Why Covid-19 Won’t Harm the Robustness of China’s Retail & Consumer Industry, Part 1
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?
The COVID-19 continues to grip the world. No one can say for sure when this pandemic will end as more countries and cities start to self-quarantine, limit travel, declare emergencies and cancel major events. China was the first to experience the outbreak and has learned abundant lessons from it. Though still fighting against the coronavirus, the country has been detecting fewer confirmed cases day by day.
In this article, EqualOcean will focus on the impact of coronavirus on China's retail and consumer industry specifically, in the hope that more countries will get rid of the virus soon and local consumption habits will recover quickly.
1. COVID-19’s impact on China’s retail & consumer industry
The coronavirus struck China at the start of December 2019. To fight against the epidemic, Beijing imposed the most extensive and strict quarantine in history. Factories shut, public events were canceled, and people were ordered indoors. This raised the awareness of the public; meanwhile, it also changed their daily behavior, and inevitably a slump in consumption was one direct result.
On March 16, 2020, the National Bureau of Statistics released the economic data for January and February, which showed a negative short term impact on China’s economy. Major economic indicators, which include industrial output, retail sales and investment, retreated in the first two months.
The total retail sales of consumer goods (TRSCG) reported CNY 5.21 trillion for January and February. Among them, commodity retail sales dropped 17.6%. Mobility related retail sales saw a bigger fall – the automobile and petroleum products sales above designated size slumped 37% and 26.2% year-on-year respectively; the catering sector fell by 43.1%; the accommodation sector revenue reported a plummet of almost 50%.
Consumption data, which had been the most robust indicator, hit a new record low. The TRSCG has not been negative since January 1995. Even in the SARS epidemic period in 2003, the growth rate of this index only decreased from 9.3% in March 2003 to 4.3% in April.
Meanwhile, the negative economic results were triggered by the demand end, as consumers were quarantined at home. Due to this characteristic, the discretionary goods and durables began to suffer more compared with necessities.
It’s worth mentioning that, from January to February, the online retail sales of consumer goods (accounted for 21.5% of the TRSCG) in China increased by 3.0% year-on-year, achieving a counter-trend growth. In response to the adverse impact of the epidemic, retailers and catering enterprises actively developed their online businesses to boost online sales. According to the data from several delivery platforms, ‘contactless delivery’ accounted for over 80% of total orders between January 26 and February 8, 2020.
From a comprehensive view, the impact of the epidemic is short-term, external, and controllable in China. With various policy reactions taking effect, companies sped up work resumption while the order of production and life gradually resumed. However, it’s worth digging into the subsectors in the retail & consumer market, unveiling the risks and opportunities within.
2. COVID-19’s impact on China’s retail & consumer subsectors
2.1 The impact of the epidemic on different retail channels varies greatly
Based on the characteristics of each kind of retailer and the attributes of the products carried by each channel, we researched the impact of each retail channel and analyzed the possible current and post-epidemic influence.
Please be noted there may have some overlaps in channels and business models among retailers due to the significant changes in the transformation of China’s retail & consumer market.
From the graph above, we separate the retail channels based on the extent of influence they have during this period; we also separate them further by the products they sell, whether daily necessities or discretionary items.
Due to the need for contactless service during this outbreak, we have observed the rise of e-commerce platforms that contain the most diversified SKUs, instant delivery’s capacity and the emerging power of new retail stores. JD.com, WeChat mini programs and Freshippo under Alibaba are leaders in this area (we delve more into these in part 2). During this period of time they have acquired a bunch of new customers, many of whom are seniors who used to go to the community fresh grocery stores or supermarkets for daily necessities. After the epidemic, we expect many of them will return to their usual habits of purchasing offline, because physical stores satisfied their needs for social networking. However, some part of them will keep using the new approaches, since the home delivery services can meet some of their demands conveniently – for example, to bring heavy things like bags of rice or deliver urgent items fast while saving some time.
The front warehouse sector also achieved explosive growth. Although it was restricted by insufficient fulfillment capacity, it did not affect short-term growth. From January 20 to February 8, Miss Fresh, one of the top players in this sector, reported a 309% jump in online orders and a 465% increase in transaction volume compared with the same period last year. On the other hand, the performance during the epidemic will increase investor confidence, which will help some leading players to obtain more funding after the pandemic, build core capabilities and look for profit opportunities. But in the long run, the business model of front warehouses still needs time to verify its profitability.
For part 2 of our article series, please click here.