potential impact on
North American retail
Much of the economic impact of the coronavirus (COVID19) remains unknown. There are certainly risks to the global retail market, but the true impacts are impossible to predict due to the complexity of global supply chains.
Virus already impacting retailers
Until last week, the epidemic appeared to be mostly confined to Asia. After a significant spread in other countries and new questions on how the illness spreads, the Center for Disease Control warned the public to expect and prepare for an outbreak in the United States. The global stock market has reacted negatively and last week the S&P had one of the worst weeks since the 2008 financial crisis. The S&P jumped back at the start of this week as global central banks pledged to step in if the situation worsens, giving confidence to investors. However, with continued instability, the Federal Reserve cut intrest rates on Tuesday.
Fashion stocks have been hit hard, especially after the outbreak in Italy which has interrupted Milan Fashion Week. Luxury retailers are heavily dependent on Chinese consumers and have seen substantial stock market declines. LVMH saw a loss of $13 billion since last week, however, there has already been improvement since late last week, but volatility will most likely continue.
In February, the National Retail Federation forecasted retail sales to increase between 3.5 and 4.1 percent in 2020. However, NRF also cautioned that this forecast assumes the coronavirus does not become a global pandemic.
- If short-lived and limited, as was the case for SARS in 2003, the coronavirus outbreak will affect economic performance mainly in the first and second quarters with many retailers feeling impacts of a disrupted supply chain but with a subsequent rebound in the following quarters.
- If prolonged, the coronavirus outbreak is expected to lead to weaker global trade due to reduced travel, elevated uncertainty that will hold back consumers, and disrupted supply chains that could impact back-to-school and holiday inventories and sales.
Disruption to the supply chain could mean inventory shortages
The coronavirus outbreak has not yet significantly impacted retailers’ inventory in North America since current stock has already shipped in advance of the Chinese New Year but many have adjusted forecasts for impending disruptions. Retailers with recent quarterly calls have braced investors for diminished returns in Q1 and potentially Q2 depending on the outbreak severity. We can expect to see some retailers struggle to replenish inventory in the coming weeks to months.
China accounts for approximately a quarter of the world’s manufacturing output – 28 percent in 2018 according to data published by the United Nations Statistics Division. More specifically, China accounted for 38 percent of U.S. textile and apparel imports from 2013 to 2017 (U.S. International Trade Commission), and the outbreak has already begun to disrupt supply chains for mid-market apparel.
Retailers that rely on products with complex supply chain networks will be slower to recover. Apple announced in mid-February that it does not expect to meet revenue targets and Under Armour is projecting a $50 to $60 million hit in Q1. Expect the most vulnerable industries to be automotive, pharmaceutical, textiles, and consumer electronics due to their complex supply chains and dependence on Chinese factories.
Interestingly, the tariffs imposed on Chinese goods in September of 2019 forced some retailers to rethink production facilities’ locations. Retailers relocated some manufacturing operations out of China and into other neighboring countries like Taiwan and Thailand and into the U.S. in preparation for the tariffs. Considering the impacts already felt by China’s dominance over the export market, expect more retailers to shift production to other Asian, European and South American countries overtime.
Drops in tourism will impact spending
Recent travel restrictions will dampen tourism numbers and retail sectors that rely heavily on those tourist dollars will inevitably see fewer transactions. North American cities with large convention centers and popular tourist destinations like New York, Las Vegas and Orlando may feel impacts sooner as organizations adjust corporate travel policies, airlines reduce the number of flights, and governments caution against mass gatherings.
Canada is a popular destination for Chinese travelers who tend to spend more than other visitors, and often on luxury goods. While New York City saw over one million Chinese tourists in 2018 (NYC & Company), Vancouver’s proximity to Asia and its reliance on tourism could impact the city negatively.
During the 2003 SARS epidemic, Toronto and Vancouver saw major declines in tourism. Travel from Asia to Canada between April and May 2003 dropped 32 percent from the previous year. However, while British Columbia’s retail sales fell by one percent in June 2003, it quickly caught up in the following months and had a minimal impact on Canada’s overall retail sales that year (StatsCan).
Consumers will change shopping habits
Inventory shortages suggest that consumer prices may rise for certain products. This would impact retail spending as consumers are unable or unwilling to pay higher prices for goods. In continental Europe, electronic goods have already seen a 10 to 15 percent price hike as inventory shortages are already taking place.
Depending on government advisories in the following weeks, consumers are likely to remain cautious and will limit consumption and reduce eating and shopping trips. This will be more extreme if people are placed on lock-down or are quarantined. As a result, online shopping is likely to see an uptick as people avoid heavily trafficked public areas. However, the supply chain disruptions may add time to retailer’s typical delivery windows. The Port of Los Angeles has already seen a quarter of sailings canceled as container volumes drop and AliExpress, Alibaba’s e-commerce platform, has warned customers of potential delivery delays because of logistics complications.
Retailers in China look for rent relief
Outside of Hubei Province, ground zero for the virus, day-to-day life is beginning to return to normal. In Shanghai, shops and restaurants are beginning to re-open and employees are slowly returning to work. However, this has clearly been a challenging time for retailers considering operations have been nearly or completely shut down over the past month. Landlords are offering two to four weeks of free rent, but retailers are already responding that they will need significantly more to cover their losses. Many retailers have said this will push back expansion plans to the second half of the year, but this ultimately will depend on how the outbreak develops and whether we see a resurgence.