Coronavirus continues to wreak havoc across the global economy. Drapers looks at the impact on fashion supply chains, how retailers are responding and how the shut-down in China could lead to long-term changes to sourcing habits.
Towns, cities and entire regions across the world are on lockdown, and in China have been for weeks. Offices and factories are closed, private vehicles banned and movement restricted in a bid to curtail the spread of a deadly new virus. Covid-19 – popularly known as coronavirus – has caused tragedy and chaos since it emerged in the Chinese city of Wuhan at the end of 2019.
Thousands of cases of the potentially deadly respiratory infection are still being reported, and on 26 February it emerged the virus was growing faster outside China than inside for the first time. The World Health Organization has cautioned against assuming the worst is over.
Beyond the devastating human cost, businesses are also feeling the deep impact of the ongoing outbreak. The Chinese economy is already taking a hit.
The government has sought to ease pressure on financial markets by offering huge cash injections to help market stability. An outbreak of SARS – a similar respiratory infection – in 2003 led to a 1.1% reduction in GDP that year. The new coronavirus is already more deadly and infectious than SARS and is impacting a Chinese economy that has grown much larger in the intervening years.
Short-term sales drops are already slowing growth for brands and retailers, particularly in the luxury space, where the booming Chinese market is key. Burberry, Apple, Moncler and Nike have temporarily closed stores and warned on the shutdown’s impact on sales. Nike has said it has closed more than half of its stores in the country and Moncler has reported footfall down 80% at its 55 Chinese stores.
It is too early to divine the long-term impact of the outbreak on the global fashion industry. This will largely be determined by if and when factories are able to return to full capacity. At present, some remain closed in the worst-impacted areas, centred in Hubei province, part of China’s central manufacturing belt.
Factories that are open face staff shortages, as employees are still unable to return following the Lunar New Year holiday at the end of January.
Made in China
China is deeply embedded in all aspects of fashion’s supply chain. The World Trade Statistical Review found that in 2018 – the most recent data available – China exported $118.5bn (£91.1bn) of textiles and $157.8bn (£121.5bn) of clothing, making it the world’s biggest exporter of these categories.
Businesses are taking mitigating action to reducing risk and their dependence on Chinese manufacturing. But even those not manufacturing directly in China are feeling the impact: the World Trade Organization reports that the country is responsible for 37.6% of all global textile exports, so the shut-down is stalling production around the globe.
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At Parisian textile trade show Première Vision, which took place earlier this month, more than 30 Chinese mills that were due to attend were absent, and international suppliers expressed concerns over the supply of yarns for their own textiles. The managing director of one British silk manufacturer, which sources 95% of its silk yarns from China, told Drapers he has been forced to send its undyed yarns to Italy to meet demand from international customers.
Northern Italy is known for its fashion manufacturing, and is home to the headquarters of luxury brands such as Moncler and eyewear label Luxottica. The region is now feeling the effects, and several towns north of Milan are in lockdown.
At Milan Fashion Week on 18-24 February, Giorgio Armani live-streamed its collection without an audience. Trade show White, held in the city on 20-23 February, reported a drop in visitors of 17% on the last edition, and footwear event Micam, also held in Milan, recorded 5% fewer visitors as a result of Asian buyers staying away (read our full coverage of Micam).
Meanwhile, at Paris Fashion Week on 24 February-3 March, Chinese fashion houses such as Masha Ma, Shiatzy Chen, Jarel Zhan, Calvin Luo and Maison Mai all cancelled their shows.
John Stevenson, retail analyst at Peel Hunt, believes the immediate impact for retailers may currently be muted by the timing of the outbreak – which reached its peak around the Lunar New Year holiday, which started on 25 January: “In a way it couldn’t actually have come at a better time for retail. Chinese New Year is traditionally a period of significant disruption, so the majority of spring-summer stock is already in the UK or on the water.”
He describes businesses as “in the waiting room”, unable to predict or plan for the longer-term impacts until the length of the delays becomes clear. Buying offices and factories are re-opening, but capacity remains limited. If the situation does not improve, late summer deliveries and autumn 20 stock will be hit.
You can switch out your supply chain. It would be costly but it’s possible.
David Maddison, HSBC
Businesses are putting contingency plans in place.
“With clothing and apparel you can switch out your supply chain and move to India or Bangladesh, or another market instead,” says David Maddison, associate director (retail and leisure) at HSBC, who works with retailers and brands working in China. “It would be costly but it’s possible. Once the factories are back at capacity, we’d expect retailers to look into air freighting stock to the UK if it misses shipping deadlines. They are taking the hit on cost to get it into the stores.”
He predicts that consumers may see smaller numbers of SKUs on the shelves in the autumn season. There is also the potential for prices to be raised to slow the “churn” of stock to counteract some of the expenses around delays.
Around 45% of value retailer Primark’s stock is manufactured in China. John Bason, chief financial officer at owner Associated British Foods told Drapers last week that it was considering moving manufacturing to south-east Asia and European countries such as Turkey to mitigate the effects of the shut-down in China in the short term. However, he stressed that ultimately, the retailer hopes Chinese workers will return to factories.
Contingency measures will eat into profits in already challenging times for retailers, but the costs associated with ensuring stock availability outweigh the potential damage and losses for retailers if there is no product to sell.
Suppliers are now telling us orders will be delivered a month later than scheduled
Frankie Thorogood, TCA Fit
Performance activewear brand TCA Fit manufactures its technical products in China. Its largest supplier is based at the epicentre of the outbreak, in Wuhan. Founder Frankie Thorogood explains that although there has not yet been a financial impact on the business, he is working to guarantee the supply of core lines and bestsellers.
“Suppliers are now telling us what the delay is for any orders that we have placed. At the moment, they will be delivered a month later than scheduled,” he says. “With some seasonal products, a month delay makes them much less relevant.
“We can’t stop the orders, as they have ordered the fabric or started production. For our core thermals, for example, we’re telling suppliers to make the products and to ship half of it now and the rest in Q4 – saving it for the new season.”
Production is also being moved to different locations.
“Two or three of our top sellers are manufactured at our Wuhan supplier,” says Thorogood. “Those are now being sent somewhere new – still within China – for sampling to get the ball rolling, as we can’t be out of stock on those items.”
The disruption is prompting retailers and suppliers to reassess their supply chains. Rising labour costs, the US trade war – which has led to huge tariffs for those importing into the US – and an increased focus from Chinese manufacturers on producing for their own market, are some of the reasons retailers are moving away from the market.
Retailers cite Bangladesh, Turkey, Vietnam and Taiwan as destinations that are emerging as alternatives – particularly for those searching for lower prices.
One footwear supplier tells Drapers the virus could hasten a move away from the market: “It’s another kick in the teeth for China, especially after the trade war with the US. They’re on the back foot.
“We don’t know when things are going to start moving again [in factories], but most people are already starting to outsource away from China. Businesses will start pulling their supply chains away. It shows that businesses are too exposed and reliant on China.”
Thorogood believes the outbreak adds weight to the case for supply chain diversification: “There are sustainable practices that we want to increase, labour costs are high in China meaning production is expensive and you are always at the mercy of the Chinese government. This adds another reason to start looking to diversify.”
Peel Hunt’s Stevenson says many will be cautious of moving away from the market completely: “Retailers will take a look at their supply chain and look at their risks to see if they have overexposure in certain areas.
“We’ve seen movement away from China already. Retailers will be loathe to have a knee-jerk move away, but it will raise questions for many on how balanced and flexible their supply chains are.”
The low cost and product expertise offered by Chinese manufacturers means that, despite the shut-down, the country is likely to remain key – especially in the current, cost-conscious environment.
“The UK retail sector continues to face challenges and for a lot of retailers keeping costs down is an imperative,” says HSBC’s Maddison. “After Brexit, when we secure a concrete trade deal, if sterling returns to a stronger position and there’s a bit more of a certainty, then that’s when retailers should take the chance to diversify their supply chains and make them more resilient to this kind of unexpected disruption.”
The specialised production available in China means moving away from the market would be a challenge for some brands. One womenswear occasionwear retailer tells Drapers it was forced to delay new product launches because stock was being held in China. The expertise of Chinese suppliers mean the country will likely remain a key sourcing destination for the brand, despite the delays.
“The decision of where our suppliers are located is product based. There is a lot of production for our specific type of product in China and it is difficult to challenge that specialism,” says a spokeswoman. “Additionally, if we were to move elsewhere – those markets still would rely on China for their fabrics. Our suppliers in India are currently impacted because they can’t access fabrics.”
Although it emerged in China, coronavirus is now spreading, and Iran, South Korea and Italy are all “hotspots”. The future impact on people and businesses around the globe remains unknowable, but China’s shut-down has for many highlighted the importance supply chain diversification and flexibility – potentially driving an existing shift from China’s dominant stance in the market.