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Coronavirus restrictions: Retailers reconsider Vietnam manufacturing


Workers fold clothing at a Thai Son S.P. In Binh Thuan, Vietnam, Co. garment factory.

Bloomberg – Getty Images The prolonged coronavirus restriction in Vietnam has become an even bigger problem for retailers as the holiday season draws near.| Bloomberg | Getty Images

Prolonged coronavirus restrictions in Vietnam have become a bigger headache for retailers, particularly those that rely on the region for manufacturing footwear and apparel, as the holiday season approaches.

The worries led Wall Street research firm BTIG to downgrade Nike shares last week. Since its last earnings report, BTIG has cited severe production problems for the sneaker manufacturer. When Nike releases its fiscal quarter financial reports, which will be released after the stock markets close next Thursday, supply chain problems are sure to be a topic of discussion.

These problems extend beyond Nike. According to investors and analysts, the risk is growing for other retailers as well. They have suffered from supply-chain delays while they wait for Vietnam’s production plants to restart.

Some companies have had to reconsider their decision not to shift production from China into Vietnam because of these difficulties.

On Monday, authorities announced a two-week extension of restrictions in Ho Chi Minh City, Vietnam’s business hub and Covid outbreak epicenter. The restrictions have made factories subject to regulations that force them to keep their workers at work or suspend production. Experts note also that the restrictions in Northern Vietnam are not as strict as those in the south.

The pressure may ease, some retailers hope. Leggings maker Lululemon has said it anticipated factories in Vietnam would start a phased reopening in the middle of September.

The high-end furniture chain RH, meantime, has targeted a restart in southern Vietnam in October. They hope to boost production to maximum capacity before the end of this year.

The manufacturing slowdown, coupled with longer transit times and heightened transportation costs, led RH to delay the launch of its contemporary furniture collection until next spring. RH also delayed sending out fall catalogs.

Many businesses will be watching to see what the consequences of restrictions on manufacturing activities are. As the holiday season approaches, the situation will only get worse.

Vietnam is not alone in having supply problems. There are backlogs at ports, shortages of cargo shipping containers and low numbers of truck drivers. Some companies that moved manufacturing out of China and into Vietnam in the past few years — in a bid to diversify their supply chains and avoid tariffs — have gone as far as to say they are bringing production back to China.

During a presentation with investors last week, Designer Brands Chief Executive Officer Roger Rawlins said he spoke to another industry CEO who told him that because of the slowdown in Vietnam, six years of supply chain work was undone in six days.

Rawlins explained that China was the sole place to get goods now, considering how much effort it took for China to be freed. It is amazing to see the rollercoaster ride everyone has experienced here.

Rawlins pointed out that Designer Brands has done better in Vietnam because it sells less performance shoes and workout clothing than its competitors. The country has been a key supplier for many categories, including athleisure.

The retail companies with some of the greatest exposure to Vietnam include Ugg and Hoka parent Deckers Outdoor, Michael Kors parent Capri Holdings, Columbia Sportswear, Nike, Coach owner Tapestry, Under Armour and Lululemon, according to an analysis by BTIG.

Camilo Lyon from BTIG, a BTIG analyst stated that Vietnam’s current manufacturing woes may not be affecting the third quarter. Lyon indicated that the problem could become more serious in the fourth, holiday and first half of next years.

Lyon pointed out that many brands had proactively reduced orders to avoid capacity limitations and backlogs after factories have been reopened following a lockdown. Many larger brands tried to relocate production abroad.

Backlogs have caused BTIG products to be delayed 12 weeks. Products normally taking three months in Asia take around 3 months.

Lyon explained that it could take factories 5-6 months to resume normal operations after lockdown. The delay of receiving raw materials can take up to five weeks, and it may take another eight weeks for factories to clear their backlog.

BTIG also stated that Vietnam’s factories will likely face difficulties getting workers to come back once the Covid-related restriction is lifted.

Urban Outfitters Late August saw Richard Hayne tell analysts that Hayne’s chief concern is receiving inventory. He specifically mentioned that dresses and bottoms ordered from Vietnam have been a major problem for the retailer.

Hayne explained, “We are in a Vietnam situation… that is closed to all orders.” We have lots of products there and are trying to import them.

Urban Outfitters noted that India had been a trouble area for retailers a while back when Covid outbreaks occurred. The company stated that Vietnam began to present challenges.

Donna Dellomo is the CFO at Lovesac furniture, and stated that the company had moved orders from Vietnam to China in order to reduce risk.

On a earnings conference call, she stated that while we know the impact of tariffs on inventory coming in from China, it still allows us to keep our inventory in stock, which is just as important for us and our customers.

BTIG reported that Nike sold 350 million sneakers in Vietnam last fiscal year. Due to these shutdowns, BTIG estimates that as high as 160 million pairs will not be produced this year.

Nike did not respond to requests for comment as it is currently in quiet mode ahead of the earnings report.

— CNBC’s Michael Bloom contributed to this reporting.