Not a good narrative in China this year. First it sees the most debilitating snowstorm in 100 years in 1Q. Then in 2Q it is hit by the earthquake – for which the death toll is still uncertain. Now the typhoon and ensuing flooding is impacting a key manufacturing province.
Remember that 86% of US footwear consumption is made in China. Nearly 3,000 footwear factories closed in 1H as raw material prices skyrocketed, government support for factory margins eased, FX pressured margins, and migrant workers simply did not show up for work due to the forces of mother nature (in addition to the ability to find better jobs in major cities for more money), and the storms exposed the weak transportation infrastructure that precluded US companies from shifting sourcing to central China.
It was already apparent to me that we’ll see thousands of additional factories close in 2H. Now there’s no doubt in my mind. Not good for footwear pricing throughout the global footwear supply chain as the economic balance shifts in favor of the survivors in China. I’d hate to be a marginal US brand or retailer right now (SKX, DSW, BWS, and even WWW). I’m incrementally of the view that this will lead to more consolidation and M&A.