on February 14, 2020 Retail Insights

From Starbucks to FedEx, Coronavirus Upends Businesses

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The virus outbreak has rattled the global economy, disrupting supply chains and closing off access to a lucrative consumer market.

The coronavirus outbreak in China has rattled the global economy, disrupting virtually every major industry, from food, fashion and entertainment to automobiles and technology.

And more than two weeks into the crisis, there is no sign that the economic impact is about to ease up.

Much of China was supposed to have reopened by now. But the country’s empty streets, quiet factories and legions of idle workers suggest that weeks or months may pass before this motor of global growth is running at full speed.

Over the years, companies as varied as Disney, Nike, McDonald’s and Hyundai have come to rely on China’s efficient factories and increasingly affluent consumers. Now the virus is forcing companies to restrict travel to China or temporarily shut stores, offices, restaurants and theme parks. And the disruption to Chinese manufacturers has rippled through global supply chains, making it difficult for companies to obtain parts for everything from video-game consoles to cars. 

It’s too early to assess the full financial impact of the outbreak. But over the last few weeks, big companies have revealed, with varying degrees of specificity, how the virus has affected them.

Here’s what we know so far.

Under Armour told investors on Tuesday that its revenues in the first few months of 2020 — and potentially beyond — would take a hit of $50 million to $60 million because of the outbreak.

The Asia-Pacific region made up about 12 percent of Under Armour’s total sales last year and has been one of its faster-growing markets. “Given the significant level of uncertainty with this dynamic and evolving situation, full-year results could be further materially impacted,” the company said.

FedEx has reached an agreement with its pilots’ union, the Air Line Pilots Association, allowing crew members to decline trips to China.

Another union representing pilots, the Independent Pilots Association, made a similar arrangement with UPS in a “Coronavirus Letter of Agreement.” That deal allows UPS pilots to take a leave of absence for trips involving “a flight segment into, or out of, mainland China,” the union’s president, Robert Travis, said.

Disney has offered one of the more detailed assessments of how the coronavirus is affecting business. For more than a week, its theme parks in Shanghai and Hong Kong have been shut. The closings are expected to reduce the company’s operating income by $175 million in the second quarter, Christine McCarthy, the chief financial officer, said on an earnings call.

The Canadian film company Imax was forced to postpone the release of five films it had planned to showcase in China during the Lunar New Year holiday period.

In Japan, Nintendo, which makes video games and gaming devices, said shipments of its Switch game console to Japanese customers would be delayed.

And last week, officials in the Chinese city of Macau asked its 41 casinos to close for half a month. The move will hit American casino operators in the region.

Wynn Resorts is losing $2.4 million to $2.6 million every day that its casino in Macau remains closed because of the coronavirus, the company’s chief executive said.

Tim Cook, the chief executive of Appletold analysts in January that its suppliers could be disrupted and that traffic to its stores in China had dropped.

Apple has a large sales presence in China and assembles most of its products there. Mr. Cook said that some Apple suppliers would remain closed and that traffic into its stores in the country had fallen off.

Qualcomm, which makes smartphone chips, is also hurting. Last year, nearly half its revenue came from China, a major hub for smartphone manufacturing and sales.

The company’s chief financial officer, Akash Palkhiwala, told investors last week that the company had reduced the low end of its earnings guidance for the next three months because of the uncertainty created by the outbreak.

This month’s Mobile World Congress in Barcelona, Spain, one of the tech industry’s biggest trade shows, is putting special safety measures in place, including prohibiting any visitors from Hubei Province in China from attending. Several big companies, including Amazon and Sony, are choosing to stay away.

Many auto plants have shut down in China because of the virus, including factories run by TeslaFord Motor and Nissan.

On Monday, Nissan of Japan said it would shut down its plant in Kyushu, Japan, for four days beginning later this week because of “supply shortages of parts from China.”

Hyundai, the world’s fifth-largest automaker, said last week that it would temporarily stop production lines at its factories in South Korea because of shortages of Chinese parts.

Auto companies had hoped to restart production on Monday, but an increasing number have pushed that off until next Monday. Volkswagen on Saturday cited problems with “the nationwide restarting of supply chains as well as limited travel options for our production employees.”

Fiat Chrysler warned that the outbreak could disrupt production at one of its European plants in the next few weeks, Reuters reported. But the company’s chief executive said it wasn’t changing its financial guidance for 2020.

Over the last couple of weeks, a series of major airlines have canceled flights to China, including DeltaUnited and American. But the airlines have said little about how the cancellations will affect their bottom lines. Analysts expect the impact to be relatively small.

United draws only about 4 percent of its revenue from service to China, which accounts for just 3 percent of Delta’s revenue and 2 percent at American, said Helane Becker, an airline analyst with Cowen Research.

Also cutting back sharply is Air China, which flies the most passengers nonstop between the United States and China. On Thursday, it was granted permission to significantly limit service between the two countries, the Transportation Department said.

Air China intends to operate seven flights a week, in both directions. In 2018, it operated an average 129 flights a week into and out of the United States, according to federal data.

The spread of the virus has also taken a toll on the cruise industry. On Friday, Royal Caribbean barred all people holding Chinese, Hong Kong or Macau passports from boarding its ships. The vast majority of those passengers would be on ships leaving China, which account for only 6 percent of the company’s business, according to Rob Zeiger, a spokesman for Royal Caribbean.

Several hundred of the approximately 3,300 McDonald’s restaurants in China have closed. But the company’s chief executive, Chris Kempczinski, said the overall impact on profits would be “fairly small” if the virus stayed contained.

Starbucks has closed more than half its 4,300 stores in China and delayed a planned update to its 2020 financial forecast, saying it expects a material but temporary hit.

And Yum Brands, the operator of the KFC and Pizza Hut franchises in China, said nearly one-third of its restaurants had been closed because of the outbreak. The remaining stores have seen a major drop in sales.

About half the Nike stores in China have shut down, and those that remain open have shortened hours, the company said. Nike has not released a numerical estimate of the financial repercussions, but told investors that it expected “the situation to have a material impact on our operations in greater China.”

Canada Goose Holdings said the impact would be substantial enough that it had to lower its profit outlook for the year, saying customer traffic in China and in “international shopping destinations in North America and Europe” has been affected. “No supply chain interruptions have occurred,” the company said in a statement on Friday.

The VF Corporation, which owns brands like Timberland and the North Face, announced it would temporarily close about 60 percent of its stores in China. And it said traffic had slipped at stores that are currently open.

Burberry warned investors that the outbreak was having a “material negative effect on luxury demand.” Twenty-four of its 64 stores in mainland China are closed, and those that remain open, with reduced operating hours, have fewer shoppers than usual, the company said.

Tapestry, the American luxury giant that owns Kate Spade, Coach and Stuart Weitzman, said the outbreak could reduce its sales by up to $250 million in the second half of the year.

And Estée Lauder, the luxury cosmetics company, warned that the outbreak would hurt its financial results “in the near term,” predicting that sales in the third quarter of 2020 would be the most affected. The spread of the virus has slowed air travel and tourism, reducing store traffic in key global shopping areas, it told investors.

Matt Sherman

Creative Director at Spectas