Consumers return to retail. The retail story in China…where are things now?

Globally, the retail sector has been heavily impacted by COVID-19. As the epicentre for the outbreak of the virus in January 2020. China is now one of the first economies showing signs of recovery, and retailers are looking to understand the pattern there, in order to help predict how retail will recover (and how long it will take to do so) following enforced store closures and restrictions on people’s daily lives.

Why does it matter?

Retail sales in China fell by 20.5% (year on year) during January and February 2020; however, signs of recovery were already showing in March as stores started to reopen. By May, this year-on-year decline had shrunk to 2.8%, with some sectors, such as luxury goods, seeing a rapid recovery. Covid-19 also gave the already strong Chinese e-commerce industry an unexpected boost. Consumers went online for their essentials and retailers traditionally thought of as “offline” experimented with livestreaming e-commerce to try to recover their loss of sales. TaoBao (a Chinese online shopping website owned by Alibaba) and JD.com (another Chinese e-commerce company, partly owned by Tencent) reported that online sales of grocery, fresh produce and consumer essentials grew significantly during quarantine, driving up the country’s online retail sales of physical goods by 3% in the first two months of 2020. 

What action should you consider?

The new consumer expectations and habits formed during COVID-19 are expected to continue beyond 2020. As at May 2020, visits to online grocery channels were still 15% above pre-Covid levels.

Studies have shown that more than a quarter of shoppers have shifted away from their primary stores during Covid-19, of which 47% do not intend to switch back (McKinsey & Company). The quality of fresh produce, distance and the delivery service offered were among the reasons for switching.

Luxury retailers traditionally relied more on brick-and-mortar stores, but the lockdown has made many re-think this strategy. JD.com reported that around 20 luxury brands have opened stores on its online marketplace since January 2020, including fine leather goods house Delvaux, jewellery brand Goossens and British luxury leather brand Smythson. The move toward omnichannel distribution is expected to continue given the younger, more tech-savvy demographics of luxury consumers in China, and the lure of collaborating with large online platforms in addition to in-house brand websites may challenge the brand positioning of traditional luxury brands. 

There are mixed signals on what the longer-term impact Covid-19 will have on consumer sentiment in China. It is forecast that half of Chinese luxury spending will be domestic by 2025, and there are already figures to support this trend (Bain & Company). LVMH, owner of brands such as Dior and Louis Vuitton, reported increased sales of up to 50% in April in some parts of China and, at the reopening of its flagship store in Guangzhou, luxury fashion brand Hermès reported US$2.7m in sales in one day, as restrictions were relaxed and consumers returned. However, once this wave of “revenge buying” passes, some predict that luxury spending will stabilise under the backdrop of a global economic downturn and political uncertainties, whilst spending on fresh produce and health-related products such as supplements, workout equipment and wearables is likely to rise, as we see consumers’ attitudes shift and become more health-conscious. More localised spending patterns developed during lockdown may also increase the market share of Chinese domestic brands.