Recession probably scares retailers more than China protests
Retailers and consumer goods groups have learned some lessons about supply disruptions over the last three years
Suddenly that mountain of stock is looking like less of a problem.
Protests in Chinese cities risk fresh disruption to supply chains in the US and Europe, just as they had been unclogging. But consumer goods groups should be better able to withstand any shocks this time around, since they have had to alter operations to cope with shut factories, missing containers and congested ports for much of the past three years.
What's more, many have already built up their holiday stocks and inventory for spring. While that's worrying investors, it means they have some safety net built in.
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Turmoil at Apple Inc.'s key manufacturing hub of Zhengzhou has sparked fears of a repeat of the shortages we saw in the early days of the pandemic and then during Asia's second wave of infection last year. The protests sputtered Monday night after Beijing deployed a heavy police presence to clamp down on gatherings. Cities including Shanghai, Hangzhou and Nanjing saw fewer demonstrations.
But if they do flare up again — and spread to manufacturing hubs such as Shenzhen and Ningbo — then there could be wider disruption to supply.
China remains an important center for large electrical appliances. With a skilled workforce and modern equipment, Chinese factories are also the go-to for sophisticated fashion production. A lot of packaging is made in China, too. So if social unrest in the country gets worse, there would be no escaping some level of interruption.
Stitch in Time
While retailers have reduced their reliance on China it remains crucial
However, there are several reasons why retailers and consumer goods groups should be able to cope.
Many have been diversifying their supply bases, with Vietnam, Cambodia and Bangladesh being the main beneficiaries. Catherine Lim, analyst at Bloomberg Intelligence, estimates that sportswear retailers Nike Inc. and Adidas AG already make more than half of their products outside of China.
This was a problem last year when Vietnam ordered factories to shut between July and September as it grappled with Covid outbreaks. Indeed, it was one of the main reasons for shortages at retailers from Gap Inc. to Urban Outfitters Inc. But this trend does mean that if there is disruption to Chinese production, retailers can turn to other locations.
Consumer goods groups have also been struggling with overstocked warehouses this year — partly due to placing orders earlier (to avoid the empty shelves seen during 2021) right as supply lines were unfreezing faster than expected. Target Inc. said recently that about $1.8 billion of stock, or one-third of the increase since 2019, was new inventory that had arrived earlier than would have been the case in the years prior the pandemic. It was a similar picture at Nike.
The Big Clear Out
The mountain of inventory has been reduced but not removed
Although the glut ties up cash and working capital, it means that holiday stock for most retailers is already in warehouses. Lowes Cos Inc., noting some unpredictability from China's Zero-Covid policy, said it expected inventory to build in the final three months of the year, as it wanted to be ready for the crucial spring season. The danger comes if the products that are in storage are out of sync with the season.
Yet amid a surfeit of stock and caution about consumer spending, many retailers have been reining in their orders. Factories are probably more worried about the possibility of a recession more than anything else, notes Lim. That means if factories in certain parts of China are unable to produce goods, retailers should be able to find spare capacity elsewhere in the country or in other regions.
For all the stock snafus, it does look like consumer goods companies learned lessons from the supply snarl-ups of the last three years: Be prepared for any eventuality. Amid the recent scenes in China, that may pay off.
Suddenly that mountain of stock is looking like less of a problem.
Protests in Chinese cities risk fresh disruption to supply chains in the US and Europe, just as they had been unclogging. But consumer goods groups should be better able to withstand any shocks this time around, since they have had to alter operations to cope with shut factories, missing containers and congested ports for much of the past three years.
Andrea Felsted is a Bloomberg Opinion columnist covering consumer goods and the retail industry. Previously, she was a reporter for the Financial Times.
Disclaimer: This article first appeared on Bloomberg, and is published by special syndication arrangement.
