Coronavirus & The Fashion Industry: What You Need to Know
The fashion industry is in turmoil as the spread of the novel Coronavirus, or Covid-19, epidemic wages on, causing major disruptions to the global retail industry and international supply chains.
The outbreak that began in late 2019 has affected more than 110,000 people and spread to 115 countries. China, the epicentre of the virus, is an important hub for clothing manufacturing and also home to roughly one-third of the world’s luxury consumers. The implications are already being felt by fashion brands around the world – stock prices for companies like LVMH, Kering, Lululemon and Revolve plummeted at the end of February.
Many have described the situation in China to be extremely grim. At least 48 cities in the country were placed on lockdown and strict travel restrictions have been imposed in major cities, Beijing and Shanghai. Many offices and retail spaces had to suspend operations for nearly a month. Some companies had even resolved to enforce unpaid leave and put a pause on hiring.
Production delays for the upcoming seasons are also expected as many Chinese factories were closed for several weeks due to strict quarantine requirements and logistics in and out of the country remain challenging.
Outside of China, the situation is also deteriorating. Travel restrictions have kept Chinese buyers from attending fashion shows during the Fall/Winter ‘20 collections. The virus began spreading to Europe in late February, coinciding with the tail-end of Milan fashion week.
A number of designers including Giorgio Armani decided to cancel their presentations due to health and safety concerns, which was later mirrored during Paris fashion week too. The upcoming cruise collections for Prada, Gucci and Versace, which were due to be held overseas, have also been put on hold or cancelled.
As of now, Italy has the highest number of Covid-19 related deaths in Europe. Earlier this week, Prime Minister Giuseppe Conte announced the entire country of Italy has been placed on quarantine to contain the outbreak, suspending all public events, schools and religious services. The climbing number of confirmed cases in Europe will impact buyers the most, with many unable to attend showroom appointments or key industry trade shows like Baselworld and Mido.
Brick-and-mortar sales hit severely
Retail is one of the largest industries to be impacted by the virus. Increased anxiety surrounding contamination has shoppers scared to enter shopping malls and crowded retail spaces, reducing footfall dramatically – some brands have even reported an 80% drop in traffic. Most major retailers including Nike, Uniqlo and Burberry closed hundreds of stores in China. Prada went as far to close stores in Macau as conditions in the nation worsened. Towards the end of February, some stores have reopened, but shoppers remain hesitant.
“Each day, less than 10 people visit us,” said a sales associate at the Saint Laurent store at Shanghai’s high-end IAPM Mall. Sales during Valentine’s Day in Beijing and Shanghai reached a record low as most retailers including Cartier and Tiffany’s, for whom the calendar date is critical, remained shut during the period.
Travel shopping has also been gravely affected. As the virus continues to spread over China’s borders, overseas travel has declined greatly. Countries relying on tourism shopping are already feeling the heat. Popular UK designer shopping outlet, Bicester Village has been described as “deserted” as the outlet reports an 85% drop in Chinese visitors.
The luxury sector is anticipating the worst as the Chinese have been a major contributor to the growth of luxury sales for the last decade. Many fashion companies are adjusting their Q1 projections based on recent events. Capri Holdings, the owner of Michael Kors, Versace and Jimmy Choo, estimates its revenue for the next quarter will take a $100 million USD hit due to the virus. The owner of Coach, Tapestry Inc, predicts a $200 million USD loss. Research from Altagamma and Boston Consulting Group shows luxury sale losses could amount to €40 billion.
Bracing for impact
Low sales and stretched supply-chains have retailers quickly re-strategising their entire merchandising and marketing plans for the next half of the year.
Many luxury retailers have opted to scale back on new launches and redirect inventory to other high-performing regions. Moncler’s chief corporate and supply officer, Luciano Santel, announced the brand will be reallocating the bulk of China’s stock to other regions and that plans for new store openings originally intended for this year would be delayed to 2021.
Kering’s CEO, Francois-Henri Pinault announced a similar strategy for the brands under the luxury group, among which are Gucci and Balenciaga.
Findings from our recent The Success of Luxury Brands Today report shows this contingency plan is working for Gucci. Data extracted from Gucci’s online sell-out performance shows the brand outpacing nine other luxury brands from 30th December 2019 to 16th February 2020.
However, in the long-run, filling a gap as large as China’s market will not be an easy task. Brands who are reliant on China’s consumption, like Burberry, will have a tough time moving the inventory elsewhere – JP Morgan estimates Chinese consumers account for 39% of the brand’s sales.
Fast-fashion under pressure
The fast-fashion industry is also unable to avoid the virus’s effect – low footfall is forcing high-street retailers to markdown new arrivals. In Singapore, one of the first countries to contract the virus outside of China, major retailers such as Uniqlo, Forever 21 and Cotton On were seen running special promotions on new products at the peak of the outbreak. Southeast Asian e-commerce platform Zalora also ran discounts for new-ins nearly every week in February.
Deep-diving into stock performance, Omnilytics’ data extracted from Cotton On, Zara, Mango, Pomelo and Uniqlo in Singapore showed these brands had a 20% increase in newly discounted SKUs in the first two months of 2020 compared to the same period last year. A huge spike in discounted SKUs was detected in February this year, coinciding with the start of the outbreak in the country.
Festival season, a key calendar event for fast-fashion retailers will also be impacted by the virus. In the US, at least eight states including California and New York have declared a state of emergency, effectively jeopardising major events such as Coachella and Ultra music festival. Retailers that have already placed orders for their festival capsules will need to find a way to remarket these collections or put them on hold.
On top of slow sales, fast-fashion retailers that depend on a quick stock turnover are at risk of low supply. The prolonged factory closures past the Lunar New Year holiday indicate next season’s stock will be delivered past deadline, a troubling situation for retailers. Late product launches will not only mean empty stores but missing key sales opportunities. Any off-season products will also need to be marked down to keep inventory from overflowing.
Merchandisers and buyers will now have to adjust their stock intake for the next few months based on what inventory is left. For retailers that can’t afford to wait, this may mean rethinking their entire sourcing process. Major retailers like Zara and H&M have opted to move orders to India and Turkey to off-set the disruptions in China.
Shoppers go digital
One of the strategies retailers is using to mitigate stagnant stock is moving store-intended inventory online. As the conditions in the retail industry remain volatile, digitally-native companies like Farfetch and JD.com appear to be more immune to the virus’s effect.
José Neves, CEO of Farfetch, stated the company has no plans to adjust Q1 financial projections based on current events in an interview with Vogue Business. “We would have seen the impact [in February], and it has been a strong month in the markets affected. China is growing faster than the rest of the Farfetch marketplace”, he said.
Farfetch has built a wide presence in China, in addition to its e-commerce platform and app, it also operates through WeChat and its partnership with JD.com. Neves said Farfetch’s unique position as a marketplace offers a solution to struggling retailers relying on brick-and-mortar sales – the company’s concession model facilitates sales without any holding inventory, allowing brands to be less dependent on wholesale distribution.
Social media has emerged as a vital way of keeping consumers engaged during the Covid-19 crisis. China’s biggest social media platform, WeChat is being utilised by various Chinese retailers to draw shoppers online – Shanghai’s IAPM Mall is using the platform to push sales for nearly 70 fashion brands including Tod’s and Versace. WeChat users will be able to browse through the products uploaded on their profile and place orders by directly messaging sales associates on the app.
Consumers are also further encouraged to move online through live-streaming. A key feature on most social media platforms today, Chinese retailers are hosting daily live-streams to promote their new-ins. Live-streaming was also the main method of updating international buyers who were unable to attend fashion shows during the Fall/Winter ‘20 season. Besides streaming the fashion show itself, live-streams were also hosted in the showrooms to assist buyers in placing orders for the new collections.
Undoubtedly, the impact of the Covid-19 epidemic on the fashion industry is detrimental. From impacted sales to supply shortages, the key takeaway from this crisis is the fragility of the industry’s retail model. The epidemic will not only disrupt businesses in the short-term but also impact long-term growth, especially in the Asia Pacific region.
The luxury industry’s reliance on brick-and-mortar sales demonstrates the importance of adopting an omnichannel distribution strategy. As e-commerce platforms such as Farfetch are helping brands transition to a more direct-to-consumer (D2C) approach, retailers that failed to prioritise e-commerce early on will suffer the consequences.
Embracing a digital mindset is absolutely necessary in navigating a crisis like this. Much of the fashion industry is still rooted in analogue processes. Tech companies like Twitter and Microsoft are set up in a way that is flexible enough to allow remote working and limited face-to-face contact, minimising any operational interruptions. The fashion industry, on the other hand, is still very much chained to its desk. Practical tasks, especially within the design process, require staff to be on-site. Prolonged office closures and quarantine requirements leave many fashion companies in a complete standstill.
As the situation evolves, many analysts predict it will take the industry at least 6 months until we see a return in momentum, mirroring the aftermath of the Sars outbreak in 2003. However, this was prior to China becoming such a crucial market in the industry.
To minimise losses this year, retailers will need to quickly re-adapt their merchandising plans for the rest of the year. Retailers that have full visibility of stock performance, diverse supply-chains and foolproof allocation strategies will fare better in this period of uncertainty.
More than 115,000 data points were analysed on products retailing online for across US and UK markets from February 2019 to February 2020, as tracked by Omnilytics.
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