New Wave of Retail in the Later Phase of COVID-19

Despite the adverse impact of the COVID-19 pandemic on retail, a revival of China’s consumer market is to be expected after such a difficult period.
Triggered by the pandemic, technology is leading a new wave of consumer demand. How will new consumption, new products, new retail and new marketing meet the emerging consumer demand? How fast will China’s retail and consumer goods market step out of the shadow of the pandemic?

Categories and Channels

According to Nielsen’s monitoring of sales of 70 FMCG categories nationwide, the offline retail market saw a -4.2% slide in sales growth in January-February due to the pandemic. Non-essentials experienced an even sharper drop in sales, with the sales of personal & home care items plunging by -9.8%, except a few epidemic prevention items, such as disinfectants (+163%), laundry sanitizers (+238%), etc. The overall sales of 47 categories of items sold through integrated online and offline channels maintained growth momentum, up 3.4% year-on-year, led by non-food (+6.8%) while growth of food is slower (+1.0%).

Online channels and neighborhood stores are the main drivers behind the growth of FMCG retail during the pandemic, with online sales growth reaching 29%; While small format Modern Trade maintained positive growth despite the pandemic, grocery stores and hypermarkets saw notable decline in sales. Hypermarkets had outstanding performance in January with leading sales growth, but reported the most visible slide in February as a result of the pandemic. As the pandemic developed, small and neighboring stores like supers, mini and convenience stores became more important in February.

Homebody Consumption was Key but Category Performance Varied

From January to February, there was a notable shift in the behavior of consumers, who stocked up for the Spring Festival in January but mainly purchased daily necessities from small stores closer to homes in February. During the pandemic, affected by the shutdown, there was more consumption at home:

♦ consumption of life essentials, such as grain, oil and non-staple food, frozen and instant food went up;

♦ leisure food like crispy snacks and carbonated soft drinks kept the same sales growth;

♦ health management items related to disease prevention, disinfection and nourishment received more attention.

Meanwhile, purchases of non-essentials were reduced significantly, and beverages and other ready-to-eat food were consumed much less due to fewer outings; personal care related items were less needed, and with the stocks purchased in previous Double 11 and Double 12 shopping festivals, consumers were not eager to buy them from offline or, if needed, resorted to online channels.

During the pandemic, consumers increased purchases of a wider range of frozen and instant food; In addition, food like oil, salt, soy sauce and vinegar was consumed more as cooking at home was more frequent.

Due to logistics and movement restrictions, grocery stores faced a shortage of supply or were even out of stock, with the out of stock rate of instant noodles reaching 18%, far higher than the level in the same period of last year (3%). The total sales volume of carbonated soft drinks didn’t change significantly, but large size carbonated soft drinks and bulk small size packs had a larger share in sales.

As consumers paid more attention to health, sales of fresh milk grew notably, while premium milk, primarily intended for gifting, recorded lukewarm performance. Sales of chocolates for the Spring Festival and Valentine’s Day, particularly those packaged as gifts, had a decline while sales of snacks like potato chips increased.

Consumption in Upper-tier Cities More Impacted, Lower-tier Cities Generally Stable

Consumption was impacted by the pandemic in both upper-tier cities and lower-tier cities. While fourth-tier cities (counties) saw generally stable consumption year on year during January-February, provincial cities experienced an 8% drop in offline retail market.

This trend may be mainly because more people were stranded in lower-tier cities due to the pandemic and failed to return to the upper tier cities where they live and work. Moreover, as the number of consumers in lower-tier cities increased year on year, consumption in upper-tier cities decreased. However, thanks to better logistics conditions in upper-tier cities, online markets made up for the loss in the offline market to some extent.

Both International and Local Manufacturers Seek New Growth Opportunities

Both the international and the local manufacturers are affected by the outbreak, however the pandemic also revealed new directions and opportunities.

In terms of life essentials, local manufacturers demonstrated the ability to respond fast to market demand. As the demand for hand sanitizers and disinfectants soared during the pandemic, local manufacturers, relying on the fast response of local leaders, quickly resumed production, cooperated with local governments and coordinated with logistics providers to secure product supply while achieving fast growth.

In terms of non-essentials, many local manufacturers that rely on lower-tier cities for growth, particularly small and medium-sized local manufacturers, were hardest hit by the pandemic. As many stores had to be shut down, local manufacturers lost an effective way to reach consumers, and demand for their products disappeared accordingly. After the pandemic is over, local manufacturers, on one hand, can strengthen brand equity and communication channels to increase consumer stickiness to their brands and gradually reduce their dependence on stores. In addition, they can establish closer cooperation with large and medium-sized retailers with more stable supply chains and stronger logistic capability, so as to improve resistance against systematic risks.

Nielsen found that some international manufacturers seized the opportunity of the homebody economy triggered by the pandemic. For example, leading international brands of crispy snacks, carbonated soft drinks and instant noodles reached more consumers, helped develop new usage occasions and grew significantly during the period. After the pandemic, international brands are expected to continue to reach new consumers, create repeat purchase opportunities, and take the chance to explore China’s market in both depth and width.

Sales Trends of All Categories at Leading Offline and Online National Retailers

After facing adversity in February, the retail market is beginning to re-emerge. According to the weekly sales performance of China’s leading offline and online retailers reported by Nielsen, in 2020, stocking for the Spring Festival peaked in the two weeks before the Spring Festival Eve. However, with the escalation of the epidemic and home quarantine across the country, unlike the same period of previous years, the week after the Spring Festival (the first week of February) saw growth in the retail market, which was mainly driven by online and offline sales of home & personal care items and mom & baby items.

In the second week of February, due to the situation in China, leading online and offline retailers experienced a week-on-week drop of 25%-30% and a year-on-year decline of 3%-5% across the country. Sales began to stabilize from late February to early March. In the two weeks from February 24 to March 8, most provinces in China saw a week-on-week sales increase of 5%-10%, which was 2%-10% lower than the same period last year.

In the four weeks from February 10 to March 8, overall retail sales shrank by more than 30% year on year in all provinces except Hubei and Jiangxi. Leading online and offline retailers reported year-on-year growth of varying degrees in sales in all provinces except Heilongjiang, Zhejiang, Jiangsu, Shaanxi, Beijing, Anhui, Fujian, Chongqing and Yunnan, where sales saw low-to-moderate decline.

It will take some time to bring the overall market back to the level of last year, which is particularly true for hard-hit retailers with traditional channels and a small part of the retailers with modern channels but weak supply chains. Nielsen found that in the period with the heaviest impact from the pandemic (from February 10 to February 16), more than 80% of the over 5 million traditional grocery stores nationwide were closed; 33% of the stores were reopened at the end of February. Continued monitoring by Nielsen showed the proportion further increased at the end of March, when only 8% of the stores remained closed with most concentrated in Hubei Province.

Active Response to the New Normal of Consumption Required

According to Nielsen interviews with key modern trade retailers during the pandemic, those optimistic about the rapid pickup of China’s retail market in the next six months made up more than 40%, with 51% among large-sized retail businesses, 46% among small-sized retail businesses and around 30% among specialized channels like cosmetics stores and Mom & baby care stores. About 67% of retailers expressed plans to intensify O2O in the next 6-12 months, 53% to increase the shelf display area ratio of health products, 43% to promote sales of fresh products and 41% to strengthen the food safety and health traceability system.

Consumers are embracing the new normal of consumption. Technology will further lead the revolution in consumption: new consumers pursue healthy ways of life and favor health concepts; new product demand is to be met with innovative products and packaging; new retail goes beyond the boundaries of offline and online businesses, with digitalization meeting the demand for comprehensive smart consumer experiences; new marketing involves product pricing, positioning and creation of new consumption occasions.

According to a global consumer survey by Nielsen, 93% of consumers will consider purchasing 5G mobile phones; 67% accept virtual shopping experience and product experience, and 68% accept drone delivery. The pandemic will accelerate the arrival of such changes.

The spreading of the pandemic worldwide may bring uncertainties to China’s market, and may affect factors like import and export balance, raw materials and supply chains, adjustment of worldwide demand, imported commodities, leisure & entertainment and tourism. Meanwhile, the stimulus package launched by the Chinese government with regard to domestic consumption, taxation and small and medium-sized enterprises will further advance the transformation of consumption through urbanization as a response to the possible slowdown of consumption. Finally, smart retail, increasingly robust local demand and further rise of local brands will play a positive role in driving the consumer market.

Source: Weixin

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