Is coronavirus a threat to the clothing industry? - Just Style
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Is coronavirus a threat to the clothing industry?

By admin-demo 30 Jan 2020

Concerns are rising over the coronavirus outbreak in China – but what is its potential impact on global fashion retailers and their supply chains?

Is coronavirus a threat to the clothing industry?

Concerns are rising over the coronavirus outbreak in China – but what is its potential impact on global fashion retailers and their supply chains? 

Since its discovery in the Chinese city of Wuhan at the beginning of the year, the spread of the new ‘Wuhan novel coronavirus’ has been rapid. Around 8,000 cases have now been confirmed, and more than 170 people have died.

Cases of infection have been reported in Thailand, Hong Kong, the United States, Taiwan, Australia, Macau, Singapore, South Korea, Malaysia, Japan, France, Canada, Vietnam, Nepal, Cambodia, Germany and the United Arab Emirates. 

In efforts to stop the spread of the outbreak, Chinese authorities have placed Wuhan in Hubei province – the most populous city in central China and located about 300 miles west of Shanghai – under quarantine and are not allowing its citizens to leave the country. 

Other precautionary measures include closing public transportation in some cities and conducting screening in major transportation centres. And several provinces and regions have also extended the Lunar New Year holiday, including key apparel-producing provinces Guangdong and Zhejiang, meaning factories will remain shut until 10 February.

British Airways (BA) has become the first airline to suspend all flights to and from China. And Britain’s Foreign Office and the US Centers for Disease Control and Prevention (CDC) have warned against all nonessential travel to China.

Likely impact

Against this rapidly-changing backdrop, analysts have been trying to work out how the spread of the coronavirus is likely to impact brands, importers and consumers.

China is a growing market for international brands and retailers, but the shutdown of cities and transportation systems as the coronavirus spreads is likely to take a toll on sales, analysts say.

According to Moody’s Investors Service, the immediate and most significant economic impact is likely to be in China, “by lowering discretionary consumer spending on transportation, retail, tourism and entertainment. It could also disrupt domestic supply chains if the outbreak persists, resulting in a broader hit to the economy. There are also potential global ramifications, given the importance of China in global growth as well as in global company revenue. 

By sector, “the coronavirus will likely have the largest negative impact on goods and services sectors within and outside of China that rely on Chinese consumers and intermediary products,” it adds. However, the impact on offline retail sales is likely to be buffered by the rapid shift to online sales in China over the past decade.

B.Riley’s Susan Anderson believes apparel and footwear retailers will likely see a lower negative impact compared with travel or restaurant companies. Consumers who are encouraged, and in some cases forced, to stay in and avoid travel may boost China’s already robust online retail sales by deciding to shop from home, she says. 

Meanwhile, Honor Strachan, principal analyst at GlobalData, believes the escalation of the severity of coronavirus coupled with a ban on travel for Chinese consumers, could have a detrimental impact on airport passenger numbers – hitting companies that rely on the Chinese domestic and tourist market for a large proportion of their revenue.

Global airport retail sales, for instance, are currently forecast to reach US$48.2bn in 2020, up 6.1% on 2019, according to GlobalData.

“Over the last few years airport retailers, especially those in Europe, have tailored their propositions, integrated Chinese payment solutions and invested in Mandarin-speaking staff to target Chinese passengers and maximise sales growth opportunities,” Strachan explains. “If outbound tourism from China suffers as a result of coronavirus, airport operators and retailers must adapt their strategies to target other passengers.”

In 2003, SARS caused tourism spend in China to collapse while visitor numbers to Thailand, Malaysia, Singapore and Hong Kong significantly dropped off, causing airlines to ground planes and reduce flight schedules. 

In response to the current crisis, retailers are considering closing stores, with the China Duty Free Group closing its mall in Haitang Bay – impacting the APAC duty-free market in 2020. 

Should foreign offices extend their advice of avoiding travel to the region, then passenger numbers and airports in tourism hubs such as Beijing, Shanghai, Chengdu and Xi’an will be negatively hit. 

As well as BA suspending all direct flights to mainland China, the likes of United Airlines and Cathay Pacific Airways have also cancelled selected flights to China.

“Asia Pacific is forecast to be the fastest performing region for airport retail spend in 2020, with sales rising 8.4% to US$21.7bn – 45.1% of the global channel,” Strachan adds. 

“While this recent coronavirus outbreak cannot yet be compared to the impact of SARS, if the coronavirus continues to spread globally over the course of 2020 its impact on tourism and economies, particularly across APAC, could be severe.”

Supply chain disruption?

Moody’s analysts also expect the negative spillover will affect “countries, sectors and companies that either derive revenue from or produce in China.” 

They add: “The outbreak will also potentially have a disruptive effect on global supply chains. Global companies operating in the affected area may face output losses as a result of the evacuation of workers. 

“Companies operating outside China that have a strong dependence on the upstream output produced from the affected area will also be under pressure because of possible supply chain disruptions resulting from temporary production delays.”

“It is also credit negative for speciality retailers – and apparel retailers in particular – which rely on Chinese suppliers and whose operations would be harmed by supply chain disruptions.”

However: “We do not expect potential supply chain disruptions to have an immediate impact on the companies we rate. The Chinese Lunar New Year is a public holiday so production levels are normally much lower during this period. The Chinese authorities have told businesses in at least 24 provinces not to resume work before 10 February. If these measures are extended beyond a couple of weeks, speciality retailers could face some disruption in their product sourcing, which could result in inventory shortages, loss of market share and a decline in sales and profit that would weaken credit quality.”

As for the implications for the apparel supply chain, Mike Flanagan, CEO at Clothesource, points out while there are virtually no spinners, weavers or garment makers in Wuhan, Hubei does play a key role in linking to China’s eastern production areas.

Writing on just-style, he also notes that there may be production shift to neighbouring producer countries such as Vietnam or Myanmar, but this is likely to be a temporary move.

The backdrop, of course, is that many Western fashion brands and retailers are already trying to reduce their exposure to sourcing from China, and are scrutinising their supply chains very carefully in response to the ongoing trade war with the United States.

So the coronavirus outbreak serves as a timely reminder to sourcing executives of the need to future-proof their strategies, diversify sources of supply, and maintain alternatives to China in an environment that already includes an uncertain global economy, geopolitical ambiguity and unclear trade relationships.

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