Target Corp. and Best Buy Co. Inc. could be among the first U.S. companies to take a direct hit from the coronavirus outbreak as concerns grow about disruptions to supply chain networks in China.
Although existing inventories are strong at most of the nation’s big-box retailers, analysts from Wells Fargo warn that shoppers could start seeing empty store shelves as early as mid-April.
“We believe the time to start to worry about the supply chain risk ... is here,” the report said.
Almost 60 million Chinese workers remain quarantined in their homes, and others are staying away from work, afraid of catching the virus at crowded factories. So far, there have been more than 42,000 confirmed cases of the coronavirus and more than 1,000 deaths.
As a result, there have been “dramatic reductions in activity” across China, and operations have been slow to restart following the Lunar New Year holiday, the Wells Fargo report said. Retailers have started to express concerns.
Minnesota-based Target and Best Buy declined to comment on how the outbreak is affecting their businesses. But Wells Fargo said the two companies, along with Walmart, Dick’s Sporting Goods and G-III Apparel Group, are among 19 retailers considered at high risk of supply-chain disruption.
Target and Walmart “are more heavily dependent on a shorter lead time replenishment model,” the report said.
Although retailers have been looking to shift production to other parts of Asia, much of the raw materials come from China.
The next few weeks are key, depending on how quickly people in China go back to work. American consumers might begin to see out-of-stock items starting within 60 to 90 days, stretching well into midsummer if disruptions continue, according to a team of analysts led by Edward Kelly.
“While there is finished product sitting in factories and distribution centers in China, our contacts have indicated that almost nothing is moving over the water or by air at the moment,” the report said.
Scott MacDonald, who owns the Minnetonka-based manufacturers’ rep firm Mac & Mac, said one of his patio furniture suppliers had only 700 of its 7,000 Chinese workers show up for work Monday, the first day of business following an extended Chinese New Year holiday.
Mac & Mac and other companies that work with China are figuring out how to deal with the work delays.
MacDonald said his client believes that workers can’t get to the factory because of transportation disruptions. Whatever the cause, many companies could be hamstrung by a lack of raw material shipments in the coming weeks.
This week, a client complained that a container ship headed to a dock in Hangzhou — 10 hours from the epicenter of the outbreak in Hubei province — couldn’t get to the port. MacDonald said it wasn’t clear if the Chinese government had shut down the port or if the ship captain simply refused to dock for fear of the virus.
Either way, his client’s products “had to be booked on a different vessel” so they could get to their final destination, he said.
MacDonald said his big-box retail customers are concerned, especially as they hear reports that planes in China may have been refused permission to land in some cities and were diverted to other airports. “Everyone is looking at this because it is definitely going to affect business and shipping.”
It is unclear whether continued travel bans and factory shutdowns in China will affect supply chains long term.
Arctic Cat’s factory in Thief River Falls, Minn., uses some Chinese components in its vehicles, including its new Tracker Off Road four-wheelers, but the company has seen no effect so far, said Dave Sylvestre, a spokesman for Arctic Cat’s parent, Textron.
“At this time, our Minnesota plants are operating normally,” said Brandon Haddock, spokesman for Textron Specialty Vehicles.
Shakopee-based Entrust Datacard, which makes data security products, credit card printers and automated ad printers for banks around the world, buys less than 10% of its supplies from vendors in China and is already adjusting to life “after” the outbreak.
During and after the Chinese New Year, it shut down its sales, service and IT offices in Shanghai, Shenzhen, Suzhou and Beijing. It asked its digital associates in China, Singapore and Hong Kong to work from home until the crisis passes.
The company has 50 employees in China and 350 across Asia. It canceled all unnecessary travel from China to customers around Asia. It has struggled to get its workers face masks, which are in short supply because they are being hoarded by hospitals in China.
“We talked to one of our [team members] today who is in Hong Kong, where there are very small homes. And she is there in the apartment with both of her parents. It’s tight,” and demoralizing not to have the freedom to leave, said Chief Human Resources Officer Beth Klehr. “So keeping everyone’s spirits up is very important to us. What we are hearing is that it’s very important to them to be able to keep working.”
Separately, Entrust Datacard is scrambling to replace workers affected by travel bans with others who can still meet with customers outside of China. And it’s racing to get supplies from Chinese vendors “that we need to build here” in Shakopee, Klehr said. “That’s our biggest challenge.”
So far, alternate suppliers are being found and no production delays are expected in Shakopee, a spokesman said.
At St. Paul-based Ecolab, which makes hand sanitizers and disinfectants for hotels, restaurants and factories worldwide, has 3,000 workers in China and has shipped “large quantities” of face masks to its workers. Now it’s scrambling to keep up with production. “We are doing all we can to support the country’s efforts to contain the virus and also help our associates and customers remain safe,” said spokesman Roman Blahoski.
Ecolab kept its hand soap factory in Taicang operating part-time during the holiday and in the past week reopened plants in Nanjing and Guangzhou.
“We are seeing an increase in demand for our hygiene and infection prevention solutions, but conversely, China’s economy is experiencing broad disruption,” Blahoski said. “At this time, we do not see indications that our production will be disrupted as a result of this outbreak, but this is an evolving situation. And we are unable to foresee the full impact it may have on our operations.”