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25 March 2017 08:11AM

Japan earthquake: effect on apparel industry

24 Mar 11 ,  Editorial
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In the wake of the massive earthquake, tsunami and nuclear power plant explosions which have devastated much of northern Japan, everyone's thoughts are with the millions of people caught up in the tragedy. But there is a commercial cost to be considered too - including its possible impact on the apparel industry.

 

For the global apparel industry and its supply chain, the short-term impact has so far been minimal compared to the automotive and electronics sectors, where delays in receiving Japanese-built component parts pose major problems for factories around the world.

 

Looking ahead, clothing firms may get caught up in the fall-out. But while there are several scenarios that could have an effect, observers point out it is too early to quantify the impact on consumer spending and the business environment.

 

"There's this huge trickle effect, this whole chain reaction that takes place, but you just don't know what that chain reaction's going to be," Kurt Cavano, CEO of the TradeCardsourcing platform, told.

 

"You can try to guess what's going to happen, but it's really tough."

 

Mike Flanagan, chief executive of industry consultancy Clothesource, agrees the full implications of the situation continue to be unclear, "above all because we've still no idea what the energy position will be like for the next month or so."

 

Most of the immediate problems stem from damage to the local infrastructure. Much of the world's third-largest economy continues to function, and many deliveries and transport systems are returning to something approaching normal.


As a producer, Japan remains a key supplier of advanced high-tech fibers - its fiber exports rose by 29% to US$1.32bn last year - although Flanagan believes the area in the north east of the country that has been worst hit accounts for just 3% of the country's total industrial production.

 

On the apparel side, retailers import most of the clothes sold in their stores. The vast majority - around 82% - of these come from China, with the rest from South East Asia or Bangladesh. Japan imported clothing worth JPY2,327bn (US$28.7bn) in 2010 - with imports from China worth JPY1,912bn.

 

This has led to claims from some supply countries that they will be hit by a slowdown in consumption as shoppers rein in their spending and economic growth slows after the crisis.

"If Japan has to refocus all its resources on rebuilding then there's going to be less spending on clothing," Cavano explains.

 

"If they have to shut down some or all of their nuclear reactors they're probably going to need more oil and gas to power the country, which may drive up oil and gas prices."

 

Not only would this hit the supply chain for synthetic fibers for the apparel industry, but if oil and gas prices rise too much that could cause the global economy to slow down.

 

Will domestic clothing grow?

While Flanagan agrees that imports are likely to slow for the next month or two, he also notes that people in the affected area will need to re- clothe themselves, "often entirely" - and that ironically this could even lead to growth in the domestic clothing market over the next three to six months.

 

For retailers who were struggling with sluggish sales before last week's earthquake and tsunami, this growth would come "for the first time in Japan for about 3-5 years," he points out.

 

According to Euromonitor data, the value of clothing retail sales in Japan fell by 8.5% between 2008 and 2010, from JPY9,649.47bn to JPY8,832.77bn. Before recent events happened, a further fall of 1.7% had been forecast for this year.

 

The latest economic update from the World Bank also points to the earthquake and tsunami shaving 0.25 to 0.50 percentage points off of Japanese GDP by mid-2011 - with growth likely to rebound strongly after that on rebuilding efforts. It also expects events to have just a short-term impact on other East Asian economies.

 

Another ironic twist has seen an easing in the price of cotton after investors rushed to rid themselves of any exposure to risk. The New York futures contract for May 2011 delivery has fallen to $1.99 per pound from a record high of $2.27.

 

Quake hits luxury brands

Many retailers have already been caught up in events. Australian surf and ski-wear retailer Billabong International has shut 18 of its 44 stores in Japan and warned full-year profit will be hit.

 

Repercussions were seen in the luxury goods market, where Japan is the third-largest market with around 11% of global sales. Burberry, Coach, Hermes and Gucci all have significant exposure to the country, but the impact of recent events is limited, with some sales shifting to other Asian cities like Hong Kong and Singapore.

 

Shares of luxury retailers Coach Inc. and Tiffany & Co. tumbled as investors fled companies with significant exposure to Japan following the devastation inflicted by Friday's earthquake and tsunami. Tiffany and Coach, both of whom get 18% of global sales from Japan, have closed stores and shortened hours around the country, and remain unsure about how long their businesses will be affected.

LVMH Moet Hennessy Louis Vuitton SA (MC FP), the world’s largest maker of luxury goods, declined 3.5 percent to 106.15 euros. Hermes International SCA (RMS FP) slipped 2.3 percent to 149.55 euros. Luxury goods makers dropped on concern that sales in Japan will suffer following the earthquake. 


The uncertainty was weighing on the retailers' stocks. Shares of Coach fell 5.2% to $53.15 and Tiffany lost 4.5% to $60.32.

 

Panic selling has hit the US and European stock markets amid fears that a nuclear meltdown in quake-hit Japan could threaten the global economy, reported the Wall Street Journal. Four days after the world's third largest economy was struck by a massive earthquake and punishing tsunami, traders were no closer to having a clear picture about spill-over risks.

 

Tokyo Fashion Week Canceled

On March 15, the JFW organizers announced that Tokyo Fashion Week 12 was canceled.

The official Japan Fashion Week 2011 in Tokyo runway shows and presentations was scheduled to kick off on March 21.