There could be another slew of supply chain disruptions on the way as China initiates major lockdowns across multiple regions.
At least 20 million people are currently in lockdown, the New York Times reported, with most occurring in the city of Xi’an in western China and in north-central China. These moves are a result of China’s strict policy on combating outbreaks of COVID-19, which have surfaced across various cities ahead of the Winter Olympics in Beijing.
Vietnam and China are key manufacturing hubs for almost all major footwear brands in the U.S. When these factories shut down this summer, the impact was almost immediate. And while Vietnam was hit harder by shutdowns in 2021, the recent lockdowns in China suggest that the issues there will take center stage in 2022.
“Current reports out of China suggest that the country’s zero-tolerance policy for combating the pandemic has driven significant Omicron-related disruptions,” wrote Cowen analyst John Kernan in a recent industry update note on Jan. 14. “Companies including Samsung, Volkswagen, and suppliers to Nike and Adidas have seen factories shut down as local officials impose lockdowns and mass testing at a level not seen since Spring 2020.”
Kernan added that “COVID conditions in factories need to be closely monitored,” something many brands already appear to be doing.
Adidas said in its most recent earnings report that supply chain issues in China caused overall revenue growth to be reduced by about 600 million euro in Q3. In China, specifically, sales declined 15%, though the company said it is forming a team of leaders to fully focus on mitigating the business impact there.
In a recent presentation in the virtual ICR conference, Crocs also expressed caution on the situation in China as well, given that the vast majority of Hey Dude, the brand it recently acquired, is made in China. The Crocs brand recently shifted production from Vietnam to China, Indonesia and Bosnia to mitigate supply chain issues. However, leadership expects to be able to manage the situation with further sourcing diversification and air freight.
Despite the recent lockdowns, it is not entirely clear how these shutdowns could impact the supply chains for certain footwear brands in the U.S. As NPD’s senior sports industry adviser Matt Powell pointed out, it is “tough to know what shoes are made in which regions,” which makes it difficult to quantify the exact risk for each company at this time.
According to Matt Priest, president and CEO of the Footwear Distributors and Retailers of America (FDRA), the provinces and cities that are currently impacted by the lockdowns are not major regions of footwear production for the American market.
“With the rapid spread of the variant, that could change, so we are watching closely,” Priest said. “The good news is that the last two years have created a lot of wisdom and agility in our industry that has helped our companies navigate these continued challenges in innovative and effective ways. I expect American shoe companies will continue to show perseverance during these challenging times.”