Last week, the US and UK began air and naval strikes in Yemen against Houthi militant targets — an escalation of a regional conflict with no resolution in sight, with significant potential consequences for the global economy.
Since November, Iran-backed Houthis — a militant group that has controlled parts of Yemen since 2014 — have staged mounting attacks on cargo ships in the region ostensibly in protest of the Israel-Hamas war in Gaza. Earlier this week, a Houthi missile struck a US-owned cargo ship carrying steel off the coast of Yemen as well as a Greek-owned vessel sailing from Vietnam to Israel.
In both instances, there were no injuries or casualties to crew members, and the ships sustained minor damage. However, the Houthis’ intensifying aggression, spurred by Western intervention, poses not only a diplomatic dilemma and a potential new flashpoint in the Middle East war, but also profound disruption to one of the world’s most vital trade routes.
Why is the Red Sea so vital to international trade?
All vessels passing through Egypt’s Suez Canal must traverse the Red Sea in order to make journeys between Asia and Europe. The canal is a crucial passage for international trade, through which roughly 15 percent of global shipping trade, including as much as 30 percent of container traffic, passes each year.
“This is a vital 119-mile shortcut between Asia and Europe that saves ships travelling an extra 5,500 miles around [South Africa’s] Cape of Good Hope,” said David Jinks, head of consumer research at UK-based logistics company Parcel Hero. “Each of those containers will likely be carrying thousands of products made in Asia … typically including everything from Barbie dolls to iPhones to fast fashion.”
Ships unable to use the Suez Canal likely opt for the longer route around Africa, which adds on average 10 to 15 days to the trip, resulting in shipment delays as well as increased costs of fuel and insurance. There are also higher risks of pirate attacks and adverse weather conditions associated with the so-called Cape Route, Jinks said. Some retailers are even reportedly exploring air and rail alternatives. These are expensive obstacles for which ultimately consumers will have to pay.
A new report released by the World Bank last week highlighted the heightened importance of Suez in light of existential threats to another of the world’s key trade routes, the Panama Canal. Drought in the region has left the canal’s water levels lower than ever, forcing Panama to almost halve the number of ships allowed through per day, significantly increasing shipping costs for freight operators using the waterway, which is a shortcut between Asia and the east coast of North America.
What has happened so far in the Red Sea?
Since Nov. 19, when Houthi militants started their recent campaign hijacking commercial vessels in the Red Sea, the rebel group has launched drone and missile attacks on over two dozen ships.
With an estimated 20,000 fighters, according to The Guardian, the Houthis occupy most of the west of Yemen and control its Red Sea coastline. The group claims to only be targeting ships which are Israeli-owned, or those headed for Israeli ports but many ships targeted have no known connections to Israel.
On Jan. 12, the US and UK began a joint military campaign in the region, launching airstrikes on over 10 sites they claim to be used by Houthi militants in Yemen. In the weeks prior to that, the US Navy had deployed several ships to defend ships passing through the region.
Three of the world’s largest shipping lines — MSC, Maersk and CMA CGM — have paused all Suez Canal transits indefinitely. DHL advised its customers to consider alternative shipping options as operators switch away from the Red Sea; Oil giant BP said it had paused all transits through the Red Sea; and French food conglomerate Danone warned of increased shipping times due to diverted cargo. Freight container volumes through the Red Sea have fallen 65 percent from expected levels since November, according to Reuters.
What’s at stake for fashion retailers?
For now, some retailers are playing down concerns.
“As of now we don’t foresee any significant disruptions in the shipments. However, we are following the situation closely,” a spokesperson for Swedish retail giant H&M told BoF on Wednesday. Japanese retailer Uniqlo told BoF on Friday: “While there are minor changes of operations, they have no significant impact for now on our business. We are continuing to monitor the situation closely.”
Earlier in the month, British retailer Next said that disruption caused by attacks on vessels in the Red Sea could impact deliveries and sales if it was to continue through 2024.
“The extra sailing time eats into capacity in the network and we could begin to get constraints. At the moment it is an inconvenience not a crisis,” said chief executive Simon Wolfson. He added that the British retailer does not expect to raise selling prices for consumers for the Spring/Summer season.
But logistics experts say the potential long-term threat could be serious. US retail giant Target said it has already experienced delays on shipments from India and Pakistan due to the re-routing of vessels.
And at some point retailers will feel the pain of heightened shipping expenses. CMA CGM, the world’s third-largest shipping company, already announced an increased $150 per container surcharge. For a regular-sized container ship carrying 5,000 containers, this results in an additional cost of $750,000 per sail, Jinks explained.
Eventually, the burden will be passed to consumers. “Expect store prices on products to rise in the coming months,” Jinks said.
There is unlikely to be any short-term resolution of the threat to ships in the region, despite the US-UK military intervention. This means retailers will inevitably be forced to hike prices to account for soaring freight costs, analysts expect.
“It does look as if retailers will have to pass on costs to customers at some point, and the longer the crisis continues, in our view, the sooner and steeper those rises will have to be,” said Jinks.
For fashion’s supply chains, disruption appears to be the new normal. First came the pandemic which saw government-imposed lockdowns and port and factory closures lead to supply chain bottlenecks across the world. Since then, the escalation of geopolitical tensions from Ukraine to the South China Sea and most recently the Middle East have also served to spook markets and disrupt global trade.
What are the potential consequences for the global economy?
Beyond the immediate impact on retailers, it is feared a prolonged Red Sea crisis, coupled with escalating conflict across the Middle East, could have a knock-on effect on the global economy.
“This would have significant spillovers to other commodity prices and heighten geopolitical and economic uncertainty, which in turn could dampen investment and lead to a further weakening of growth,” the World Bank predicted. The knock-on inflation risk could encompass everything from oil and gas to foodstuffs and clothing.
Meanwhile, dampened hopes of a global economic recovery could spark uncertainty in capital markets — where several fashion companies are set to debut early this year — and affect M&A activity which has picked up across the fashion and beauty industries in recent months.
It also warned of supply chain bottlenecks — exacerbated by the Panama Canal’s capacity crisis — along with the risk of rising energy prices brought on by the continuation and potential escalation of conflicts from the Middle East to Ukraine.
THE NEWS IN BRIEF
FASHION, BUSINESS AND THE ECONOMY
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Hugo Boss shares sink as profit disappoints. Quarterly earnings before interest and tax came in at €121 million ($132 million), missing analysts’ average estimate of €129 million. Shares were down 11 percent at €59 at 14:25 GMT, set for their worst day since March 2020.
Birkenstock slumps as forecast disappoints some investors. The stock slid 12 percent in trading before US exchanges opened. If the drop extends into trading hours, it could erase the gains made since the company’s initial public offering in October. Birkenstock said revenue this year could grow by as much as 18 percent to €1.76 billion ($1.92 billion).
Richemont shares climb as demand for Cartier and Van Cleef boosts holiday sales. Sales rose 8 percent year-on-year at constant exchange rates for the three months ending Dec. 31, reaching €5.6 billion ($6.1 billion) and beating analyst expectations. Shares surged 10 percent in early trading.
Watches of Switzerland dives as watch shoppers retreat. Shares of Watches of Switzerland Group Plc slumped nearly 30 percent after the top seller of Rolex watches in the UK cut its sales and growth forecasts. The company, also a major luxury watch and jewellery dealer in the US, said holiday sales were volatile amid challenging macroeconomic conditions that it expects to persist.
China launches data review into Shein ahead of US IPO. The Cyberspace Administration of China is looking into whether Shein can protect data on its China-based staff, suppliers and partners effectively and prevent the information from leaking overseas. The agency is also trying to learn what data Shein needs to provide to US regulators.
Macy’s to slash 2,350 jobs and close stores in a streamlining effort. The layoffs make up 3.5 percent of the overall workforce across Macy’s. The retailer’s incoming CEO Tony Spring is also focussed on cutting expenses on promotions to boost margins as the company recovers from 2022′s inventory glut.
Ex-Abercrombie & Fitch CEO reportedly under FBI inquiry for alleged sex crimes. Mike Jeffries and his partner Matthew Smith are being investigated by federal agencies following allegations that they sexually exploited and abused young men at parties they hosted, reported BBC News. The FBI and the US attorney’s office are reportedly interviewing witnesses and issuing subpoenas as part of their investigation.
De Beers cuts diamond prices to revive sales. De Beers cut prices by about 10 percent across the board at its first sale of this year. The one-time monopoly made bigger cuts for some larger stones, with one category being lowered about 25 percent.
Italy court seeks to stop the sale of La Perla lingerie in the UK. The news follows the liquidation of the holding company to recoup unpaid tax debts. The Bologna court ruled the seizure of all the assets in London-based unit La Perla Global Management Ltd., including its valuable brand, according to local unions.
Uniqlo sues Shein for allegedly copying viral shoulder bag. The entities that operate the Shein brand must immediately cease sales of “imitation products” and compensate for damages, Uniqlo parent Fast Retailing said. Uniqlo filed the lawsuit on Dec. 28 at the Tokyo District Court.
London police say covert operation has halved luxury watch thefts. The operation helped to reduce annual watch robberies from 113 to 55 in the year to July 2023 in three central London boroughs: Westminster; Kensington and Chelsea; and Hammersmith and Fulham. In two operations over several months in 2022 and 2023, 27 people were arrested.
EU bans ‘misleading’ environmental claims that rely on offsetting. Members of the European parliament voted to outlaw the use of terms such as “environmentally friendly”, “climate neutral” or “eco” without evidence, while introducing a total ban on using carbon offsetting schemes to substantiate the claims. Under the new directive, only sustainability labels using approved certification schemes will be allowed by the bloc.
VF Corp’s cyber incident causes data breach of 35.5 million consumers. The unauthorised activity, detected on Dec. 13, disrupted global customer orders on its e-commerce site. The company said it has substantially restored the IT systems and data that were impacted by the cyber incident.
Struggling fashion house Trussardi nears brand and asset sale. The house is nearing a deal that will see it transferred to a new owner and have assets sold off as part of a debt restructuring. After an extended marketing process that saw little demand, the brand, together with some of the group’s branches, is set to be sold to Miroglio Group.
THE BUSINESS OF BEAUTY
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Kim Kardashian teases the return of makeup and fragrance. In a video posted on Jan. 16 to Kardashian’s Instagram, she reads out comments from fans lamenting the closure of her previous brands. The celebrity influencer and entrepreneur closed her cosmetics and fragrances lines KKW Beauty and KKW Fragrance in August 2021 and April 2022 respectively.
German beauty retailer Douglas sees sales grow to $1.7 billion in the first quarter. E-commerce sales for the period, which covered October to December 2023, increased 10.7 percent, while in-store sales rose 7.1 percent. The company said it is on-track to hit $5.5 billion in net sales in 2026 despite the tough economic climate in Europe.
Saudi online cosmetics retailer Nice One plans local IPO. The firm has asked banks to pitch for a role on the potential deal, according to people familiar with the matter. Deliberations are ongoing and details such as the size and timing of the IPO are still undecided.
Compass Diversified announced majority stake in The Honey Pot. The deal is worth $380 million and will close in February. Compass reported that the brand has a 4.5 percent household penetration; Nielsen ranks The Honey Pot as the fifth-largest feminine care brand at retail.
L’Oréal bets on longevity biotech company Timeline. The $66 million Series D round was led by BOLD, L’Oréal Groupe’s venture capital arm, with participation from Nestlé. The company will use its latest funding round for expansion across food, beauty and health sectors.
E.l.f cosmetics returns to the Super Bowl. On Feb. 11, it will air a 30-second spot directed by Zach Woods, the actor and director best known for his roles as Jared on “Silicon Valley” and Gabe on “The Office.” The ad will feature the brand’s $14 Halo Glow Liquid Filter, E.l.f.’s top-selling product of 2023.
Natura & Co to delist from New York Stock Exchange. The company will retain its primary listing in its native Brazil. Natura & Co expects its shares to be delisted on or before Feb. 9.
PEOPLE
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Michael Burke to succeed Toledano at LVMH’s Fashion Group. The former Louis Vuitton CEO will become chief executive and chairman of the unit that houses Celine, Loewe, Givenchy, Marc Jacobs, Pucci and Kenzo, effective Feb. 1. Burke will add oversight of Fendi to his responsibilities, and could eventually add Loro Piana to his portfolio, too.
Eighth Day names new CEO. The prestige skincare line has tapped former Tula and Birchbox executive Savannah Sachs to helm the company. The new appointment comes after the line received minority investment from private equity firm L Catterton in September.
Susan Yara joins influencer marketing agency The Digital Dept. to form a new beauty division. The newly formed division will focus on skincare expertise and bring 16 creators to the fold, including Yara. Yara will also work as a consultant to advise on potential product development and investment ventures.
Allbirds announced new executive leadership appointments. The brand announced this week that Kelly Olmstead, formerly senior vice president of brand and marketing, has been promoted to chief marketing officer and footwear industry veteran Adrian Nyman was appointed to the new position of chief design officer. Both were effective December 2023.
MEDIA AND TECHNOLOGY
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Reddit seeks to IPO in March. The company, which filed confidentially for its IPO in December 2021, is planning to make its public filing in late February and launch in early March. It would be the first IPO of a major social media company since Pinterest’s debut in 2019.
The Independents acquired Atelier Athem. The Paris-based firm that focuses on set design for brands’ experiences and stores, including lighting, projections, scenery, interactive elements and sound marks The Independents’ tenth acquisition. In July 2023, The Independents announced that it had raised $400 million with ambitions to double in size by 2025.
Compiled by Yola Mzizi.
