Covid-19’s long wave hits Italian luxury manufacturing

Key takeaways: Luxury brands and businesses, initially worried about China’s drop in consumption, are now focusing on the fate of their Italian supply chains as the country continues to battle Covid-19. Some manufacturers are operating at reduced capacity, while others have decided to halt operations temporarily. All see the impact on the sector lasting until mid-2021. The Italian government approved a €25 billion economic package, but more stimulus, financing and strategic planning will be needed in the rebound phase. “It’s an era-defining moment,” says Stefano Albini, president of luxury textile manufacturer Albini Group. In Italy, which is facing the worst outbreak of the Covid-19 virus outside of China, entrepreneurs, luxury business owners and manufacturers are bracing themselves. On 9 March, the country entered a lockdown that includes schools, non-essential travel and all commercial activities, with the exception of those providing food and medicines. For the time being, the government order doesn’t include industrial production and manufacturing. However, companies have had to quickly adhere to new rules, including allowing office employees to work from home, regularly sanitising manufacturing plants and maintaining a safe distance of at least one metre between workers. “We had to change strategy in relation to how we communicate, how we sell, and how we operate,” says Cesare Casadei, creative director of family-run luxury shoe brand Casadei. The label, which is manufactured in-house, is based in San Mauro Pascoli, in Emilia-Romagna, the country’s second most-hit region by the pandemic after Lombardy. The company’s manufacturing operations are running, but Casadei has implemented alternate production cycles to respect the government mandate of distance between workers. The initial economic impact of Covid-19 on luxury brands was mainly calculated in terms of the drop in consumption when the outbreak was concentrated in mainland China, affecting the spending and travelling habits of luxury’s most important customers. Now the focus is shifting to the whole luxury supply chain. Italian households spend half of what Chinese households spend on luxury goods per year, but the country remains the heartland of global luxury manufacturing. Roughly 88 per cent of Kering’s centrally managed suppliers are in Italy, as are the majority of Prada’s owned manufacturers. LVMH has 30 production sites in the country and Only The Brave, which owns Margiela, Viktor & Rolf and Marni, produces more than 90 per cent in Italy. According to Confartigianato Moda, there are a total of 55,491 micro and small enterprises operating in the textile, clothing and leather sectors with a total of 311,697 employees. In 2018, exports from these three sectors reached €52.7 million, around 83.3 per cent of all fashion exports. As the epicentre of the pandemic has moved from Asia to Europe, management consulting company BCG has revised its initial forecast, which anticipated a 10 to 15 per cent drop in luxury sales for 2020. It has now increased the drop to 20 to 25 per cent, or a decrease in sales between €70 and €87 billion from the current value of €349 billion. However, Guia Ricci, principal of BCG Milan, still believes that retail sales will suffer a greater blow than production, as luxury’s traditionally long lead times could shelter its supply chain. The garments in stores now were produced six or more months ago, and what supply chains are producing now will likely be on shop floors at the end of the year, Ricci says. “Maybe the pace has slowed down, but we believe that for the Autumn/Winter 2020 collections there is still time to catch up.” Manufacturers and entrepreneurs think otherwise, anticipating the slowdown’s impact to be felt at until the first half of 2021. “It’s a long wave,” says Arianna Casadei, marketing manager at the family-owned company. “It’s not only about China’s rebound, Italy’s rebound; it’s an issue that affects the world.” Delays, cancellations and closures With most of its production based in Italy and only 5 per cent of revenue coming from China, OTB was minimally impacted by the outbreak of Covid-19 until it reached the country at the end of February. Soon after, according to CEO Ubaldo Minelli, clients inquired about cancelling orders that were already in production or to defer payments of pre-collection shipments, which usually hit stores in April. The group hasn’t adjusted its 2020 revenue target for now. An impact is inevitable, says Minelli, although too difficult to quantify yet. “The coronavirus has resulted and will inevitably lead to delays in the deliveries of the productions and in turn, we will have delays with our customers,” he says. Manteco, a luxury supplier of wool based in Prato, Tuscany, has already seen a reduction in order quantities and some order postponements. At Sapaf, a family-run leather company based in Scandicci, which produces handmade leather accessories for international luxury brands, SS20 orders haven’t been delayed or cancelled, but CEO Andrea Calistri is expecting lower order quantities for AW20. The cancellation of trade fairs and the uncertainty around the fate of the ones to come, and consequently the opportunity to meet with clients, has also weighed in. “We have at least a couple of complex seasons ahead of us,” he says, adding that it will take time for the system to regain confidence, while some companies, unfortunately, won’t be able to withstand a year of difficulties. The situation will improve in the early months of 2021 “if we are lucky”, he says. Ratti, a leading manufacturer of fabrics for international luxury brands based in Guanzate, near Como, currently has 150 employees operating through “smart working”, which allows them to work remotely and with flexible hours while remaining under the same legal and compensation terms. Another 100 employees are still working in its plant, roughly a third of its usual capacity. “It’s completely on a voluntary basis,” says CEO Sergio Tamborini, adding that the company is ready to close if the emergency situation was to worsen even further. He says the decision to remain partially operative is less cost-effective than shutting down completely, but it’s a choice made to preserve relationships with clients and guarantee employees’ wages. “Fashion doesn't serve any purpose — we could all stop working for a year and a half, and nothing would change, except for the people who work in it,” he says. “Stopping the flow for them would be disruptive, with [consequences] difficult to assess.” Other companies in areas more harshly hit by the pandemic have decided to temporarily halt production altogether, even when not required by the government. Albini Group, the leading European manufacturer of shirting fabrics that has worked with brands like Calvin Klein, Ralph Lauren, Thom Browne and Dior, has closed its three production plants in Albino, Gandino and Mottola this week. Albino and Gandino are in the province of Bergamo, where the local daily newspaper obituary pages have more than tripled to 10. “We have a fairly diversified supply chain and can balance orders by producing in other factories like in Egypt or the Czech Republic,” says Albini. “The fear is in the financial and economic slowdown that will directly impact consumer sentiment around the world.” All five manufacturers used by Venice-based shoe brand Nodaleto have been closed for a week and won’t reopen until at least 20 March. The brand managed to receive 95 per cent of its Spring/Summer collection before the lockdown, but the production of its AW21 collection remains on hold. Nodaleto is now struggling with managing the stock that was supposed to be sold through its Italian wholesalers, which are currently closed, redirecting to its e-commerce site. Buyers have also ordered smaller quantities for AW21 and shops have asked to postpone deliveries. Protecting the supply chain According to BCG’s Ricci, in the long-term companies will need to think about diversifying their supply chain to better mitigate risks in emergencies, but among Italian entrepreneurs, there is a strong sense of shared responsibility towards the finely interconnected Italian supply chain and its safeguard. OTB’s Minelli has created a crisis unit to act quickly to implement solutions aimed at minimising disruptions in production and the impact on the group’s finances and says the group’s worries are not primarily about missing its targets for the year. The company, he says, makes more than €1.5 billion in revenue, has €900 million in equity and is debt-free. “Our concern is upstream, on the made-in-Italy production chain, made of many medium-sized, small family-run structures that are fragile from an equity and financial point of view.” Minelli says the group is not planning to reduce its order quantities or make other strategic decisions that could favour its own interests while penalising its suppliers. What most expect is a domino effect. A decrease in retail sales will hurt brands and affect payments to suppliers, overwhelming the chain as a whole. Entrepreneurs and associations have asked the Italian government to emanate moratoriums on mortgages, bank loans and taxes to guarantee liquidity in the system. “The suspension [will allow] companies to pay their current expenses, and therefore their workforce, which is a treasure. If we lose it, we won’t be able to get it back,” says Sapaf’s Calistri. On Monday the Italian government approved a €25 billion economic package, which includes the deferment of contributions, tax and tax withholdings due on 16 March to 31 May for entities that declare a turnover of less than €2 million and for those supply chains most harshly hit by the emergency. The decree also suspends mortgages and loan repayments and freezes collective dismissals. Albini sees the role of the government as essential also in the rebound phase when the industry will need strategic planning, substantial stimulus and financing. But the main concern remains curbing the health emergency. “It’s not easy because [the country] has limited resources,” says Albini. “But we must take all precautions to overcome this situation because if it keeps dragging on, it will be much worse.” To receive the Vogue Business newsletter, sign up here. Comments, questions or feedback? Email us at feedback@voguebusiness.com. 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