Pandemic Traps Apparel Supply Chain Between a Rock and a Hard Place

The coronavirus pandemic and its economic impact has trapped the apparel industry between plummeting demand and supply caught in limbo.

The global pandemic and resulting widespread store closures and stay-at-home orders has the textile and apparel industry squeezed between challenges in supply and demand.

As Stefan Doboczky, CEO of the Lenzing Group, said, “The COVID-19 crisis has [had] a severe impact on the entire textile and apparel industry and has further increased the pressure on prices and volumes in the global fiber market.”

At the beginning of the supply chain, fiber prices have flattened out to near or at historic lows with demand nearly disappearing as textile and apparel factories around the world either shut down or pivoted production to making masks, gowns and other personal protective equipment to combat the coronavirus pandemic.

U.S. spot cotton prices averaged 50.02 cents per pound for the week ended May 7, according to the U.S. Department of Agriculture (USDA). That was down from 51.42 cents per pound the prior week and well below the 67.45 cents pound reported a year earlier.

Cotton Leads said the emergence of COVID-19 in China represented a threat to global apparel supply chains, which commonly rely on the world’s second largest economy for one or more inputs, even if garments are not sourced from China. This initially resulted in supply issues posed by delayed or uncompleted orders.

The rapid spread of the virus beyond China and the resulting general shutdowns in economic activity around the world produced a collapse in demand. The USDA’s Prospective Plantings Report suggests that cotton acreage will be nearly even with the level planted one year ago, which was around 13.7 million acres.

“This finding contrasts with some other predictions which called for nearly a 10 percent reduction in cotton acreage in 2020,” Cotton Leads said. “The rise of cotton prices to above 70 cents per pound in late winter is likely a factor that contributed to the higher acreage estimate by the USDA. Since then, cotton prices have dropped to below 60 cents per pound again, a factor that may lead actual planted acres to be lower than the current USDA forecast.”

With only about 3 million bales of domestic use, this means a near-record volume of cotton will need to be exported to prevent a buildup in stocks, the sustainable cotton group said.

“With the global economy in turmoil as a result of the COVID-19 pandemic, it may be difficult to export near the record, and the threat of a substantial increase in warehoused supply could weigh on prices in the U.S. and around the world for the foreseeable future,” Cotton Leads said.

The synthetic fiber Producer Price Index, measuring materials such as polyester and nylon, was 0.4 percent in April from March, and a full 3 percent below April 2019.

For the week ended May 9, the Australian benchmark Eastern Market Indicator for wool prices was down 55 cents to 11.70 Australian dollars ($7.51) per kilogram for the week ended May 8.

For yarn spinners and fiber and fabric firms, the low raw material prices help the bottom line, but the lower demand that caused it is impacting them, as well.

Tom Caudle, president and chief operating officer of Unifi Inc., said raw material pricing remains at low levels, which aids short-term working capital and liquidity.

“Lower polyester raw material costs led to lower average selling prices across the polyester, Asia and Brazil segments, while lower nylon volumes resulted from the previously communicated demand declines for North American supply chains, and unfavorable foreign currency translation was driven by weakening of the Brazilian real,” Caudle said.

Lenzing noted that the impact of the COVID-19 crisis further increased pressure on prices and volumes. The price for standard viscose dropped to a new all-time low of 9,150 yuan ($1,288) per ton by March 31, 33 percent lower than in the prior-year quarter.

The relatively positive development of Lenzing’s specialty fiber business and slightly higher demand for fibers in the medical and hygiene segments partially offset the decline in revenue in the first quarter.

While the lower raw materials prices are welcomed by apparel manufacturers, it can’t help enough to balance out the slackened demand that has eaten into their bottom lines.

Gildan Activewear reported a first-quarter gross margin of 23.2 percent, down from 25.8 percent in the 2019 period. The decrease in gross margin was mainly due to labor and overhead costs, as well as costs incurred as a result of the COVID-19 pandemic, which together negatively impacted gross margin by 340 basis points and more than offset the benefit of cost savings from the company’s manufacturing optimization initiatives, favorable product-mix, lower promotional discounting, and lower raw material costs compared to the first quarter of 2019.

“Our number one focus is definitely to make sure that we first of all utilize all of our existing inventory and…bring on capacity as we need it,” Glenn J. Chamandy, president and CEO of Gildan Activewear, said. “We ended up Q1 with just under $1.2 billion of inventory. We want to see that number come down and generate some cash flow from that during the course of this year to continue to improve our liquidity situation and put us in a better position as we enter into 2021.”

Chamandy said cotton prices are down about 10 cents pound since the crisis began, but he expects that to be short lived.

“So short term, there is going to be a lot of capacity because people have inventory and didn’t sell anything,” he said. “But there is going to be another side of the coin in how are people going to bring capacity back on.”

Scott Baxter, president and CEO of Koontor Brands, parent company of Wrangler and Lee, said a decline in adjusted gross margin of 320 basis points to 38 percent of revenue was primarily driven by inventory provisions based upon higher levels of excess and distressed goods and lower anticipated recovery rates.

“The cost of downtime in our plans, as we reduced production to align supply and demand and tightly manage inventory, represented a 40-basis-point headwind in the quarter,” Baxter said. “During the first quarter, the favorable impacts of restricting and quality of sales initiatives, pricing and product cost improvements, as well as improving channel mix, positively impacted gross margin by 270 basis points.”

The result of the crises on the supply chain so far led to the price of all apparel sold at retail last month to fall a seasonally adjusted 4.7 percent from March, with declines in all sectors, according to the Bureau of Labor Statistics’ Consumer Price Index (CPI). This was the largest monthly decline since the CPI began to be measured in 1957.

Compared to April 2019, apparel prices were down an unadjusted 5.7 percent, as many stores closed over government mandates and those that were open and direct-to-consumer merchants instituted significant discounting.

Women’s apparel prices tumbled 6.3 percent for the month, led by a 9.6 percent tumble for dresses—normally a key spring item for special occasions like proms, graduations and weddings, many of which were cancelled or postponed. Men’s wear prices dropped 4.7 percent in April, led by an 11.3 percent decline in suits, sport coats and outerwear, as work from home became the norm, rendering the concept of dressing up generally unnecessary.