Short-term impacts could mean a drop in store visits and an increased shift to online shopping

Short-term impacts could mean a drop in store visits and an increased shift to online shopping

How retail and fashion companies and their supply chains might fare coming out of the coronavirus crisis – and possible longer-term impacts on social trends and behaviour.

There is an old saying that "The true test of strength is a challenge." Challenges come in all shapes and sizes, and retail and fashion have seen their fair share – whether catching up with disruption, adapting to internal or external change, technology, cost and margin pressures, new consumer behaviours or trade wars.

While our hearts are with the people and families impacted by Covid-19, the coronavirus or any other contagious disease is not a challenge that would come to mind as a test of strength for fashion companies. But here it is: a virus that started in Wuhan, China, disrupting global supply chains and quickly spreading to other countries across the world with its accompanying panic and fear. The World Health Organization (WHO) on 11 March declared the virus a pandemic, underlining its rapid and global spread.

There are two possible situations when it comes to the impact of the coronavirus on retail and fashion companies, how they will fare coming out of the crisis, and any longer-term impacts on social trends and behaviour.

Scenario 1: It turns out to be a truly apocalyptic plague with widespread loss of life. All facts suggest otherwise and it seems that strict containment strategies are working. An example being China, which has been able to curb the spread of the virus. So we can disregard this extreme scenario.

Scenario 2: The most likely outcome will be that governments' containment and isolation strategies work and within months the spread of the virus will be stopped, and a vaccine and cure will be available – mitigating any further risk.

Let's explore the impact of this short-term disruption, first in the supply chain, and then the effect on consumers and how various fashion companies might emerge from this crisis.

Supply chain shock: The immediate impact on supply stability and security

Supply disruption by region and dependence on foreign inputs:

So far the virus has already impacted two of the major fashion goods producing countries – China and Italy – with China now ramping up slowly after 3-4 weeks of severe disruption after Chinese New Year and Northern Italy almost shut down at this point.

Chinese manufacturing is more vertical compared to other countries – it makes garments and other fashion product with little or no imported components. Since we have assumed this impact is over a few months, we won't talk about primary raw materials like wool or cotton as they would be covered from current reserves already in place. Chinese factories saw a lot of disruption coming out of the Chinese New Year holidays, but this is typically a less busy time, which would slightly mitigate the impact of this disruption.

South Korea and Japan, also niche producers of premium fashion products and some raw materials like fibre, fabrics and leather, have also been badly impacted, with the textile producing city of Daegu in South Korea being at the centre of the virus's spread in the country.

Central and South America production using US, regional or Chinese components was also less disrupted, and any Chinese origin inputs that are required are probably in production or on their way with Chinese factories starting to come back to work.

European manufacturing, including that in Eastern Europe, is dependent on some components from China and other raw materials from the European region, especially Italy. While Chinese factories are coming back to capacity, there are large disruptions across Italy and potentially Spain, Germany and France – and uncertainties over the potential scale of this disruption to supply chains connected to producers in these countries.

With the whole country in lockdown, Italian manufacturing now is most impacted. This has implications not just for finished goods like shoes, bags and clothes that are made in Italy, but also the trims and fabrics made here and shipped to other countries around the world for many luxury and accessible luxury players.

While every company will be impacted by these supply chain issues, based on the usual geographical spread of production for a typical discount, mid-market and luxury company, businesses sourcing outside of Europe will be less impacted due to larger capacities, less dependency on European components and seemingly successful isolation of infectious areas in China.

Supply chain capacity crunch:

After the disruption, as manufacturing capacity comes back after factories open and regain full worker strength there will be two challenges these suppliers will have to contend with:

  • A backlog of orders to be produced;
  • In most cases there will be fewer workers available as they take time to regain confidence to return to work.

With factories having to produce more quantity in less time for planned season launches, they will prioritise – and most likely prioritise based on the margin they make with each customer – with the most profitable goods being made before the least profitable.

The fear of cancellations on delayed goods could also encourage this approach with factories preferring to have cancellations on lower value versus higher value goods.

Shipping and air freight capacity:

The initial backlog in production will then spill into shipping and air freight capacity as more goods become available to ship from factories to international markets. Air freight capacity is also being hit globally, with flight cancellations due to countries enforcing travel and entry bans and people postponing travel out of fear. This capacity crunch is bound to cause a significant jump in freight costs despite the decline in the price of oil.

While the impact of the virus disruption to supply chains is going to be widespread, every company's situation is unique, as is their supply chain and customer base. Supply chain footprint, configuration and the factors listed below can all have a bearing on how successfully a company deals with the aftermath of this disruption:

  • Markets served and proximity to suppliers;
  • Internal collaboration fostered by structure and culture;
  • Skills and experience of supply chain teams;
  • Supplier capabilities;
  • Supplier relationships;
  • Level of collaboration within the extended supply chain, including raw material suppliers.

Customer behaviour impacts

All crises leave a legacy. The great depression spurred a "waste not want not" attitude that defined consumer patterns for decades. The Asian financial crisis left the region hoarding the world's biggest collection of foreign exchange. The 2008 global financial crisis defined the behaviour and attitude of a whole generation that still reverberates.

As the effect of the coronavirus has now spread beyond China to other parts of the world including key fashion markets like the US, Europe and Japan, impacts are starting to be seen on customer and shopping behaviour.

Morgan Stanley analysts last week found that in the US, total retail traffic fell 9.1%, apparel retail traffic fell 3.9% and luxury retail traffic declined by 14.7% – and that was just at the start of the panic over the virus. Expecting the final numbers to be worse and to support containment, many retailers are voluntarily closing their stores or limiting the trading hours.

  • Some short-term impacts could mean a drop in store visits, an increased shift to online shopping, and perhaps even a sharp drop in overall sales, with discretionary purchases being most impacted as consumers focus on buying necessities and core items.
  • Long-term impacts may be towards remote working, increased proliferation of IT and digital collaboration, or the disease serving as a wake-up call on the fragility of human life and driving a shift to a more minimalistic way of living.

Companies facing double disruption – both to their bottom-line profitability and to their top-line revenues from a combination of supply chain upheaval and reduced consumer spending – will have to work to mitigate the impact of coronavirus-led disruption once the dust settles and calm returns.

Irrespective of price positioning or geography, companies that are strong, profitable and well managed with robust business models will emerge stronger – while those without risk being added to the growing list of retail bankruptcies as great retail disruption continues.

About the author: Roit Kathiala has led sourcing, production and manufacturing teams with some of the leading global fashion retailers in Europe, Asia and North America. In addition to his years of industry experience he advises leading fashion companies on their sustainability, sourcing and supply chain strategies and transformations.?