Suppliers might be in for a world of pain if the global port crisis and shipping meltdown mean goods don’t make it to retail shelves before the holiday season expires.
At last week’s Fourth Annual Wells Fargo Consumer Conference, major apparel companies expressed a willingness to cancel orders yet again rather than risk marking down late-arriving product.
While Gap Inc. said it’s making bigger upfront inventory buys ahead of holiday and reducing open-to-buy in the fourth quarter, Abercrombie & Fitch and Urban Outfitters said they’d prefer to reneg on an order if it means having less inventory on clearance post-Dec. 25.
Companies in the sector have relied on air freight to fly goods in for the critical holiday period, Wells Fargo retail analyst Boruchow said. Gap executives said air freight costs that typically total $2 million to $3 million annually leaped to a “staggering $50 million,” he said.
Urban, meanwhile, diversified its sourcing base and countries of origin, transportation providers and vendor relationships to work around the supply chain challenges.
Vertically integrated retailers such as Abercrombie & Fitch and Gap seem better able to chase and secure goods. But regardless of the mitigation strategies, they’re unlikely to fully solve the problem and like others, will all but inevitably miss out on some sales this season.
What’s more, companies have adjusted their structural operations to manage through Covid, and the lessons learned might become the new norm.
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Many are now managing inventory and markdowns much more efficiently, minimizing fixed costs by closing stores and restructuring. Many believe those changes are “likely to stick,” Boruchow said. However, he believes retailers are unlikely to resist the temptation to overbuy, kicking off a new flood of promotional activity across the sector.
For now retail and apparel companies might be in a good position to start 2022 with a much lower cost base, Boruchow said.
Gap’s profit and loss statement will enter the year ahead with lower fixed costs. After closing 245 stores last year, the retailer is closing 75 this year and will close 75 more of its costlier mall-based locations next year. Abercrombie believes its margins structure is now set higher post-Covid, crediting strong fashion execution and brand differentiation, tight inventories, and new inventory management strategies. It also has been renegotiating rent, closing unproductive stores and refocusing on smaller store formats.
“Sustainability of merchandise margin remains the wild card, with some companies arguing we’re operating at a higher base today, while others suggest some normalization on the horizon as inventories rebuild into 2022 and the promotional environment returns in some capacity,” Boruchow said.
In general, pent-up demand shows that the consumer remains in very good shape, he said. And even with rising Covid case counts from the Delta variant, the “overhang on sales right now appears to be more of a unit supply issue rather than waning consumer demand,” he added.
Still, it was hard to avoid the hot topic: Vietnam sourcing. Many are struggling to figure out how long the disruption in the supply chain could last and what its impact on holiday will be, Boruchow said.
Companies such as Urban Outfitters, Gap, Decker’s Inc., and Abercrombie & Fitch said they’re leveraging their existing vendor relationships to secure capacity elsewhere in Asia, which means in some cases “going back into China following years of de-emphasization in that market,” Boruchow said. “We sense that those that actually paid their suppliers during the 2020 shutdowns were actually in a beneficial position on the priority list.”
Urban was the most vocal on supply chain flexibility, Boruchow said, noting that over the past 18 months, the retailer weathered supply chain disruption in India during the second quarter, representing 20 percent of its sourcing. Vietnam disruptions amounted to 20 percent of Urban’s sourcing, and the country is now expected to see lockdowns extend through the end of September.
“While some factories in Vietnam are somewhat operational as workers actually stay on site in an effort to make a living, productivity is clearly lagging in that market,” Boruchow said.
He’s bullish on ThredUp, mostly because resale firm is adding 150 percent capacity through a newly opened Texas distribution center, as well as Carter’s focus on SKU reductions and reducing promotions. Boruchow’s not as bullish on Urban because of its supply chain constraints into holiday or on Stitch Fix as the firm sees Fiscal Year 2022 as transitional as it pivots to Freestyle, its direct buy program.