While you’re hoarding wipes and toilet paper, you might want to stock up now on clothing and other supplies for the back-to-school season
That’s because retailers are preparing orders for August as manufacturers in China cope with coronavirus shutdowns and delays, and there might not be enough goods to go around.
“Everybody will want to be back shopping, and that’s when the real inventory shortage will hit,” said Richard Maicki, a managing director at consulting firm Berkeley Research Group, who advises retail and consumer companies on turnaround plans. “That is not great timing.”
The coronavirus outbreak has idled factories that produce the world’s clothing, shoes and electronics. Spring and summer goods were shipped before the disruptions began, but expect shelves to look leaner by early summer, Maicki said.
U.S. retailers are struggling to figure out how to predict the cadence of their business as the virus — and fears about its lethality — continues to spread. The World Health Organization on Wednesday designated the outbreak as a pandemic.
The upheaval comes as many retailers are already closing stores and facing bankruptcy under pressure from debt and changing consumer tastes. In response, retailers have lightened up on inventory in recent years to save costs and stay agile as trends change rapidly; that shift could now hurt as it leaves them without merchandise when new shipments dry up.
Factories are coming back online in China, said Stephen Lamar, chief executive officer of the American Apparel & Footwear Association, a nonprofit organization for retailers and suppliers. The trouble lies in the lag created by their downtime. The National Retail Federation on Monday said the virus may have a longer and larger impact on imports at major U.S. retail container ports than previously believed.
“It’s a minute-by-minute, hour-by-hour, day-by-day approach,” Lamar said. “What we’re looking at is how fast will these supply chains be able to come fully back up to speed” to support back-to-school and even the holiday season.
Ryan Mulcunry, a managing director at B. Riley Financial Inc.’s Great American Group, said he’s spoken with some retailers who are getting their factories back online and expect supply chain delays of only four to six weeks. That would give them a decent back-to-school season, he said. Anything over six weeks will mean trouble, especially for those retailers already struggling.
“You’re going to have empty shelves,” Mulcunry said. “Which, even if the demand doesn’t go down, you’re going to have negative sales because you’re not going to have anything to sell.”
Some vendors are assuming the additional cost of sending products via fast boats or air to speed them to retailers, said Michael Stanley, a managing director at Rosenthal & Rosenthal, a finance company. Vendors he works with are also speaking with retailers about widening the shipping windows for their goods, which can incur penalties if they’re late.
Retailers and manufacturers have worked to diversify where they make their goods in recent years, a process accelerated last year by U.S. tariff increases on Chinese goods. But many components like buttons and fuses are still primarily made in China, Maicki said, meaning the impact of even contained shutdowns can be broad.
“It could be the smallest fuse that’s part of a piece of electronics,” Maicki said. “It could be the specific denim material that you need to cut and sew a pair of pants; any of that can impact the delivery of the finished goods.”
It takes anywhere from two to six months to shift to another supplier, and many factories elsewhere “are not geared up to take the kind of potential capacity shift” needed, said Holly Etlin, a managing director at AlixPartners who works to turn around retailers and other troubled companies. She spoke Tuesday on a webinar hosted by the American Bankruptcy Institute about the effect of the virus on supply chains.
Even if workers are getting back to factories in China, there are other delays, Etlin and Maicki said.
Manufacturers often need specialized equipment, so “it’s not as simple as work 20% more and we’ll catch up,” Maicki said. Creating samples, a process done in person, is another important step, and if workers can’t gather, “you’re changing your whole timeline in terms of hitting the dates that you need to hit.”
Retailers already have enough trouble grappling with tariffs on Chinese-made goods, according to Lamar. “Those tariffs are still very much part of the landscape of what our members are facing,” he said. “And now coronavirus is on top of it.”
By: Lauren Coleman-Lochner and Eliza Ronalds-Hannon
The original article appears here: https://www.bloomberg.com/news/articles/2020-03-11/china-s-virus-shutdowns-threaten-u-s-back-to-school-supplies