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US apparel supply chain set to suffer major changes in wake of Covid-19

Published
Jun 30, 2020
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As the long-term effects of the Covid-19 pandemic on the apparel and footwear supply chain start to become clear, GlobalData has published two new reports outlining the threat posed to suppliers by the post-pandemic credit crisis, as well as the strong possibility that retailers will shorten their supply chains in an effort to reduce their dependence on China.
 

Many apparel retailers are expected to reduce their supply chains' dependence on China - Photo: Reuters


According to GlobalData, as U.S. retailers begin to settle into a new normal after temporary coronavirus-related store closures, a commercial credit crisis is threatening the recovery of clothing and footwear suppliers.
 
Although customers are now returning to stores, it is revenue and cash flow from previous seasons that inform the credit decisions which will determine retailers’ projects for the future. Due to the revenue declines caused by Covid-19 over the past few months, many retailers and brands are struggling to secure the loans they need to be able to design new products, place orders and ship goods.

Compounding matters is the fact that credit terms have changed significantly due to the crisis, which has led insurers to reduce their coverage and services so as to avoid more risk.
 
With brands and retailers failing to secure credit, many may be forced to cancel orders or attempt to negotiate reductions, actions which will put more pressure on suppliers, who have already been struggling with the impact of Covid-19 and may be pushed to the edge by further losses.
 
“Supply chains the world over are in tatters right now,” commented GlobalData apparel analyst Leonie Barrie. “The continued availability of trade credit insurance is key to helping speed up the economic recovery, as well as offer some support against the risk of even more severe disruption and millions more job losses if factories don’t have the funds to survive.”
 
With this in mind, the American Apparel & Footwear Association (AAFA) is urging the U.S. government to follow the example of Canada, France, Germany and the UK, and take action to backstop credit insurers’ losses.
 
GlobalData also believes that the disruption experienced by apparel and footwear retailers during the pandemic will push many to “shift significant portions of their production closer to home.”
 
The U.S. apparel industry is currently heavily dependent on China, which is the world’s top producer of both synthetic fibres and silk, as well as one of the largest producers of wool and the largest exporter of apparel. However, with the start of the Covid-19 crisis in the country at the end of 2019, garment and raw material exports were halted or delayed.
 
“For US brands, already reeling from tariff hikes on Chinese goods, this has been the wakeup call needed and many will now look more seriously to lower their reliance on China,” said GlobalData apparel correspondent Hannah Abdulla. “Some had already started with this process, following the U.S.-China trade war, but that's likely to pick up pace now.”
 
In Abdulla’s opinion, despite possible issues related to cost and skill, this repositioning will ultimately benefit brands and retailers, who will benefit from faster and more flexible supply chains which will allow them to react more quickly to future issues.

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