Three months ago COViD-19 forced China’s major cities into lockdown. More than 80,000 confirmed infections and close to 5,000 deaths later, the economy is getting back to speed again with the strict safety measures having been eased beginning of April. The impact on Western economies will be uncertain before the release of Q2 2020 statistics. Taking a look at the developments in retail in China during Q1 2020 will help to draw conclusions about the probable impact of the coronavirus on the retail industry in other countries.
The economic earthquake also shook up retail
According to a Chinese proverb “at a market all things find their places.” However, a market only functions well if supply and demand is able to meet each other. The consequences of COViD-19 led to a negative supply as well as a demand shock at the same time, a highly unusual event in the history of markets. According to data from the National Bureau of Statistics, China’s GDP was down 6.8% year-over-year in Q1. The economy got hit throughout industries. Retail was no exception. Instead of seeing people strolling along shopping streets, like Nanjing Road in Shanghai, with full bags in their hands, these usually vital areas have been empty. As a result, retail sales were down almost 18% year over year. The sale of physical goods decreased by almost 16%. FMCG[i] dropped 6.8% compared to the same period in the previous year. Even total online retail sales decreased slightly by 1% compared to Q1 2019. Certainly not all things found their places in this market anymore, Coronavirus has suspended the old Chinese proverb.
Online grocery shopping got a boost
With people being locked up at home, demand shifted online. The online retail sales of physical goods were up by 5.9% year-over-year. In FMCG, for example, online penetration among urban households reached new all time highs with 63%, an increase of 17% compared to Q1 2019. Chinese O2O2 players like Alibaba’s Hema, JD.com’s 7Fresh or Daojia benefited from strong tailwinds. Among offline channels, the demand shifted from hypermarkets to mini markets, which are located in communities, with the latter experiencing a robust growth of 14%. Demand for certain goods like medical supplies, living necessities and also workout equipment increased, while alcohol, gifts and clothing saw a decrease. As uncertainty negatively impacts consumer confidence and spending, the sale of discretionary goods in general dropped. The purchase of luxury goods has been cancelled or at least postponed.
Chinese households stocked-up instant food and home hygiene articles
Source: “Locked down by Coronavirus, China’s shoppers ramp up online purchases”3
Last mile delivery had to upgrade to cope with the new challenges
The increasing e-commerce demand combined with coronavirus social distancing measurements led to new challenges for last-mile delivery companies, like Dada Group and Ele.me. Delivery of all kinds of consumer goods has already been much more adopted in China than for example in Europe, however the last mile delivery infrastructure for these consumer purchases needed some improvements. First of all, the rise in demand for perishable products required a better planned cold chain. According to Pinduoduo, orders for apples, strawberries and other fresh fruit from its 586,000 sellers of agricultural products were up 120% in January. Secondly, a structured contactless handover became a necessity. To illustrate the challenge of handover, during “singles days,” the world’s biggest e-commerce day, the whole entrance hall of resident compounds in China are usually looking like chaotic logistics centers. There actually are small rooms dedicated for storage and pick up of parcels but these rooms do not have enough capacity for high delivery volume. To find their parcels, residents are plodding through these massive piles of parcels with excitement to find their singles day parcels, basically touching every single parcel to check if their name is on it. Asking a friend in Shanghai how this problem was solved during the pandemic he explained how his residential pick up station evolved quickly in just the matter of a few days. “At the entrance of my compound they started building tables for e-commerce parcels. Later they built shelves and eventually built a dedicated area of 20+ sqm with three smart parcel lockers and one heated food delivery locker to cater for the requirement of contactless e-commerce and food deliveries.”
Sellers count on live streaming to reach consumers
As demand shifted online, suppliers had to follow. As a result, many offline retailers went online and suppliers had to carefully decide how much supply they allocate to each platform. Major international brands like Apple and IKEA shut down their stores completely. Malls have been empty and shopping streets were avoided. “I once went out to a mall during February. Basically, there was no one really in the malls. Within the stores I could barely get the attention of the staff, because they were so busy doing product introductions and reviews on live streaming on Taobao and JD.com” recounts a German businessman working and living in Beijing. South China Morning Post reports that even farmers, like 59-year old Zhang Jiacheng, started to promote their goods online. Thanks to live-streaming slots Zhang has managed to maintain sales of around 100 to 150 kilograms (220 to 330lbs) of apples per day from his remote orchard in Li County, Gansu province. Between a dozens to a few thousands viewers are watching his broadcasts on Taobao Live.4 According to data by Alibaba Group, transactions through Taobao Live increased by over 160% year over year. The number of new merchants who joined the platform even increased by almost 300%. E-commerce sales on other live streaming platforms like Kuaishou (“Kwai” in the Western world) are also surging. For example, a shoe factory in Jiangsu sold 2 million yuan worth of surplus footwear through Kuaishou.5
Whether the shift in consumer behavior and purchasing channels will last or if the observed changes are just temporary remains uncertain. In a report from strategy consultancy Bain and Company and Chinese e-commerce giant Alibaba Tmall, the company expects post-epidemic consumption recovery to follow patterns similar to the 2002–2003 SARS outbreak. This would result in a steep sales decline for medicines and home hygiene products, a quick return to normal consumption for food and cosmetics, and a surge for apparel, cigarettes and some other items. The second quarter of 2020, traditionally an important quarter for retail in China due to the mid-year shopping festival, often called “618,” will shed some light on the pace of consumption recovery and if the changes will last.
Conclusions for retail in Western economies
According to estimates from the US Census Bureau retail and food services sales dropped only 0.4% from January to February. A driving factor for this small drop was of course the delay in lock-downs in the US, which started as late as March 17th with California ordering people to stay at home. From February to March there already was a drop in US retail and food sales by 8.7%. Taking Chinese Q1 results into account, it is possible to derive that US retail probably plunged again from March to April. In Germany retail sales in February even increased by 6.4% year over year, due to consumers stockpiling before the anticipated lock-down.6 The German Statistical Office reported that demand was particularly strong in food, drinks, tobacco, pharmaceutics and cosmetics. Retail sales in March then fell moderately by 2.8% on the year. It is fair to expect German retail sales declined considerably stronger in April, with the country being under lock-down for the full month. The hit that the Chinese retail industry had to take in February will very likely be the hit retail in Western economies experienced in April.
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