beyond covid-19: retail recovery lessons from china · 2020-07-05 · 3 eyond covd-19: retail...

Beyond COVID-19What can Australian retailers learn from the experience of their Chinese counterparts to prepare for recovery?

Updated on 11 May 2020 to include category growth insights.

Retail recovery lessons from China

KPMG.com.au

http://www.kpmg.com.au

2 Beyond COVID-19: Retail recovery lessons from China

The industry is watching with anticipation and there are already important insights to assist Australian retailers as they begin planning for recovery:

• The frontier for retail recovery is re-building community confidence in safety

• Physical store re-openings could begin soon after the curve bends

• Retail categories are entering the recovery period at four-speeds

• Local armies of community shopping agents have risen to become a powerful channel

• Mega-sales events hosted by cross-industry collaborations are being planned

• Physical experiences are being delivered virtually or delivered through open channels

The onset of disruption to the retail industry in China from coronavirus (COVID-19) differed from Australia in two important ways. Firstly, the lockdown period began during China’s peak spending and inventory season in the lead up to Chinese New Year celebrations. Secondly, the unprecedented lockdown restrictions were implemented at astonishing speed that caught both consumers and retailers unprepared.

Australians had the benefit of more warning and a gradual introduction of restrictions which saw a surge of consumer spending in preparation. Retailers also had additional time to enact their crisis management plans to protect staff and customers, secure revenue streams and manage costs as best they could. As a result, some

Australian retailers have relatively strong cash positions going into this crisis, although not all sectors have benefited. Australian consumers and retailers are also expected to receive significant support through Government interventions such as JobKeeper and the new code of conduct for landlords which will help the sector through the immediate crisis period. On the flipside, it is expected that Australian restrictions will be in place longer than in China.

Despite the differences, Australian retailers will benefit greatly from understanding how retailers have operated under restrictions in China. The hope for Australia is that the retail industry can leverage the ingenuity observed in China to act quickly and emerge more evolved and more resilient.

The experience in China gives Australian retailers visibility into what may lie ahead. China steadily released the restrictions imposed to tackle the coronavirus (COVID-19) pandemic and formally moved into the recovery period in April with the re-opening of Wuhan.

Onset ~ 2 months

Restriction~1.5 months

Release~5 months+ ?

Onset~ 1 month

Restriction2-3 weeks

Release~ 2 months

23 Jan – Wuhan lockdown started

10 Feb – Businesses staged return to work

8 Apr – Wuhan lockdown ended

Recovery…?

31 Dec – China first reported COVID-19 cases

13 Mar – PM announcednon-essential gatherings

of 500 people to be cancelled31 Mar – States rolled

out Stage III restrictions1 May – Major States started lifting restrictions

25 Jan – Australia first reported COVID-19 cases

NoteOnset period – From the time of first reported cases until the announcement of major restrictionsRestriction period – From the time restrictive measures are introduced until the measures start to relaxRelease period – From the time restrictive measures start to relax until major restrictions are removedRecovery period – The time taken for confidence of the broad community to returnAll events noted above are based on best available information at the date of this publication

© 2020 KPMG, an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. The KPMG name and logo are registered trademarks or trademarks of KPMG International.

Liability limited by a scheme approved under Professional Standards Legislation.


We are eager to know how quickly retail will bounce back as physical distancing measures are released. A lead indicator will be how quickly Australians resume their normal routines. Once restrictions are lifted, will Australians pick up their busy schedules from where they left off? Or will they more gradually re-engage with the outside world? Another alternative could be that there will

be a more permanent shift towards living within their local communities. Analysing trends in road traffic and mobile phone location data can help answer these questions.

China is two months ahead of Australia on this journey. On the 8th April the city of Wuhan re-opened, relaxing almost all domestic physical distancing restrictions. The Chinese

Government is confident that it is safe to return to normal life, but the broader community needs time to restore confidence. Road passenger traffic remains at just 40 percent compared to last year, even though physical distancing measures have been gradually relaxed since 10 February and the number of daily active cases of coronavirus remains low.

The frontier for retail recovery is re-building community confidence in public safety

60,000

0

10,000

20,000

30,000

40,000

50,000

80%

100%

60%

40%

20%

0%

50

Days since first case in China

No

. of

dai

ly a

ctiv

e c

ase

s in

Ch

ina

20

Daily p

assen

ge

rs by v

eh

icles co

mp

ared

to th

e sam

e tim

e last ye

ar

100t=0 10 30 9040 60 70 80 110 120

Onset~ 1 month

Restriction2 - 3 weeks

Release~ 2 months

Recovery…?

23 Jan – Wuhan lockdown started

10 Feb – Businesses staged return to work

8 Apr – Wuhan lockdown ended

31 Dec – China first reported COVID-19 cases

• Road passenger traffic is still down ~ 60%

• This is aligned with major department stores and shopping centers reporting 40-60% of normal traffic

• At this stage there are no signs of an imminent 'bounce-back' to physical retail

Source: WHO; National Health Commission of China; KPMG Economics; CCAGM; Ministry of Transport; Haver Analytics)

Note: Above data is as of 1 May 2020; road vehicles are the main form of transport in China




Three possible explanations for why activity levels remain low in China are:

• lingering concerns regarding safety in public places;

• household efforts to save money; and

• changes to how people are spending their time.

Although all three could be playing a role, concerns for safety will be weighing heavily on consumer’s minds. It is unclear for how long and how low reported local cases need to be before consumers will regain a sense of safety.

This will not be an issue unique to China. Stimulating the economy as we emerge from the coronavirus crisis will require more than financial stimulus. The Australian retail industry will need to demonstrate a vigilant safety culture with a focus on health and hygiene practices to win the confidence of customers and staff alike. Retailers could consider appointing safety executives and building leading ‘safety first’ cultures adapted from high risk industries such as mining, oil and gas.

Chinese retailers are rising to the safety assurance challenge. For example, online food delivery platforms have seized the opportunity to promote new ‘contactless’ processes and technologies to win consumer trust. This has included introducing local smart storage points accompanied by digital certificates of temperature readings of all human touchpoints (e.g. cooks, packers, drivers); food ordered via scanning QR codes for pick-up at street front windows; and end-to-end contactless dine-in guarantees from ingredient sourcing to robot enabled in-store service.




It is unlikely there will be a clear victory day for this war on COVID-19. Restrictions are expected to be gradually relaxed in a similar way to how they have been imposed in Australia. If this is the case, the decision about whether, and when, to re-open physical stores will largely be at the discretion of individual retailers. Retailers will need to decide whether opening individual stores is viable based on expected foot traffic, their ability to minimize fixed costs and the effectiveness and impact of the Federal and relevant State Governments’ actions. They will also need to consider whether phased openings will confuse already cautious customers during the early stages, or whether to wait to synchronise with other retailers.

In China, stores began re-opening soon after the curve of active coronavirus cases started to bend. This was in response to the Chinese Government calling for businesses to return to work in stages from 10 February. In anticipation of lower traffic and safety concerns, many

retailers aligned opening dates with festivals (i.e. Valentine’s Day) to give consumers extra reasons to go shopping, introduced additional hygiene measures, limited crowd numbers, phased store openings and varied opening hours to manage costs. China’s approach did not trigger a resurgence of the virus, making it effective from a safety perspective. However, it is unclear if under ‘normal’ footfall volumes the interventions are sufficient to protect the public.

Australia succeeded at ‘flattening the curve’ before some retailers reached the point of closing all of their stores, such as David Jones, Rebel Sports, Kmart and JB Hi-Fi. These retailers now need to consider whether to trade continuously through the restricted period now that demand and the cost of operating is better understood.

The impact of the current restrictions on retail footfall is punishing – for example pedestrian traffic in Bourke Street, Melbourne, has fallen below 10 percent compared to the same time last year.

Retailers who have made the difficult decision to close stores, should now be actively considering when and how they intend to re-open. Working together with other retailers and stakeholders at each store location will be important to build momentum through a synchronised response to clearly manage consumer expectations. What would you need to believe about footfall and basket size to make it worth opening during the restriction period?

Physical store re-openings could begin soon after the curve bends




0

1,000

2,000

3,000

4,000

5,000

-100%

-80%

-60%

-40%

-20%

0%

10

Days since first case in Australia

50

No

. of

Dai

ly A

ctiv

e C

ase

s

3020 100

Melb

ou

rne C

BD

Ped

estrians co

mp

ared to

the sam

e time last year)

t=0 7040 8060 90 110 120

-90%

Onset~ 2 months

Restriction~1.5 months

25 Jan – Australia first reported COVID-19 cases

13 Mar – PM announced non-essential gatherings of 500 people to be cancelled

31 Mar – States rolled out Stage III restrictions

1 May – Major States started lifting restrictions

Release~5 months+ ?

Source: Worldometer; Australian Department of Health; City of Melbourne; Company announcements; KPMG analysis

Note: Above data is as of 1 May 2020

There are a number of notable retailers that staged and realigned store re-openings throughout the crisis in China. They have adapted their lessons from China across other markets.

• Apple in China closed all retail stores as restrictions started and staged re-opening of its 42 stores over 30 days with reduced hours and new hygiene requirements as active cases starting coming under control. Having closed all locations outside of China in March, Apple is expected to open more locations following South Korea in April.

• Starbucks in China closed ~80 percent of its stores at peak of the outbreak and re-opened 90 percent in a month with upgraded hygiene controls, new store seatings, pickup / delivery services and personalised cup messages. In the US, it is expected to re-open some locations with similar store experiences as offered in China after closing half of its company stores from March

• Nike in China closed ~80 percent of its stores as the spread escalated and gradually re-opened ~80 percent of its stores a month from the peak outbreak at normal business

hours with increasing traffic. Nike announced it had applied its China playbook to South Korea and Japan with signs of early momentum and further roll-out could be expected across Europe and the US.




Speculation continues about whether the Australian economy is headed for a V, U, L or even W shaped recovery profile following the coronavirus (COVID-19) pandemic. Whichever path we follow, one certainty is that the pain will not be shared equally across the retail industry. Different categories are already following divergent journeys through the crises in Australia, with some categories booming while others are stalling.

China’s recently released retail results for the March quarter provide Australian retailers with a preview of category re-growth scenarios. During this time, China experienced a full crisis management cycle including the onset of restrictions, a period of tight restriction and a period of gradual release. Over the quarter, the total value of consumer goods and services fell by ~19 percent versus the prior year. However, within the quarter there was a significant uptick of retail activity in the month of March as restrictions were withdrawing.

There are genuine signs that retail recovery has started in China, but not for all categories. It is still early, but some interesting signals are emerging for how categories are entering the recovery period.

There appears to be a 4-speed retail recovery tale emerging:

/ – shaped sustained growth categoriesEssential food, medicine and beverage categories continued to grow throughout the crisis and have accelerated as restrictions have been released. The surge in food sales during the release period has been attributed to recommendations given to consumers to eat more meat, eggs and vegetable produce to strengthen immunity. As expected, there has been a shift towards ecommerce channels with online food sales growing 33 percent in the quarter over 2019, while total food sales grew 13 percent.1

V – shaped bounce back categories Back to work and school essentials such as office supplies and communications equipment suffered a ~9 percent sales decline in January and February under lockdown, but quickly bounced back and returned to strong growth once restrictions were lifted.1

U – shaped delayed recovery categoriesMost retail categories appear to be on a slower recovery curve, including Beauty, Furniture and Automotive. Although the decline in sales for this group of categories have slowed, they remain substantially down on last year.

1

For example, the decline in Jewellery sales has improved by 11 percent points in March from a devastating 41 percent decline in January and February to a lesser but equally concerning 30 percent decline in March relative to the same periods in 2019.1 On the other hand, there was significant growth reported in small home appliances, however home electronics sales remained subdued due to decline in larger ticket items, particularly those requiring assisted installation.

U or L – shaped prolonged downturn categoriesFood services and Apparel categories are showing a further degradation of sales in March compared to combined January and February results, despite the alleviation of restrictions. These categories haven’t only been a challenge for physical stores. Online sales for apparel and food services were similarly affected, declining 15 percent and 25 percent respectively during the quarter. More recently, major listed apparel retailers have reported seeing evidence of improvement.1 Safety concerns continue to deter dine-in patrons and may result in a longer recovery path akin to SARS, where it took almost a year for Food Services to recover.

Retail categories are entering the recovery period at four-speeds

1 National Bureau of Statistics of China




Australia will chart its own journey through the crises and the retail industry starts from a very different place than China. However, the key messages for Australia from these results are that retail recovery will have many profiles and a key component of recovery planning should be to consider a category and price-point remix, and a shorter more agile merchandise buying process to respond quickly to changed demand profiles.

Food

Medicines

Non-alcoholic beverages

Office supplies

Communication equipment

General consumables

Beauty

Tobacco & liquor

Building materials

Automotives

Fuels

Furniture

Home electronics

Food services

Jewellery

Apparel

0.3%

Changes in retail sales by categoryJan – Feb 2020; % change year on year

Changes in retail sales by categoryMar 2020, % change year on year

Change in growthrates in % points

Initialrecovery shape

+9.5%

+7.8%

+3.2%

+15.3%

+15.0%

+6.9%

+6.3%

+2.5%

+16.6%

+18.9%

+7.4%

+10.8%

+0.3%

+11.0%

-3.9%

-3.7% L or U

V

/

U

19%

8%

6%

7%

6%

-9%

-12%

-14%

-18%

-19%

-23%

-30%

-30%

-35%

-47%

0.2%

10%

3%

-9%

-9%

-7%

-16%

-14%

-31%

-37%

-26%

-34%

-30%

-41%

-31%

-43%

Restriction period1) Release period1) Emerging recovery speed

Source: National Bureau of Statistics of China (Jan and Feb results were reported as one period); KPMG analysis




The concept of home quarantine to contain infectious diseases is not as foreign to China as it is to Australia. Through these experiences, Chinese families have developed strategies to manage physical distancing by embracing technology and leveraging their local communities. The SARS outbreak in 2003 which lasted six months and kept millions of workers and consumers at home is credited for accelerating China’s eCommerce industry. At the time, B2C eCommerce was in its infancy in China – estimated to be worth ~AUD $0.4 billion – and Alibaba had just launched its B2C platform in May that year. eCommerce was in the right place at the right time. Today it accounts for ~23 percent or

~AUD $2.2 trillion of China’s domestic retail merchandise sales, and now Alibaba is the third largest retailer in the world.

In response to the coronavirus restrictions, Chinese communities once again began seeking out innovative solutions to meet their needs. This time growing consumer-to-business (C2B) eCommerce models have been in the right place at the right time and have been embraced. These models – where commissioned shopping agents build orders, negotiate terms and become last mile delivery points for their local communities – had already been growing rapidly before the crisis.

The agents quickly expanded and adapted to take orders, shop and deliver essential groceries door-to-door on demand.

The largest player is China’s PDD (or Pin Duo Duo meaning ‘Together, More savings, More fun’) which provides a social-based and gamified mobile platform connecting manufacturers, merchants, logistics providers and agents to communities. Launched in 2015, PDD has grown rapidly – it was valued at AUD ~$70 billion and accounted for ~10 percent of online sales in China just prior to the crisis. We expect the channel has grown rapidly since then.

Local armies of community shopping agents have risen to become a powerful channel

+167%

+21%

2017

29

98

210

0.4

1,500

1,875

2,208

2017 2019 2003 2017 2018 2019

Source: Disclosed company financials; National Bureau of Statistics of China; KPMG analysis.

PDD Gross Merchandise Value

CY 2017 – 2019 AUD $billion; CAGR

Online retail Gross Merchandise Value in China

CY 2017 – 2019 AUD $billion; CAGR




The timing of the coronavirus lockdown was devastating for retailers in China. It coincided with Golden Week, a seven-day national holiday for Chinese New Year where typically families indulge in dining, shopping, entertaining and globe-trotting. Extensive merchandise planning and inventory build-up starts months earlier, similar to the Christmas trading period in Australia. Retail sales for the week were expected to hit ~AUD $225 billion in 2020 having grown steadily at ~12 percent per annum over the past decade. With increased number of cases of coronavirus being reported in January, the Chinese Government took the drastic measure to lock down Wuhan and

limit movement across many other cities during Golden Week. Footfall fell overnight by almost ~90 percent across the country.

Overall retail sales in China were down by ~19 percent from January to March on the prior year, leaving retailers with large discretionary and seasonal inventory surpluses. Apparel has been particularly hard hit due to stock build-up from a double whammy of a warmer winter and coronavirus disrupting the spring. Uncoordinated resumption of supply chains is also threatening summer stock availability. Online apparel channels were not immune with a 15 percent decline for the quarter.

To clear inventory, local governments, manufacturers, industry associations, universities, landlords and retailers have pooled resources online to create scaled events with social purposes. This includes the design and launch of new offerings priced to attract larger audiences as well as engagement of social media and virtual live shows for interactive shopping experiences. The Guang Dong province, China’s undisputed leader in economic development, has been particularly entrepreneurial in leveraging its scale to organise high profile online fashion events with major online platforms to promote ~10,000 participating apparel businesses throughout March.

Mega-sales events are being planned to clear inventory surpluses

1,656

1,251

466

462

2019 2020

Online -1%

1,713

2,122

Offline -24%

-19%

Online Services-25%

Online Apparels

-15%

Online Grocery (non-food)+10%

Online Grocery (food)+33%

Source: National Bureau of Statistics of China; KPMG analysis

China retail sales of consumer goods and services by channelJan-Mar 2019 - 2020AUD $billion




Many highly impacted Chinese retailers where physical experiences have been at the heart of their value proposition (for example fresh produce markets, beauty services, fitness services and tourist sites) have applied digital technologies at astonishing speed to operate during the crisis.

Partnering to ‘borrow’ established ecommerce channels China has a highly developed and sophisticated end-to-end eCommerce ecosystem that is able to manage large peaks in demand such as Singles Day. This agility means that new partnerships between previously unrelated businesses can quickly be implemented. Bookstores are partnering with high traffic food ordering platforms to procure and deliver ‘contactless’ books targeting children and students at home. Integrated online-to-offline (O2O) retailers such as JD Fresh market takes consumer orders online for fulfilment offline at local stores, helping farmers’ direct fresh produce that would have previously been sold at wet markets to their online direct and offline store network.

Digitising beauty consultation experiencesCosmetics businesses in China have traditionally relied upon quality physical settings and well-trained sales teams to deliver face-to-face immersive brand experiences. Online was previously

a supplementary channel for smaller orders. For example, Forest Cabin, a Chinese personal care company known for its traditional herbal formulations, reportedly over-achieved its sales targets – from 25 percent to 90 percent – by pivoting its business online. This was achieved through re-training its salesforce to engage on social media platforms; partnering with complementary retail businesses to share and access new members; and redesigning physical stores to be an extension of its interactive online community experience.

Developing home fitness solutionsRetailers dependent on experiences outside the home such as sports apparel, have started live streaming workout classes to drive orders for home-based fitness merchandise. Lululemon collaborated with its brand ambassadors to develop a series of online yoga classes; Under Armour engaged personal trainers to stream

daily fitness classes; and Nike launched workout classes through its own Nike Training Club app which contributed to a ~30 percent growth in online sales in the first quarter of 2020.

Offering virtual experiences of physical placesFor experience-based retailers such as cultural places of significance, the loss of visitation-based revenue saw them pivot to online to continue interactive engagement and drive merchandising opportunities with would-be customers. Tibet’s Potala Palace attracted one million visitors, equivalent to its annual visitation, in its first hour of live guided tour streaming which included options to purchase merchandise and tour packages. Online travel agency, Elong, partnered with local governments and podcaster Dragonfly FM to develop high definition virtual reality content and curate cultural podcasts across sixteen of China’s most visited cities in anticipation of a post-coronavirus travel spike.

“ Our experiences demonstrated how quickly consumer’s preferences and expectations had shifted dramatically during this pandemic. Chinese companies with long-term strategic planning are learning from this experience, thus are accelerating their digital transformation and improving on more agile business models to be better equipped to deal with future challenges.”KPMG China Head of Consumer Markets, Jessie Qian

Physical experiences are being delivered virtually or diverted through open channels




So how can Australian retailers leverage China’s experience for their own recovery?

Be prepared

Demonstrate a vigilant safety-first culture to win the confidence of customers and staff alike.

Identify the trigger points for re-opening stores (i.e. when the curve flattens, when restrictions are lifted, when footfall reaches a certain level) and consider options to change opening hours and staffing levels over time.

Look for opportunities to work collaboratively with local stakeholders for a synchronised response.

Consider a remix of categories and price-points, and ways to shorten the merchandise buying cycle

Be prepared for rapid growth of C2B channels supporting local communities and local businesses.

Start assessing inventory pain points and prepare to respond to, or drive, major clearance sales events.

Take the opportunity to be creative with how to translate winning physical experiences digitally.



Jane CohenHead of Consumer and Retail, KPMG Strategy, AustraliaT: +61 3 8663 8375 E: [email protected]

Jessie QianHead of Consumer and Retail, KPMG ChinaT: +86 21 2212 2580 E: [email protected]

Matthew DarbyHead of Retail, KPMG AustraliaT: +61 3 8626 0962 E: [email protected]

Keith RenEngagement Manager, KPMG Strategy, AustraliaT: +61 3 9288 6742 E: [email protected]

This article reflects situational perspectives and conclusions as of the title date. All financial data reported in Chinese local currency have been converted using a common spot rate as of 3 January 2020 to remove the currency effect and allow local comparison.

The information contained in this document is of a general nature and is not intended to address the objectives, financial situation or needs of any particular individual or entity. It is provided for information purposes only and does not constitute, nor should it be regarded in any manner whatsoever, as advice and is not intended to influence a person in making a decision, including, if applicable, in relation to any financial product or an interest in a financial product. Although we endeavour to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation.

To the extent permissible by law, KPMG and its associated entities shall not be liable for any errors, omissions, defects or misrepresentations in the information or for any loss or damage suffered by persons who use or rely on such information (including for reasons of negligence, negligent misstatement or otherwise).

© 2020 KPMG, an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.

The KPMG name and logo are registered trademarks or trademarks of KPMG International.

Liability limited by a scheme approved under Professional Standards Legislation. May 2020.489652289CORPS

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beyond covid-19: retail recovery lessons from china · 2020-07-05 · 3 eyond covd-19: retail...

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