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Covid-19: "This crisis will change the face of luxury brands' supply chain strategy"

Alissa Demorest

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Covid-19:

In an exclusive interview, Luxe Packaging Insight spoke with a top executive from an industry leader in supply-chain solutions, logistics and transportation about the many hurdles luxury brands are facing in the developing coronavirus crisis.

What changes are happening in terms of transporting goods?

We’ve seen a major shift in the larger volume trade. A few months ago, we were heavily importing goods to the US and Europe from Asia, especially via air, and today we are more focused on helping our customers move their goods to Asia while the major mode of airfreight has pretty much disappeared. 

With airfreight at a virtual standstill, what alternatives are you proposing?

We’ve been developing other modes for our customers: train from Europe to Asia as well as train-truck. Don’t forget that the major automotive hub in China was in Wuhan, as a lot of production is centered near there. As a result, we are going to other locations like Shanghai via train and then by truck. We’re also doing sea-air, so shipping by sea to Dubai, for example, and then putting the goods on a flight to Hong Kong or Shenzhen. 

We have a lot of customers that have asked us to slow steam their transit. For example, if in normal times they have 30-day sea freight, they are asking us to find alternative routes to slow it down to 50 or 60 days. Some of our vendors are changing their routes: instead of going from China to the Suez Canal and up to Europe (the Suez Canal being extremely costly, at around $250,000 per ship to cross) they are going around the Cape instead. This allows the cargo to sit on the vessel and not come into Europe and incur storage costs. In addition, a lot of distribution centers are closed or are full. So some brands are slow-steaming and others have opted to cancel 100% of their orders. 

What are the most impacted product categories?

As of today, luxury goods, electronics and seafood, as these are primarily 100% airfreight customers and when the airlines shut down, it left zero capacity space. Most of the big wide-body aircraft (Airbus 380, Boeing 747) have big belly space, which is normally full of cargo. Fragrance and cosmetics ship via air because they have small quantities more often, rather than large quantities less often, which would be more adapted to shipping by sea. Also, high-value goods, and therefore luxury items, only go airfreight.

What are your luxury-goods clients’ priorities?

They are asking us for alternative modes to get their goods where they need to go for outbound, so items produced in Europe, for example, and heading to the US, Asia or the Middle East. The airline capacity fell to less than 30% at the beginning of the crisis—when airlines were no longer allowed to fly to China—and we’re now seeing the same thing towards the US with maybe one out of 10 flights per week, so a capacity of less than 20%. 

These brands are importing parts needed to make the finished goods in Europe and there too they are asking for help. Train in that case is coming in quite handy as it’s much quicker than by sea and you can ship smaller quantities. Sea/air is also a good fit for smaller volumes. 

How are these shifts to alternate modes of transport impacting brands from a price perspective? 

For our luxury clients, we’ve seen their transportation costs go up between 50% and 200% since the crisis began—a direct result of capacity being squeezed. The cost of sea freight rose around 25-30% month-on-month in March, and as the volumes were down 50% that’s about a 70% increase. And airfreight costs are up 50%-200%. Brands are now planning for that and while it’s not in their budget, they are reducing and/or consolidating some of their orders.

What impact has the crisis had on sourcing?

We’re seeing shifts there too; some of our customers are looking to source much closer to their production facilities. In textiles, the Middle East, notably Jordan and Turkey, is being looked at as one of the larger sources, and some brands are envisaging production in Europe, especially in countries like Spain and Portugal.

However, the reality is also that there are things China manufacturing can do that no other region can do at this moment in time. 

How will luxury brands come out of the crisis?

As I mentioned, the luxury customers are among those that have been hit the hardest because of the reduced capacity in airfreight transportation. Today they are getting used to a new normal, which means a slower supply chain and this crisis may very well change the way in which their entire supply chain is designed and planned. 

They are also changing their sourcing mode for the interim period; if they see that starting to work, this crisis will have definite long-term effects on the way that companies view their supply chain, their modes of transport and their costs that are incurred around the sourcing of their finished goods or other components. It’s going to change the face of shipping.

What about consumer behavior?

Consumers drive demand, and when their mentality changes it impacts production. I think we’ll see a different type of consumer demand coming out of this crisis—there will be both a big decrease in demand and a slower pace of demand. That will boomerang into how brands produce, source and make their products available. 

Competition is also going to shrink, demand is going to shrink and therefore manufacturing will have a little bit more breathing room and will be able to slow down production. Fast fashion might not be so fast anymore. 

It’ll take at the very least 12 months for us to get back to where we were in December of 2019, but whether it lasts for five months of five years, this crisis will undoubtedly profoundly alter many brands’ supply chains. 

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