In a very short period of time, the COVID-19 outbreak has had a significant impact on economies throughout the world and across all industries and sectors. The earliest stages of the U.S. consumer supply chain are heavily dependent upon China. That means the work stoppage caused by the virus had a significant impact on production of new goods, as well as the timely shipping of already-manufactured items to the United States, and ultimately, to either retailers or consumers.
The U.S. consumer ecosystem has learned to manage its supply chain around the Chinese New Year holiday, which generally affects production and shipping for up to a month in late January and early February. This makes mid to late February a critical time for consumer products firms in the United States as they attempt to true up inventory shortages and place orders for the rest of the calendar year.
The timeline of the outbreak caused an extension beyond the normal interruption of the Chinese New Year as many Chinese workers remained quarantined at home. Most factories resumed production the second week of February, albeit at less than full capacity. Bloomberg Economics estimated that the Chinese economy was only operating at about 50% to 60% of normal levels at the end of February. The normal pattern of imports from China has historically shown a slowdown in goods hitting U.S. shores in March, followed by a ramp up in April and May, as inventory levels are replenished heading into the summer. The factory shutdowns and prolonged reduction in capacity will make a late spring ramp up challenging. Depending upon the carrier, shipments from China to the United States over water can take between four to eight weeks. That means U.S. firms will see the greatest disruption to their supply in April and May.
Retailers that depend upon China to stock their shelves will have difficulty managing inventory levels as Chinese factories and shipping companies catch up with the pent up demand. This will cause significant disruption in the second quarter.
Beyond the impact on supply chains, consumer fear has already reduced demand across the entire ecosystem, from travel and leisure to hospitality and retail. The reduced travel as a result of the coronavirus will have a significant impact on duty-free and travel retail sales, which account for approximately $8.2 billion in GDP, according to a report published by the Duty Free World Council in 2018. Shopping centers and malls are also likely to see reduced traffic, as the outbreak becomes more significant in the United States. A survey conducted by Coresight Research found that 58% of respondents are likely to avoid public areas in such a scenario. At the height of the outbreak in China, online sales increased sharply and the same short-term trend is likely to follow in the United States as the impact of the outbreak escalates. Those middle market retailers with strong platforms for online marketing and sales will have the best opportunity to capture the demand that exists from online consumers during the outbreak.
It’s unusual for the economy to experience an event that impacts both supply and demand. This creates a situation that is difficult for the Federal Reserve and other authorities to address with stimulus. As a result, many middle market retailers may be challenged to hit sales targets late in the first quarter and into the second quarter of 2020. RSM spoke with executives at one middle market company in the consumer ecosystem who stated the company is already adjusting sales estimates down for the upcoming Mother’s Day holiday. It is likely not alone. Even those consumer firms that manufacture in the United States or buy goods manufactured in the United States may be impacted, as many of the parts and components that go into the finished goods may come from China.
How bad will it be?
The magnitude of the impact will vary among sectors. Restaurants that see reduced foot traffic as a result of household fears or temporary quarantines will not recover unsold meals at a later date. On the other hand, apparel retailers may lose sales in the near term as a result of reduced foot traffic or supply chain delays, but may recover those sales when fears subside later in the year and supply chains catch up. For those consumer entities with a supply chain completely contained within the United States and manufacturing or selling products that are easily accessible online, the impact will be less severe.
The response to the impact that COVID-19 has on consumer firms will be similar to what the ecosystem experienced in response to the implementation of tariffs in 2019. The actions required, however, will be more short term in nature and, in some cases, may only partially offset the overall impact caused by the disruption. However, all savvy retailers will consider the potential impact to supply chains deeper into 2020 and should plan to mitigate the potential disruption to the extent possible.
Consumer products middle market COVID-19 playbook
- Create a response team – Consider creating a response team that includes the appropriate people throughout all critical aspects of the organization. Having a plan that the company can follow and employees to own the plan is a critical first step in mitigating the impact.
- Keep employees safe – It will be important to implement policies and procedures surrounding business travel, flexible working arrangements for office workers. In the consumer ecosystem, many employees are in stores, warehouses and manufacturing facilities. Firms should emphasize good hygiene and preventative behaviors. It’s also important to have regular and clear communication with employees so that they are comfortable that their employer is doing everything they can to keep them safe.
- Update budgets and forecasts – Nearly all consumer firms are going to be financially impacted in the short term. Even those less exposed to supply chain shocks will be impacted by reduced consumer demand. Update budgets and forecasts to quantify potential impact and to help the organization to react appropriately.
- Re-evaluate tax strategies – If updated budgets and forecasts result in a significantly different result than previously expected, it may also be beneficial to evaluate whether or not your tax strategy should change as well.
- Create appropriate cash reserves – There are a number of ways to help manage your cash if sales level out during the outbreak. Consider liquidating older inventory online to take advantage of customers shopping online rather than in brick and mortar locations. It’s also important to take advantage of existing payment terms. If you have better payment terms with certain vendors, or you make early payments, be aware of where you have flexibility.
- Increase online discounts and promotions – Foot traffic will be down at brick and mortar locations, but online traffic will likely be up. Take advantage of consumers’ online shopping with smart and targeted discounts and promotions for online shoppers.
- Identify acquisition opportunities – If you have the capital, a temporary downturn may be a buying opportunity. If a strategic acquisition can help you take market share when the economy begins to accelerate, identify the companies or the assets that would be value-accretive to the business.
- Assess cyberrisks – Hackers and other cybercriminals may anticipate potential weaknesses during times of distress. Re-evaluate risks of cyberattacks and ensure you have insurance to mitigate risk.
- Secure financing – Credit markets will tighten very quickly. If you have the ability to secure or increase a line of credit, that may help with liquidity needs in the short term.