Amid what’s perhaps the worst crisis this industry has seen, apparel and footwear’s burden is falling hard on the supply chain partners that support it.
As retailers and brands grapple with the unprecedented reality of near zero revenue, they must look for all means possible to stay liquid. For many, the simplest way to do so is to reduce inventory liability and just cancel all upcoming orders.
The fashion industry is no stranger to issues of excess inventory and liquidity, even during the bull market. Now faced with a global shutdown, they have little option but to draw down credit lines and cancel all near-term orders—but are brands making business decisions that are both sound and ethical? What are the short and long-term effects of these actions?
It seems like yesterday the fashion industry was consumed with corporate social responsibility and sustainability, a better world for our consumers, our workers and our factories. What remains of these conversations now? Has the industry been reduced to survival of the fittest?
In a week’s time, $1.5 billion worth of already placed orders have been cancelled in Bangladesh, potentially putting more than four million workers at risk. Whether coming from already troubled retailers, small specialty retailers, fast fashion leaders, large discounters, popular e-commerce sites and even luxury fashion—all have cancelled major orders and the pile-up of lost businesses may be too much for Bangladesh’s ready-made garment sector to stomach. The whole world has used this industrious country for economic gain, arbitrating their cheap labor advantage for years to yield profits at all costs, and now we are truly realizing the very high cost of low cost fashion.
It has been nine or 10 days since I have been working from home, and the phone calls from factories and agencies increase each day. No country or factory is immune from knee-jerk reactions.
While I can understand retailers’ need to conserve cash amid the crunch that coronavirus has fueled for the industry, the short-sighted and unconsidered approach is concerning.
On Monday, the president of the Bangladesh Garment Manufacturers and Exporters Association (BGMEA), Rubana Huq, released a video appealing to brands to face this time as the “partners” they have purported to be. “All we have is hope and trust in our future together,” she said. Brand X cancelling out everything not shipped, is not the way. Designer Y, et al, asking for a federal bailout is also not the way.
The world is battling COVID-19 together. No one can outsmart this virus. We can continue to compete in the shopping aisle with the best product and marketing. But we must come together and have some pre-competitive collaboration if we hope to have factories to work with when this calamity is all over.
Millions of your workers can hardly go days with no money–and forget months. When orders that are ready to ship are cancelled, you are crushing the factory. How do they pay for the fabric? How do they pay the workers? If fabric was imported, what about that factory and those workers? What about fabric that has been produced for orders that you no longer want? Most factories work on a month to month basis. If orders start to flow in June, many won’t get paid until the fall. Most factories do not have the reserves to float workers and expenses for that span. We must find a middle ground, a solution to get workers paid, a way to cover raw materials.
As Huq has pleaded, do not stop the supply chain, do not simply walk away from commitments. Find a way to pay, defer, work on a plan with your vendors.
A mass email to all your vendor partners alerting them of cancellations seems like an easy way out of this liability. These emails have been increasing daily, too, but I have spoken to company leaders who at once seemed unbreakable and who are now on the verge of tears. Never mind that their own livelihoods will evaporate, it’s the burden of their workers’ lives that is weighing them down now, and the industry’s total lack of regard for that responsibility.
Not only are companies bankrupting the very people needed to create and deliver product, they may also be putting themselves in a financially unsustainable situation.
Some companies are just experiencing a cash crunch, but are financially sound at the core. In a recent CNN interview, AMC CEO Adam Aron said the company needs loans because the coronavirus pandemic has forced all AMC theaters to close. The only way to survive, he said, is by getting liquidity from the government. AMC was a strong company in 2019, with roughly $5.5 billion in revenue and $770 million in earnings. This past week, it blew through $30 million in operating expenses, with exactly zero revenue. At this rate, they will burn this cash and a lot of it. Everyone asking is asking the banks for help and the banks can’t fund everyone, so the government needs to step in. Aron isn’t asking for a bailout, but a loan to pay back with interest.
Why do I bring this up? AMC’s business isn’t much different from others in our industry that have been quick to draw down on their lines of credit. Macy’s drew down $1.5 billion last week. And they are not the only ones. Will the balance sheets of many brands and retailers allow them to repay the debt with interest? Were their businesses sound before COVID-19? Who is going to cover these debts?
What’s more, who’s doling out the next round of cash to the direct-to-consumer ventures? Are the days of cash flow negative customer growth brands dead? Who is going to help Simon when mall retailers claim they can’t pay rent? Which private equity firms are preparing to pounce on undervalued assets?
We are going to see true entrepreneurs and leaders emerge. Those trying to manage back to the “old way” may find no stores to return to in a few months. Of those that do survive, most will be on life support.
No one is coming out of this unharmed, but how we treat each other, and our partners, will be remembered long after this virus passes. You cannot control many things at the moment, but you can ensure you have a reputation that can last, because that goodwill may be the most important currency left to trade.
Edward Hertzman is the founder and president of Sourcing Journal, and has spent more than a decade working as a sourcing executive in the apparel industry.