Chinese consumers have made few e-commerce purchases during the first three weeks of China’s battle with Covid-19, Alibaba officials said during its quarterly earnings call on Feb. 13, during which it forecasted slower or negative growth in its China retail and local services businesses during the current quarter as a result. With takeout food orders also affected, the only exception is grocery deliveries.
Alibaba was the first major e-commerce platform to describe trends in online consumption during the virus period. Rivals JD and Pinduoduo are likely facing similar challenges. Their difficulties, however, pale compared to much brick and mortar retail. Nearly all non-essential physical stores are closed indefinitely.
Millions of people confined to their homes might seem like a golden opportunity for online platforms to make sales. But in fact, the crisis has upended the momentum of China’s digital economy, depressing sales and sending many consumers back to local markets.
Supply-side difficulties
Alibaba said that supply-side disruptions accounted for much of the decline, as many merchants on its online marketplaces were not able to do business under quarantine conditions. Disruptions to logistics further affected business, the company said, observing that “significant numbers of packages were not able to be delivered on time.” Company executives added, “The demand is there, but the means of production have been affected.”
However, customers were not interested in buying nonessentials such as clothing and electronics during the height of the epidemic, the company said, normally among the top-selling categories on its marketplaces. It predicted a slow return to normal business, noting that many workers across China are still in their hometowns and face difficulty returning.
E-commerce marketplaces have been dysfunctional during the quarantine period. Many listed products warn halfway through a product description that the seller will not ship orders for weeks, while orders that are shipped can get stuck in logistics company warehouses. A bag of coffee bought on Tmall on Feb. 6 has spent eight days in two Hangzhou warehouses, according to the app’s tracking information.
Deliveries have had to contend not only with short-staffed companies, but a patchwork of quarantine regulations and checkpoints which greatly limit inter-city travel. Many cities, towns, and villages have declared themselves closed to outsiders. E-commerce platform Pinduoduo allowed merchants to delay delivery of goods ordered as early as Jan. 17 until Feb. 12, a three-week wait that reflects the limits of China’s logistics sector during this crisis.
In a statement, Alibaba competitor JD claimed that its in-house logistics network gave it a competitive advantage in fulfilling orders, but conceded that “delays are expected.”
Consumers stock up on basics
What people have been buying are household necessities. Both data and on the ground observations suggest that consumers stuck at home have been doing a lot more cooking, and buying weeks’ worth of vegetables and other household supplies at once. Online services appear to have won some of this traffic, but brick and mortar vegetable markets have also played a major role.
Both Alibaba and JD described robust growth in orders for groceries and other essentials compared with the same holiday period last year. JD said that orders for food products on its platform grew 154% compared with a similar period following last Chinese New Year (which follows the lunar calendar), with rice and wheat products selling a respective 5.4 and 4.7 times more.
Alibaba CEO Daniel Zhang said on the call that the crisis is bringing in new customers for food and household supplies. “We’re seeing this epidemic cause many newly-online users in lower-tier cities and less-developed cities to begin to purchase daily necessities, which is a very good sign for the future,” he said.
Zhang described “fairly rapid growth” in these categories, noting that part of the growth was driven by deliveries from nearby shops. New retail grocery market Hema, also known as Freshippo, he said, saw increases in orders but also had difficulty making deliveries because of staffing issues.
However, the crisis has also demonstrated the resilience and popularity of local vegetable markets. TechNode reporters in smaller cities saw people rush to these markets during the early days of quarantine to stock up. Even as quarantine measures intensified and people avoided, or were banned from, leaving their homes, they continued to buy vegetables from these markets.
In Zhangjiagang, a modestly sized city of 1.3 million in eastern Jiangsu province, local merchants organized deliveries using WeChat groups populated by residents of neighborhoods and housing compounds. A vegetable seller at the Zhangjiagang East Wet Market told TechNode that her retail business was better than usual, although the gains were offset by the loss of restaurant trade. “I think now is the time we can really serve the people,” said another. While Shanghai has ordered most stores to remain closed, vegetable markets and supermarkets are exempt, along with pharmacies and other medical services.
In a small city in eastern Zhejiang province where local authorities banned residents from leaving their homes, they made an exception for visits to the vegetable markets. Initially, the system relied on paper ration tickets, but on Feb. 13 these were replaced with a WeChat mini app. Residents are required to apply for approval to go outside based on a risk factors survey and to scan a QR code to report each trip to the market.
A Meituan delivery driver in the Zhangjiagang market told TechNode that he was seeing fewer overall orders than usual during the period despite the uptick in grocery deliveries.
Perfect storm
E-commerce platforms face a larger challenge than getting parcels through: keeping their merchants in business.
The timing of the quarantine measures maximized their effect on the economy: beginning as China celebrated its most important annual holiday, they caught many businesses while they were closed for a long holiday. In US terms, it’s as though Christmas Day lasted through the middle of January—only the bare minimum of businesses are open.
While e-commerce platforms have experienced disruptions, many of the merchants who populate online marketplaces have been completely closed for weeks. Without revenue, many small merchants are struggling to survive. In the face of merchant mass extinction, e-commerce marketplaces will not be able to recover supply for a long time.
They appear to be prioritizing medium-term measures to help merchants stay afloat, including subsidized loans.
E-commerce has taken a big hit from the crisis, but it could still be a long-term winner. The operational difficulties of the past few weeks give them a head start over brick and mortar rivals, who are in most cases still closed. If e-commerce can recover faster—or if an extended crisis drives alternatives into bankruptcy—they could have a clear field for rapid growth ahead.