Tapestry, Apple, and other brands feel the brunt of China’s zero-COVID policy

The news: Retailers around the world have experienced significant headwinds since March due to mainland China’s tightening restrictions and imposing stay-home orders in many parts of cities to combat the COVID-19 virus.

• The policy has hurt retail sales in China, prevented many factories from producing at full capacity, and hindered the flow of goods.

More on this: The zero-COVID policy has led retailers and other foreign companies’ confidence in doing business in China to decrease.

• Fifty-eight percent of businesses have decreased their 2022 revenues projections following the recent COVID-19 outbreak in China, up four percentage points from the previous month, per an American Chamber of Commerce in China survey.
• Fifty-nine percent have slowed or reduced their production capabilities due to a lack of employees, inability to get supplies, or government-ordered lockdowns.

In China: China’s National Bureau of Statistics acknowledged that the country’s approach had a “big impact” on the economy in April, but suggested the effects are likely to be short-lived, per Bloomberg.

• Retail sales fell by 11.1% in April year-over-year (YoY), which is more than the 6.1% decline experts predicted in a Reuters poll, per CNBC.
• Industrial production dropped by 2.9% in April YoY, while experts expected a 0.4% increase.
• China’s consumer and producer prices both rose more than expected in April due to mounting transportation costs and restocking demand from tighter Covid restrictions, according to the National Bureau of Statistics.

The fallout: The shutdowns have hurt retailers’ sales in China, as well as hindered their ability to maintain their supply of products.

• Tapestry—parent company of Coach, Kate Spade, and Stuart Weitzman—trimmed its profit outlook for fiscal 2022, as the lockdowns in China are poised to hurt consumer demand for its high-end products.
• Apple said the COVID-19 disruptions would have a nearly 300-basis-point headwind to its YoY growth rate.
• Sony cut its PlayStation 5 fiscal year forecast to about 18 million units from its previous estimate of 22.6 million due to supply chain complications.
• Under Armour said lockdown disruptions contributed to its Asia-Pacific revenues falling 14% in the quarter, as well as affected transportation, which caused delivery delays.
• Luggage manufacturer Samsonite had one of its worst sales months in China in the past two years in April, and while sales are improving this month, they are still “significantly down.”
• Adidas’ revenues from China fell by 35% YoY, which forced the brand to lower its fiscal expectations for 2022. The ramifications from the lockdowns were wide-ranging as its store traffic declined significantly even in areas not directly impacted.

The big takeaway: The Chinese government’s pandemic response has highlighted the consequences of relying on China as the world’s factory.

• The situation has driven a host of manufacturers to reassess their production and supply chain strategies to mitigate their risk.
• Yet there’s no simple way to counteract the ripple effects of slowing Chinese retail sales.