Experts are scrambling to make sense of a volatile geopolitical climate and the stark economic realities ahead for companies still struggling with strained supply chains.
Deglobalizing supply chains
Dana Peterson, chief economist at The Conference Board, believes many companies will start to walk back decades of deglobalization, at least to some degree. Chasing cheaper parts and labor around the globe isn’t nearly as compelling when goods are stranded in locked-down Chinese production hubs far from store shelves.
Governments are likely to “encourage or force businesses to localize their supply chains, diversify their supply chains or even bring production home,” she said earlier this month. “And as [any] economist will tell you, that results in slower growth and higher inflation—and those two things are not a good combination.”
Some nations are already picking sides, with allies lining up behind either the U.S. or China.
Not only economies but also “multinationals” will have to decide “who they’re going to side with,” she added. “Certainly, that’s going to affect not only where businesses operate, but where they source their products and what customers they are going to be trying to attract.”
The pandemic reminded companies why diversification matters, according to AlixPartners CEO Simon Freakley.
“Coming out of Covid, what we learned was that we had to have a just-in-case strategy as well as a just-in-time strategy, and that regional supply chains as well as local supply chains are going to be absolutely essential for companies because they weren’t able to rely on global supply chains in what is rapidly becoming a deglobalized world,” he said in a webinar last month.
Related Stories
Retail and brand impact
Russia’s war in Ukraine has become a “polarizing issue” for some, Freakley said.
He added that business leaders must “get right on the front foot” and state exactly what they do stand for and their corporate the values are.” So far, most have taken a strong stance against the invasion with roughly 300 major corporations pulling out of Russia and just a “few dozen major corporations” still continuing with business as usual, said Freakley, adding “there will be consequences” for companies that fail to act quickly against the attacks.
Prada Group, Hermès, Chanel, LVMH, Kering, Burberry, Valentino, Versace and Hugo Boss have all tapped the brakes on their operations in Russia.
Though sources say Russia’s luxury sales reached $8 billion to $9 billion last year, fashion gets a smaller share of sales from the market, minimizing its fallout despite the temporary store closures.
For Prada, Russia accounts for just 1.5 percent to 2 percent of sales, which reached 2.93 billion euros ($3.21 billion) for retail last year and grew 61 percent when looking at the online business. Prada chairman Paolo Zannoni said Russia “remains potentially an important market and we would like to be able to keep it open if the situation allows us to,” even if the country doesn’t drive huge numbers.
The executive went on to cite a declining geopolitical and macroeconomic outlook and increasing volatility. “We cannot foresee at this stage the impact of current events on the luxury goods industry, but we are closely monitoring our business environment, ready to react swiftly to unexpected developments,” Zannoni said.
Russia last week launched a “new phase” of its war in eastern Ukraine.
Retail analyst Walter Loeb of Loeb Associates believes Zannoni’s comments could indicate that stores closed during the invasion might not reopen when the war ends. Neighboring NATO nations jumping into the fray without Russia directly attacking them could unleash a whole new set of concerns, the former retail executive said.
Companies like the owner of Marshalls are already backing away from Russia. The TJ Maxx parent quickly announced plans to sell its 25 percent minority stake in the 400-door Russian off-price retailer Familia, though it’s losing money in the process as the ruble’s decline means the $225 million TJX originally paid was worth just $186 million as of January, Loeb said. TJX executives Doug Mizzi and Scott Goldenberg resigned their Familia board roles.
Shein reportedly scrapped IPO plans though it never confirmed its intent to go public and is now talking with private equity firms instead. IPO tracking firm Renaissance Capital blamed the Russia-Ukraine war for chilling the previously red-hot IPO boom.
New world order?
Companies should brace for “long lasting” fallout from the war, according to Dr. Lori Esposito Murray, president of the Committee for Economic Development at The Public Policy Center of The Conference Board.
“This is not just about Russia and Ukraine,” she said. “It is really about the changing world order.” Even if the war ends up being relatively brief, the “impact will be long lasting,” she added.
Ilaria Maselli, who serves as The Conference Board’s chief economist in Europe, pointed to “signals that the manufacturing sector is clearly losing momentum” even as sentiment around employment is also taking a nosedive.
“European countries entered into this crisis with a very strong labor market [and] now we know that inflation is increasing and it’s accelerating,” Maselli said. “And as a consequence of that, I think a major conversation that will happen in companies between employers and workers in 2022 and ’23 will be around wage growth.”
Higher inflation will inevitably erode household purchasing power when wages don’t stretch as far, she added.
Meanwhile, Moody’s Investors Service expects retailers will face mounting profit pressure as higher input and freight costs exacerbate elevated operating expenses and test consumers’ tolerance for higher prices. The credit ratings firm’s analysts believe “smaller companies with higher leverage have less scope to absorb higher costs and less clout to negotiate with vendors and secure product in a disrupted supply-chain environment.” In contrast, large retailers such as Walmart will “use their financial clout to absorb and juggle rising costs by leveraging strong vendor relationships.”
Mid-price retailers catering to lower- and middle-income consumers, particularly in discretionary categories, are at greatest risk if consumers start shifting their dollars to value-oriented buys—putting Macy’s and Kohl’s in the line of fire while mass, dollar and off-price stores are poised to win.