For the fashion business to survive past the coronavirus crisis, it is going to take companies coming together to support one another through slowing cash flows and closures.
During the first webinar in Sourcing Journal’s Coronavirus Impact Series, “Closures, Cancellations and a Collective Reckoning,” speakers from Impactiva, Synergies Worldwide and Eurofins discussed why companies need to think beyond their own self-interest to protect their business relationships and ensure that partners will still be there after the pandemic ends.
“Unfortunately, because we’re all in survival mode, a lot of us are acting in a ‘me’ mindset instead of a ‘we,’” said Jose Suarez, founder and CEO of Impactiva. “And how you behave in difficult times is the way that you will be perceived in the long run.”
The apparel business’ challenges during COVID-19 have changed drastically in a matter of weeks. Earlier in the outbreak, the focus was on getting a supply of raw materials and goods from a locked-down China. As the virus has spread, this pressure has given way to retail concerns as store closures and lower consumer demand are shrinking sales.
With overstock expected to amass, discount retailers are positioned to be winners in the current retail environment. In a poll, 14 percent of webinar attendees said they are already funneling more product to off-price channels. “If you have a strong retailer with a good balance sheet—which are very few—they are going to ride this…We have already heard from some of the discounters in Europe and off-price and other people that they are going to come out ahead because you’re going to have a lot of unsold stock, and you need good outlets and good balance sheets to see through the storm,” said Munir Mashooqullah, founder and chairman of Synergies Worldwide. “And they’re going to have a lot of hemorrhaging with very large names.”
Indicative of the financial struggles facing retailers during shutdowns, Galeria Karstadt Kaufhof has filed for insolvency in Germany, and Debenhams announced it also intends to file for the equivalent of Chapter 11 in the United Kingdom.
Small- to mid-size businesses are some of the most at-risk during the pandemic. To mitigate the financial hit, 68 percent of respondents to a webinar poll indicated they are cutting overhead and staff, contributing to the current record unemployment rates.
Lowered demand is also trickling up the supply chain and impacting factories as retailers cancel orders or extend payment terms. In a poll of the retailers tuning into the webinar, about half said they had cut orders with suppliers or were planning more conservative assortments for summer or fall. Almost six in 10 retailer respondents reported they had cancelled at least 20 percent of their Spring/Summer orders, with 19 percent saying they had withdrawn 60 percent or more of their orders. Additionally, 31 percent of those surveyed said they had requested their suppliers extend payment terms by 90 days, with 25 percent requesting payments be pushed out by 120 days or more.
Rather than invoking force majeure clauses in contracts or bailing on suppliers, panelists suggested having conversations with suppliers and supporting them financially by collecting goods. On the supplier side, some of the factories surveyed during the webinar are working with retailers to postpone shipments, temporarily store goods domestically or delay orders for future seasons, finding workarounds and compromises during store closures.
About seven in 10 factory-side respondents expect to lose at least 40 percent of their revenue in 2020, with 22 percent anticipating losses of 60 percent or more compared to 2019. Suarez noted that only a small portion of factories in places such as Pakistan, Bangladesh and India have the cash flow needed to survive the rest of the year. By the end of 2020, he predicts that between 50 percent and 70 percent of fashion factories could go out of business.
If this happens, fashion could once again be facing a supply issue tied to this crisis.
Cancelled orders have led to temporary factory closures in nations such as Cambodia, while a stay-at-home mandate in India has also halted production in the nation. During the webinar, attendees indicated that their No. 1 supply-oriented concern is factory closures, at 46 percent, followed by lack of visibility into their supply chain at 28 percent.
Aside from closures creating a supply problem, companies should consider the welfare and corporate responsibility issues surrounding the furloughed garment workers as the situation evolves. Mashooqullah noted that unlike in the United States where workers can collect unemployment, there is no means in place for Southeast Asian governments to offer factory employees benefits while the facilities sit idle. Instead, it is left up to the factories to pay workers during the closures.
The fate of these workers during the factory closures will also rely on institutional assistance, such as the stimulus packages in India and Bangladesh. “[Factory workers are] in much the same place as many of our furloughed workers are on the retail side here,” said Randal Rankin, global client development director, North America for Eurofins. “They’re not working, they need support. How do they get that support? I think the companies have roles to play in that.”
Watch “Coronavirus Impact Series: Closures, Cancellations and a Collective Reckoning,” sponsored by Eurofins, First Insight, Lectra, Texworld USA and Tradewind, to learn more about:
• The economic outlook for the rest of the year
• Which companies are most at risk during COVID-19
• What support is coming from banks and governments
• How store closures are affecting orders
• How factories and suppliers can cope with uncertainty
• What responsibilities retailers have to their suppliers
• When fashion sales might get back to “normal”
• What companies throughout the supply chain should be doing right now