Sourcing Around SARS

The outbreak of severe acute respiratory syndrome (SARS) that has been plaguing Asia — particularly China — has prompted many catalogers to halt travel to the continent. This could pose a major problem for the merchandisers, given that Asia is a prime source of new product: According to the 2002 Catalog Age Benchmark Report on Merchandising (November issue), nearly 55% of catalogers — including 78% of those with sales of at least $50 million — sourced new product in the Far East.

Oshkosh, WI-based Miles Kimball is one of the catalogers that, following a series of warnings issued in March by the Centers for Disease Control and Prevention, the World Health Organization, and the U.S. State Department regarding the danger of SARS, stopped sending buyers to China. “No one goes to Asia until we get a better handle from World Health [Organization] and the State Department on the nature of this disease,” says Mike Muoio, president/CEO of the gifts mailer.

In fact, 2003 marked the first year in more than a decade that representatives from Rye, New York-based Lillian Vernon Corp. did not attend the spring Chinese Export Commodities Fair, also known as the Canton Fair. China’s foremost trade exposition, this gathering provides a showcase for Chinese exporters selling everything from hard goods to apparel. Lillian Vernon’s best-selling Chinese imports include a range of toys and Christmas ornaments, says Lillian Vernon spokesperson David Hochberg.

That’s not to say that the gifts and home accessories cataloger has stopped sourcing and importing goods from China. Suppliers in China are able to show Lillian Vernon executives new products through e-mail and CD-ROMs sent through the mail. In addition, they have been sending samples through overnight delivery, Hochberg says, so trading has not yet been interrupted.

Indeed, “catalogers are doing a lot of things with Asian suppliers via e-mail — things they’d normally do in person,” says catalog consultant Katie Muldoon, president of Tequesta, FL-based Muldoon & Baer. “They’re getting actual renderings of products” via digital photos transmitted by e-mail. “They can do versions of architectural renderings that show sizes — all the things you’d see in person,” she says. “They’re sending more samples also.” Of course, none of this is as good as going in person, Muldoon notes, “but [right now] it’s probably a lot wiser.”

The Company Store domestics division of Edgewater, NJ-based multititle cataloger Hanover Direct has also stopped all travel to Hong Kong and China “for the time being,” says Farley Nachemin, chief merchandising officer/president of The Company Store Group. “Until we get a clearer picture of what’s going on and that things are under control, we’ll not travel to the Far East.” Merchandisers for the unit were still traveling elsewhere in Asia, however, such as India.

For its Domestications and Company Store bedding and home furnishings titles, the company sources hand-pieced quilts, resin and painted furniture, and some sheets and comforter shells from the Far East. For now, the division is communicating with its Chinese vendors via fax and e-mail, and by exchanging samples through the mail.

Plano, TX-based J.C. Penney Co., which buys Chinese-made shoes, apparel, and home accessories, has suspended all travel to China as well, but it hasn’t seen any disruption of delivery and production from Chinese factories, says spokesperson Tim Lyons. So far the greatest difficulty for the cataloger/retailer is dealing with the time difference between the U.S. and Asia, Lyons says. “Sometimes our folks have to stay later or the merchants over there have to come in very early,” he explains of the efforts to organize video conferencing in lieu of face-to-face communication.

But if the worst of the SARS crisis amounts to missed sourcing and buying in Asia this past spring, most catalogers feel they’ll be able to effectively navigate the obstacle via technology. In fact, Colorado Springs, CO-based Walter Drake & Sons, which imports hard goods such as kitchen gadgets and home organization items, has always conducted its Asian buying missions via the phone and e-mail. “There’s no concern at this time,” says purchasing manager Debbie Andersen. “So far it’s been status quo.”

But J. Craig Shearman, senior director for media relations for the Washington-based National Retail Federation (NRF), says that while catalogers may be able to get by with trading via e-mail and video conferencing, technology has its limitations. “At a certain point,” he says, “you need to touch the product, feel the quality of the fabric, and try out a product yourself.”

Moreover, the additional time required to transmit product photos back and forth — as opposed to a merchandiser being able to make an on-the-spot buying decision when in the Far East — could add more than a month in product development time for The Company Store, Nachemin says. “A lot of things are accomplished when you’re sitting there in person,” he notes.

The good news is that most mailers avoiding travel to the Far East because of SARS have already bought for the year. For The Company Store Group, the absence of travel to the Far East “will have more impact on our spring/summer business in 2004,” Nachemin explains, “because most of our ’03 business has already been booked and is in production. Some goods have already shipped, so it just affects our product development for the early part of summer ’04, since we’re already in progress for the first quarter of ’04.”

Seeking alternatives

If the SARS problem escalates, however, mailers could be in trouble. But importers have no reason to panic yet, Shearman says. “This disease is transmitted through human contact, so it’s not affecting the delivery of cargo. Where we would see a concern is if SARS were to become so widespread that factories and ports shut down.”

Miles Kimball’s Muoio agrees. “If this became a plague and factories failed to produce, there would be a problem,” but so far the cataloger’s purchases from China are continuing as planned. What’s more, Miles Kimball has contracts with factories or vendors in nine other countries. Muoio says the company would be able to provide customers with the same merchandise it buys from China.

Likewise J.C. Penney imports goods from 65 countries, so it has no fear of leaving customers without the merchandise they expect. “With apparel, there’s a lot of flexibility with the ability to move production around the globe,” Lyons says. “We’re more flexible than a heavier industry like automotive.”

Looking ahead, San Francisco-based gifts cataloger RedEnvelope has already moved some of its merchandise from Chinese vendors to factories it contracts with in other countries, says chief marketing officer Hilary Billings. Not that SARS has yet affected RedEnvelope financially, Billings notes. “Foregoing buying trips in China isn’t a large risk, as we can conduct most of our business via e-mail and phone,” she says. “However, if we were unable to import certain items that we could not easily transfer out of China, the financial impact would be greater.”

Lillian Vernon has no plans to begin sourcing from other vendors, Hochberg says. “But if this becomes a massive epidemic, and the supply chain is adversely affected, that may be an option,” at which point the company would consider sourcing from countries such as India. Although Lillian Vernon buys 50% of its products from China, it purchases merchandise from 34 countries in all.

If the SARS crisis does affect Chinese product vendors, many U.S. catalogers may be able to find backup suppliers in other Asian countries, but they may not be able to buy the goods at the same low prices. “Products are sourced from China for a reason,” says Muoio — namely, the low cost. If China could not be used as a purchasing source, it is almost certain that companies would have to spend more money to attain the merchandise they need. The catalogers would then have to either lose margin or raise prices.

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