Impact of Coronavirus in China to Last Beyond Outbreak in Some Sectors
This article is part of a series on COVID-19 focusing on how the outbreak is affecting industries.
China has been at the centre of the Coronavirus (COVID-19) outbreak in Q1 2020, prompting extreme measures from central and local governments, including an extension of the Spring Festival holiday, neighbourhood/housing complex lockdowns, and compulsory temperature checks. Quarantine measures have helped to contain the virus but have impacted China’s economy, FMCG industries and service sectors, which will worsen if the situation extends beyond Q1 2020.
Some industries have already seen dramatic downturns, starting with travel, consumer foodservice, alcoholic drinks and luxury goods. Conversely, the outbreak is benefiting categories such as liquid soap, probiotics and online gaming. The overall retailing space is going through polarised performances; non-grocery offline retailers have plummeted while O2O platforms boomed. The insights in the following sections come from our analysts on the ground in China with sharp industry knowledge. As COVID-19 continues to spread beyond Asia, we expect similar trends and changes in consumer demand in other crisis-hit countries, such as Italy.
Alcoholic drinks: Upcoming sporting events will partially offset the short-term sales dip
Upcoming sporting events will partially offset the short-term dip in alcoholic drinks sales. A large number of restaurants and bars were temporarily closed during the Spring Festival, which severely impacted alcoholic drinks sales in Q1 2020, especially in the on-trade channel where alcoholic drinks play an important role in social and festival gathering occasions (the on-trade channel accounted for 47% of alcoholic drinks volume sales in 2019).
As the largest category in alcoholic drinks, beer recorded a total sales volume of 45.6 billion litres in 2019. We estimate that the negative impact of COVID-19 on the beer industry in 2020 will be minimal, largely thanks to Q1 being the off-season for beer sales. If the epidemic is contained by the end of Q1 2020, beer sales during the upcoming Tokyo Olympic Games (assuming this is held as planned) and European Football Championships, as well as other international sports events in Q2 and Q3 2020, will largely offset the sales loss in Q1. Collaboration with events is one of the key growth opportunities for alcoholic drinks players, especially in beer.
Apparel and footwear: Offline sales severely hit
The first quarter, during which the Spring Festival occurs, is normally the peak season for the apparel and footwear industry; therefore, sales loss in this quarter might be difficult to compensate for during the rest of the year. It is very likely that we will adjust our 2020 forecast growth downwards in the next edition compared to the current estimate.
China also plays a core role in the production of apparel globally, with a production share of 56% in 2019. The COVID-19 outbreak has directly resulted in a temporary halt of production capacity, which will, in turn, pose a challenge to apparel brand owners’ supply chain management.
Beauty and personal care: The awakening of “healthy beauty” demand
China’s beauty and personal care market reached some CNY470 billion in 2019, with a dynamic CAGR of around 9% over the past five years. Although negatively impacted during the epidemic period, basic skincare products and toiletries may only witness a small degree of turbulence throughout the year, as these products see more rigid demand and hence sales could rebound quickly after the quarantine period.
Products like liquid soap have seen a dramatic boost in sales. As consumers’ self-protection awareness tends to increase rapidly during the epidemic period, liquid soap with disinfectant claims has been quick to sell out, as have hand sanitisers. Some local skincare brands, for example, Inoherb and Chando, have plans to launch liquid soap and hand sanitiser products accordingly.
Another thought-provoking trend in the longer term will be Chinese consumers’ demand for ‘healthy beauty’ which might take many forms including but not limited to, a focus on healthy ingredients, products promoting a healthy lifestyle, and holistic beauty tastes.
Cooking ingredients and meals, staple foods, fresh food: Temporary win for instant food and intensified reliance on e-commerce for fresh food
During the outbreak, convenience-driven categories that have a long shelf life have enjoyed temporary prosperity, including frozen and shelf-stable ready meals, instant noodles, as well as processed meat and seafood, primarily due to the tendency to stockpile food under strict quarantine controls.
Fresh food, a category with rigid demand and high consumption frequency, is expected to witness an accelerated online sales value growth in 2020. Online sales of fresh food accounted for 6.3% of retail value in 2019, and this share is expected to increase in 2020, due to the quarantine policies and people’s reluctance to go to crowded areas such as supermarkets or hypermarkets.
Consumer appliances: Ventilation demands power certain products
The outbreak of COVID-19 will further drag down the currently stagnant housing market and is likely to have adverse consequences for major appliances, especially large cooking appliances, in 2020, a category which was already struggling in 2019, with volume sales down by 4%.
Some categories are expected to see opportunities, however. During the SARS outbreak, in 2003, cooling fans registered a solid retail sales volume growth of 20%, almost double that of 2002, and air conditioners witnessed strong growth of 54%, which was also higher than the previous year, according to the National Bureau of Statistics of China. Similarly, COVID-19 is projected to positively impact cooling fans and air conditioning models with built-in ventilating functions.
Consumer foodservice: Short-term crisis but long-term opportunities
Consumer foodservice has maintained strong growth momentum over the past decade in China, reaching CNY4.9 trillion in 2019. However, COVID-19 has resulted in a large number of restaurants closing temporarily. Full-service restaurants, which accounts for roughly 75% of the revenue share of consumer foodservice total sales, faces the sharpest plunge.
No-contact delivery services will increasingly be a preferred option. We’ve already observed many creative food delivery methods, such as unmanned aerial vehicle (UAV) delivery provided by JD.com.
Post the Coronavirus period, the consumer foodservice industry is likely to orient towards a more standardised and chain-oriented direction to better absorb unexpected risks. Capital will favour brands with highly standardised operations and diversified restaurant portfolios, accelerating the trend. Furthermore, enhancing online operations and seeking flexibility or balance between in-store versus takeaway and delivery offerings will be another key focus for foodservice players.
Consumer health: A rare winner in the COVID-19 outbreak
COVID-19 is known to be far more contagious than SARS, which has led to Chinese consumers’ increasing awareness of the importance of enhancing their immune systems, especially when there are currently no designated medicines or cures for the outbreak.
General healthcare and immune system improvement products, including but not limited to single vitamins such as vitamin C, fish oils, mineral supplements, as well as protein supplements, will likely see a sales boost.
Given the state’s recent discovery that probiotics can be used to resist secondary bacterial infections for disease prevention, probiotic supplements will likely see robust growth as well. The category registered value growth of 18% in 2019 and is anticipated to see a further acceleration in growth.
Dairy: Decreased demand from foodservice impacting fresh milk sales
The rise of coffee specialists and milk tea shops has been an important driver for the dairy industry. Milk, for instance, recorded a 98% CAGR in foodservice volume 2014-2019. However, with COVID-19s hitting, many outlets are closed, and consumers turn to hot drinks as alternatives to making coffee and milk tea at home; negatively impacting fresh milk sales in the foodservice channel.
In 2019, milk reached CNY128 billion in retail sales value and yoghurt, CNY149 billion. Ever since the COVID-19 outbreak, demand by Chinese consumers for milk and yoghurt has risen as authorities advise sufficient dairy intake to boost immunity and stay healthy. The epidemic will accelerate consumer awareness of nutrition and enhance the connection between dairy and immunity. Dairy is likely to benefit, especially functional/fortified products such as high protein milk and probiotic yoghurt.
Home care and hygiene: E-commerce cushions the decline
Even though the outbreak of the Coronavirus will hamper home care product purchases in physical stores, online purchases are expected to offset any negative impacts and alleviate the retail sales pressure in this market. As was the case in the SARS epidemic, laundry sanitiser will once again benefit from the Coronavirus during 2020 and 2021.
Due to the highly contagious nature of COVID-19, disposable wipes in a portable format that contain 75% alcohol and kill viruses are in great and urgent demand amongst Chinese consumers. However, such products are not widely available for limited daily usage and are in short supply, so consumers are turning to the next best thing – personal wipes positioned with germ-killing and anti-bacterial functionalities, to improve personal hygiene. Personal wipes are expected to enjoy a temporary win or at least a slight bump in sales as a result of increased consumer demand in 2020.
Luxury goods: Sales slump during the epidemic period
The outbreak of COVID-19 has negatively impacted the luxury industry, as China constitutes a core part of the global luxury market, where Chinese consumers contribute via consumption generated both home and abroad. Travel restrictions have blocked tourists of Chinese nationality as well, especially during the Spring Festival. Due to these impacts in Q1 2020, luxury companies such as Burberry, Tapestry and Capri, have adjusted their sales forecasts for 2020 down.
If the epidemic can be contained before the end of Q1 2020, the rebound of entertainment and travel demands amongst Chinese consumers will remain a strong driver for luxury sales in the remainder of the year, however.
Travel: Motivation and demand amongst Chinese consumers to remain strong
Travel, both inbound and outbound, has been severely affected by the COVID-19 outbreak. The outbreak emerged right before Chinese New Year, which is normally the busiest season for the tourism industry. According to Euromonitor International data, tourism income generated during the Chinese New Year typically contributes to some 10% of the industry’s annual total.
Lodging has proved one of the most negatively impacted sectors within the travel industry. According to Euromonitor International, the COVID-19 outbreak has led to a drop of 80% in hotel occupancy rates compared to the Spring Festival period in the previous year.
As an emerging part of the industry in China with small and micro-entrepreneurs, short-term rentals may fare even worse while platforms are also restricting their services. For example, Airbnb has announced a preliminary halt to short-term rental bookings in cities such as Beijing until May 2020.
Video games: Consumers opt for gaming as one of their few at-home entertainment choices
Demand for video games has seen a boost with the increase in Chinese consumers’ screen time, with more people staying at home since the outbreak. Given this, Q1 2020 is expected to be an especially strong quarter for video games software, as China is the largest market in the world with a substantial consumer base, with sales rising to an estimated USD35.6 billion 2019.
In the mid- to long term, consumers’ devotion to gaming would eventually return to normal as the public situation recovers. The real benefits for China’s video games software industry might be beyond just an uptick in monthly or quarterly sales, but consumers’ greater willingness to pay for gaming – a big step for most Chinese gamers who are used to not spending (much) on gaming.
Profound changes are expected in China’s organisations
From sales planning to operational strategy, corporates will consider multiple factors and restructure accordingly, build omnichannel distribution and become more agile at handling potential risks and disruption in the future.
For Chinese consumers, changes in behaviour will likely focus on attitudes toward health and hygiene, as well as a more diversified path to purchase with the boost to e-commerce likely to remain a more permanent shift beyond the epidemic.
For more information, read our report “The Impact of Coronavirus on FCMG and Service Sectors in China“.