TFR latest post was a sociological perspective on Coronavirus, a virus that has the potential to destabilize the pillars of Modern Life. This is a global threat, the worst challenge since WWII, that will cause the first ever global recession (every country is impacted). Blocking the economy might cause rebellion too. Note that guns and ammunition sales have surged in USA due to coronavirus panic. It´s not science fiction. If this could happen in the richest countries, what is going to happen in developing ones?
A Favela in Rio
Closing borders and blocking the economy for a long period of time is not the solution in a global ecosystem with an economy based on consumerism. This doesn´t mean that the system was perfect. In fact, this is a historic opportunity to embrace a more sustainable economy. It´s time for collaboration and solidarity (also when getting the vaccine), but time is a limited resource right now. Anticipation is key!
Luxury stores in NYC boarding up storefronts due to coronavirus – Photo: John Nacion/Nurphoto via Getty
The Business of Fashion and Coronavirus (1/2)
In mid January, companies were concerned about restrictions on their shippings from China. Many fashion retailers outsource manufacturing to low-cost locations, and People’s Republic of China is the biggest “supplier”. In fact, according to IKAR data analysis, as of 2019, China was the largest exporter of textile and clothing products in the world still, with about 24,000 enterprises in this industry and around eight million employers.
Many of these mass-market retailers are make-to-stock businesses. They trust on “accurate demand forecast”, buying high-volume stocks to make better profits thanks to economies of scale. If Customs are blocking cargo and containers, there is a high risk that orders won´t be fulfilled while stock on hand couldn´t support regular demand. In summary, coronavirus could drive up out-of-stock in apparel stores (if demand is stable). At that point in time, as China is still the world´s factory, Coronavirus was a Supply concern from a business point of view.
But today, coronavirus is hitting Supply and Demand. Retail business is on hold and inventories are not sold. “Retail companies are not built to have their stores closed for extended periods of time,” as PVH CEO Manny Chirico said recently. According to McKinsey&Co, 80% of firms face a highly uncertain future if stores close for two months. Luxury execs are expecting the coronavirus epidemic to cost the luxury market as much as €30 to €40 billion ($32 to $43 billion) in sales, according to a new survey done by Bernstein and Boston Consulting Group. Burberry confirmed that sales were down nearly 80% like-for-like, a plunge in sales that many luxury retailers are noticing and McKinsey&Co estimates that revenues for the global fashion industry (apparel and footwear sectors) will contract by -27 to -30 percent in 2020 year-on-year.
Consumerism is taking a sabbatical, and customer behaviour could change forever.
FASHION RETAIL SHORT TERM STRATEGY AFTER LOCKDOWN ENDS
• COMMUNICATION: From shop assistants to people working in headquarters, every employee is a brand ambassador. This is an extraordinary situation and the solution should be based on collaboration. Be transparent, it´s time for solidarity from both sides. Companies will need to reduce overheads including temporarily lay-offs or cutting executives salaries. In regards to “brand awareness”, brands helping out during coronavirus (e.g. New Balance or Chanel are producing masks to help health workers) will be rewarded by customers.
• CASH POSITION: increase the amount of time between accounts payable (cash outflow) and accounts receivable (cash inflow).
- Reduce overheads costs (e.g. unpaid leave, temporary reduction in pay and benefits)
- Renegociate loans terms and conditions
- Negociate new payment terms to suppliers and stop new orders (long-term relationship with your suppliers benefit your company. This should be a win-win negotiation)
- Renegociate rent with landlords (impact on tourism due to international travel bans will hit flagship stores even harder).
- Ask for Government rescue packages
- Reduce CAPEX and block investments/projects that are not “key” (Digitalization is a priority as digital is more important than ever)
• REVENUE “GROWTH”:
What is your most efficient revenue stream? It´s not time to think about margins, but revenues (volume). Overstocking is the greater risk. Where do you sell online? Do you still have any store opened? Work on your strengths and look for additional revenue streams. Recovery will differ by region and China will lead the economy both from supply and demand.
This is a point in time where having a plan is crucial. Create different scenarios depending on duration of lockdown. Merchandise planning should consider different scenarios (e.g. assortment plan, allocations) and channels.
- Focus on “recovery regions“. The U.S. and the euro area will see negative growth, while Chinese growth is expected to come in at a paltry 1.5%,” said Ethan Harris, head of global economics at BofA.
- Partner with sales channels such as marketplaces (e.g. Farfetch, Yoox Net-a-Porter, Tmall)
- Partner with flash sales platforms (e.g. Veepee, Groupon, Mei.com)
- Sell on Social Media
- Focus on loyal customers. Use your CRM or clienteling, mail them or even phone them. Communities help get through difficult times.
- Offer discounts and deals. If you already sell through digital channels (e.g. owned e-commerce site) start with discounts (Nike is already giving a 25% off online, for example), and increase this percentage in categories or styles (type/color) that are more seasonal (these items lose value). Create cross-selling opportunities to increase your ticket size. This is a “wartime economy” and you should focus on volume, not margin. Sell as much stock as you can (don´t miss the break even point). Cash is an urgent need, depending on your working capital, maybe it´s time to make an exception and give discounts on basics, non-seasonal clothing or accessories too.
• STORES: ANTICIPATE CHANGE
- Traffic: Customers could avoid over-crowded, large locations and also will reduce the time spent inside the store. Control social distance in stores.
- Hygiene: Make masks and gloves available. Increase cleanings and offer free hand sanitizer. Retail scent could create a clean, welcoming atmosphere and perception (scent doesn´t protect from a virus, but fights against stress and fear). Other necessary measures are self-payment checkouts and cash payment restrictions. Ensuring cleanliness will be a must. Second-hand clothing businesses could face problems due to customer fearing used clothing.
- Product and Customers: Supermarkets see empty shelves caused by panic buying, but this won´t be the situation in apparel stores when the quarantine is over. Retail ticket size could increase, and the number of visits per customer will decrease. Customers are expected to make rational purchases, looking for good quality/price relation. In this regards, companies that bet for high-quality materials and sustainability embrace social and environmental activism will benefit from coronavirus. This is also about marketing and strengthening community engagement.
- Store Operations: In relation to what is mentioned above, stores will have less inventory (less is more!) and store layouts will change (Mid Term Strategy). Curated Retail: Having the right quantity of stock and the right styles like H&M is testing in Berlin or what Nike calls Live Stores. Stores should allow to find the most successful items for the customers in that specific location and let them find the rest of the collection online (Focus on a hyper-curated “Pareto”, or A products). Stores must update to showrooming, ROPO, Click&Collect and other omnichannel options.
Read more about Fashion and Coronavirus on:
- Virus impact on fashion and luxury to be ‘worse than recession’ – FT
- Chinese luxury industry rebounds from coronavirus thanks to ‘revenge spending’ – Fortune
- Coronavirus Impact: How the Epidemic Has Impacted the Fashion Industry – WWD
- A perspective for the luxury-goods industry during—and after—coronavirus – McKinsey&Co
- Perspectives for North America’s fashion industry in a time of crisis – McKinsey&Co
- COVID-19 Recovery Scenarios for Fashion and Luxury Brands – BCG
- The coronavirus epidemic could wipe out $43 billion of luxury sales in 2020 – Business Insider