As once-bustling Chinese cities turn into ghost towns with only a few figures wearing face masks scuttling between essential appointments, footwear and clothing brands and retailers are preparing to take stock of the impact of the coronavirus on their businesses. And retailers across the world are anxiously waiting to see how seriously the supply chain disruptions from China will affect their trade.
Businesses outside the quarantine areas in Hubei, especially around Wuhan, had been given the go-ahead by the Chinese government to reopen on February 10. But that was easier said than done, with international brands reporting that they had only opened half, or fewer, of their stores, and that the remaining stores only opened for limited hours. The reason is simple: most of the 1.4-bn Chinese consumers are staying indoors and only go shopping for essentials because they fear contracting the coronavirus, which had already killed more than 2 400 people in the country.
The Chinese government’s lockdown measures to prevent the spread of infections outside the Hubei province seems to have borne fruit, with the recent reports of infection and death mainly from Hubei. But, it has taken its economic toll.
Once known as the world’s factory, China is still a major source of manufactured goods for most brands. In 2018 Euromonitor International estimated that 54% of global textile and apparel was manufactured in China.
It is therefore of concern that by February 13th it was estimated that only 21% of all factory workers had returned to work. A week later many factories were still operating at reduced capacity due to the controversial travel ban that locked down about 50-m people in 16 affected cities – which many visited for the annual Lunar Holiday weekend that ended 25 January.
“Due to the suspension or limited services of transportation facilities in certain areas, some employees in the affected provinces and cities, especially those in the Hubei region, are still unable to return to the production units as planned,” said one of China’s biggest clothing and footwear brands, Anta, in a statement. “As a result, the productivity of the group’s in house factories could not achieve a normal level and it is expected to take certain time to resume operation.”
Workers who did manage to travel from Hubei were quarantined for 14 days and many businesses asked people to work from home to reduce the possibility of infection. Others isolated factory staff, in some cases placing cardboard boxes around them.
In Putian, dubbed sneaker city because so many sneaker brands (including Nike, PUMA and adidas) manufacture there, ten of the shoe factories are now making components for protective face masks, which has become the symbol of the disease – even though the World Health Organisation is dubious about their value to prevent infection. But, as a worker was quoted by marketplace.org: people almost treat you as a criminal if you don’t wear a mask.
According to a Shanghai Daily publication, Shine, more than a million face masks per day are made in the city, which had no factories that made masks prior to the epidemic. The shoe factories are reportedly making the nose pieces and ear loops, while diaper factories are making the actual masks.
Trade shows in China have also been cancelled, or postponed during the period. Affected shows are Chic Shanghai, which has been postponed from its scheduled 11-13 March dates. Organisers of the Hong Kong-based APLF sourcing fair are monitoring developments as they consider postponing the show, scheduled for March 31 to April 2. The ISPO Beijing fair in February was cancelled and Messe Frankfurt’s textile trade fairs in Shanghai (12-13 March) were also postponed.
On the plus side, China has injected a lot of fiscal stimuli to try and limit the economic impact – for example, halving tariffs on US goods. In response, pres. Trump tweeted sympathetically about Chinese efforts to contain the spread of the virus – a welcome about-turn from his belligerent comments during the recent tariff wars.
Footwear brands that manufacture outside China (e.g. Vietnam and Cambodia) also benefitted as retailers attending the Atlanta Shoe Market in February were desperately seeking suppliers from other countries, several told Footwearnews. The move to find alternative manufacturing countries, which had started a few years ago due to rising wages and changes in Chinese society, was hastened by the Trump tariff threats and several brands have already found alternatives for manufacturing.
But, despite some of these halos of hope, no big brands expect good news for the first quarter.
Nike sales drop 70%
Nike was the first clothing and footwear brand manufacturing in China to warn investors on February 4 that the coronavirus outbreak would have a negative impact on their Chinese business. About half of the company’s stores in China were closed at that stage and they were operating other stores with reduced hours due to lower foot traffic.
China is a huge market for Nike: Chinese customers account for nearly 1 in every $6 of Nike sales. In the previous quarter the brand reported that nearly 18% of its global sales – $1.68-bn of its annual revenue of $10.66-bn – come from the greater China region. Sales in the region grew 22% from the same quarter the previous year.
After the virus outbreak it is estimated that Nike’s comparable store sales in China declined by as much as 70% in February and in January Nike’s share price dropped 8%. Some analysts estimate a 2c per week drop in the Nike share price for every week that their Chinese stores remain closed.
The problem could become worse if Nike’s product launches are delayed until the fourth quarter, as some analysts speculate, and the merchandise that is currently available is marked down because nobody is shopping in China.
“In the short term, we expect the situation to have a material impact on our operations in Greater China,” the brand acknowledged in a statement, but said that their ecommerce business remained strong. They also point out that they bounced back fast after the outbreak of the SARS virus.
Adidas’ China business 85% down
Adidas also announced in the beginning of February that it had shuttered a “significant” number of its stores in China … and three weeks later the brand said that its commercial activity in the Greater China region had dropped about 85% since the end of January compared to the same period last year. Adidas is sold in about 12 000 standalone, franchise and partner stores across China.
Although, like most other brands, adidas has expanded manufacturing to Vietnam, Indonesia and Cambodia, China remains an important manufacturing country for the brand, which in 2018 said that it made 18% of its 409-m pairs of shoes and 19% of its clothes in China. The country accounted for €4.5-bn in sales in 2018, which comprised about 21% of adidas’ total business.
Adidas reported that sales also dropped in Japan and South Korea, where the most new cases of coronavirus infections seem to occur.
“Our business in the country performed strongly in the first three weeks of the year,” the brand said in a statement. In the previous two quarters in 2019, adidas’ China sales grew 11% and 14[extra space] % respectively. “We have been experiencing a material negative impact from the coronavirus outbreak on our operations in China since then. As the situation continues to evolve on a daily basis, the magnitude of the overall impact on our business for the year 2020 cannot yet be reliably quantified,” adidas added.
Ironically, adidas announced in November 2019 that it will be moving its automated Speedfactory manufacturing technologies, developed at plants in Ansbach and Atlanta, to existing factories in Greater China for “better utilization of existing production capacity and more flexibility in product design”.
PUMA factories running
Most of their factories were running again by the third week of February, PUMA CEO Bjorn Gulden said. All February and March orders would be fulfilled with about a three week delay, he reassured investors.
He believed that “long-term, this will not have an impact on our industry and our brand,” [extra space] but acknowledged that the virus had negatively impacted its business since the beginning of February after they had reported record sales (18% up) and earnings for the quarter until end December 2019.
The brand had closed about half its stores in China and expected a sales drop in other Asian markets because of a reduced number of Chinese tourists and the spread of the virus to South Korea.
While this will affect first quarter 2020 sales, Gulden said PUMA is “currently working under the assumptions that the situation will normalize in the short term and that we then will be able to achieve our full year targets.”
Skechers said in their financial report for the financial year 2019 (see here) [LINK] that they were anticipating first quarter 2020 sales in the range of $1.4-bn – $1.425-bn after “an initial estimate of the impact to the company of current events in China” that includes “a significant number” of temporary store closures and “below average” comparable store sales.
But, the brand remains optimistic that the impact could be contained.
Like other brands, they also shut a “meaningful number” of company-owned stores and franchise locations in China, while those that remained open reported “significantly below-average traffic and comparable store sales,” CFO John Vandemore told investors in a conference call. “If the severity of the situation in China worsens and impacts our businesses outside of China and/or our global supply chain, this guidance may change.”
CEO Robert Greenberg added “we are deeply concerned by the health crisis in China, and for the well-being of our employees, partners, vendors and consumers in the region. We continue to monitor this situation and its potential disruption to our global business. The Skechers brand is strong in China, and we remain confident in our long-term prospects in the country.”
Anta and Amer Sport help fight virus
Anta Sports Products, the big Chinese clothing and footwear brand which last year became one of the owners of Amer Sports, parent of sport and outdoor brands like Wilson, Salomon and Suunto, said in a stock exchange filing that it hopes that it will recover from the impact of the coronavirus in the second half of the year.
By mid-February, it had reopened about 40% of its network of its 10 000 retail stores in mainland China. They also vigorously promoted and grew online sales. This announcement did not include the Amer Sports Corporation business.
Since the end of January the company’s Anta Group Emergency Management Commanding Team for the Prevention of Epidemic has been implementing health and safety measures and keeping an eye on the impact of the virus outbreak.
The group has also donated RMB10-m to a charity organisation combating the impact of the disease and RMB20-m worth of winter outfits and medical support supplies to fight the epidemic.
Most companies and brands operating in China, report the same concerns.
- By mid-February Under Armour announced that it expected to lose sales worth $50-m to $60-m in China due to the coronavirus outbreak – following a disappointing financial year with only 1.4% global sales growth, and a loss reported over the holiday season. What’s more, the company warned that the sales losses could get worse. “Given the significant level of uncertainty with this dynamic and evolving situation, full year results could be further materially impacted,” the brand said in a statement. Under Armour has about 600 stores in China.
- VF Corp, the owner of brands like Vans, The North Face, Timberland etc. closed about 60% of its own and partner stores in China and also reports sales declines in the stores that remained open due to a drop in foot traffic. Last year China contributed 6% of the company’s global sales and about 16% worth of all its merchandise is sourced directly from China.
- PVH Corp. representing brands like Calvin Klein and Tommy Hilfiger, amongst others, closed most of these two brands’ stores in China. They also report that those who do open for limited hours are reporting very little sales or foot traffic. Many of their employees are working from home. The Greater China region accounts for about 7% of PVHs 2019 sales and the Asia-Pacific region 16%. The company sources about 20% of its products from China.
- Ralph Lauren Corp., owner of Polo Ralph Lauren, shuttered two-thirds of its Chinese stores in February due to low foot traffic. Asia contributes $55-70-m of the brand’s sales and $35-45-m in operating income.
- Capri Holdings, which includes brands like Versace, Jimmy Choo and Michael Kors, also warned investors that they could expect sales to drop as much as $100-m in this quarter as the virus spreads. They have closed 150 of their 225 stores in mainland China.