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Supply Chain Recovery Plans Are Meaningless Without a Read on Post-Virus Consumer Spending

There’s little certainty around what the post-pandemic new “normal” will look like, and that’s why the fashion supply chain should be thinking now about what consumer spending might be to properly gauge a recovery plan for the back half of 2020.

Fitch Ratings is projecting that retail discretionary spending will plunge 40 percent to 50 percent in the first half of 2020, with a slow rate of improvement through the summer from a current 80 percent to 90 percent decline in sales if stores start to open mid-May or early June.

The credit ratings firm is expecting an increased likelihood of consumer downturn, down mid-to-high single digits in the second-half of 2020, and sees 2021 sales declining 8 percent to 10 percent from 2019’s levels. It is predicting that revenue trends won’t begin to improve until the tail end of 2021 and continue an uptick throughout 2022. That time frame builds in the typical four-to-six quarter duration of past consumer downturns.

“Inventories do need to be purchased for the important second half and management teams are trying to prepare for a new reduced normal,” Oliver Chen, Cowen & Co.’s retail analyst, said of the impact of the coronavirus outbreak. He’s predicting that fourth-quarter results could be down 20 percent to 30 percent, or even lower, depending on unemployment, consumer confidence and category shifts as spending preferences change. That’s not a good sign for the holiday season.

One plus that’s come from the cancellation of spring and summer orders due to government-imposed lockdowns has been the reduction in the use of subcontractors by tier-one factories to smaller, unregistered operators or home workers–the sector where labor abuses and safety rules tend to go undetected, GlobalData noted.

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The concern is that when consumers start spending again, there’s the risk that factories could begin to quickly outsource work to meet the demand of incoming apparel orders. And that means brands need to double-down on responsible sourcing procedures, such as working with audit teams and local firms, to ensure compliance at factories over their ability to source safely and ethically, GlobalData said.

Right now, no one knows what the consumer appetite will be when stores in the U.S. and Europe reopen. If China is to serve as an indication of what might be forthcoming, then the re-opening of physical retail definitely showed that business did not return back to “normal.”

“When 90 percent of apparel stores re-opened in China, footfall and purchases were still 50 to 60 percent below pre-crisis levels,” according to McKinsey’s “The State of Fashion 2020” report. Noting there will be different rates of return of consumer confidence based on speed and effectiveness of government support as well as how severely hit the country was by the pandemic, the report said businesses will have to review their operating models to position themselves for the recovery period, and that could mean reassessing geographic footprints, looking for emerging whitespace for future growth and how supply chains can best support the ramp-up.

“On the supply chain side, fashion companies should learn from this global trade disruption that the value chain must be re-invented,” McKinsey said, noting that the review should include identifying possible disruptions before they occur, as well as strengthening regional integrated supply chains.

The report expects that excess and outdated product will have retailers resort to steep discounting to clear out inventory levels, while more frugal consumers might elect to trade down and hit the off-price channel.

Another impact from COVID-19 could see consumers rejecting the idea of buying goods in large volumes, the management consulting firm said, which in turn could see fashion players using innovative ideas to reduce stock and re-infuse value into their products, such as accelerating nascent sustainability trends. “For many players, repurposing existing stock for new seasons will be a more viable option than recycling or upcycling with fabric additions or extractions,” or even revising the product calendar and moving monthly drops into later seasons, McKinsey said.

Sources have told Sourcing Journal in recent weeks that they expect many of the stores that are temporarily closed may just never reopen. In a BDO webinar on Monday on COVID-19’s impact on retail, David Berliner, head of BDO’s restructuring and turnaround practice, advocates that retailers begin to plan now for how they will reopen their stores. One option is opening “A locations first, and then moving to open B [doors and then] to C locations,” Berliner said. He also said retailers should evaluate now whether they want to open or actually close under-performing stores.

Those closures will add to the decrease in future apparel orders, and suppliers should take that into consideration as they consider their own business models, such as staffing and input quantities to keep on hand when determining inventory levels.

And as retailers have disrupted the supply chain by canceling spring and summer orders, vendors and their supply chains should begin to have conversations about pending late summer and fall orders. Those talks should include possible requests for delay in payments by retailers, as well as what could happen should a second wave of virus infections begin spreading again come fall as everyone looks to holiday and winter orders.