know and we have broad concerns about it.

That is why we have implored the Biden Administration to remove the additional duties President Trump put on certain Chinese footwear that the US imports, with the hope that would have an impact on, or at least, that would lessen impact of the inflation by removing some of the cost structure that is added as those products hit the store shelves. We will continue asking them to do that, they have not yet decided, but that is our hope, that they will do it soon.

Do you feel optimistic about the outcome?

Well, by this point in the political narrative of inflation here in the US, we believe that the US Administration would have already announced that it is removing duties on consumer goods, while maybe increasing duties on other things that China is focused on, like technology, aeronautics and heavy machinery. However, they haven’t done it yet, even though some Administration officials, like Secretary Janet Yellen, have said on record that tariffs impact inflation, that they drive costs up. It would be wonderful if they were to announce that.

I think it would be politically popular for the President to decrease some of these tariffs and maybe increase tariffs elsewhere. We are curious to see when and if that happens, particularly because this is an election year in the US (midterm fall in November). As of now, the president's party is not polling very well and, historically, the president in power loses seats in our Congress in the first midterm election of the president's first term. He is in a political challenging position, and I think this would be something that he could do to help ease some of the inflationary pressures. But he needs to do it soon if he wants it to have an impact on the American consumer before the elections.

Let me take a step back. What drove the US consumer to buy footwear in 2021? Did you spot any particular shift on trends?

There is a correlation in our industry between the US Government pushing out money into the pockets of our citizens and the increase in footwear spending, and that drove a lot of consumer behaviour. We also have to keep in mind that we are fifty unique marketplaces tied together as the US, and many states approached the COVID-19 restrictions differently (for example, Texas, Florida, South-eastern states), remaining relatively open almost throughout the entire pandemic. They might have closed in the first month, March/April 2020, but quickly opened again. A lot of our companies in the footwear retail space operating in these markets didn't furlough people. They were ready to open the moment the Government said it was ok and a lot of consumers responded to the opportunity to buy.

Lastly, on the trend side. Before the COVID-19 pandemic, we were experiencing the casualization of the Western world: more textile, knit up footwear, sneakers, sneakers being worn on every occasion, whether at a board meeting at work, dining out or at church. The pandemic worked like an accelerator for these categories. So, sneaker categories, casual, comfort, outdoors, hiking boots, hiking shoes, running shoes, slippers, Crocs: these are part of the casual active trend propelled by the pandemic. Occasion footwear, like fashion footwear, party footwear if you will, are seeing a resurgence now, as we get back together, but comfort is king in our society and I think that trend will continue.

We have witnessed some changes in the US labour market during 2021, regarding, for example, wages, which have increase in some States, and millions of people quitting their jobs. What are your thoughts on this issue?

I suspect they will continue to increase. We had... They call it the Great Resignation, millions of people quitting their jobs, moving to other jobs, or relocating to work remotely. The entire workforce has kind of turned on its head, so I assume wages will continue to go up, as will the competition for talent. If you go around the US, pretty consistently there is help wanted signs in about every window. The flexibility built by the remote work environment has allowed people to be more discriminatory towards what opportunities they take. Employees are determining the terms they want to work and for, or for whom they will work, and this has created an interesting environment. Therefore, competition for personnel and talent will continue, which will drive costs, playing right into our inflation theme. Salaries need to stay in competition with inflation, and right now they are not, so, for employers to be attractive they will have to overspend for talent.

Can you give us your insight on the Ocean Shipping Reform Act, which was already approved in the House of Representatives? How can this bill contribute to the growth of the footwear industry?  

We are hopeful that it will apply the appropriate pressure on the carriers to be more upfront about pricing and on terminal operators to be more collaborative. Currently, we are in an environment where carriers are making a ton of money and terminal operators are presenting difficulties in access to the containers. It has been very frustrating. Not just for footwear, for all importing industries. That is why we are starting to see big companies, such as Walmart, commission their own fleets, so they can chart their own course. I think we will continue seeing this trend post supply chain crisis because big retailers cannot rely on these third parties to sustain them as they need to deliver goods to their customers.

The carriers will argue that the bill creates more restrictions around pricing in the short term, but that in the long term, the historical nature of their relationship shows that spot rates have been more advantageous for importers. This is one of the rare times when there has been a flip, spot rates are astronomical and companies are getting dumped from their contracts because the carriers have to earn money. They hadn't had this opportunity a long time.

You hear both sides of the argument, but I think that the US Congress has spoken, the US House passed it overwhelmingly. There is very little opposition to it, we expect the Senate to pass it at some point soon, and we expect that President Biden will sign it. It is not a short-term fix, if it passes tomorrow, it won't fix everything that is causing issues within our supply chain, but we think it will apply appropriate pressure to the carriers, it will power the Federal Maritime Commission to be more active in the regulatory process as it comes to rates and additional charges, which have been very frustrating for our members. So, we are optimistic that it will provide some relief in the long term.

To conclude, we have already discussed your expectations for 2022. So, let me ask you if you believe there were benefits for the industry during the pandemic period and, if so, in what ways has changed our industry for the future.

People are sometimes afraid to talk of the benefits of what we can take away from a crisis. I think that both from a personal and professional perspective, when we are faced with challenges and adversities, looking back, we often find the ways in which it has strengthened us, creating unique opportunities, reinforcing us to critically think about what we were doing before, maybe not taking for granted certain aspects of our lives or our businesses.

It really sped up the development of digital tools at the service of efficiency. Companies had to pivot to stay connected, particularly on product development, design, production, manufacturing. They had to use tools they were not used to using, fostering digital or virtual engagement, making them more efficient. For example, instead of going to Asia eight times a year for two weeks each trip, maybe go four times. It has eliminated the need to be somewhere else at all times, building up a more appropriate work-life balance. It is both more efficient and better for the environment.

So, heading into COVID we started digitizing the supply chain, figuring out ways to use digital design development of samples, keeping people off aeroplanes as much. I believe that in the future we will hold on to these things that made us more efficient and engaged, taking off the pressure to always be in the room meeting for everything. At the same time, as we ease back into it, we can choose to gather where it makes sense, creating the right opportunities for people to continue meeting in-person, reconnecting and socializing. I hope we can look back and hold on onto these lessons in some way.

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