Read more on the Coronavirus and how it is affecting suppliers here.
by John Pitman, krunchbox CEO
A version of this article was also published in the Australian Financial Review.
January 31, 2020
Uncertainty is never a friend of retail. In times of economic or political uncertainty, companies tend to delay investment decisions, and consumers hesitate before reaching for their wallets.
The outbreak of the Coronavirus creates an additional and unusual degree of uncertainty. Some retailers have already been reporting softer than usual sales, as consumers restrict their travel, and the impact is not just being felt in China. Already some of the world’s largest consumer brands are flagging the potential negative impact on earnings calls.
However, there is an additional risk to retail that is less obvious, and that is the supply chain risk. Many retailers and thousands of brand manufacturers have significant exposure to production houses within China. As the Chinese authorities impose travel restrictions, some factories are closed until further notice, and thousands of Chinese workers delay their own return to work for fear of exposure. There is considerable disruption to production schedules.
The timing of the outbreak of the Coronavirus is significant. The January – February period is traditionally a low production volume time of year, as many factories close for the Chinese Lunar New Year holiday, and millions of Chinese citizens travel back to their hometowns for celebrations. Given that scenario, most retailers and their suppliers build up their inventories towards the end of the year, to tide them over until normal production cycles and shipments resume post Chinese New Year. That means that shelves are well stocked now and will remain so for several months, but any significant delay in production starting up again will impact supply chains in the second quarter of 2020.
Production and shipping lead times from China to North America vary, but many fall in the 60-90 day range, so many wholesalers will carry safety stock of a similar quantum, and retailers will typically carry 30-60 days of inventory. Logically then, wholesalers are going to start facing shortages from April onwards, and gaps will start appearing on shelves coming into the northern hemisphere spring/summer.
As the extent of the production capacity disruption becomes clearer, suppliers will have to decide whether to source from other countries or air freight goods from China in order to shorten lead times, or else ride out the shortages and risk damaging relationships with retail partners.
Little wonder then that according to CNBC, the words ‘virus’ and ‘Coronavirus’ were mentioned 27 different times by S&P Composite 1500 companies on earnings calls this week.
Just as trade tensions between the US and China appeared to be easing, the virus outbreak threatens to throw another curve ball at the retail industry. It seems uncertainty is the new norm.