After COVID-19: Retail revolution?

The images were telling. Wuhan’s coronavirus lockdown had been lifted several days earlier, giving the 11 million population more or less free license to eat out, but the restaurants stood empty. Media reports quoted restauranteurs who observed that diners preferred take-out delivery or cooking at home. According to KPMG, road passenger traffic in the city was still down 60% year-on-year while department stores and shopping centers were reporting footfall of 40-60% normal levels.

In fact, all kinds of formal and informal restrictions on movement remain, while temperature checks are performed as routine before entering buildings. This reflects wider fears of a resurgence in COVID-19, with a recent epidemiologic modeling study in China suggesting that a second wave would be harder to contain than the first.

The empty restaurants of Wuhan, the epicenter of the pandemic, offer a snapshot of the risks inherent to making predictions about how long it will take for activity to return to normal. This hasn’t stopped people trying: a recent KPMG study draws on the experiences of China’s retail recovery to give pointers on how it may pan out in Australia, while Bain & Company presents a range of consumer behavioral scenarios in its latest China private equity report.

All of this is relevant to PE and VC investors looking to managing existing portfolio companies and – if the conditions are right – consider new deals. KPMG is sector-specific, identifying key considerations for retailers that want to hit the ground running. These include rebuilding consumer confidence in public safety; re-opening physical stores soon after the curve tracking active coronavirus cases starts to turn downwards; assessing the impact of technology-enabled solutions employed during lockdown periods; and holding mega-sales events to clear inventory.

Bain’s analysis is wider and takes in a longer outlook. There are segments such as personal computers, household goods and packaged foods that benefited from coronavirus-induced panic stockpiling but are likely to see reduced or stable demand in the long-term. Then there is a lengthy list of segments hurt by the outbreak and with very different prospects. Some traditional retail is dismissed as a long-term loser; restaurants, real estate and logistics will recover; while demand for apparel, beauty products and alcohol will moderate after a post-crisis “revenge buying” spike.

The final category comprises businesses that gained traction during the crisis and will retain it in the long term, albeit following an immediate dip as consumption routines return to normal. These are the supposed beneficiaries of long-term behavioral shifts and they are relatively obvious: online services from entertainment to education, digital healthcare, and certain e-commerce verticals. They might also be the hardest to fathom.

Asked how he establishes whether there is a sustainable business model behind the immediate coronavirus spike, one investor notes that start-ups must demonstrate a substantial change in user behavior or the successful cultivation of a new customer segment. For example, online grocery might be described as the final frontier of e-commerce because the target audience is generally more mature. COVID-19 forced older housewives to shop online rather than visit wet markets and supermarkets. They will certainly revert to former habits, but maybe make fewer trips each week.

Similarly, when the KPMG report discusses technology-enabled solutions that have risen to prominence in recent months, it singles out community group buying – where agents aggregate demand within their neighborhoods, negotiate deals with suppliers, and take responsibility for last-mile delivery. This C2B model predates the COVID-19 outbreak and has been propelled forward because of it. But is community group buying an agent of long-term disruption?

While digitization will likely dictate the future of retail, the specific – and perhaps highly localized – consumer dynamics that underpin this transition are as yet unclear.

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• Topics
• Greater China
• Consumer
• Expansion
• China
• covid-19
• coronavirus