Insights

Revitalizing Retail Online and Offline after COVID-19

An Update on the Retail Market in China from Imke Wouters

Editor's note: Oliver Wyman is monitoring the COVID-19 events in real time, and we have compiled resources to help our clients and the industries they serve. Please continue to monitor the Responding To Coronavirus Hub and the Oliver Wyman RCG Coronavirus Hub for updates.

The Retail and Consumer Goods Practice is interviewing members of the team from around the world to see how industry trends and current events are playing out in their respective geographic markets. To get Imke's perspective on e-commerce and digital trends in China, please read the recent discussion she had with Jim Bacos, Retail & Consumer Goods Senior Partner.

Jim: Can you generally explain the impact of COVID-19 on the retail sector in China?

Imke: If you’re talking China retail sales January to May, overall retail sales dropped by 12.5 percent. January was still pretty normal as the crisis started around the end of the month. February and March were really terrible, and in April and May you saw recovery starting.

If you look at just offline retail, in the first four months of the year alone $300 billion USD in sales were wiped off. There was a big hit in the first few months of the year, and then it started to improve as retailers used aggressive promotions to get consumers back into the stores.

We see a very intense period of promotional spending to get consumers back into the stores, with a level of competitive intensity and steep discounts that we have never experienced before. Online retailers have become very aggressive. Take Alibaba for example - for the 6.18 “shopping festival” this year the company invested $2 billion USD just for one day. JD.com is equally aggressive. If you’re an unknown brand on that platform, you have to join a promotion, so it makes it tough. But you want to join because that is where consumers are shopping.

Overall, there was a very deep impact the first few months of 2020, then things began coming back up driven by promotions, and then returning to normal for the rest of the year. Our expectation is that sales will go back to continue as normal for the second half of the year. 

Jim: How are shopping patterns shifting in China now, specifically due to the pandemic? 

Imke: I think we see some shifts, but I think things that were happening before COVID have only been accelerated. Take for example the shift to online. Apparel was already one/third online pre-COVID, but for 2020 we expect almost half of the market to be online, which is a significant shift. And consumers are telling us that they expect to continue to spend more online.

Consumers are telling us that they expect to continue to spend more online

And then the other thing we see because of COVID-19 is a polarization of the market. Lower income groups have felt the biggest impact on their income and therefore also reduced their spending the most. They are still optimistic but far less optimistic about the rest of the year than the higher income groups. Therefore, what you see there is lower spending by that group for the rest of the year, in addition to wanting to buy cheaper items.

But on the other hand, you see that the higher income groups are much more eager to start spending again, because they didn't shop so much in the beginning of the year. Things are going in two directions - a shift to more spending by higher income groups and lower spending by the lower income groups. 

Jim: COVID-19 has accelerated the e-commerce market in China - can you talk a little bit about that? 

Imke: First, to just survive in this market it’s even more important to have a strong online channel. It was already the case, because online is so important in China. The brands pre-COVID-19 that were able to establish some type of direct relationship with their consumers have done relatively well. I think it became evident that more control over your online channel becomes more important. Brands need to have more control over how to reach their consumers, and how to run promotions. 

Jim: An Oliver Wyman survey found that China's apparel market expects a $60 Billion contraction in 2020 - what are some of the impacts of that for retailers here?

Imke: Even with a $60 billion contraction overall, we still expect an increase for the year in online, but a significant decrease of offline of 25 percent. We anticipate that one/fourth of the offline market will be gone for the full year.

Even with a $60 billion contraction overall, we still expect an increase for the year in online

And if you're looking at most of the branded apparel, most of them actually still have a relatively small share online because a lot of the online sales are unbranded. Those brands, given that they are much more exposed to what's happening now, will lose much more sales – as they are dependent on offline. And it significantly impacts their financials as well. So they really need to manage their losses for 2020 and think about: how can I manage my costs, how am I going to manage my store network, and how can I actually rapidly adjust my store network and improve my online presence.

For 2020 it’s a big impact, but also because of the acceleration of online, beyond 2020 the role of the store will be different and therefore becomes very important for them to really think about what the role of my store should be, and how am I going to optimize my store network.

And the other thing is that they also need is to think smarter. How do you manage the huge promotional pressure in the market? And how are you going to be smart about promotions and pricing? Retailers need to think about what they are going to offer given that you have this polarization in the market of lower income, less spending and higher income, high spending. True value for money, or be a little bit more differentiated and focus on better fashion, better quality. Because I think it will be hard if you're stuck in the middle.

A lot of the brands are stuck in the middle though – not clearly better from a fashion or quality point of view, and not the most attractive in terms of price – and were already suffering before COVID-19. Some of them have been forced to exit the market. What you probably will see now is an acceleration of that trend, with even more of them exiting. 

Jim: Is the collapse of the high street something that you’re seeing happening in China? 

Imke: I think it's a very interesting question. We don’t see it happening yet. I would expect that for the rest of the year we would see more, however. Because if you ask retailers if they are expecting to optimize their store network, almost 70 percent would say yes. But we haven't seen massive store closures yet in China, which is a little bit surprising. 

Jim: Successful retailers are going to be focused on minimizing 2020 losses while also preparing for the future - how can Oliver Wyman help?

Imke: We can work with retailers to optimize their store network – what are potential new locations that they need to open, and what locations are loss-making and without prospects of a turnaround.

We have a great proprietary store optimization tool called Bluespider, which covers more than 200 cities in China. And we have a lot of information on all the potential store locations within those cities, and how attractive each of the store locations are. We also have a lot of brands in it, so we can very easily compare brands to others to see what critical locations are and which locations are not very good that you should potentially rationalize.

The tool can help to make quicker decisions than a retailer normally would, because if they were to do it themselves, it would take a long time to get all of this data.  Because we have everything in this tool, we can help them to make faster and better strategic decisions on their store network.

Given the impact of COVID-19, cost has also become much more important. We have a lot of experience in managing costs and can support retailers on making sure that their cost base is fit for the future as well. We can help them to realize the cost savings on a shorter basis in 2020, but also making sure that they have the right organization and right cost structure to prepare for the future.

We also can help retailers on their channel strategy: online vs. offline. How should you manage your online channel, how to establish a more direct channel with your consumers? What is the role of the store, and how to offer something more unique? We can also support them with strengthening their proposition given the polarization of the market, helping decide which part of the market are you going to play in and how are you going to make sure that you can communicate and get across your proposition to consumers. And given the increasing promotional pressure, we can also support them to optimize their promotional strategy with our advanced analytics.

 

Imke Wouters –Retail and Consumer Goods Partner and Hong Kong Office Leader 

Imke started her consulting career in the Netherlands and moved to China 10 years ago when an opportunity came up to support the growth of the Shanghai office. She covers Greater China and South-East Asia and works both with retailers and consumer goods companies as well as with Private Equity companies. Read her full bio here.