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Commercial analysis: Coronavirus (COVID-19) has dominated fashion month as luxury retailers are just now beginning to grasp the impact of the rapid global spread of the virus. James Gill, partner, and Alan Hunt, managing associate at Lewis Silkin LLP discuss the implications of the virus on the international retail supply chain and how businesses can minimise the risks it poses.
At Milan Fashion Week Georgio Armani revealed their Women’s Fall/Winter collection behind closed doors, taking the decision to live-stream the deserted runway show. While at Paris Fashion Week notable Chinese fashion houses such as Masha Ma, Shiatzy Chen, Jarel Zhan, Calvin Luo and Maison Mai all cancelled their shows.
Beyond the catwalk, the effects of coronavirus are being felt at all levels of the retail supply chain. China is beginning to reopen factories, but disruption persists as production levels are anticipated to recover gradually. As the world’s biggest exporter of textiles and clothing the disruption in China has a ripple effect across the industry. Estimates place delays in delivery between one to three months, putting seasonal releases at a particular risk.
At the other end of the spectrum, foot-traffic plummeted throughout China. Chinese consumers make up a third of the global luxury market, meaning decisions by companies like Burberry and Nike to temporarily close stores demonstrate the severity of the downturn. The Italian Government’s decision to lockdown the country indicates that the effect on in person sales is likely to spread as countries attempt to combat the virus. Airports, the second fastest growing luxury retail channel, will be particularly badly hit as airlines cancel flights due to lack of travellers and government restrictions.
Brands with a diversified supply chain and a strong online presence are proving more resilient in the face of the outbreak. However, many luxury retailers are in a position that puts obligations in business to consumer contracts at risk of not being met. What are the key issues and how can businesses minimise their risk?
UK consumers are entitled to specific remedies which differ depending on whether they are buying a good or service (or digital content). Additionally, whether the sale is made online or offline will impact available remedies.
The main risks we foresee for UK vendors is the ability to adequately stock stores and fulfil deliveries on time because of disrupted logistics and supply chains.
While online sales are moderating the damage caused by falling foot-traffic, they also present a greater cancellation risk if delivery becomes subject to significant delays. Consumers typically have a right to cancel online purchases if they change their mind (there are exemptions, eg for perishables and personalised goods). The right runs from the contract conclusion until 14 days from when delivery has been made to the consumer of the item (or the last item where there are several items in one order).
Other risks might include:
• orders being taken in store (eg for high value items or items with longer lead times such as vehicles) but where the contractual terms do not allow for delayed delivery
• orders where it has been agreed that the delivery time is essential, either because the circumstances dictate that delivery is essential (such as a wedding cake delivery) or because the consumer made it clear to the vendor that delivery time was essential. This right can exist for products even where the online cancellation right does not apply
• offering an item for sale at a specified price without disclosing that you may not be able to supply a reasonable quantity of those items at that price within a reasonable period. Determination of reasonableness will take into account the type of the item, the scale of the advertising and the price offered. Offering an item in these circumstances can be a criminal offence and/or give rise to other consumer rights
A key challenge for businesses dealing with consumers is to quickly identify and manage the delay in the supply chain. Several retailers that source either raw materials or have their manufacturing operations in China are looking for solutions overseas: choosing to accept the costs to ensure stock availability for autumn collections.
A less costly alternative might be to consider substituting certain items or components. Contractually, this can be hard to achieve. It may be possible where there are no specific promises about the particular component or where an express term made it clear that an item might be substituted.
The starting point is to look at your contractual terms. Even if you have an express right to make a substitution, the term will still need to meet the ‘fairness’ test in the Consumer Rights Act 2015. You will also still need to ensure that any alternative is ‘as described and match any sample or model seen’. Failure to do so may give the consumer a right of rejection.
Statements made about products and yourself as a trader must still be complied with when they form part of the contract. This obligation is key to sustainability claims which are becoming more commonplace in luxury retail. If products are marketed as made from 100% recycled materials, this standard must be maintained even if the process of production is disrupted. Likewise, trader claims of a carbon neutral supply chain must be complied with. This will be particularly relevant if manufacturing in China recovers and brands consider air freighting instead of shipping products to their destination. Failure to comply with these statements may give the consumer a right to a price reduction.
See here for more about defending contractual non-performance, here for specific issues in respect of the ability to cancel consumer events, here to understand the implications for you as an employer and here to find out more about responsible advertising.
On a practical level, it is key to engage not only with your staff, supply chain and logistics providers, but also with your customers. Keep the dialogue open, be fair and keep them onside.
• consider what steps you have taken to prevent the spread in your own organisation and minimise disruption to your workforce
• identify your key supply chain issues. Engage in constructive dialogue with suppliers and identify ‘workarounds’
• for existing but unfulfilled sales, check the position under your consumer contracts. Assess whether any terms that are helpful to you are ‘fair’ and that enforcement of those rights won’t upset your customers or give rise to adverse PR
• consider if you can lawfully substitute items
• maintain an ongoing dialogue with consumers about any actual or likely delays
• consider offering customers a ‘sweetener’ if you need to reduce the risk of cancellation of online sales
• update your consumer contracts and ensure they pass the fairness test
• check your current and new advertising and marketing statements (including on your website and apps) to ensure they are ‘responsible’ and are clear about stock availability and/or delivery times
• liaise with and notify your insurers
• have a contingency plan
This article by James Gill and Alan Hunt first appeared on The Collective by Lewis Silkin and is available here.
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