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Gucci, Prada, Hermès and other fashion brands face double virus punch

Luxury and fashion companies already reeling from coronavirus-related store closures and slumping sales in Hong Kong, mainland China and now large swaths of their European home market are grappling with a separate domestic problem: disruption to production lines.

Most of Europe's big fashion and luxury brands, including Kering SA, LVMH Moët Hennessy - Louis Vuitton Société Européenne, Prada SpA, Salvatore Ferragamo SpA, Hermès International Société en commandite par actions and Tod's SpA, manufacture a large portion of their clothing, footwear, handbags and suitcases in Italy and France — two countries that are in lockdown as part of their governments' efforts to stem the spread of COVID-19 infections.

As a result, many factories run by fashion brands are closed or operating at reduced capacity. Those that remain open have been forced to enact strict measures to prevent infections spreading among co-workers, especially those working in close quarters.

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Hermès sources 80% of its products from France, and most Louis Vuitton leather factories are there too. Of Prada's 22 manufacturing plants, 19 are in Italy. Gucci relies much more on production from Italy, as does Ferragamo, which makes about 83% of its handbags and suitcases domestically. Many of those production lines have been affected.

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Most luxury and fashion companies, buoyed by several years of robust growth, have low debt levels and are well equipped to weather even a prolonged downturn. "Importantly, both supply and demand [are] reduced significantly by the quarantines, so there is unlikely to be a significant supply shock," said Jelena Sokolova, analyst at Morningstar, in an email. "Also before lockdowns in France and Italy, most brands were reducing orders."

Hermes said March 17 that it was suspending all manufacturing in France until March 30, except for a single perfume facility to produce hand sanitizer. Two days earlier, eyewear-maker EssilorLuxottica Société anonyme, owner of Rayban and Sunglass Hut, said it would briefly suspend its Italian production and logistics operations to adapt its procedures and safeguard workers from COVID-19.

Kering, owner of the Gucci, Balenciaga and Bottega Veneta brands, has closed all of its factories in Italy until at least March 20. "The company is constantly monitoring the situation in order to quickly react and implement further measures, if needed," Kering said in a statement sent to Market Intelligence.

Italian footwear-maker Tod's says it is trying to adapt its production to the potential change in demand in the coming months. "Most of the production is focused in these times to the fall and winter, so there is still some months to happen," said CEO Umberto Macchi di Cellere during a March 12 earnings call. "And we are monitoring constantly how much product we need to produce based on what the expectations would be."

Northern Italy, home to a great deal of high-end fashion production, has been under lockdown since early March and therefore is especially affected. And now with all of Italy under quarantine conditions, the impact is even greater. In 2018, the Italian fashion industry, including textiles, leather and shoes, had sales of about €89.3 billion, of which 75% was destined for foreign shores, according to the country's National Chamber for Italian Fashion.

Even in Britain, which is not under lockdown but where the number of COVID-19 cases is rising, fashion brands are trying to adjust. On March 19, Burberry Group PLC, which manufactures mainly in the U.K. but has Italian suppliers, said it was "reducing work patterns and introducing specific shift rotations for teams whose roles cannot be performed remotely, as well as putting in place strict protocols for hygiene and social distancing."