Coronavirus Hits Keep On Coming
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Last week, Brian and I both talked about the risk of supply chain shocks, and Covid-19, the “official” name for that virus you’re hearing so much about, which appears to be growing in its impact. As Yahoo Finance pointed out, “a slew of corporate earnings results will draw investor attention this week.”
Along with the retrospective announcement on corporate earnings, we can expect to hear new guidance from management on the outlook for quarters to come. Bets here are that guidance will show a downward trend, both on the supply and demand sides of the business, for companies up and down the retail value chain. We’ve already seen that from Under Armour, as I pointed out last week, but there are many, many retailers to follow, at every end of the product spectrum. And as the BBC reports, Jaguar/Landrover is so concerned about running out of parts for its UK-based factories that it has resorted to flying in parts for its cars from China in suitcases – something most retailers will not have the luxury of doing!
A week ago, Business of Fashion (paywall) summed up what has already happened:
- There’s the human toll. While the fatality rate is supposedly lower than a “standard” influenza outbreak, the sheer numbers are very high, and growing in scope daily
- The impact on China’s economy is going to be huge. Many factories employ workers stranded in other cities and would have to be quarantined if and when they arrive in a new city for two weeks
- This bit is stunning: “For global fashion brands, samples and spring shipments are hanging in the balance. “If they’re not in production now, I don’t know how they’ll make it to stores and consumers,” Burstein [Mark Burstein, president of NGC] said. Although major retailers are considering supply chain diversions to countries like Vietnam, getting acquainted and up to speed with new vendors could take months, and cutting corners could create problems down the road.”
- The world’s largest mobile phone industry event (MWC) has been canceled
- Art Basel Hong Kong has been called off
- Fashion companies with big names and brands like Burberry, Moncler and Kerig are “bracing themselves” for continued disruption.
Bear in mind, that information is now over a week old.
Today, we’re learning that the pandemic has moved far outside of China. South Korea, Iran and Italy are all reporting “a surge in confirmed cases.” The situation is somewhat freakish, with evacuated cruise ships (very poorly executed for re-patriated Americans), somewhat high profile deaths, including two of those cruise ship passengers, the doctor who has worked the longest on treating victims, and the “whistleblower” who first told the world the virus was extant and growing, and a death toll that already exceeds that of the SARS virus some years ago. It feels like the world is waiting for another shoe to drop in this story (no pun intended).
Sooner or later, we can expect to see economic impact trickling down to consumers. Retailers and suppliers will likely seek other, more expensive sources of goods and consumers will see price increases at the register.
This is the long way around saying what is rapidly becoming RSR’s mantra. It is time for better, faster forecasting (and re-forecasting) systems. It would help if those forecasts were tied into sourcing systems to improve reaction time. I know it’s not a small ask – to ask retailers to spend money in an era of economic uncertainty. But honestly, I don’t think we have a choice. Demand is going to fluctuate wildly. Supply may dry up or suddenly flood the market. We simply don’t know. The industry’s only hope is to reduce reaction time. We don’t want to see retailers running out of working capital because they can’t meet the inventory covenants of their asset-based loans.
In fact, that’s another thing you can expect to see over the next few months. We already got wind of lenders changing retailers’ borrowing bases because of the higher return rates associated with eCommerce sales. If lenders believe inventory will age, retailers may hit a double whammy of a larger carve-out for aged or imperfect inventory and a reduction in buying power because there’s less inventory in the first place.
Now is the time to be very strategic. To reduce reaction time. And to be prepared for things to go sideways very quickly. These are very intense times. We all must pay very careful attention to what’s going on around us. And, of course, stay safe!