The coronavirus outbreak, unlike a structural crisis, has impacted the demand end. Therefore, consumption-related indicators will retreat. Are there any opportunities amid the downsides? What does the post-epidemic period look like?
This series article will focus on the impact of the coronavirus on China’s retail and consumer industry specifically, in the hopes that more countries will get rid of the virus soon and that local consumption habits will recover quickly. This is the second of three articles covering these questions. Click here to read part 1.
Supermarkets, community-based fresh grocery and convenience stores, which provide daily necessities mainly in physical spaces, have played a significant role in guaranteeing the public’s basic supply, stabilizing prices and reducing panic in the epidemic. Compared with other traditional offline retail channels, supermarkets have been relatively less affected by the epidemic. According to the National Bureau of Statistics, the retail sales of supermarkets and membered chain stores increased by 1.6% and 9.2% respectively on a year-on-year basis; the retail sales of community-based grocery stores and convenience stores decreased by 14.3% and 10.8% respectively.
After the epidemic, most supermarkets will still face competition from online players and omnichannel challenges. Without the adjustment of business models and thorough digitalization, it is difficult to achieve long-term growth.
The traditional farmers market has seen a heavy toll on its sales from the beginning of February, since a large number of consumers turned to more sanitized supermarket channels, the contactless e-commerce platforms. In the past few years, the market share of the farmers market has been continuously replaced by supermarkets and e-commerce players at a rate of 1% to 2% per year. In the medium to long term, this situation is expected to remain despite the effects of the coronavirus.
Shopping malls and department stores, which provide mainly discretionary products and durables such as home appliances and luxury items, are undoubtedly the worst hit. The steep decline in sales will see recovery after the epidemic.
As opposed to some observers, who expect a drastic consumption rebound, we hold a more conservative view. In recent years, shopping centers have adjusted their business model, welcoming more ‘non-retail’ merchants in catering and entertainment and media into the mall. Therefore, the sunk loss will hardly be compensated for, bringing more uncertainty to these two channels as well as the merchants operating in the shopping centers and department stores.
A large number of shopping malls have initiated a rent-free and rent-reduction plan to reduce the operating pressure on tenants. Operators include the Wanda Group, SCPG, China Resources, Seazen and Century Golden Resources Group, all hoping to bring a positive support to the resumption of business as usual.
2.2 Retailers’ practices
JD.com has benefited a lot from its self-operated supply chain and logistics during the epidemic. As well as its fast delivery speed compared with other outsourced e-commerce counterparties, it has also enlisted self-driving robots to bring goods to medical workers in Wuhan and provide delivery services to pharmaceutical companies and hospitals. JD.com has implemented subsidy support measures to ensure that the burden is not placed on the 250,000 merchants who use JD’s warehouse services. The measures have cost CNY 1 billion in expenses, deployed in order to lessen the pressure of logistics fees, traffic and advertisement and to support their promotion activities. Meanwhile, JD has also maintained a steady flow of consumer goods during the crisis. By collaborating with brand partners – sometimes even utilizing JD Logistics to pick up the necessary inventory directly from brand warehouses – JD has positioned itself as a reliable source for the needs of the public.
WeChat mini programs have been used by many retailers to offer contactless pickup to ensure safe delivery to customers and to lower their operational risks. On February 18, 2019, WeChat launched a ‘Smart Retail’ entry point on its payment page, where the mini-programs of merchants such as Miss Fresh, Yonghui Superstores, Uniqlo and Walmart are handier for online buyers to access. WeChat also released the data of mini programs during the epidemic period. From January 20 to February 8, the orders of fresh groceries increased by 149%, and the number of transactions in community-based e-commerce surged 322% year-on-year.
Freshippo, Alibaba’s self-operated grocery chain, has become a lifeline for many residents in China during the coronavirus outbreak. The leading new retail players committed to a policy of remaining open for business, not raising prices and remaining stocked, particularly in the 18 stores across Wuhan. According to a survey conducted by CMB Securities on February 2, Freshippo was the third largest fresh grocery channel in Beijing, Shanghai, Guangzhou, Shenzhen, after supermarkets and community-based markets. The self-operated delivery service is the key reason for its outstanding performance during the epidemic. However, the fulfillment capability dropped dramatically due to the labor shortage and the sharp rise of grocery deliveries across the country. Freshippo has initiated a temporary staff recruitment program from many catering companies who are also facing enormous challenges. Through its official Weibo account, Freshippo announced that 500 staff from Yunhaiyao and Youth Restaurant would join the company. It also said another 1,000 employees from Xibei, the country’s largest restaurant chain, specializing in northwest Chinese cuisine, and 500 more staff from other restaurants, would form part of its temporary workforce.
2.3 What about each segment of the consumer market?
Based on a consumer survey conducted by KANTAR during the epidemic period from February 6 to February 9, we find that the results also predict a recovery for categories in offline channels and the discretionary items. However, the pure online consumption categories such as live streaming, short video making and the front warehouse business will need to spend some effort in retaining users.
Examining different categories of the consumer market, we observed that online entertainment and luxury goods are most likely to decrease after the coronavirus outbreak. Consumers who took part in the survey expressed that they would reduce their consumption in online entertainment and luxury goods, by 26% and 21% respectively. The offline activities (for consumers) which are likely to see recovery after this period are sales, dining and travel.
More to come.