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Many firms are grappling with the ripple effects of the deadly coronavirus, which has already killed 2,250 people and sickened 76,800.
Such disruption is arguably felt particularly strongly by fashion players: China is responsible for producing the bulk of apparel, footwear and accessories sold around the world, and travel restrictions in the country have impeded manufacturing and foot traffic to stores. Millions of workers in China have also been delayed in returning to their factories and corporate offices, subsequently disrupting global supply chains.
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“With factories closed and the flow of materials and finished products interrupted, they’re unable to get the products they need,” said Sharon Lim, CEO of fashion design, development and merchandising software firm Browzwear. “Without contingency plans in place, manufacturers can’t get things like fabric, buttons and zippers, and designers can’t get the samples for their showrooms made, and retailers — especially ones who have adopted just-in-time business models — will be without merchandise to sell.”
The industry’s shift to a just-in-time inventory system — which aligns production with demand — has helped temper fashion’s overproduction problem by reducing waste and offering more flexibility to shift manufacturing as needed. However, experts have also pointed out the vulnerabilities of this model, which presents no guarantee that companies can meet the demand for a specific product and can leave supply chains in disarray in the event of a natural disaster or epidemic. By waiting for demand, businesses can face significant under-stock issues — made even worse by shipping setbacks as a result of reduced air travel and cargo routes.
“Factories that have not planned for this disruption will become stagnant,” said Sabrina Finlay, CEO of footwear and apparel manufacturer Otabo, which is headquartered in Minneapolis and also operates a facility in China’s Guangzhou province.
Beyond production setbacks, some retailers have opted to shutter their stores in heavily affected regions or cut back on their operating hours, leading to lower sales that could add up to a significant dent in their bottom lines for the fiscal year. A number of companies including Ralph Lauren Corp. and Kate Spade parent Tapestry Inc. have already downwardly adjusted their outlooks to account for expected losses.
“It is unclear whether these retailers will be able to make up that lost sales volume after operations return to normal,” said David Landau, a partner and leader of law firm Ballard Spahr’s retail and fashion group.
However, experts say that the coronavirus may not be as disruptive today as it might have been if it happened a few years ago: Many fashion companies based in the U.S. have shifted or are in the process of shifting their sourcing away from China largely due to the tariffs that have been imposed on billions of dollars in items coming from the country. Further, some experts have suggested that fears about the outbreak might be overblown.
“We see a lot of people in companies reacting with fear and making big uninformed decisions because they haven’t looked at the facts and put them into context,” Finlay added. “But there are also a lot of very clear solutions out there, and there isn’t a lot of talk around that. If we don’t get shoelaces on time, it shouldn’t stop the whole production of a shoe; we would go to another shoelace factory as a temporary solution. There are thousands and thousands of factories in China, so a flexible manufacturer is going to find it easy to make backup plans.”
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