March 04, 2020

Retail Update - Coronavirus Impact - Private Label Affected More Than Branded

AMZN, KSS, NKE, ROST, TGT, TJX, WMT
By Lois Sakany
Disruption in the retail supply chain caused by the coronavirus is perceived as more problematic for private label than for brands and is most likely to be concentrated in 2H20, depending on the category.

Retailers and one Chinese supplier interviewed for OTR Global's athletic reports as well as five U.S. suppliers for an array of channels have weighed in on the impact of the new coronavirus (COVID-19), and most said the virus has already affected their business or anticipate an impact on their business in the coming year. While sources were mixed on the seriousness of the virus, there is widespread consensus that its impact on the supply chain is meaningful. And while most anticipate delivery disruption will be concentrated in 2H20, there are some who have already been hit with cancellations and requests for changes to order cadence. 

U.S. buyers expressed more concern than the two French buyers and not surprisingly, the one Chinese distributor who weighed in was the most concerned of all because of a severe drop-off in traffic, which continued into early March. When interviewed on March 2, the source said, "All stores were shut down during the Chinese New Year and right now only a small percentage are open with shorter hours of operation. Even when the opening hours are normal, the mall has no customers."

Branded vs. Private-Label Production, Delivery Impact: There was consensus among U.S. buyers that the virus was having a bigger impact on private-label production compared with branded, partly because factories favor brands but also because private apparel and footwear hubs are located in regions of China more affected by the loss of workers. One buyer said, "So far, there's been no impact on major brands, but yes with private label. All our private brand deliveries originally planned for March-April delivery are expected to come in May."

Another buyer said, "My [private-label] guy said these [factory workers] aren't coming back [any time soon]. It's real and it's really going to make an impact. It will be interesting to see if some brands start raising prices on off-price goods. Another said, "We were trying to get samples made at the factory where we do our private label, but there was a two- to three-week delay because they're making face masks."

Meanwhile, a French buyer said the disruption would not have much impact as long as production in China resumed soon. He said, "We have not heard from any brand regarding possible delays. This seems to be business as usual. In terms of stocks, I have received roughly 60%-70% of my 1H20 merchandise but need to receive additional stock by mid-May, for the European soccer championship for instance. I'm not sure, but I guess if the Chinese factories return to normal soon, it should be OK."

Although private label was cited as most affected, brands were not immune to challenges, and several buyers said Nike Inc. had shortened the lead time for placing holiday orders; two sources said they were forced to place orders on product sight unseen. Another noted a cancellation of two shoe silhouettes and a delivery delay on a third Nike shoe, and while Nike didn't provide an explanation, the source viewed the action as "fishy" given the timing.

One holiday goods supplier interviewed in mid-February also reported caution on holiday deliveries. "Halloween will be OK, but our holiday sets and toys business will be effected. Right now, 50% of the workforce is back," the source said.

U.S. Inventory Availability: When news of the outbreak went global in late January, some retailers reacted more quickly than others by reaching out to suppliers in search of any excess inventory. The TJX Cos. Inc. and Ross Stores Inc. were cited as especially aggressive in their efforts to grab leftover inventory. Highlighting TJX's approach, one home goods supplier said, "TJX bought a ton of goods in January. TJX has a very experienced home buyer who was ahead of the game in terms of the coronavirus."

One department store buyer who began to hunt down inventory last week said the best inventory was long gone. "If you're starting to look now, you're three weeks too late," said another buyer who expressed concern that suppliers would begin price gauging on leftover inventory if the spread of the illness continued to disrupt production.

Inventory delays are also coming on the ground in China. "Every five miles, truckers have to stop to get permission to go through. This week the government started to open roads, but it's caused a three-to-four-week delay on raw materials," said a supplier who was interviewed in mid-February. He added, "We had a lot of extra goods because we bought extra, with tariff concerns. I think in another month that inventory will be gone." The same source said Walmart Inc.Amazon.com Inc.Target Corp. and Kohl’s Corp. would be most affected because of their exposure to private label.

Costs: In addition to production, coronavirus has also affected the cost of shipping, which has skyrocketed. One buyer for a large chain said, "Air shipping has tripled. Vendors can't ship on time, so they're having to air things over and we have to pay for it. They can charge whatever they want."