Dive Brief:
- Gucci's parent company, Kering, is shuffling its supply chain in an attempt to mitigate the impact of COVID-19, an illness caused by a member of the coronavirus family, which has resulted in the company closing 50% of its store network in mainland China, company executives said Wednesday.
- "We are now brand-by-brand reallocating that inventory to the other regions of the world to make sure that we're not too heavy on stock in China," Kering CEO François-Henri Pinault said on the company's fourth-quarter earnings call.
- A relatively recent redesign of the company's supply chain allowed it to quickly rebalance inventory across its network, Pinault said. About five years ago, the company would send all seasonal inventory to a region at the start of the season. "[That is] not the case anymore," he said. "We keep most of it and we replenish during the season. So thanks to that replenishment system, we are able to redirect what has been already produced for China."
Dive Insight:
Kering's production largely takes place in Italy and faces fewer hurdles than companies that rely on factories in China. But it's not the only retailer figuring out what the coronavirus outbreak will mean for its China-based retail operation as companies choose to close storefronts as a precaution.
"Due to the evolving nature of this situation, it is impossible at this time to fully evaluate its impact on our businesses and how fast they will recover," said Pinault. "We are hearing lots of different theories on the speed and shape of the rebound, but the reality is that it is too early to predict."
Under Armour executives said this week the company expects to take a $50 million to $60 million hit to revenue in the first quarter as a result of the virus.
"Looking at the greater marketplace and how consumption, consumer behavior, and overall economic shifts could potentially play out is where it gets even more unclear with respect to duration and the possible levels of elevated inventories and promotional activities later in the year," Under Armour CEO Patrik Frisk said Tuesday on the company's earnings call.
The COVID-19 outbreak is expected to result in decreased demand for "most retail and wholesale goods" in China, according to a recent Dun & Bradstreet report.
Retailers closing storefronts will face different supply chain challenges than manufacturers waiting on Chinese factories to resume operations. Manufacturers could benefit from increasing their buffer inventory if possible, according to a research note from The Hackett Group. Retailers, meanwhile, will have to figure out the best way to get inventory into stores where it can make sales.
Reshuffling inventory could prove to be difficult. Air cargo capacity is limited as airlines cancel flights. Demand for rail has increased as a result, which has also experienced capacity challenges as containers from pre-Lunar New Year are being given priority and there have been multiple trip cancellations, according to a note from Resilience360.
"The magnitude of the impact will depend on the duration of store closures as we work with local authorities to manage the situation and protect our partners and customers," Starbucks CFO Pat Grismer said on the company's earnings call last month. Starbucks has closed multiple locations in China as a result of the outbreak.
Predicting the impact going forward could be difficult. The U.S. Centers for Disease Control predicts the outbreak could last "beyond this year," according to CNN.
