What began in early January as a pneumonia outbreak in the central Chinese city of Wuhan has since been declared a worldwide health emergency. Retail Week looks at what effect the outbreak will have on retail supply chains in the region and tourism.

With insight including:

  • Fashion retailers such as H&M on their supply chain back-up plans 
  • Popular Chinese tourist destination Bicester Village, which is preparing for weeks of disruption
  • Why luxury goods will be the category worse affected

On January 30, the World Health Organisation declared the recent outbreak of novel coronavirus a global public emergency. According to a live tracker set up by John Hopkins University, the total number of confirmed cases of the disease stands at over 20,000 in mainland China, with over 420 deaths.

As of this afternoon, a further 194 cases have been reported outside of China across 23 countries and regions, including two confirmed cases of the disease in the UK.

The speed the virus has spread at has had a chilling effect on China’s economy, with the region’s stock index opening 9.1% down yesterday – its worst opening in 13 years, which has prompted the Chinese government to pump £16.3bn into the economy to ensure banking liquidity.

With whole provinces in a state of lockdown, flights to and from the region halted or curbed, and the number of cases growing by the hour, international retailers are scrambling to understand and address the situation on the ground.

Confirmed cases of coronavirus, February 4, 2020
Country/region Confirmed cases
Mainland China 20,490
Japan 20
Thailand 19
Singapore 18
Hong Kong 17
South Korea 15
Australia 12
Germany 12
USA 11
Taiwan 11
Macau 10
Malaysia 10
Vietnam 8
France 6
UAE 5
Canada 4
India 3
Italy 2
Russia 2
Philippines 2
UK 2
Nepal 1
Cambodia 1
Spain 1
Finland 1
Sweden 1
Sri Lanka 1

Source: John Hopkins University, as of 3pm February 4, 2020

Supply chain shutdown

After first being reported in early January in Wuhan in Hubei province, central China, the coronavirus outbreak has intensified over the last fortnight, coinciding with China’s Lunar New Year holidays. Many schools have been closed until at least February 10, which will also mean factories will be closed until that date at least.

Coronavirus 2

Flights to and from China have been halted or curbed to try to contain the virus

A spokeswoman from international delivery service DHL says: “All pick-up, delivery and warehousing services in Hubei province are currently suspended – however, DHL currently does not see any other effects to its operational business.”

According to leader for digital supply chain at management consultancy Kearney, Suketu Gandhi, Wuhan is a “major logistical hub” in China. The disease has been spreading to other large city hubs such as Guangzhou in Guangdong province and Shanghai.

Given the delays, Retail Week understands a number of UK fashion brands that source textiles from China are already considering moving their buying and sourcing of stock to other countries such as Bangladesh, Sri Lanka, India or Turkey.

According to one source with knowledge of the UK fashion sector: “Most retailers who do a lot of sourcing in China would already have bought an excess of stock heading into the Lunar New Year anyway, given the disruptions they knew that would cause. Most will have around four weeks’ worth of stock and there are levers they will pull to be able to slow down the sale of that stock, including possibly looking at increasing prices.

“We have lots of sourcing from China, but we also have a flexible supply chain… we have back-up plans and we will have to see what happens”

Karl-Johan Persson, H&M

“A lot of fashion retailers at the moment aren’t hugely concerned, but they are looking seriously at moving their supply chain base to places like Sri Lanka or Bangladesh, particularly if Chinese warehouses are closed for another week or so.”

This has been corroborated by global fashion giant H&M. Its chair Karl-Johan Persson says: “It’s hard to say what will happen [with China]. We have lots of sourcing from China, but we also have a flexible supply chain, so today it’s having a marginal effect, but we have back-up plans and we will have to see what happens.

“So many different things that go into that. We have a great supply chain and a good supplier network, we are present in many markets and it’s not just in China. We have back-up suppliers and back-up plans and we can move between markets.”

This is being mirrored in the US, according to Gandhi, though many retailers in America are better placed as they have spent the best part of the last year relocating supply chains in South East Asia given the ongoing trade war between the US and China.

“Over the last six to nine months, we’ve been seeing retailers make the switch in terms of sourcing to places like Vietnam, India and Indonesia,” he says. “US retailers had started making small bets along the way that has made the situation a little less pernicious for the supply chain.”

Many European fashion retailers will also see their supply chains affected due to the outbreak of the virus.

One source with knowledge of European retail said supply chain carriers are “now pushing back the estimated time of departure [from China] for products by between two and four weeks as a best-case scenario” – which means delays will start to filter through on the continent.

Buyers blocked

Another issue for fashion retailers is going to the fact that many merchandisers, buyers and designers are not able to visit China in the foreseeable future. The UK Foreign Office has today advised all British nationals in China that they should leave if they can to minimise their risk of exposure to the virus.

While most designs and stock for the summer season will already have been sourced, Gandhi claims autumn lines will be affected.

“If you think about autumn, that’s what a lot of fashion retailers will be planning now. Summer is already planned. Most of these areas you can ramp up production quite quickly, but the design part is being quite badly affected,” he says.

A number of larger US retailers are “looking to send their buyers to Hong Kong”, which is why he says it’s critical that the city protects itself from the coronavirus outbreak.

“When we look back at Sars, China was effectively in lockdown for five or six months”

Suketu Gandhi, Kearney

Hong Kong has been taking drastic measures to stop the spread of the disease from the Chinese mainland, closing 12 of its 14 direct links with China – including the direct route through Kowloon.

However, these precautions seem to have failed, with the city reporting its first confirmed death from the virus overnight. This has led to reports that American Airlines has grounded all flights to Hong Kong. 

Retail Week understands Fortnum & Mason, which opened its first overseas store in Kowloon at the end of last year, is concerned with developments. A source close to the retailer says it has been “very unlucky” – first with the protests that paralysed the city last year and now with the spread of coronavirus.

While Fortnum’s has yet to take the step of closing its store in Hong Kong, many international brands and retailers have chosen to close stores in mainland China, including Apple, Ikea and Starbucks.

While luxury department store Harrods would not comment, a spokeswoman for the retailer indicated that it was following all Public Health England guidance with regards to travelling to China.

Closing borders

To compound issues within China itself, a number of international governments have been taking drastic steps to halt the spread of the disease by curbing or even outright stopping Chinese tourists from entering their countries.

On Sunday, the US government bought stringent travel restrictions into effect – including temporarily denying entry to foreign nationals who had visited China in the two weeks before they arrived in the US.

K11 MUSEA in Hong Kong

Fortnum & Mason opened its first overseas branch in Hong Kong last year

Restrictions have even been put in place for US citizens who have been in the worst-affected Hubei province.

Last Wednesday, British Airways halted all flights between the UK and China, while Cathay Pacific has cut flights by half until at least the end of March.

This will clearly slash the numbers of Chinese tourists travelling to the UK, which will have short-term effects on tourist spending. Figures from VisitBritain show in 2018 there were 391,000 visits from China to the UK – which saw tourists spend £657m.

Retail Week understands luxury outlet destination Bicester Village – which is such a popular destination for Chinese tourists that the direct train from London Marylebone makes onboard announcements in Mandarin – has already seen tourist numbers drop off and is preparing for weeks or possibly months of disruption.

HSBC head of retail James Sawley says travel restrictions “will mean that those retailers reliant on making sales to tourists will suffer” and that “luxury goods will be the category worse affected”.

However, he notes that January and February are “reasonably quiet, so the immediate impact may be softened”.

International payment platform Planet’s UK country manager and group head of customer experience David Perrotta also noted that Chinese tourists that had travelled to the UK for Lunar New Year would likely have arrived before the coronavirus led to flights being grounded, so was unlikely to have significantly dampened tourist spend.

However, given that the numbers of confirmed coronavirus cases around the world have already exceeded that of the Sars outbreak in 2003, experts warn the effects will be felt in the months to come.

As Gandhi says: “When we look back at Sars, China was effectively in lockdown for five or six months.”

In the 17 years since the Sars outbreak, China’s warehousing and logistics network has grown exponentially and the country has placed itself firmly at the centre of many of the world’s largest brands’ supply chain networks.

Given the outbreak is still in its relatively early days, the full effects will likely not be felt for weeks or even months to come. In the meantime, retailers will likely be holding their breath and hoping for a swift resolution.