Thousand-point stock market losses, extensive media coverage, and a steady increase of never-before-seen disease. You would be forgiven thinking this was a Hollywood movie. If it were, the next act might involve global calamity and dire, permanent consequences.
In real life, however, global stock markets are indeed flirting with quadruple-digit losses, and the number of confirmed cases of the coronavirus has now exceeded one million. The epidemic has seriously altered typical ways of life for many Chinese citizens. And the economic changes will have medium-to-long term impacts on consumer habits in China.
Jacob Cooke is co-founder and CEO of WPIC Marketing + Technologies, a technology consulting company that helps global brands with their web presence in China and Japan through data, analytics, e-commerce solutions and more.
First order impacts
As China enters its fifth month of confirmed cases of the novel coronavirus, the data has slowly begun to paint a more detailed picture of adjustments made by Chinese consumers. WPIC’s data show that purchases related to outdoor activities and recreation decreased significantly, to the tune of 40-50%.
A reduction in consumption might be skewed by pre-virus efforts by the Chinese government to encourage physical activity, but the reality of a near country-wide dampening of time spent outdoors is notable—and will undoubtedly persist until China returns to full normalcy.
Brick-and-mortar retail has been even more affected by changes in consumer behavior and caution about the virus. Until recently, the government has encouraged people to remain at home and avoid normal daily interactions. This means, unsurprisingly, a decrease in the foot-traffic that stores depend on.
For a sector of the economy already under pressure from a paradigm shift towards online shopping, the impact of COVID-19 could deal a devastating blow.
That isn’t to suggest that consumers have altogether refrained from shopping—far from it. Certain everyday products on e-commerce platforms are even seeing modest increases from this time last year (WPIC data).
Why? Because many consumers have begun aggressively shopping online for products that might have been procured at physical storefronts if not for the outbreak. Meicai, a fresh food e-commerce platform, has announced it will recruit an additional 6,000 drivers and 4,000 food sorters from 40 cities across the country to help with the increase in consumer demand.
Medical supplies—such as protective masks, over-the-counter medications, and anything related to the virus—are doing particularly well. We are also seeing the broader “health” and “nutrition” product categories do exceptionally well. Vitamins and nutraceuticals, for example, have seen triple-digit increases in online searches and sales.
So, while Chinese consumers might have been delaying the purchase of a new pair of running shoes, anything that is perceived to lead to a better chance of maintaining good health and staving off the virus are enjoying a clear boost.
A similar spike in online activity is also occurring in food sales and fresh produce. On a week by week basis, the number of online searches for fresh produce on Baidu for the first two months of the year was up anywhere from 273% to 2800% YoY (data courtesy of Discripto, WPIC’s big data tool).
Industrial-sized orders of fresh food (representing cooking ingredients and specialty ingredients for restaurants) completely stopped on e-commerce platforms, but individual and family sized fresh food orders from the platform have surged. This tells us that more and more consumers are turning to e-commerce as a means to stock their pantries and fridges. And as the threat of contagion dissipates, we are asking whether consumers will return to their old habits after experiencing the relative ease and convenience of shopping online?
As an example, data from WPIC shows that orders of instant noodles are up between 71% and 520% YoY (depending on the week). Furthermore, downloads of fresh produce apps like Hema Fresh, Dingdong Produce, JD Home, and others have surged in the App Store to unprecedented heights (entering the top five in some cases). Meicai.com, for instance, was hovering between the #120-#140 spots at the beginning of the year, and reached #4 at the height of the virus.
The auto industry in China is another sector facing massive disruption due to the effects of Covid-19. Aside from the fact that the sector’s supply chain is particularly vulnerable to the virus, Chinese consumers have also cut back on purchases of cars in automobile dealerships. Initially, this could be attributed to government mobility and travel restrictions, which meant no customers in auto malls and dealerships. However, now those same customers are behaving much more conservatively with their money, as a result of the economic uncertainty the virus presents, according to RIWI. Those who were thinking about walking into a dealership and purchasing a car are now having second thoughts.
Eventually, car buying will return, but what does this inability to access a dealership mean in the long run? At a minimum, it provides an opportunity for online shopping for cars (which had previously been one of the last bastions of brick-and-mortar retail) to take off. And as younger generations (Millennials, Gen-Z) grow in their economic power, they’re the very consumers who are going to be more comfortable with purchasing their cars online (as opposed to their parents and grandparents).
It should be noted that an increased proclivity towards online shopping is not only because of Covid-19. Part of the continued rise in the penetration of e-commerce in Chinese tier-3 and tier-4 cities is also driven by: middle-income earners having greater access to online retailers as a repository for their disposable income; rapid advancements in and adoption of mobile shopping; and Chinese retailers investing heavily in omnichannel capabilities.
These factors have all conspired to create a reality where north of 25% of all retail shopping is done online. These factors were in play long before the first case of the novel coronavirus was diagnosed in Wuhan.
That said, the situation on the ground in Hubei Province and throughout the PRC appears to have caused an acceleration of the trajectory towards digital sales. The outbreak could very well have prompted someone who might have previously visited a local store for vitamins, cars, and groceries to turn to online resources. And if the e-commerce experience proved fruitful, then there’s nothing stopping that person from continuing to leverage technology to acquire those necessities once more in the future—especially when Chinese platforms invest heavily in building out a pleasant online shopping experience designed to retain users.
Second order effects
What will be particularly interesting to watch over the coming months and years will be second order effects of Covid-19 across the Chinese consumption spectrum.
For instance, leading social e-commerce platform Pinduoduo has announced that condoms and birth control are among the most popular items for sale on its platform right now. What is clear is that while people may be having more sex than they were previous to the outbreak, what they evidently are not doing is procreating. People are unsure of how long this virus is going to last and are delaying having children for now. For an economy that relies on growth in population, this will have massive effects.
One that immediately comes to mind is the child-baby-mother sector in China, which annually accounts for roughly RMB 9.62 billion (as of 2018) and is growing. As a result of the virus, the sector is going to have a massive decline, six-nine months from now. From milk formula to toys, swaddling blankets to nursing bras, producers of those items should prepare for a cold Fall this year.
In addition to the changes in the apparel sector in China, we expect the real estate sector to take a huge hit. With real estate sales at a standstill this past February, Chinese consumers are going to hold on to their money for the next few months, while the country’s economy fully returns to pre-virus levels.
At the end of February, 34% of Chinese survey respondents, said they could only survive one month on their current cash levels (33% said they could hold out for two months). This means that, just like auto’s, big ticket purchases like housing are going to face significant delays until consumers feel more economically secure.
And then there’s the psychological impact of Covid-19. As Chinese parents and students witness how seemingly disorganized the United States, the UK, and the EU appear to be with their respective Coronavirus responses (especially when compared to that of the PRC), more and more are going to hesitate taking up the opportunity to get educated abroad.
Additionally, with thousands of Chinese students abroad kicked out of their dorms as universities and colleges closed down across the United States, the interruption they’ve experienced to their degrees is only going to make it easier to drop out.
According to RIWI’s survey data, 39% of Chinese respondents already felt that domestic post-secondary education was the best option for them (followed by 26% in the US; 13% in Europe and 9% in Canada). We’re expecting that domestic number to increase over the coming months, as the rest of the world comes to an economic halt, while China gets back online.
Just as the psychological impacts of the 2008 Financial Crisis permanently altered the behavior of North American and European millennials, so too, do we expect Covid-19 to have permanent effects on the psychology of Chinese parents and children.
Will online retail trend last?
The lasting impacts of Covid-19 on China and the world are yet to be revealed. But recent history offers some insight into what the globe can expect: SARS is one of the most obvious analogues for assessing the novel coronavirus’ impact. SARS also had its genesis in China and proceeded to spread to almost every continent. It infected around 8,000 people and claimed almost 800 lives worldwide, accounting for a 0.5-1.0% blow to the Chinese economy in 2003, and modestly impacting the global economy as a whole. However, its broader economic impact was arguably minimal.
As of late March, the World Health Organization reported over 3,200 Covid-19 related deaths in China alone, and infections in more than 150 countries worldwide. This outbreak is clearly more widespread and impactful than anything before it. More dire and lasting consequences to China’s economy and its people would therefore be expected. And while the sale of certain products has benefited from adjustments made by Chinese consumers, China’s strategic position in the world economy and as a primary node in the supply chain are much different now than they were during the SARS outbreak.
Quick and decisive action by Chinese health authorities have attempted to contain the spread of the virus and decrease the number of overall infections. The potential world health crisis posed by Covid-19 is rightfully being taken seriously by both national and international bodies around the world.
But a return to normalcy in China and around the world is not imminent. When it comes to Chinese consumer habits, normalcy pre-and-post coronavirus will be different. Because if the news that e-commerce is often a more convenient and increasingly common way to shop hadn’t sunk in before the outbreak, those who have turned to the internet to buy products that help them live their lives might well consider it the new normal.