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SARS & Shopping

Shopkeepers in Manhattan's Chinatown are asking city government to help rejuvenate retail traffic in their neighborhood, as SARS-wary consumers avoid the district. Though no SARS incidents have been reported in Chinatown, consumers are avoiding the Asian connection associated with the disease, whose 4,400 infections are concentrated in "hot spots" such as China, Hong Kong, Singapore, Vietnam and Toronto. Chinatown merchants are calling for tax breaks and for New York City officials to dine and shop publicly in their district to reassure tourists and locals.

Malls in China are already taking steps to combat decreases in traffic. Hong Kong's Times Square Mall offers "hygiene houses" that offer patrons a chance to take a quick clean break amidst their shopping. Elevators are cleaned every 15 minutes at the mall, which also provides free masks and disinfectant wipes. But in the United States, the SARS threat is impacting supply chain concerns more than mall traffic.

Many apparel retailers, which rely heavily on Asian-manufactured inventory, have already eliminated travel plans to and from SARS hot spots, relying instead on videoconferencing and third-party representatives to monitor production and delivery issues, says Banc of America analyst Dana Cohen. Such methods could lead to slowdowns and errors, says Pacific Growth Equities analyst Marcia Aaron. "More goods will have to be shipped back and forth via express mail, which could add time to the production process," she says. " Mistakes could increase as more product changes will be communicated electronically rather than in person, leaving room for interpretation."

While supply chain issues have been negligible to date, back-to-school goods are currently in production and holiday 2003 will follow. As a result, any problems in the near term could affect important second half deliveries, and could leave some retailers with less-than-desirable merchandise and inventory levels during the crucial back-to-school and Christmas seasons, Cohen says. "As a contingency, some companies are already shifting production out of China, and we suspect that most have or are building contingency plans for production and delivery if the epidemic continues to spread."

The luxury sector is particularly vulnerable to SARS shock effects, Cohen notes. Saks Inc., for example, reports a slight slowdown in business on the West Coast at its luxury Saks Fifth Avenue division. In the global arena, Gucci and Tiffany are feeling the impact in stores in the far East. Non-Japan Asia represents about 17 percent of Gucci's sales and about 6 percent for Tiffany. "The biggest risk here is any migration of the epidemic to Japan, which represents far more -- about 30 percent of the business for most luxury retailers," she says.

Major disruptions are likely to be thwarted, Aaron concludes. But, "this obviously assumes that health officials continue to believe that there is not transmission via items manufactured in Asia and sold in the U.S.

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