Coronavirus restrictions: Retailers reconsider manufacturing in Vietnam


Workers fold clothes at a Thai Son SP Co. garment factory in Binh Thuan province, Vietnam.

Maïka Elan | Bloomberg | Getty Images

Vietnam’s extended coronavirus restrictions have become a bigger headache for retailers, especially those who depend on the region for shoe and clothing manufacturing, as the holiday season approaches.

Concerns led Wall Street research firm BTIG to downgrade Nike shares last week. BTIG has raised serious production issues for the sneaker maker since the last earnings release. Supply chain challenges are expected to be a hot topic when Nike’s next fiscal quarter financial report drops after the market closes next Thursday.

The issues go beyond Nike. The risk has increased for a number of other retailers, who have been hampered by delays in the supply chain as they wait for production facilities in Vietnam to resume operations, according to recent comments to analysts and reporters. investors.

The difficulties have even led some companies to reconsider their decisions to move their production out of China to Vietnam.

On Monday, authorities announced a two-week extension of restrictions in Ho Chi Minh City, Vietnam’s business hub and epicenter of the Covid epidemic. Under the restrictions, factories have been put under rules that require them to either keep workers in place or completely suspend operations. Experts also note that the restrictions in northern Vietnam have not been as strict as the rules in the southern part of the country.

Some retailers have expressed hope that the pressure will ease. Leggings maker Lululemon said it expects factories in Vietnam to begin a gradual reopening in mid-September.

High-end furniture chain RH, meanwhile, targeted a reboot in southern Vietnam in October. He hopes to increase production to full capacity by the end of the year.

The slowdown in manufacturing, coupled with longer delivery times and increased transportation costs, has led RH to postpone the launch of its contemporary furniture collection until next spring. He also delayed the dispatch of the fall catalogs.

For now, many companies are watching and waiting to see how restrictions and manufacturing activity evolve. But the picture will likely get darker as the holidays approach.

The obstacles in Vietnam add to a litany of other supply chain issues, ranging from a shortage of freight containers to waiting ports and a limited number of truck drivers. Some companies that have moved their manufacturing out of China to Vietnam in recent years – in an effort to diversify their supply chains and avoid tariffs – have gone so far as to say they are bringing production back into the country. China.

In a presentation with investors last week, Designer Brands CEO Roger Rawlins said he spoke to another industry CEO who told him that due to the slowdown in Vietnam, six years of work on the supply chain had been canceled within six days.

“When you think about the amount of effort everyone was putting in to get out of China, and now one of the only places you can get the goods is China,” Rawlins said. “It’s really crazy, the roller coaster everyone has been on here.”

Rawlins noted that because Designer Brands sold less workout clothing and performance footwear, such as running and basketball shoes, the company fared better than some of its peers thanks to the metrics. lockdown in Vietnam. Categories, including so-called athleisure, have traditionally relied on country.

The most exposed retail companies in Vietnam include Ugg and Hoka, parent company Deckers Outdoor, parent company of Michael Kors, Capri Holdings, Columbia Sportswear, Nike, owner of Coach Tapestry, Under Armor and Lululemon, according to one. BTIG analysis.

Manufacturing issues in Vietnam might not have much of an effect in the third quarter, BTIG analyst Camilo Lyon said in a report to clients. That could cause more problems in the fourth quarter and holidays and possibly the first half of next year, Lyon said.

“Many brands have proactively reduced orders in anticipation of capacity constraints and backlogs once factories are back up and running after the lockdown,” Lyon noted. “Many big brands have moved or attempted to move part of their production to other countries.”

Products tracked by BTIG which normally take around three months to produce in parts of Asia now take 12 more weeks due to backlogs.

“It can take 5 to 6 months for factories to be back to normal operation after the lockdown,” Lyon said. “This includes 4 to 5 weeks of delay in receiving raw materials and an additional 8 weeks for a factory to resolve its production delay.”

Vietnamese factories are also likely to struggle to bring workers back after authorities lift Covid-related restrictions, BTIG said.

Urban Outfitters CEO Richard Hayne told analysts in late August that the retailer’s biggest concern was receiving inventory, especially dresses and stockings ordered from Vietnam.

“We have a situation in Vietnam (…) where the country is completely closed,” he explained. “We have a lot of products there, and we’re trying to get them in.”

Months earlier, the Covid outbreaks made India a hotspot for the retail sector, before conditions improved there, Urban Outfitters said. Vietnam then began to pose challenges, the company said.

Donna Dellomo, chief financial officer of furniture company Lovesac, said the company moved orders from Vietnam to China in an attempt to minimize the risk.

“We know that the stocks coming from China are impacted by the tariffs, but this allows us to stay in stock on our stock, which is very important for us, as for our customers,” she said during the meeting. ‘a conference on the results. call earlier this month.

Nike produced some 350 million pairs of sneakers in Vietnam last year, the BTIG estimated. The research company predicts that 160 million pairs may not be made this year due to the closures.

Nike declined to comment as the company is in a quiet period ahead of its earnings report.

– CNBC Michael bloom contributed to this report.

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