The biggest coronavirus risk to retailers on both sides of the Atlantic may turn out to be empty stores, rather than empty shelves.
As the outbreak has spread from Asia to Europe and the U.S., concern has shifted from the impact on supply chains because of closed Chinese factories to the potential of the deadly disease to put a sudden brake on consumer spending.
While fashion chains and do-it-yourself merchandisers rely less on China today than they did a decade ago, it's inevitable there will be some supply problems. The country is still the world's biggest clothing exporter, and it makes everything from paddling pools to power tools. Associated British Foods Plc, owner of cheap chic fashion chain Primark, and U.S. athletic apparel maker Under Armour Inc. have recently warned of the risks.
A full understanding of the impact will only come later. Many spring fashions and home furnishings were shipped before the outbreak, and there is evidence that factories are returning to work. But the closures in February will mean that some orders for the summer and potentially even the back-to-school shopping seasons may not reach stores in time. For apparel retailers this is a particular risk. If say, pastel hued coats designed to be worn in the spring arrive when the weather is warmer, those coats will need to be discounted to sell.
But some canceled orders may be a blessing.
The worry now is not that shoppers won't find what they are looking for, it's that they won't hit the mall and spend time browsing for it in the first place. Almost half of U.K. retailers surveyed by consultancy Retail Economics and law firm Squire Patton Boggs had already seen a negative impact on their sales, with three quarters expecting revenue to be hit if the virus continues, according to a report published on Wednesday.
This adds to anecdotal evidence, from some retailers finding trading tougher than expected to others seeing footfall weaken. In the U.K., traffic to stores held up until Thursday, but as bad news about the virus intensified, shopper numbers dropped, particularly in malls. Even for a Tuesday evening in March, London's Oxford Street seemed unusually quiet yesterday. Expect the same pattern in the U.S. as new cases pop up in new cities.
It would be understandable if people hesitate to head to the mall and avoid lingering at the supermarket after filling their cart with hand sanitizer, toilet paper and food staples for a month. After all, employers such as Amazon.com Inc. are telling workers to limit non-essential travel and governments in countries like France are banning events for more than 5,000, leaving worried citizens to wonder how many people is too many people in one place. And with Covid-19's symptoms silent for a long incubation period it can be tempting to avoid public spaces altogether.
Reasons for splurging at the shops are also evaporating as major events get canceled or delayed, and by extension people contemplate skipping parties, weddings or graduations. For example, tech giants including Facebook Inc. and Twitter Inc. have pulled out of the South by Southwest tech conference in Austin, Texas. That means purchases that would have been made — from trendy sneakers to wear at SXSW to the suit to impress at any number of industry conferences — may be lost.
Travel is another boon to spending that risks being sapped. Tour operator TUI AG said holiday bookings have weakened over the past week. Unless they come back later on, that means fewer bikinis and tubes of suntan lotion filling shopping carts. If the problem is consumers hibernating, then online retailers such as Amazon and Britain's Asos Plc, could be protected. But if the issue is a lack of stimulants to spending, no one will be spared. There's also the knock on effect on restaurants and bars if consumers stay home.
There may be some offsetting factors. For example, Brits and Americans have been bulk buying essentials in retailers such as Costco Wholesale Corp. Long-life milk, nappies and bottled water are all in demand at supermarkets. At the other end of the spectrum, shares in Peloton Interactive Inc. defied the market rout last week on hopes that more fitness fanatics would work out at home, rather than go to the gym.
Any short-term silver linings will be lost if consumers simply hunker down. The risk of a pandemic, as well as market uncertainty or worse, are hardly conducive to splashing out. Britons had started spending again after pulling in their purse strings during the impasse over their departure from the European Union. In contrast, U.S. consumer confidence has remained remarkably robust. But cracks are emerging. U.K. consumer confidence dropped for the first time in five months, according to YouGov and the Centre for Economics and Business Research. Meanwhile, in the U.S., the Bloomberg Weekly Consumer Comfort Index suffered its largest one-week drop since late October in the week ending Feb. 23.
As with trading, it's hard to separate out what's due to the virus and what's down to other factors. But either way, it's a timely reminder that faced with an epidemic, consumer demand also isn't immune.
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