Covid-19 has caused complete disruption for the apparel industry, globally. Garment manufacturing factories in Asia have stopped production either due to lockdowns (as is happening in India), or due to a severe shortage of raw materials that are sourced from China. The apparel manufacturing industry in China is gradually limping back to normalcy, but there is hardly any market for the goods currently.
International retailers and brands are expected to face even tougher times, making it that much harder for supply chains to recover. Apparel makers in South and Southeast Asia face months of potentially fatal factory closures and mass layoffs as European & American retailers shut their stores & suspend supply orders due to the Covid-19 pandemic.
China limps back, but where is the market?
In southern China’s Guangdong province, a major clothing and textile hub, over 60% of export-oriented firms said their overseas orders have declined, according to a survey by the Guangdong Clothing and Apparel Industry Association in early March. Amid the still-recovering domestic supply chain, businesses – especially the more vulnerable smaller firms – are facing issues with stockpiling, tight cash flow, and reduced staff, according to the industry trade group. “We’ve lost the spring and summer seasons; now we’ll look to the fall and winter,” sources said. “It’s best if the fall and winter seasons can be salvaged, but to be honest, there is too much pressure.”
India’s textile & apparel industry stares at Rs 1 lakh crore losses
The Clothing Manufacturers Association Of India (CMAI), the representative body for the domestic apparel manufacturers, conducted a survey of its members to understand the impact of Covid-19. The 1500 plus CMAI members who participated in the survey have sales of about Rs 60,000 crore and employ 400,000 plus people.
They expect more than 40% drop in demand after the lockdown. CMAI believes that the domestic apparel industry could take a hit of almost Rs 1 lakh crore due to the lockdown and the subsequent slow down in economic growth. Almost 50 lakh jobs in the apparel industry are at risk. 80% of the members indicated that they will need to downsize their organization immediately.
A minimum 30% reduction in employee count and 20% reduction in salaries for all continuing employees is the action that CMAI members are likely to take.
90% of the members expect 30-40% increase inventory due to zero sales during the lock down. Further 100% of members are worried of collection from trade post the lock down. 25% of the collections may become bad-debts and members expected a minimum 90 days additional delay in collections. The choking of working capital will lead to a delay in reviving factories and thus 75% of the members expect normalcy in the market only in FY 2021-22.
The Tirupur garment industry, which has over 10,000 manufacturing units, employing over 6 lakh people is staring at a loss of over Rs 10,000 crore in just three months. For both the small and big firms, the road to revival seems difficult.
Tirupur exports industry used to see a turnover of Rs 2,500 crore per month on an average, but the units have not yet received their payment dues for January and February.
As coronavirus affected the EU, Canada and other markets, the brands have not made payments yet. Besides, the shipments released in March are right now on high seas or lying at the ports. Nobody knows when these shipments will be cleared and taken to warehouses or when exporters will get their dues. Even after the lockdown is over, there may hardly be any business in April. Exporters estimate losses of Rs 10,000-12,000 crore in just three months.
Vietnam apparel exports could fall 8% in first two quarters
Vietnam’s apparel exports are expected to register a negative growth in the coming quarters due to the lock down in US and Europe. Vietnamese authorities reckon that exports to European markets could decrease by 8%, if not more, in the first and second quarter of this year. Local reports suggest that dozens of apparel companies have already lost European and US supply contracts. Vietnam’s apparel exports were worth US$ 36 billion in 2018.
Cambodia faces double impact of Covid-19 and EU actions
Cambodia’s government has estimated that as many as 200 factories employing roughly 160,000 workers might temporarily close their operations as they run out of raw material imports from China.
China has shipped more than 200 containers to Cambodia’s garment industry in the last week. However, the Garment Manufacturers Association in Cambodia (GMAC) said these materials might not be enough to meet garment factory demands beyond May. The industry expects normalcy to return by then, and garment factories will hopefully resume operations. In Cambodia, garment and footwear exports account for two-fifths of gross domestic product (GDP) and employ more than 800,000 workers, representing the country’s largest employer.
However, European brands are pulling out of Cambodia. In November, Primark said it would “pull out of production” in Cambodia if the country lost its EU trade privileges, which has now partially happened, while H&M warned of a “substantial backlash” for Cambodian manufacturers.
Myanmar’s apparel exporters are boxed in from all sides
Myanmar’s apparel industry is in particularly bad shape as European Union has withdrawn some of the preferential trade benefits, and Covid-19 has led to cancellation of orders, and a shortage of raw materials that are sourced from China.
According to media reports in Myanmar, at least 20 out of 500 apparel factories in Myanmar have shut down while 10,000 of a total of 500,000 garment workers have been temporarily laid off.
A Chinese-owned garment factory in Yangon, Myanmar is the first victim of this situation. The company has declared bankruptcy, blaming it on losses caused by the COVID-19 virus outbreak. The Myanmar Royal Apollo garment factory in Shwe Pyi Thar township, Yangon, said it ran out of raw materials after China shut down factories due to the virus.
Thirteen factories in Yangon and Bago regions have closed or cut back staff in Myanmar since January due to factors like a lack of raw materials, no orders and no buyers. Seven factories had closed permanently, four have shut temporarily and two have reduced their workforces. Due to the factory closures, more than 3,000 workers are now unemployed. The shutdowns were not all linked to the coronavirus, according to the director-general. The Myanmar Garment Manufacturers Association (MGMG) said this week that 20 more clothing factories have threatened to close.
In August, the international clothing brand Esprit ceased procuring apparel from factories in two industrial zones owned by a Myanmar military conglomerate, Myanmar Economic Holdings, while suppliers for H&M and Bestseller said they would review their contracts.
Bangladesh loses orders
Bangladeshi factories have so far lost an estimated US$ 138 million due to cancelled or suspended orders from international brands, Reuters reported. The Economist Intelligence Unit recently predicted global trade will grow by just 0.4% this year, a downgrade of its previous 2.3% projection made before the Covid-19 outbreak was declared a global pandemic. The International Labor Organization, meanwhile, estimates that in the worst case scenario 25 million jobs across the world could be lost as a result of the Covid-19 crisis, compared to 22 million erased after the 2008 financial crash.
Whether most South and Southeast Asian garment makers have enough liquidity at hand to weather the storm is in question. Most apparel makers have two survival options, industry analysts say.
They can remain as operational as possible and stockpile goods to sell when the virus crisis ends and European and US consumer demand revives. The analysts believe consumption including for clothing will skyrocket in the West after their populations are allowed to exit weeks or even months of quarantines and satisfy their literally pent-up demand.
That means garment makers will need to continue paying for raw materials and labour without immediate underlying orders and payments. Stockpiling, however, could drive down the price of apparel even further once the crisis ends, as cash-starved manufacturers race to the bottom to assure their stored and ageing products are sold quickly.
The alternative choice is for manufacturers to wind down their operations for several months, temporarily suspend workers and conserve cash for when the global economy is definitely poised to recover. That seems to be the route most regional garment makers are taking, despite the impact it will have on ordinary workers who often live month-to-month on low hourly wages without protective social safety nets.
Retail closures in the West will hamper revival
Asia’s textile factories are expected to suffer much more from declining European and American retail demand than they have in more recent months because of disrupted supply chains.
Almost 630,000 outlets in the US have been forced to close due to fears about Covid-19 and restrictions on movement to contain its spread, according to Coresight estimates. With the National Retail Federation calculating that US$ 430 billion in industry revenues could evaporate over the next three months, the question is how many of them will reopen. March 27 was the day that many retailers set roughly two weeks ago as the marker for how long they planned to temporarily keep their shops closed. But as the number of COVID-19 cases continues to rise, nothing is opening back up again.
Retailers are now faced with uncertainty regarding store openings, the burden of rent even as stores are closed, and fervent appeals from South and Southeast Asian governments and industries to avoid order cancellations and renegotiations. Primark, one of Europe’s largest discount clothing retailers, last week cancelled dozens of orders and advised suppliers – many of whom are located in Southeast Asia – to “seriously consider putting a halt on all current and future production and the purchasing of any materials in relation to any Primark orders.”
Associated British Foods, the conglomerate that owns Primark and other clothing outlets, has closed shops in France, Spain and Italy, as has Sweden-based H&M.
Marks and Spencer, a British multinational retailer, said last week it will reduce clothing orders by at least US$ 118 million in the coming months. Other big Western clothing brands, like Zara, Mango, Macy’s and J.C. Penney, have also cut back orders or suspended them outright.
International brand Next predicts a drop of US$ 1.1 billion in global sales.
Nike and Lululemon both reported quarterly earnings this week and said that as stores in the US remain closed for the foreseeable future, their plans to reopen will be on a location by location basis, according to local mandates and information provided by the government.
Lululemon said that the company is preparing for its shops in the US to be closed for longer than they were in China, where COVID-19 originated. Nordstrom said it would be extending its store closures in the US and Canada through at least April 5. It is also beginning to furlough a portion of its corporate workforce, starting April 5 for six weeks.
Tailored Brands, the parent of Men’s Warehouse and Jos. A. Bank, said that it’s keeping all of its stores dark until at least May 4. The company said it is, in the meantime, furloughing all US store workers and a “significant portion of employees” in its distribution centres and offices. It did not quantify how many people will be impacted.
Closures could be more permanent
The temporary closures will likely lead to more permanent ones. With the coronavirus as a new wrench in their businesses, the US retail industry could see a record year for announced closures, amounting to 15,000, one analyst has predicted.
Extended store closures will also lead to more furloughs, which is a temporary leave of employees, and then ultimately layoffs.
As companies try to conserve cash, dividend payouts have been postponed at groups, including Nordstrom. At the same time, Best Buy, TJX and Kohl’s are among 126 discretionary consumer companies to draw a total US$ 86 billion from credit lines, according to Autonomous Research. Some, such as Mattress Firm, have told landlords that they will fail to make required rent payments for April.
Another 30 nationally known US retail companies could file for bankruptcy protection this year, according to analysts. Especially vulnerable are department stores and mall-based clothing chains that have long struggled to stay relevant in the age of Amazon.
Long before coronavirus, however, many retailers were battling to keep creditors at bay. Household names including Forever 21 and Pier 1 filed for bankruptcy in recent months and the sector accounted for almost a fifth of US corporate debt that defaulted in the fourth quarter.
Junk-rated retailers with large debt burdens, cited by the rating agency Moody’s, include luxury chain Neiman Marcus, with outstanding debt of US$ 6.1 billion, mass market department store operator JCPenney (US$ 4.2 billion), womenswear company Ascena (US$ 1.8 billion) and clothing retailer J Crew (US$ 1.4 billion). Mark Cohen, director of retail studies at Columbia University and a former chief executive of Sears Canada, doubted federal loans could resuscitate heavily indebted companies. “A business that was struggling going into this crisis and is already leveraged up is unlikely to recover by taking on additional loans, even on favourable terms,” he said.
Not everyone is sure coronavirus will lead directly to a wave of retail bankruptcies. “I expect to see an uptick, as companies that were on the edge have greater risk of falling off the edge quicker, but I don’t believe it will be the Armageddon that everyone thinks,” said Perry Mandarino, head of restructuring and co-head of investment banking at B Riley FBR. Such is the scale of the crisis that the bankruptcy process itself is not functioning properly. New York-based Modell’s Sporting Goods has put liquidation sales on hold as customers are unable to visit its stores, and a judge last week granted its request to suspend Chapter 11 proceedings. One leading restructuring banker argued lenders and landlords would do as much as they could to “hit the pause button” for the duration of the crisis. Prof Cohen added it may well be in creditors’ own interests to be more flexible than usual. “The assets that they would seize are currently worth a fraction of what they were before this erupted,” he said. “There will have to be widespread forbearance.”
Furloughs and lay-offs in retail sector in the West
Victoria’s Secret and Bath & Body Works parent L Brands said that its stores in the US and Canada will remain closed beyond the end of March. It said it will pay workers through April 4. But, beginning April 5, it will be furloughing “most” store workers, in addition to those people who cannot work from home or those who are not supporting L Brands’ e-commerce operations.
“As the situation continues to evolve rapidly, L Brands is not currently able to predict the timing of store reopenings,” the company said.
Build-A-Bear Workshop said that it will be furloughing more than 90% of its workers. Fitness chain Flywheel Sports has temporarily laid off 98% of its workforce.
Macy’s and Gap said that they planned to furlough much of their work forces. Macy’s, which said the cuts would affect the “majority” of its 125,000 workers, lost most of its sales after the pandemic forced it to close stores. Gap, which also owns Old Navy and Banana Republic, said it would furlough nearly 80,000 store employees in the United States and Canada. As the odds of reopening stores quickly became increasingly unlikely, many retailers are extending workers’ pay into April.
Rent the Runway laid off its retail employees through a call via Zoom last week, while Everlane laid off or furloughed nearly 300 of its workers.
Ascena Retail, which owns Ann Taylor and Lane Bryant, said that it was furloughing all its store employees and half its corporate workers, which amounts to about 90% of the company’s 43,000 employees.
Kohl’s, which employed an average of 122,000 associates in 2019, said that it would furlough about 85,000 of them. Guitar Center also said that it was furloughing 9,000 store employees.
The cuts were not limited to store employees. Gap, for example, said that it planned to reduce the number of its corporate employees around the world. Employees in jobs that support online sales, including call center positions and distribution center roles, were largely spared from the furloughs.
Retailers stressed that they had already made other cost cuts before turning to their workers. Macy’s said it has decided to scale back to “the absolute minimum work force needed to maintain basic operations” after first taking actions including drawing down its credit line, suspending its dividend and halting capital spending. Furloughed staff receiving health benefits would retain coverage through May, the company said, adding that it would cover all of the premium costs. A representative for the union representing Macy’s workers in New York City said that relatively few workers nationally use the company’s health benefits because the plan is costly.
Everlane, the apparel start-up known for its transparency regarding where and how its clothing is made, said that it laid off 222 employees who worked in customer experience and part-time in retail, and furloughed 68 full-time retail employees. It offered two weeks of severance. The Covid-19 crisis will lead to an acceleration of the US retail shake-out, says analysts.
Meanwhile, all this will dent consumer confidence and consumer spending, further adding to the woes of the apparel manufacturers and retailers.