Coronavirus crisis could transform how fashion works in China

The infectious disease has rocked luxury stock prices and its consequences range from manufacturing to influencing consumer behavior.

Key takeaways:

Analysts forecast limited commercial impact on luxury labels, but brands that depend on the country for manufacturing could face months of operational delays as holiday closures have been extended to 9 February.

E-commerce could grow further as consumers stay at home and spend time online to fight boredom, anxiety, and frustration.

Hong Kong, which has already seen Mainland tourism fall due to protests, is likely to come under further pressure.

As of 31 January, the month-old coronavirus outbreak had already caused more than 200 deaths and infected more than 7,700 people in Mainland China. It’s intensified during this year’s Lunar New Year holiday, a week that usually boosts spending in categories from luxury to travel. During last year’s holiday, Chinese consumers spent RMB 1.01 trillion ($149 billion) on shopping and restaurants at home, while more than 6.3 million Chinese tourists traveled abroad.

The China Outbound Travel Research Institute expected the number of outbound tourists to surpass 7 million during this year’s Spring Festival, but the Chinese government has now actively discouraged traveling. The US has encouraged its citizens to avoid China, and Singapore — a popular destination among Chinese for luxury shopping — has banned most Chinese travelers. Airlines from British Airways to American Airlines have partially or completely suspended flights. Overall travel on the first day of the Lunar New Year holiday dropped 28.8 percent compared to last year, according to China’s vice minister of transport.

Observers forecasting the economic impact of the coronavirus on the luxury sector often reference Sars, the respiratory disease, which infected more than 8,000 people and killed 774 in nine months between 2002 and 2003. But 17 years ago, Chinese nationals accounted for only 8 percent of luxury consumption, compared to a third today, according to UBS. In 2003, Chinese tourists took around 20 million overseas trips, compared to an estimated 150 million in 2018. Beyond consumption, China remains the world’s largest textile producer and exporter, rounding up $119 billion in textile exports in 2018, or 37.6 percent of the global market share.

Vogue Business reached out to more than 25 companies, organizations and analysts to understand how the pandemic is affecting the global fashion industry, and what contingency plans brands are putting in place.

Relatively small impact on luxury

On Tuesday, LVMH released its eagerly anticipated full-year financial results, which provided one of the first opportunities for public comments on the coronavirus outbreak from a luxury player. “If it’s resolved over the next two and a half months, then it won’t be that bad,” chief financial officer Jean-Jacques Guiony said during a call with analysts, adding that the luxury group’s Chinese team expects the situation to be partly resolved by the end of March.

Analysts think the coronavirus outbreak will ultimately have minimal effect on well-run businesses that have good cost controls, high profitability levels and comparatively lower exposure to the Chinese consumer. “Brands with momentum and high margins will be able to withstand the short-term volatility,” says Swetha Ramachandran, investment manager at GAM. Assuming a 20 percent drop in Chinese consumption in Q2 2020, UBS predicts a 3 percent decrease in earning per share for brands like LVMH and Hermès, compared to 8 percent for Richemont and 7 percent for Burberry.

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Luxury stocks have been hit by the coronavirus emergency.
Brands should limit production in the short-term to counteract a temporary decrease in demand. However, a return to consumption in the second half of the year will likely balance a more muted performance in the first half, says Kristina Hooper, chief global market strategist for Invesco, a US-based independent investment management company.

“Once this illness is eradicated, we will be likely to see a big increase in consumer spending,” she says, adding that consumer and business sentiment was positive in the country after a truce in trade tensions between the US and China. In the case of Sars, the Asian market (excluding Japan) recovered in only two months after the virus was contained.

Supply chain disruptions

On 27 January, the Chinese government extended the Lunar New Year holiday, which originally ran from 24 to 30 January, to 2 February. Many local governments have extended the closure of non-essential enterprises up to 9 February. This has led to manufacturing coming to a near-standstill.

Anne Harper, founder of OMG Accessories, a lifestyle brand that produces out of Guangzhou, expects production to be delayed from two to four months and has already started doing damage control with retailers. Everything from raw material sourcing and manufacturing to shipment will likely be affected, she says.

“We’ll have to prioritize whoever did all the upfront orders, and then I’m going to have to pick the most important styles to prioritize,” she says. Harper has access to the raw material she ordered before the start of the holiday period but doesn’t know how long it will take for a new order to come in once she runs out of it. “We are going to have to scale back.”

“[Closures] could drag on as far as April,” says Xuzhi Chen, a London-based fashion designer who flew back from China shortly after the New Year celebrations. Chen moved his entire production to China in 2017 and manages a 10-person office in Shanghai, where he also has his showroom. The designer has already postponed the launch of a collaboration that was supposed to land in March and is currently trying to reorganize his entire operations to face the next six months. “In the next few months, we will need to operate differently,” he says.

Hong Kong chief executive Carrie Lam holds a press conference as travel from Mainland China to the financial hub is restricted.
© Getty Images

Hong Kong Chief Executive Carrie Lam holds a press conference as travel from Mainland China to the financial hub is restricted.
Brands with multiple manufacturing bases are better equipped to weather the situation by temporarily re-allocating some orders to other regions, says Veronica Wang, a partner at OC&C Strategy Consultants. Karl-Johan Persson, newly named chairman of the H&M Group, alluded to a similar solution during a call with analysts on Thursday, saying that the group has backup suppliers and “can move between markets”. The H&M Group currently works with 1,899 manufacturing factories worldwide, 427 of which are in China.

E-commerce

The Chinese government has imposed travel restrictions on around 60 million people, and citizens throughout the country have been encouraged to stay home and avoid public places. Companies including H&M, Uniqlo and Ikea have indefinitely closed stores across the country to counter the spread of the virus and protect employees. E-commerce websites like Alibaba’s Taobao, JD.com and Pinduoduo, on the other hand, have seen a spike in sales of medical and sanitary products. Citizens in lockdown and away from their families in a traditionally festive period have flocked to social media to fight boredom, frustration and anxiety.

According to Kate Nightingale, founder of consultancy firm Style Psychology, situations of distress like this one can increase consumption. “Customers can become more impulsive in their purchases when reminded of their mortality,” she writes via email, pointing out that a similar phenomenon took place in the wake of 9/11 and the London attacks of 2006.

China is already the global e-commerce leader with an estimated $1.5 trillion sales in 2019 and 855 million digital consumers, according to McKinsey. But the transition from bricks-and-mortar to digital could accelerate even further during this period. Hong Kong and Singapore embraced telecommuting during the 2003 Sars outbreak, spurring the adoption of remote working technologies.

What to expect

The effect of coronavirus is likely to be particularly acute in Hong Kong, where luxury brands closed stores, and retailers lost an estimated €2 billion in sales following more than seven months of protests starting last year. The Chinese territory, whose luxury sector is heavily dependent on Mainland Chinese, is suspending train and ferry services to the Mainland and halving the number of flights. This is forcing luxury brands to double ongoing efforts to target local shoppers.

“The city has been doubly hurt,” says OC&C’s Wang. “Luxury brands will rethink their Hong Kong strategy in the long-term, [deciding] whether they need to rationalize their retail network.”

As the World Health Organisation declared the new coronavirus a global emergency on Thursday, economists have been readjusting their estimates on the impact of the epidemic on China’s GDP for the quarter. In a note to clients, Nomura economists wrote that the country’s GDP growth for Q1 2020 could drop to 4 percent from the expected 6 percent. Chris Low, the chief economist at FHN Financial, told Bloomberg that a 4.5 percent growth for the quarter seemed “reasonable”.

Invesco’s Hooper expects China to proactively support the economy with fiscal and monetary stimulus, eventually reaching 6 percent growth in 2020. “I don’t believe that China will stand by and allow any kind of significant deterioration in economic growth,” she says.

Yiling Pan contributed reporting from Quzhou.