Footwear & Related Fairs in Italy:
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The Italian Footwear Industry
Preliminary financial statement 2002
*(The data relative to production, pricing, orders and employment were developed on the basis of a sample survey conducted among Association members of ANCI)

• Introduction
• Production and pricing
• Commercial interchange
• Orders and domestic consumption
• Employment
• Collections and payments
• Conclusions

The data in the preliminary financial statement portray a 2002 that was generally unsatisfactory from an economical point of view. The expectations from the previous semester report and the results of the rapid survey of the first 9 months had already indicated that the balance for the whole year would not have contained positive surprises.

The lull in international demand continues to have a negative effect on production volumes and pricing policies, and the trend in domestic consumption is not able to compensate for the difficulties in the international markets.

If, in absolute terms, the negative signs do not seem to be particularly worrying in terms of the competitiveness, the prolongation of negative conditions has also affected employment and the collections/payments cycle, creating further difficulties for companies.

The orders book and the expectations for the first part of 2003 leave little room for optimism, as they unfortunately tend to confirm an unpromising picture also for the next months.

One of the few elements of novelty can be found in the different perception of prospects: behind the average values lies a differentiation of expectations among manufacturers. This may seem to be a first sign of dynamism in the economic situation. In any event, from the 2002 end of year balance and the short-term forecasts the signs remain negative for much of the industry.

Let us now examine in detail the individual economic variables.

The product volume dynamic is the indicator that best explains the negative economic situation that distinguishes the footwear industry.

The first six months of the year closed with a drop of 3 percentage points for the companies in our sample, and forecasts did not leave room for optimism. Indeed, in the second part of the year also production rates continued at unsatisfactory levels, with a reduction of about 5%.

In short, the preliminary financial statement for the year just ended shows, as far as the sample of the survey is concerned, an overall reduction of -4.4% of the quantities produced compared with 2001.

The results of the survey speak for themselves: only 15% of the companies interviewed declared an increase in production volumes for the year 2002, whereas 74% of the sample showed a reduction in actual sales. This unequivocally negative data is mitigated by the fact that almost half of the reduction is of less than 3% / 4%.

For about 11% of the companies polled, instead, 2002 showed no particular change compared with the previous year.

If therefore the results for 2002 are decidedly convergent, in the sense that the majority of the companies declared a reduction in volumes produced, the expectations for the first quarter 2003, albeit within a situation that is still negative, are of increased dynamism. Seventeen per cent of our sample are optimists, whereas more than 30% expect substantial stability: in short, in the first six months of 2003 - according to these initial indications- the production volumes of the companies contacted should drop a further 2 percentage points compared with the same period in 2002 (already negative).

With reference to pricing dynamics, the trend in the end of year statement for 2002 shows a growth of +2.9% in Italy and +2.7% abroad, with a price trend that is substantially in line with those of the first six months of the year.

By combining the price dynamics with quantity dynamics we can estimate, for 2002, a reduction in the value of industry sales of -1.5%: with the current rate of inflation this means a loss of value in the system of not less than 4%.

As far as pricing is concerned, the data on expectations for the first six months of 2003 confirms the disappointing situation, with wise estimates between +1.6% (for prices abroad) and +2.2% (for the domestic market): these price levels, combined with expectations for production, go to make up an unsatisfactory situation for companies, to be faced once again with investments and managerial sacrifices.

The degree of plant use, usually very high, shows the signs of the long-lasting difficulty. In December 2002 the rate of production capacity usage in the companies polled was close to 82%, whereas the expectations for the first six months of 2003 show a further reduction to around 80%. However, in spite of the negative economic picture, the flexibility of the system of sub-contracting and third party work relations, typical of the footwear supply chain, seems still able to sustain the production efficiency.

The development of international commerce is one of the most important elements in the footwear industry, and often determines the basic economic trend. In a critical phase such as the current one, the analysis of commercial interchange is an even more highly characterizing element of the economic panorama, as it is within the international markets that we find the major source of the continuing negative economic situation.

Starting from export dynamics, after a particularly negative first six months (-12.8% in quantity), the second half of the year has shown a noticeable decrease in reduction (-1.5% in volume in the period July/November compared with the same months in 2001). This, however, was largely insufficient to compensate the previous dynamics: in the first eleven months of 2002 Italian footwear export dropped by -8.4% in quantity and -5.7% in value, with an average price increase of +2.9%.

This data, which is in line with the pricing in foreign markets detected by our survey, is totally insufficient to compensate the highly negative dynamics of the real trend.

In terms of merchandise categories, if we exclude the slipper market - which shows an increase of 13.4% in quantity and 3.4% in value - all the other segments of the industry show drops in sales, including those with the highest added value. The demand for leather footwear has dropped by -9.1% in volume.

The situation is unfortunately similar in market areas.

Exports to the European Union have gone down overall by 7.5% in quantity and 4.1% in value: if we exclude the dynamics registered in France (+2.1% in volume), Spain (+9.7%), Denmark (+3%) and Portugal (+2.9%), in all the other countries Italian export has fallen, even sharply, starting with Germany (-17% both in quantity and value).

The countries in Eastern Europe and the Community of Independent States also continue to show a negative trend, even if only in quantity (-4%). Following the recovery of the past two years, the Russian market shows a reduction in volume of -17.9%, accompanied, however, by an increase in value (+4.5%).

In 2002 the North American market was not very receptive to the Italian industry: -11.5% in quantity and -13.1% in value, even if the persistent trend in appreciation of the Euro against the dollar plays an important role in these dynamics.

In the first 11 months the USA registered a drop of 11.7% in volume (-13.8% in value). These data are certainly less negative compared with those of the first six months (drops of more than 20%). We have to bear in mind that this reduction can also be attributed to the highly negative trend in sales in the USA in the last six months of 2001, the period to which these figures refer.

Vice versa, for countries in Central and South America the export trend is positive, at least in quantity (+4%), particularly in the Mexican and Peruvian markets.

The data from the Asian continent are negative: both towards countries in the Far East and the Middle East, Italian footwear export has gone down (by -12.5% in volume and by -7.8% in overall value). The only exceptions in this unsatisfactory picture are South Korea and Lebanon.

Finally, exports to African countries show a reduction in quantity (-6%): the dynamics are more negative in the markets in the north compared with other areas of the continent.

On the contrary, imports of footwear continue to show signs of growth which for some time has helped to worsen the trade balance in the industry.

We should never forget, however, when commenting on interchange data, the importance of processing traffic and sub-contracting, which make simple statistical data more pessimistic than the real situation (including, in importation, the re-importing of products for which some processing stages are carried out abroad).

Imports increased in the first 11 months of last year, by +9.9% in volume and 7.4% in value, with a reduction in average prices of about two percentage points. This shows, however, a substantial separation in competitive areas between the high added value production, which concerns the higher market segments, and the relevant quota of imported footwear, which is positioned among the more economical market segments (the average price of imported footwear is exactly half that of exported footwear.)

In terms of productive sectors, import has the most positive dynamics in footwear with synthetic uppers (+23.2% in quantity) and, to a lesser extent, leather footwear (+9.5%).

In terms of geographical areas we can see how imports from EU countries are generally stable (+0.8%); this average, however, hides uneven situations, as it is the result of dynamics of strong growth in Germany and Holland and wakening dynamics in France, Belgium, and the United Kingdom. From last year's levels imports from Spain have only increased in value.

With reference to the Eastern European areas, which have always been favoured by outsourcing practices, imports of footwear have increased by 6.4% in quantity and 7% in value; the most significant dynamics concern Rumania (+8.2% in volume) and Bosnia-Herzegovina (+6.3%), as well as peaks in the Ukraine (+63%) and Slovakia (+50%).

Another area that benefits from decentring of production is certainly Africa (especially the north), where import volumes have grown by 7.6% in quantity and 2.6% in value: Tunisia (+14%) alone is the fourth country in terms of footwear supply to the Italian market.

The countries in North America have registered a reduction in the contribution to import of footwear in 2002: the flows from these areas have in fact decreased by 37% in quantity, remaining more or less stable in value only thanks to the monetary effects of exchange. This is not the case for countries in Central-South America: imports from this area have increased by 44% in volume, even if we consider the low starting levels.

Finally, as far as Asian suppliers are concerned there is a fairly asymmetric situation: imports from Middle Eastern countries seem to have collapsed (-37% in quantity), whereas those from the Far East show significant rates of growth (+15%, again in quantity). In particular, strong increase have been registered for China (+19%) and Vietnam (+15%).

Statistics regarding the order books in the last 3 months of the year interconnect with those already present in the survey carried out at the end of November. They provide a further piece to the puzzle of the economic situation. In comparison with those data, however, the data presented here also include reorders, and therefore the result is higher in absolute value: any comparisons should therefore be made with caution.

One of the most significant indicators, however, that leaves no space for optimism for 2003 is the disappointing trend in collection of orders. The average orders book of the companies interviewed is in fact positioned at the same real levels of the previous period (+0.4%).

In such a context, the domestic market shows an improvement of close to one percentage point, which is however important for the positioning in the domestic market.

The order book generated by the German market is unfortunately linked to the negative trend in demand in that country: in quantity, the collection of orders from Germany decreased in the last quarter by -5%. The dynamics of orders collected from other EU countries is decidedly more promising, with an average increase of +2.4% in real terms.
The American market is still moderately negative. Orders collected show a decrease that is however less than one percentage point (-0.7%), probably penalized by the unfavorable exchange dynamic.

The Japanese market also shows a slight reduction in the orders collected (-0.6% in quantity), which demonstrates that the negative market situations are not only a feature of European market areas.

The residual data concerning "Other countries" shows instead a fairly positive order book situation (+4%).

In short, we can say that the overall picture regarding order books does not leave much hope for a change in the economic situation in the short-term, as the pace of production and sales for the first half of 2003 will not differ much from the levels reached in the last few months. If this is probably true on average, it is however possible that some markets or segments may have a performance that is more or less lively in the next few months.

The order books are also somewhat less substantial compared with the last survey. The period of production guaranteed by the orders collected has dropped below three months: the tendency to divide up orders is one of the symptoms of a continued narrowing in demand.

As mentioned, the forecasts for orders regarding the first six months of 2003, to be assessed with caution given that they are samples, are characterized by considerable skepticism about the expected economic development.

Concerning the domestic market, among those companies interviewed 44% do not expect changes compared to the orders currently collected, while only 19% expect an improvement. For the remaining 37% the drop in the domestic market will continue into the first 6 months of 2003.

The picture becomes more positive, however, if we consider expectations for foreign orders: 38% of the entrepreneurs interviewed foresee stability in the order book, 36% expect a further reduction in the orders collected, but 26% of the interviewees expect to see a recovery in foreign orders.

This aspect also demonstrates a picture of future development: an average that is still not positive, but high variability in the results, underlying some situations that are potentially very positive alongside others that are very negative.

Moving on to an analysis of the trend in domestic consumption, in the first ten months of 2002 consumption by Italian families increased by +2.9% in quantity and +5.2% in terms of expenditure. In spite of the slowdown in the last months of the year, there is confirmation of a modest recovery in end consumption compared with the levels of the previous year.

With reference to the various product categories, all the categories considered show positive dynamics, which range from the substantial stability of the children's segment (increased by +1% in value), up to +4.8% in volume (+7% in value) for women's footwear. Positive consumption trends have also characterised leisure footwear (+3.6% in quantity) and, to a lesser extent men's footwear (+1.9%) and sports shoes (+0.6%).

As in previous surveys, the data concerning the labour market show some problems, which is understandable given the persistence of difficult economic conditions.

Even though companies have made great efforts to defend employment levels, the end of year situation shows a further cutback in the workforce employed in the footwear industry (-1% the result for companies in the sample).

Sixty-one per cent of the entrepreneurs interviewed declared there was substantial stability in the workforce employed, more than 26% of our sample stated they had undergone a reduction in the workforce, while 13% of the interviewees increased employment in the period in question.

Another signal of structural difficulty comes from the data of the development of companies being set up/folding. According to the Chamber of Commerce's databank, in the entire Leather Area (tanneries, leather goods shops, shoe factories and makers of parts), the number of companies that were active in 2002 dropped by 1.1% (equal to 300 units).

As for expectations concerning the first half of the current year, consistent with the evidence emerging from other variables, the employment situation confirms the possibility of a further cutback in the workforce of around one percentage point, as a result of the still unpromising scenario that awaits footwear companies in the near future.

The analysis of the data concerning recourse to wage supplement instruments, referring to the entire Leather Area, shows even more explicit signs of current difficulties: the hours of CIG requested by companies exceeded 9.2 million (it was a little under 6.5 million in 2001), with an overall increase of +42.4%.

The average figure is made up of an exorbitant increase in ordinary instruments (more than double compared with 2001, +136.6%), and a considerable reduction (-34.4%) in extraordinary instruments.

Collections and payments
Evidence regarding the collections/payments cycle for the last six months of 2002 can only confirm the economic situation just described.

The relations with foreign suppliers show a trend of increase in terms of payments, reported by 36% of interviewees, while the situation of domestic supply is stable (79% of interviewees). The extended payment conditions, a rather rare phenomenon especially towards foreign suppliers, is a further demonstration of the difficult economic situation. Various footwear companies find they have to renegotiate extension terms "upstream" due to real liquidity crises, thus increasing the burden of interest paid for these extensions.

The data concerning extensions granted to customers show the tendency to extend terms which have long characterised the relations of exchange with demand and which have naturally increased in this economic phase. In the domestic market 57% of the interviewees report that collection periods have increased, and 38% of interviewees reported the same phenomenon for foreign markets.