Supply Chain Coronavirus Questions Loom
The impact on sales in China is getting all the attention, but another worry looms.
While the world is still holding its breath hoping the coronavirus outbreak doesn’t get any worse — or deadlier — the accounting of its financial impact is starting to become more clear.
At least on the revenue-generating side of the fashion equation, that is. The supply chain is still a big unknown.
Many companies, including Levi Strauss & Co., Ralph Lauren Corp. and Nike Inc., have all closed about half of their stores in China. But Capri Holdings was the first to put the disruption from the illness into sales terms on Wednesday.
The company, which owns Michael Kors, Versace and Jimmy Choo, has closed 150 stores in China and said its revenues next quarter would take a $100 million hit from the virus.
But there could still be another shoe to drop if more factories close as Chinese officials work to contain the virus and the international transportation network reacts.
The timing of the outbreak has helped to ease its impact. At least some brands shipped goods earlier than usual given the early Lunar New Year. And for factories that were already shut down for the holiday, the closure was simply lengthened. February is also traditionally a slow month for shipping and retail, a time of the post-holidays shopping lull.
“This is a very slack time for retail supply chains as it is, so it will probably be several weeks before supply chains start to feel any measurable impact,” said David French, senior vice president of government relations at the lobbying group the National Retail Federation. “And we don’t know what the course of the containment strategies are going to be between now and then.”
The U.S.-China trade war could now — oddly — work in fashion’s favor, since higher tariffs and the threat of even more prompted companies to fast-forward efforts to diversify their supply chains.
“Many retailers have already been looking for alternative sourcing and locations, and tried to diversify their supply chains,” he said. “This is a circumstance that retailers have been working on for a couple of years now, and the coronavirus may accelerate it.”
The supply chain, however, has lots of moving parts and doesn’t move easily.
And it has many links, with raw materials needing to be produced, then moved to the factory, which then makes the goods and sends it on to the ports and so on.
Each step of the way, key players and regulators are looking at how to contain the virus, tightening up in ways that could restrict the flow of trade.
Shipping ports around the U.S. are taking their cues from the federal agencies handling the response to the outbreak, namely the U.S. Coast Guard, the Centers for Disease Control and Prevention and the Department of Health and Human Services.
The U.S. Coast Guard on Sunday issued restrictions for vessels coming in from China, saying that vessels containing passengers who have been in China within the previous 14 days would not be allowed into the U.S.
Its restrictions for cargo vessels so far seem less stringent — commercial vessels without passengers, which have been to China in the last 14 days, will generally be allowed to come in as long as their crew members are not ill.
The American Association of Port Authorities, which represents 80 of the roughly 150 commercial port authorities around the country, has been in contact with member ports, and is following guidance from federal agencies.
“We’re proactively establishing points of contact for our ports,” said Cary Davis, the AAPA’s government relations director and general counsel. “We’re tracking CDC’s travel advisories, we’re tracking the [Customs and Border Protection’s] clampdown on travelers from high-risk regions — not only are we tracking, but we’re also educating all of our port members on what we’re hearing from Washington,” he said.
The American Apparel & Footwear Association, the trade group representing more than 1,000 brands, has highlighted the CDC’s guidance that the virus is unlikely to spread through contact with products shipped from China.
The CDC has said that the viruses do not survive long on physical surfaces, and are more likely to be spread through “respiratory droplets.”
Meanwhile, brands monitoring the factory closures in China will also need to consider how the supply chain will function when factories reopen, and deal with revived components of the chain potentially moving at different speeds.
“You are producing a product made from a number of materials and components,” said Stephen Lamar, president and chief executive officer of the AAFA. “Under normal circumstances, this is a very efficient supply chain that is used to shutting down for a couple of days over the Lunar New Year, and now it’s being shut down for [longer]. Will it turn back on again efficiently and seamlessly?”
That’s just one of many questions for fashion’s supply gurus to ponder.
For now, investors are in wait-and-see mode and seem to be generally thinking about other issues.
Wells Fargo analyst Ike Boruchow noted, “The market does seem to be shrugging off China-related concerns.”
He pointed to Capri’s shares, which rose strongly despite the sales hit in China.
Boruchow attributed this to some pullback already in the stock market over the past few weeks and reports that progress is being made toward a treatment of the illness.
But the stock market — and the outbreak — both have the potential to move fast.