On March 4, U.N. economists announced that, once the dust has settled, global manufacturing exports will have dropped by $50 Billion in February alone, precipitated by COVID-19.(1) This caps off a short month mired by:
- The stock market experiencing one of its worst weeks since the 2008 recession with the trading week ending February 28 (although some volatility is expected in an election year).(2)
- Publicly traded U.S. apparel company G-III Apparel Group Ltd. saw a 27% drop in its stock price in February, ending at $22.08 per share.(3)
- Fashion shows abroad being canceled over concerns of spreading the virus, including showings at Milan Fashion Week (scheduled for mid-February) and Shanghai Fashion Week (scheduled for the end of March).
- Apparel trade shows domestically revealing a dramatic decline in attendance due to travel bans. For this reason, about 60% of sourcing exhibitors at the Magic fashion trade show in Las Vegas (scheduled for early February) were unable to attend.(4)
- U.S.-based global companies like Nike, Levi Strauss, and Tapestry brand (which owns Coach, Kate Spade and Stuart Weitzman) announcing the closure of a majority of their stores in China.(5)
All told, by March 13, the World Health Organization reported a rising number of COVID-19 cases (more than 132,758) globally; of that, the U.S. counted 1,264 confirmed cases, including cases of community transmission (where the patient had not traveled to an affected country or been in contact with people who had). A World Health Organization report published on March 13 recorded 4,955 deaths globally.(6)
Aside from the impact on people and their everyday lives, the impact on the consumer products industry has been disproportionate, due to:
- Heavy reliance on China’s skilled labor,
- China’s highly integrated worldwide value chains within manufacturing and shipping,
- China’s extensive raw/intermediate material sourcing (cotton, silk, fabrics/textiles)
- A trade war between the U.S. and China triggered in March 2018 which led to increased tariffs in July 2018 on more than $300B worth of consumer goods like apparel and footwear
- The timing of the outbreak:
Though many factories and ports have reopened after an initial lockdown on January 23, 2020, the “resumption rate” (the rate at which China is getting back on its feet) is low. According to Bloomberg Economics, China’s economy appeared to be running at 60%-70% of its normal level in the last week of February.(7) If there’s any bright spot in all of this, perhaps it’s that the U.S. apparel industry is not the hardest hit. According to a March 4 U.N. Conference on Trade and Development(8):
- Of the global textile and apparel industries, the U.S. is the least impacted:
- In comparison to other industries reliant on Chinese manufacturing, experts say apparel will likely not be hit as hard as the automobile, consumer electronics and pharmaceutical/medical supplies sectors.
And aside from the supply chain disruption that consumer products companies continue to wade through, the U.S. retail environment is largely taking a hit as well. While big-box retailers can expect to see strong sales in the next few weeks from consumers hoarding household essentials, disinfectants, and food and beverage items (as long as they can keep supplies in stock), most other retailers will face tough decisions as foot traffic drops and the responsibility to contain the spread of the virus heightens. For these reasons, Patagonia (based in Seattle) announced on March 13 that it was closing all its stores and shutting down its website, with no announcement of when it may reopen.(9) Similarly on March 14, Apple announced it is closing more than 450 stores across 21 countries until March 27.(10) Both retailers will continue to pay their employees in the interim. But for local retailers who have already been struggling with online competition before the breakout of COVID-19 and more recently, people’s reluctance to leave the house after news of COVID-19, we can expect to see more local stores shutter first temporarily and then permanently.
Unfortunately, until the virus is curbed and trade fully resumes, much of the discussion regarding the future remains speculative. At this point, economists and owners of consumer goods companies cannot accurately determine the impact on lost business, trickle-down costs and shipping delays. Those of you who own or manage consumer goods companies can and should take the following steps to mitigate the impact:
1. Update your cash flow projections for 2020 and beyond
--Anticipate the new normal - expect ecommerce to boom as people stay indoors, while in-store sales will likely bust
--Consider that changes could impact debt covenants, tax planning, long-term contracts, etc.
2. Plan to maintain liquidity by cutting costs in other operational areas
--If already liquid, consider exploiting the market or exploring asset purchase opportunities
3. Talk with your bank contact about a potential need for additional borrowings or flexibility
--Banks are starting to restrict lending; seek sources of collateral if needed
4. Monitor inventory levels closely
-- Push sales of older stock on hand; avoid early stock-outs of quality products
-- Consider performing a physical inventory now while operations are slow to be certain regarding current stock
5. If not done yet, research options to diversify your supply chain and sourcing relationships
--100% resumption rate for China could take time or potentially never occur
-- Many companies sought out other options during the 2018 tariff hike, including Bangladesh, India, Vietnam, Cambodia and Indonesia
6. Review your company’s insurance policies to determine what, if any, business interruption coverage the company could be eligible for if needed
7. Tighten cybersecurity if (a) you are planning to ramp up online sales/offerings or (b) you have concerns about security during a market downturn
8. Support employees through flexible work arrangements, a swift response plan to COVID-19 fears, and open communications
9. Provide excellent customer service and be willing to adapt to the changing business landscape
Friedman LLP’s Consumer Products Group has a vast network of contacts internally and externally who have experience helping businesses tackle these tasks and we remain open for business. If you have questions or concerns relating to COVID-19’s impact on your business, contact us today.