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How much is the Coronavirus costing the fashion industry

2020/06/28



The Coronavirus pandemic has crystallized our daily lives in an in-home quarantine, the end date of which is still unknown. Leaving aside the human factor of this epidemic (which is taking thousands of lives), the spread of COVID-19 will inevitably have devastating consequences on the global economy, an impact that has not been fully understood and analyzed yet.

 

While almost all luxury groups, including LVMH, Kering and Prada, but also fast fashion giants such as H&M, are progressively converting their production to provide masks and health materials to hospitals and the population, they're also focusing on a new sales model - of necessity online - and they're beginning to do the damage count.

 

The effects of COVID-19, due to an already complicated financial situation, are clearly affected by the H&M group. The Swedish fast-fashion chain was forced to close 334 of its 518 stores on Chinese territory, thus accounting for a drop in sales of -24% in the first quarter of the year. And while the emergency slowly comes to an end in China, thus giving H&M the opportunity to reopen a small number of stores, H&M sees many of its European stores temporarily closing the shutters in Italy, France, Spain, Belgium, Austria, Greece and many other countries. A drop equal to, if not greater than, that occurred in China also on European territory will, therefore, be inevitable.

 

What Inditex is facing seems a less dramatic situation, despite the fact that the group that owns Zara, Bershka, but also Massimo Dutti, has had to close 3785 stores in over 39 different markets. This is while in China the shops slowly begin to reopen, testifying to a situation that travels in the opposite direction from the rest of the world. Although in 2019 Inditex recorded a + 8% increase in sales, for a turnover of € 28.3 billion, the new data of the Spanish giant reports that from the beginning of February to March 16, online and online sales stores dropped by about 5%, while general sales from 1 to 16 March suffered a total decline of -24%. Nonetheless, the group reassures that online sales continue normally, as does the production chain in the factories.

 

In addition to the losses in economic terms, what appears to be on the horizon for fast fashion chains is a much bigger problem, that of unsold goods, a very delicate and much-discussed issue, which has caused many to question the environmental impact of fast fashion brands. H&M, for example, had been accused of burning about 12 tons of clothing, still usable and salable, every year in recent years. Destroying unused products is for many a useful choice for resolving duties and customs protection issues. Just think of the United States policy that allows brands that import goods within their borders to get back 99% of the duties, taxes or fees paid on the goods, if the goods are not used, exported or destroyed under customs supervision. It remains to be seen how the Inditex and H&M groups will move in this direction in order not to find warehouses and warehouses full of unsold goods.

 

As WWD writes, the world of luxury by definition is the world of desire, not of need, and it is therefore natural that it too, if not to an even greater extent, will be affected by the crisis caused by the spread of COVID-19. The estimates speak of a loss that would amount to between $32 and $42 billion for the luxury sector, penalized by the closure of stores and large shopping centres, especially on Chinese territory. 35% of luxury sales are also insured every year by consumers of Chinese nationality: it is worth noting that the vast majority of these purchases take place abroad, not on Chinese territory, by Chinese citizens on vacation, that tourist shopping that at least in the first few months of 2020 it will disappear for obvious reasons. A strategic asset of luxury shopping is also the airports, which thanks above all to duty-free policies and tax breaks, have created a turnover that stabilized around $44 billion dollars last year. It is no coincidence that the major agglomerations of luxury are concentrating more and more on this type of sale, which for example for Kering is a very fast-growing sales channel. With the spread of the virus and the consequent closure of borders and airports, shopping in these places will drop by at least 70% this year.

 

The most dramatic case is that of Burberry, whose 44% of sales are made thanks to citizens of Chinese nationality. In recent weeks, sales of Burberry have fallen by 40/50%, and according to experts' forecasts will drop again, by 70/80% by the end of the month. In general, store sales fell 30% compared to the same period last year. 60% of Burberry single-brand stores are also closed between Europe, the Middle East, India and Africa, while this percentage rises to 85% when it comes to the United States.

 

The Kering Group, the luxury conglomerate that owns among others Gucci, Saint Laurent, Balenciaga and Bottega Veneta, estimates a -14% drop in sales in the first quarter of 2020. The group that last year billed $17 billion dollars said it expects similar losses in the second quarter of the year, mainly because a solution to this global pandemic is not yet visible, even though there are encouraging signs and a timid return to purchases in China.

 

Although purchases have grown by 2.7% steadily throughout 2019, the Prada group also expects a slowdown in these first months of 2020, without however providing further indications of the estimate for the coming months.

 

After closing 2019 at its all-time high, following the spread of COVID-19, adidas found itself forced to cancel all wholesale shipments and declare that it planned to eliminate the excess inventory for the rest of 2020. While most of the factories in China have returned to operation, its distribution chain has suffered disruptions, without particularly affecting the company's general budget. adidas, as well as PUMA, makes nearly a third of its sales in Asia, and although many of its factories are back in business and production is slowly restarting, PUMA admitted that it did not expect such a drastic drop in sales in the Chinese markets, Singapore, Japan and South Korea.

 

Beyond seasonal estimates and quarterly profits, it remains to be seen whether this quarantine period will change the way consumers shop even when online shopping is no longer the only possible option. In the United States, online shopping, for example, accounts for a third of all clothing purchases, and 12% of luxury purchases are made online. There are brands that at this time not only have closed all the physical stores, but also the online ones, as in the case of Patagonia. Given the results of online quarantine shopping - just think of the Nike case - it is clear that brands, of any level and sector, will continue to invest in the digitalization of purchases, not only to achieve a further increase in sales but also to go to create a sort of fund, of insurance, in the event that such a situation arises again.

 

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