The coronavirus is stirring retail

The coronavirus is stirring Chinese retail Here is what retailers can do now to turn crisis into long-term opportunity

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Within two years of the epidemic’s containment, China’s retail industry will accelerate online, using socialized e-commerce, market fragmentation, unmanned retail, and platform-based integration as normal business procedure.

Among the sectors hardest hit by the coronavirus’s sweep across China is retail. With billions of people sequestered at home, stores of all sizes and in all areas of retail—along with restaurants—have been empty, if not closed. The impact on their bottom line is huge. Our primary estimates indicate that retailers will lose $213 billion to $426 billion (1.5 trillion to 3 trillion yuan) in the first quarter of 2020 alone (see figure 1 on page 2). Those losses may be greatest during the first three months of the year, because the country’s government has introduced policies and measures to revive the economy alongside the public health interventions it has put in place to halt the virus.

Even so, we see the effect on retailers as far from temporary. The epidemic changed consumers’ buying habits overnight and drastically affected retailers’ ability to operate. At Kearney, we recognize the severity of the epidemic’s impact on retailers, including how it will likely reshape retail for the long term. Even as the epidemic continues to unfold, we have conducted in-depth analysis on the impact the epidemic is having on China’s retail sector. Combined with feedback we have sought from retailers on the frontlines, we have developed a picture of the major ways the epidemic is reshaping retail in China today. We also have identified the four major forces that have arisen that will profoundly influence retail for the long term. These insights, along with our recommendations for you as a retailer doing business in China, can help you revisit your operational, technological, and marketing strategies for years to come.

The virus’s impact on Chinese retail right nowWho would have seen this coming? Within days, consumers who never would have considered shopping online for cabbage, meat, or soap are doing so in droves just to put something on the dinner table and take care of their households. Indeed, segments of offline retail are suffering terribly, while the crisis has turned into an opportunity for e-commerce merchants selling fresh products and traditional retailers that have figured out how to go online in a hurry. The lockdown of cities and household quarantines has forced people to avoid unnecessary trips outside home. Not only are they not going to work and finding ways to work at home wherever possible, they also have limited trips to the grocery store.

Major e-commerce platforms have seen a spike in sales for the things people need every day, such as fresh food. Younger consumers who normally depend on delivery of prepared meals have had to buy fresh-food ingredients online and cook at home, now that restaurants have closed. Older consumers and others who prefer shopping at local stores have been pushed to shop for groceries online as well. To weather this sudden shift, some offline retailers have turned to online means of communicating with customers, using social media groups and live streaming to reach them. We see these trends continuing and believe that the movement of more consumers to online shopping will not stop with the epidemic’s end. In fact, e-commerce sales, as part of total retail sales volume, could remain up to 24 percent higher once the epidemic is over.

1The coronavirus is stirring Chinese retail

Community retail sustained while CBD retail suffered. For community retailers, such as supermarkets, convenience stores, and fresh-products stores, whose outlets are a short distance from customers’ homes, it has been a little easier to remain open. But for central business districts (CBDs) —such as shopping centers, department stores, specialty stores, and restaurants—things are much different. Government policies have forced them to close, which has created a severe cash flow crisis for them. With entire shopping complexes shut down, nearly 80 commercial real estate operators, including Wanda and China Resources, have reduced rents to ease their retail tenants’ struggles.

E-commerce giants have been more resilient than smaller platforms during this crisis. The giants have greater resources that have led to faster response time to the outbreak, more management capacity, and operational flexibility. Where smaller e-commerce merchants simultaneously saw a marked drop in manpower as demand for fresh products and groceries surged, giants such as Alibaba Fresh Hema and JD 7Fresh were able to draw workers from their other restaurant and food enterprises, and Carrefour O2O, which is owned by Suning, received staff support from Suning Appliance Stores. Meanwhile, smaller platforms, such as Miss Fresh and Dingdong Shopping, have lacked such external resources. Even smaller platforms, such as Dai Luo Bo, were incapable of providing alternative approaches like self pickup due to a lack of organizational capacity and enough manpower.


The four post-epidemic trends that will reshape retail in ChinaWhile the epidemic will end—and we hope very soon —we believe its effects will profoundly change the retail industry for years to come (see figure 2). The economic shock will lead to greater market polarization among retailers of different scales. The consumer shopping habits that we have seen change overnight will persist and intensify. Operational efficiency will become paramount as business and investment strategies adjust. And retailers will continue to address the government’s countercyclical stimulus policies and measures.

With these factors in mind, we conducted synthesized derivation analysis and collected feedback from retailers on the front lines that are grappling with the epidemic’s effects. From this data, we have identified four crucial trends that will accelerate retail’s evolution in the next two years.

Trend 1: The fresh-products retail segment will embrace e-commerce, but operational inefficiencies may require more capital investment.

During the national lockdown, certain sectors, including education, healthcare, and telecommunications, that were reluctant to go online in the past broke new ground overnight to reach their constituents. In the retail sector, the fresh-food category has always resisted going online. After years of exploration, only a few retailers with premium positioning, such as FreshHema, have broken through. The overall fresh-food e-commerce market showed slow progress in comprehensive integration across regions and shopping scenarios, due mainly to mature consumers’ limited willingness to shop online. These consumers (age 55 and older) typically do not trust online retail, yet account for more than half of buying power. During the epidemic, the oldest consumers were deemed the most vulnerable to contracting the virus, so staying at home and shopping online became necessary. Meanwhile, the younger generations’ demand for restaurant dining and food delivery were converted into demand for fresh food to be prepared at home. The result: demand-side blockage of fresh-food e-commerce has been broken.


Sales of all major fresh-food e-commerce merchants have multiplied during the epidemic. The daily sales of FreshHema in mature markets doubled year-on-year. Sales at MissFresh tripled compared with 2019, and the per customer transactions of Dingdong Maicai increased from 55 yuan to 90 yuan. Suning Caichang’s daily sales were six to eight times of those before the epidemic, and the average daily order volume of Meituan Maicai was two to three times of that before the crisis. Each platform also gained growth in new users, including many age 55 and older, and fresh-food e-commerce finally began to approach the core buyer group of the category.

However, as demand has grown, so has pressure on the supply side of e-commerce, including stockouts. The Lunar New Year holiday, which coincided with the epidemic’s appearance, certainly contributed to increased online demand and stockouts overall, but according to our on-site research, stockouts have been more severe in e-commerce than in offline supermarkets and community fresh-food stores. We believe this is due to gaps in supply chain investment, and it is a place where online pioneers can learn from traditional retail. After experiencing its own stockouts during the holiday, FreshHema has been looking for an effective solution, including outsourcing its fresh products to third-party suppliers or service providers. It has not yet involved its entire value chain from farmland to dining table, as Wal-Mart and Yonghui have to better control their value chain’s upstream. In the first 10 days of the epidemic outbreak, for instance, Wal-Mart stores’ stock rate stayed above 96 percent. It appears that for retailers that made preemptive investments in their supply chain, the move helped them expand or preserve market share. Whether outsourcing is a superior approach overall, however, depends on a retailer’s scale and business model. What is clear is that challenges in supply chain and other long-term issues deserve attention and potentially more capital investment.

Another point we find important regarding further online expansion is that for most categories, the margin of online operation is thinner than for offline. During the epidemic, major platforms tried hard to maintain original pricing despite a sharp increase in supplier and logistics costs, which threatened profitability. When offline consumption goes online, it can be challenging for online retailers to maintain the profitability of the entire value chain if the incremental effect is not obvious.

Trend 2: Socialized e-commerce and market fragmentation will go from emergency measures to a regular part of business for physical stores.

With most CBDs shut down during the epidemic, an offline-to-online approach (known as O2O + community) became a way for traditional retailers to continue doing business with their local customers, often by using WeChat mini programs, live streaming, and short videos. The CEO of Forest Cabin Cosmetics, for example, said on WeChat Moments that despite having to close more than 30 stores in Wuhan, 100 salespeople from those stores turned to online communication with local customers during the lockdown, which unexpectedly pushed the company’s Wuhan-area sales to the second highest in the country.

In another example, Suning, the nation’s largest home appliance retailer, had its salespeople from more than 1,000 stores shift to working online, making sales based on customer relationship management data. Sportswear brand Lululemon moved its yoga classes online with live streaming. Shopping malls under management by companies such as Longfor, Joy City, and CapitaL worked with their retail tenants to support online sales via their WeChat official accounts. Small and medium-sized retailers also adopted online social-media sales channels using live streaming and short videos to survive.


While retailers made these moves out of urgent necessity, we expect such approaches to become part of traditional retail stores’ routine operations after the epidemic is over. What’s more, this social e-commerce boom is different from the one driven by Pinduoduo last year. This round was decentralized. The traffic was fragmented, generated by independent operation of a large number of offline retailers on various media. Transaction executions were also decentralized, with different agents performing tasks such as placing an order on a WeChat mini program and product delivery carried out by local, physical stores. This combination works when socialized e-commerce is independent from centralized e-commerce platforms such as T-mall. In fact, before the coronavirus outbreak, we saw such decentralized transaction models used at the grassroots level by a broad group of small and medium-sized retailers. Many small, self-employed fresh-food stores in a given community, for example, have a chat group consisting of 100–300 regular customers who order within the group and enjoy free home-delivery service.

We expect more large-scale retail enterprises to adapt this model post-epidemic. There will be a profound impact on two levels as a consequence.

First, the transformation of offline stores will further intensify, with the physical stores no longer the center of transactions, but part of the O2O + community transaction chain instead. Second, traffic acquisition and fulfillment will further fragment. When it comes to traffic acquisition, physical retailers will adapt to communities’ operating strategies to intensively integrate with each one’s unique social discourse and content (via WeChat groups, WeChat Moments, live streaming, and short videos, for example). As for transaction fulfillment, brands and retailers rely on WeChat mini programs to form their own closed transaction loop, which is a potential threat to traditional centralized e-commerce platforms. Although e-commerce based on WeChat mini programs has been around for years, the current epidemic has indeed accelerated adaptation and triggered a wider range of application scenarios by offline retailers.

Trend 3: Retailers and customers alike will accept unmanned retail, whose application we will see front-end and back-end, on both the demand and supply sides.

As Chinese society has sought to prevent further spread of the coronavirus, consumers have been sensitive to personal contact, including the receipt of home-delivered food and packages, so retailers and communities have adopted contact-free services. The development of smart courier cabinets is one of the officially encouraged anti-epidemic measures. In Wuhan, online food-delivery service Eleme worked with local convenience stores to set up instore pickup service to encourage customers to pick up online purchases themselves and do so as safely as possible. Now that these consumers have experienced a contact-free service, their acceptance of unmanned retail should greatly improve. During the epidemic, among the fresh-food e-commerce retailers, Suning Caichang, which primarily focuses on the self-pickup model, doubled its user base in Nanjing and Shanghai, achieving six to eight times more in sales.

We believe that the growing number of centralized courier cabinets and self-pickup points is also creating a favorable environment on the demand side for unmanned distribution. With the traditional delivery-to-home model, a delivery person takes several steps to complete the job, such as accessing a secured apartment building and taking the elevator. Granted, these steps are a challenge for intelligent robots as well. Food-delivery robots in hotels can access the elevator and in-room dialing systems, but the situation is more complicated with residential buildings on a large scale. But if the last mile of delivery is from a drop-off point to a centralized pickup point, the difficulty of unmanned operation is significantly reduced. In Wuhan, where the epidemic has been the most severe, JD Logistics’ intelligent distribution robot has completed its first order of unmanned distribution for Wuhan No.9 Hospital.


Trend 4: Platform-based integration will continue to incorporate smaller and independent retail into larger retail systems.

The business environment for retail in China was already tough in 2019. The virus-imposed economic downturn now means that a group of small and medium-sized enterprises are at risk for bankruptcy. They had benefited from the New Retail boom two years ago, when many start-ups expanded using funds borrowed from the capital market. Now that the market is more risk-averse, start-ups, with their stronger need for outside financing, may have a hard time surviving. A reshuffle of the retail industry could take place earlier than we would normally expect. Meanwhile, we anticipate particularly capital-intensive retailers, including restaurants and convenience stores, to take some of the hardest hits.

In contrast, large retailers have demonstrated high mobilization capabilities and technology-driven advantages, allowing them to turn crisis into opportunity through further customer acquisition and sales. Large platforms also tend to have a wider range of businesses and customers gained during this period, especially in the fresh-food category, that can be transferred across categories and industries, which can greatly enhance the value of customer groups.

Most important, for the merchants within a larger platform, the powerful resources and technical capabilities are a cushion. Meituan took steps to help caterers develop a delivery business, working with banks to provide preferential lending rates to merchants. The Suning Retail Cloud platform quickly organized more than 5,000 owners of franchised independent stores to expand community-based, out-of-store sales. Some storekeepers achieved 30 to 80 percent of their usual sales during the closure period of epidemic prevention, which helped cover daily costs. Since then, the fundamental role of large platforms has become more prominent, and empowerment’s value more pronounced. Traditional formats, small chains, and self-employed people are more willing to join a system of large platforms to develop themselves with the help of a platform’s resources.

It is true that the retail industry has seen a reorganization of the weak and a boost for the strong as a result of the epidemic, but it has also seen the value of large-scale systems for traditional formats, small chains, and independent stores.

While the manpower shortage during the outbreak severely hampered retailers’ supply chains and logistics, especially for sorting and distribution, more enterprises are applying unmanned technology to these areas to improve efficiency—a benefit that may become increasingly more compelling in the future. JD Logistics, for example, is already using sorting robots, and Meituan made research and development of its unmanned “Weicang” (mini warehouse) a priority to optimize instore pickup.

With analysts downgrading their economic forecast for Chinese retail given the coronavirus, adopting an unmanned retail application could become a distinguishing advantage for retailers as they look to improve efficiency and profit. Although self-pickup of food and package delivery may limit service quality, it is more economical than traditional to-home delivery, offering a way to overcome what would normally be the high logistics costs of e-commerce. For back-end operations, as automated sorting shelves and technology for conveying equipment matures, we expect retailers to be even more willing to use unmanned solutions for controlling costs and improving efficiency.


How you can prepare for the coming reboundBusiness will rebound once the coronavirus is contained. It will come in waves from pent-up demand, reduction in commercial real estate rent, and countercyclical stimulus policies and measures. Those retailers that recover best will use the present moment to cultivate skills for capitalizing on post-epidemic growth opportunities.

To that end, we recommend you focus on three areas:

1. Make market fragmentation and proprietary user assets a strategic priority.

As consumers shop more online, we expect their behavior trajectories to diverge widely. Purchases will become increasingly tied to highly decentralized contents and each consumer’s social circle. User-traffic fragmentation has created more challenges for brands and retailers (a carefully operated online shop no longer suffices as the singular premises for online retail’s success, for example), which could reduce share dominated by current moguls. So, retail enterprises may enjoy more opportunity to grow proprietary user assets.

For some medium- and large-scale retailers, having to rely on head-traffic delivery platforms, such as Eleme and Meituan, during the epidemic meant submitting to a platform’s stringent rules and policies, yet some have seized the unprecedented opportunity to further develop their own WeChat mini program for increasing proprietary users. Growth in these assets will come from fragmented channels, including physical stores, applets (such as WeChat mini), WeChat groups, and social e-commerce, to allow effective user interactions, with traffic coming from sources including highly decentralized content and cross-industry alliances.

However, converting traffic into loyal users requires its own set of skills. We recommend you fine-tune your data utilization, from user-database construction to insight analysis. (Many retailers remain incapable of extracting value from existing data.) Data utilization should work with your operation model to allow cross-platform and scenario data tracking and user behavior analysis. Focus as well on content creation, synching it to market dynamics so that you can keep pace with or lead content marketing. Finally, improve internal organizational coordination for the best possible response given different traffic and user asset channels.

2. Improve user retention and maximize consumer value.

For retailers in segments such as fresh e-commerce and supermarket O2O that have achieved significant breakthroughs in consumption or service recently, the epidemic has delivered an important opportunity to educate the market and attract new customers. However, the boon will become a long-term benefit only if the business can keep new customers, improve per-user contribution to revenue, and promote user fission. For instance, top-performing e-commerce retailers aim for reinforced user repurchase after a sale instead of simply a spike in single purchases during the promotion.

Absorbing user traffic is just a first step to achieve long-term retail success. User retention is a more important determinant—as is consumer value optimization. For that, a retailer will need an “octopus” structure with multiple product categories and shopping scenarios that help retain newly gained users with lots of shopping options. More accurate user labels and continuous interaction with users across product categories and scenarios will also be key.

3. Enhance operational and internal capacity, combining independent and cooperative practices.

In the past three years, many retailers have created and accepted innovative models. While their strategic direction may be accurate, many have not yet established a solid foundation in operations to support it. For instance, factors such as in-depth control of upstream supply chain and flexibility in logistics and distribution capabilities were key to sales volume during the epidemic and will continue to be so to support future growth and service quality.

On the other hand, sustaining profitability remains the lead challenge for online-intensive retail businesses. This is especially true for medium-scale enterprises that experienced a swift decline in capital-market support. Maintaining operational efficiencies and achieving financial self-sustainment will be pivotal. Lean operations, cost reductions, and adopting unmanned retail practices are all valid directions to take.


Authors

Sherri HePartner, [email protected]

Lorraine Shen Consultant, [email protected]

Tina Si Consultant, Hong [email protected]

Yuan WangConsultant, [email protected]

External acquisition is one way to fill gaps not covered by internal improvement. A stronger partner network, along with further exploration of potential cooperative practices and models are ways to add corporate strength now and for the future. In fact, as consumer interaction becomes more fragmented and retail operation becomes more complicated, there has been an increase in the number of professional retail-operation service providers, from membership management, data analysis, all the way to concepts such as last-mile outsourcing and shared warehousing. By understanding which capacities to

build in-house and which to acquire externally, you can begin to chart what should lie at the business’s core and what can be achieved with the help of a shared system as we move into better times.


For more information, permission to reprint or translate this work, and all other correspondence, please email [email protected]. A.T. Kearney Korea LLC is a separate and independent legal entity operating under the Kearney name in Korea. A.T. Kearney operates in India as A.T. Kearney Limited (Branch Office), a branch office of A.T. Kearney Limited, a company organized under the laws of England and Wales. © 2020, A.T. Kearney, Inc. All rights reserved.

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