With spring/summer now a write-off for most fashion retailers, the resulting flood of excess inventory – and the subsequent discounting and margin erosion – will likely lead to widespread administrations for companies in the UK, Europe and the US.
“Brands are very, very threatened in a way that they haven’t been before,” says Richard Hyman, an independent UK-based retail analyst. “This is a completely unprecedented situation, and this amount of stock is mind boggling. The market’s natural stance is to avoid scarcity, but not on this scale.”
Mike Flanagan, CEO of UK-based apparel industry consultancy Clothesource, suggests that only those who have either got strong cash reserves, are financially stable due to prudent management, can raise new funds from shareholders, or “have a strong physical retail network that can drag customers in to buy other stuff [such as food],” are well-placed to survive.
Hyman adds that while “it is certain that all western markets will be hit hard,” the UK “is in a particularly vulnerable position” due to its middle market being significantly larger than elsewhere.
With consumers likely to shift their purchasing to more casual value-driven pieces and one-off high-end items for special occasions, the middle market is “where we’re going to see a disproportionate amount of distress,” he explains.
He adds that the UK will also suffer because its online clothing market has expanded more quickly than elsewhere, while the amount of retail floor space has also continued to increase, leading to a market which is “grossly over supplied.” He notes “there are far, far too many players,” adding that the looming impact of Brexit will also lead to extra damage.
Once the temporary government support for businesses disappears, “a lot of [UK clothing retail brands] are going to go I’m afraid.”
When it comes to dealing with the merchandise of the brands that go bust, Flanagan says such garments may not even reach the western markets where they were due to be sold.
“Most of the stocks are in Asia, and probably not worth shipping to the US or Europe,” he explains. “In China, a lot might be sold off locally; elsewhere it’ll probably go to a dump.”
Hyman adds that, due to the excess levels of stock, for many brands still operating there will be far more discounting. He reveals that one retail CEO told him: “It’s going to be Black Friday every day,” adding: “It’s very difficult to maintain any kind of brand equity in a market like that. Everyone suffers.”
Rosemary Coates, executive director of the US-based Reshoring Institute, a collaboration between the University of San Diego and Blue Silk Consulting, says that for the stock that is sold off to consumers, “there are bargains to be purchased by those with the money to buy, and this is how many well-known labels got re-started and made a second-coming.”
As for what types of clothing are likely to be purchased as the pandemic eases, she predicts working habits are far more likely to include many or all days where employees work from home. As a result, there will be “less spent on business apparel and more on home loungewear such as sweatpants and T-shirts.”
Hyman says consumers are likely to continue using e-commerce to buy their clothes, having done so during lockdown, and due to lingering concerns about coronavirus.
He notes that many people “who were reluctant to shop online have been won over,” adding that brands will be under far greater pressure to create compelling reasons for consumers to venture out to stores.
Meanwhile, suppliers are also in danger as brands face the prospect of going into administration.
Flanagan stresses the only way a supplier can avoid risk completely – either with a current or new client – is by ensuring a buyer has issued a “confirmed, irrevocable letter of credit. No other sign means anything when disaster strikes.” He explained that apart from cash in advance, this is the “only infallible sign of ability to pay.”
Coates adds that looking ahead, “suppliers should stay very close to buyers’ forecasts and confirm the forecast regularly. In this environment, a conservative approach to production is the best strategy.”
Hyman says that when it comes to striking deals with new clients, “suppliers need to do proper due diligence…or you need to indemnify yourself,” adding that it is extremely difficult to get credit insurance when supplying brands who are struggling.
As for how brands can maintain good relations with key suppliers without pushing themselves to the wall by sending out money they do not have, Coates suggests the best way to cancel orders in progress is “to negotiate a settlement between you and your supplier – perhaps pay for the raw materials or a percentage of the labour used. In this way, you can preserve the business relationship for the future.”
And buyers will also need to do their due diligence to ensure suppliers will be able to deliver.
In India, for instance, cancelled orders and the non-payment of invoices is likely to force 25% of the country’s apparel manufacturing units into bankruptcy when they restart operations in June or later once the current lockdown ends and look at the books, says Rahul Mehta, president of the Clothing Manufacturers Association of India (CMAI).
“The new orders are unlikely to be placed before August because of huge unsold stock,” he told just-style. “There will be some amount of bad debt and a huge amount of extended credit.”
Some exporters are already looking to sell their unshipped garments in the Indian market, but due to the lockdown, retail outlets remain closed, and are unlikely to open before June.
Furthermore, according to a note issued last month by the Federation of Indian Chambers of Commerce and Industry (FICCI), entitled ‘Textiles – Issues faced by the Industry due to Covid-19,’ domestic demand could be reduced by 80% and an anticipated crash in prices will likely to erode 30% to 40% value of the inventory.
A similarly unstable situation exists in Bangladesh, where the textiles and clothing industry, which delivers 84% of the country’s annual export income, has already reported US$3.17bn worth of shipment cancellations or suspensions from 1,149 factories.
“We have payments being held up by buyers for the goods being shipped, discounts being imposed absurdly, and we don’t know the fate of raw materials we purchased against confirmed orders by drawing bank loans,” says Dr Rubana Huq, president of the Bangladesh Garment Manufacturers and Exporters Association (BGMEA).
She estimates the sector, which employs more than four million people, has roughly US$2bn worth of liabilities with banks to be settled, which is “enough to disable a good number of factories here.”
“We cannot say yet for sure how many factories will be forced out of business due to the excessive stocks and the current impasse,” the BGMEA president told just-style, warning that this depended on how well the government can help manufacturers withstand the crisis, how well global brands and retailers behave and support the industry, “and how quick the world gets back to normal.”
That is the big unknown, stresses Dr Huq, given the potential for a post-Covid 19 global recession, future sluggish demand for apparel, declines in prices, germaphobia, and a shift from bricks-and-mortar to online shopping.
“We don’t know yet how the world will look like in one or two months’ time, but we are certainly not sitting idle and let our hard earned success be doomed.”
With additional reporting by Raghavendra Verma and AZM Anas.