With the majority of our manufacturing taking place offshore, Australian companies rely heavily on the international supply chain. As cities and countries lock down, and some may suspend the operations of their factories – as they have done in Italy – significant disruptions may occur in the production of goods across the global economy.
Jessica Ip, Chief Transformation Officer at leading parcel delivery service CouriersPlease (CP), explains the ripple effect significant disruptions in the global supply chain have on retailers and consumers – and what we can expect in the coming months.
China is Australia’s largest trading partner for imports and exports, particularly manufacturing, education and tourism. Business and factory closures in China, along with shipping port lockdowns, significantly halted the supply chain and led to delays in production, manufacturing and distribution of stock – leading to loss of revenue for retailers and their partners.
Airlines reducing international flights have also put retailers under challenging positions, as their options to bring stock into the country diminishes. Global lockdowns may also result in lower production levels as factories in important manufacturing markets outside of China seek to protect their people.
How retailers and manufacturers are effected
While the preventative measures to minimise the spread of the coronavirus are necessary, wholesalers and retailers have felt the effects of China shutting shop – particularly, retailers who procure by seasons, such as fashion.
Jessica says: “Fashion brands would usually be pushing out their autumn/winter stock around this time, but instead, many are holding back what remaining stock they have left and pushing it out slowly. New product hasn’t arrived in the country due to factories and ports closing, with some still in the production phase. This has been made all the more difficult, with the Chinese New Year closures between January and February each year, so brands are essentially feeling that operations haven’t happened since the start of the year.
“Port closures have also seen many retailers turn to air freight to get their stock into the country, but this is a more costly option. What might usually cost about $2 per kg is now costing around $10 per kg. To make matters worse, airlines have significantly cut back their international flights in and out of Asia. While these are passenger flights, the belly of the planes carry goods, so there are also fewer planes taking stock to Australia. Supply of international goods is becoming limited.”
Jessica says the loss of retail sales due to limited stock, in addition to paying higher costs to get stock into the country, will see businesses facing challenging times ahead.
“The retail industry was already suffering before coronavirus, and their margins have been tight. Some retailers are pushed to breaking point as a result of paying higher costs to move stock. Among those retailers who are unable pay for air freight, we’ll start to see stock run very low by June as they won’t be able to stretch their existing inventory to last the next three months. This has a ripple effect, and some businesses will be forced to make redundancies.”
As factories and shipping ports in China start to reopen, Jessica predicts it may not be a first-in, best-dressed situation, but rather, those willing to fork out the higher costs for manufacturing will get priority. Companies and businesses in China will also be looking at ways to recoup their business losses from the country shut-down and will see this as an attractive means.
How consumers are effected
With retailers suffering from the economic effects of coronavirus, Jessica says we’ll see a shift in consumer shopping habits.
“We’ll be experiencing delays in products hitting the shelves, so stock that should have arrived leading up to the cold months may arrive in the middle of winter instead. Retailers will see lower sales compared with the previous year, as stock isn’t likely to be in demand.
“Similarly, as businesses look for ways to recoup lost profits during this period, they’re less likely to offer sales and promotions. Consumers are likely to, therefore, be forced to pay full price for items. The ramifications of this being that consumer spending will fall even further, as Australians have less disposable income. We can also see more retailers close their bricks-and-mortar stores, as consumers shift to shopping online.”
The industries most impacted from coronavirus
Despite the spike in eCommerce – with consumers purchasing items online to avoid going in-store to protect themselves – online retail has suffered further.
Jessica says: “While eCommerce and online shopping are terms often used interchangeably, the meanings differ. Online retail is the selling of retail goods online, while eCommerce is the commercial transaction conducted by electronic means on the internet. What we’re seeing isn’t the thrive of online shopping, but rather, eCommerce having its time in the spotlight.
“We can see people cutting back on non-essential items, with the retail sector feeling the primary effects, and logistics and courier companies feeling the secondary effects as they have lower volumes to fulfill. Software and technology providers are non-directly impacted, mainly those built on a per-transaction model. For example, logistics companies use software to track and process their orders, with some software platforms paid per transaction.
Not all companies are in the red as a result of coronavirus, with some FMCG brands getting a boost.
Jessica says: “The sales of toilet paper and hygiene items are going through the roof right now as people stock up in preparation for the worst. One of our customers, toilet paper supplier Who Gives a Crap, has sold four times more product over this period than usual, to the point that they’ve sold out. As a result, our franchisees and delivery drivers have had an influx of jobs. However, not all FMCG goods will be thriving – we’ll see non-essential items left on the shelf as consumer’s disposable income becomes less apparent.”
Retailers need stronger relationships with their suppliers right now
Jessica warns that businesses with an offshore and outsourcing model will continue to suffer in the coming months, but there are things they can do to bolster the supply chain.
“Your usual suppliers will be experiencing a surplus of demand, with limited supplies and capacity to take on work. Consider sourcing multiple suppliers, who have varied production and delivery schedules. Retailers should be speaking with their suppliers to get assurance their suppliers have a plan in place for operations should conditions worsen.
“Retailers need to have regular and transparent communication with their suppliers. Therefore, strong relationships with suppliers are vital. If your business is facing cash flow issues, your suppliers may be able to support you and be flexible. For instance, they may alter their payment terms and allow you to change stock order quotas.”