What the Coronavirus Means for Retailers
As Wuhan has been sealed from the rest of the world, and authorities have done mass shutdowns in cities, transportation to and within China, there is no doubt that this has led to a detrimental effect for retailers all over the world.
What the virus means for retailers around the world
This is evident from the stock market plunge on luxury stocks, along with everything else.
With global luxury companies being highly reliant on Chinese consumers – as they are expected to deliver 65 percent of the world’s additional spending to 2025 according to McKinsey – high fashion retailers have definitely felt the impact across these past several weeks.
The outbreak wiped $15 billion from the bottom line of European luxury players, as shares of Louis Vuitton SE were down 2.49% in early trading as of January 2020, while Kering SA and Compagnie Financière Richemont SA stocks had been traded more than 3% lower.
Moreover, cosmetic companies in the surrounding countries of South Korea and Japan have also taken a major hit, with shares of Amorepacific Corp. closing down 2.67%. The Japanese conglomerate Shiseido Co. Ltd. also traded 3.87% lower.
The effects on China and the rest of the world
As the growth of China slows compared to prior years, the country came out of 2019 with economic growth of 6.1 percent. While the numbers are still within the government’s targeted 6-6.5 percent range, it represents one of the lowest levels in decades.
With Chinese consumers spending USD $145 billion on shopping and food during the Spring Festival holiday the year before, displaying a growth of 8.5 percent over 2018, the outbreak of the coronavirus has left Chinese retail at a pit stop, with overall poor performance during the past Chinese New Year not boding well for the country’s economy.
According to an estimate by Economist Intelligence Unit, it was predicted that the effects of the virus would cut China’s GDP by 0.5–1.0 percentage points, or USD $7.2–14.3 billion. It is expected that the retail sales in China would drop from 8% YoY to around 3% – 4% YoY.
Chinese tourists spent USD $277.3 billion overseas in 2018 and domestic travel within China rising 10.8 percent from 2017, it is no surprise to say that global tourism relies heavily on Chinese tourists. With that being said, the effects of the coronavirus closures could lead to a negative growth of more than 30%. Moreover, if the virus continues to spread and more casualties arise, the yuan per dollar may show signs of decrease, as it had already breached the 7.
The effects of the coronavirus outbreak may be so bad that it is believed it could cost China USD $62 billion in lost growth in the first quarter of 2020. From cutting taxes and slashing interest rates, economists stated that the country’s growth rate could drop two percentage points.
How coronavirus is affecting retail
With mass outrage of the virus spreading everywhere, many actions have been taken to affect even online retailers. As the Chinese government takes greater precautions to keep local and international populations safe, they have placed lockdowns on several Chinese cities, temporarily shutting down public transport.
What has made this outbreak more detrimental to retailers all over the world has been its inconvenient timing, as the news of its spread disseminated around the time of Chinese New Year. This has caused many factories from extending their temporary closures for much longer.
Usually, factories in China take an average of 3-4 weeks to open after the Chinese New Year period, but with the recent travel restrictions, this period has only extended for longer. For example, cities in Shanghai, Jiangsu, Zhejiang, and Guangdong provinces have already prolonged the Chinese New Year period until February 10th. Such an occurrence has meant delays in production, as well as shipments.
Any orders going in and out of China have experienced delays, as several logistics and airline companies have halted their operations. FedEx, for example, has noted that it acts on containing the virus in accordance to Chinese officials, affecting shipments going in and out to/from Wuhan. This affects stores, as the delivery company is reported to have 9,500 employees in China and 220 flights a week from five Chinese airports.
Other examples of disruption include American Airlines, which have stated they will suspend some flights between China and the USA for seven weeks. United has also commented that they would halt 24 flights between China and the USA during the first week of February. There have been many other cases like this with each passing week, from British Airways to Seoul Air, ceasing all flights to China.
As Jonathan Gold (Vice President of Supply Chain and Customs Policy for the National Retail Federation) commented, “We’re hearing some discussion of factories being closed longer than they normally would. Obviously, that could have an impact if factories aren’t opened up in a timely manner.”
Impact on Sales
While the mainstream public may have not heard of Wuhan, it serves as an important manufacturing center for global corporations around the world. In fact, according to Bloomberg News, it ranks 13th of 2,000 cities in China. The city’s province of Hubei is also the seventh-largest of 32 jurisdictions and contains 44 facilities that are run by U.S. companies and 40 more operated by European ones. This makes the outbreak of the coronavirus doubly impactful on global companies.
Considering that China represents about 4-5% of system-wide sales, it is no wonder that the above-mentioned shutdowns of cities and transportation will definitely take a toll on sales globally. According to Moody’s Investors Service, given China’s importance in global company revenue for retailers around the world, this economic impact that is currently being experienced within the nation will inevitably ripple outward to countries globally.
As more consumers stay home in the coming months, the most that will be affected remains to be brick-and-mortar retail, travel (within China and to neighboring countries), restaurants and gaming. According to B.Riley’s Susan Anderson, it is believed that the retailers most susceptible to being impacted negatively by the outbreak are those in apparel and footwear.
The continued escalation of the severity of coronavirus, along with the travel ban for Chinese consumers is believed to decrease airport passenger numbers, which in turn will have a detrimental effect on airport retail. Previously, global airport retail sales were forecasted to reach US$48.2bn in 2020, up 6.1% from 2019, yet these numbers may change the recent outbreak.
Along with the shutdowns and mass quarantines in China, major tourist attractions including the Shanghai Disney Resort and InterContinental Hotels Group have also temporarily closed. The same has been seen in restaurant chains like McDonald’s, where operations have been suspended in Wuhan, Ezhou, Huanggang, Qianjiang, and Xiantao branches until further notice. Even tech giants like Apple have been affected by the outbreak, as the company limited employee travel to China, thereby influencing the sales and manufacturing operations within one of its most vital markets.
Major apparel retailers like Gap Inc. reported closing five of its namesake store locations in China as a result of the outbreak. One spokesperson of the company has commented that the safety of their employees and customers remained a top priority.
The same has been seen with brands like H&M, which closed 97 of its 520 stores in mainland China, suspending business trips to and within the country. Adidas also spoke with Reuters that they would be closing a number of stores due to the business being negatively impacted by the virus.
Labor shortages and less spending
With the casualties of the virus having worsened through the Chinese New Year holidays, this has led to a slew of problems for companies of all types. The increasing travel restrictions to keep workers in their home towns and shutdown of transportation systems causing citizens to stay inside has led to labor shortages.
One example of how the virus has greatly impacted tech supply chains is with Apple’s iPhone productions. As reported by Nikkei Asian Review, the tech giant ordered suppliers to make up 80 million iPhones for the first half of 2020. The lack of workers has caused a massive issue for key Apple suppliers, leaving them to brace for trouble in the upcoming year. Often times, the Chinese New Year period is a time when production rates are low, but they usually pick up after the holidays. This year, however, may be quite different, as thousands of workers remained stranded in their homes.
As more people choose to stay inside, and more companies asking employees to take unpaid leave, it is only reasonable that discretionary spending will lower because of the outbreak. As a result, there is less money being poured into the economy, causing things to come to a standstill.
The proliferation of panic buying
On the other hand, since the outbreak of the virus, people have broken out into panic, going to stores to stock up for the coming weeks. With more and more people staying in, out of fear of being exposed to the virus, essential items have been flying off the shelves.
There have been countless posts on social media that have shown the long queues of people stocking up at supermarkets for essentials like rice, toilet paper, and instant noodles. The problem has become so severe in places like Singapore, that politicians have urged citizens to remain calm, reassuring the people that there is no risk of running short of said essentials. With the city-state having reported 33 cases and the recent alert level being changed to ‘orange’ (one below the highest level red), fear has begun to run rampant in the minds of the people, with thousands of shoppers flocking to the stores to stock up.
The same has been seen in places like Hong Kong, where wide-spread panic has caused the people to empty out the shelves of many stores out of fear that they may run out of supply, despite government assurances. While there are several reasons attributed to this panic-buying behavior, some government officials believe it is caused by the spread of rumors. For example, one buyer reported stocking up because she had heard rumors that there was no tissue paper.
Jenny Cheung, a President of Hong Kong Pharmacists Union expressed the belief that minimal trust in the government was one of the reasons for this phenomenon. As she stated in a CNA interview, the fear-induced behavior has gotten so out of hand that, “people even camp out at night for 6-9 hours in order to get just two boxes of surgical masks. If there is a queue and people see there is a queue, they will just join it in order not to miss the distribution of surgical masks.”
What retailers can do moving forward
Consumer behavior has definitely changed, as people rush to the stores, ready to empty out the shelves for the above-mentioned supplies. From toilet paper-buying frenzies to soar in sales for surgical masks, learning how to replenish products quickly can definitely help to maximize sales.
With Chain of Demand’s predictive analytics solutions, retailers can learn what items should be replenished immediately using multiple data sources surrounding weather, socio-economic conditions, and the stock market. During a time where people are consumed in panic-buying behavior, retailers can make more sales, and have less deadstock by working with predictive analytics solutions.
While it is difficult for anyone to ever forecast an outbreak that has much global significance as the coronavirus, retailers can at least start depending on artificial intelligence to make smarter decisions for managing their inventory better