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How the Coronavirus Crisis in China Will Affect E-commerce Brands in different ways

2020/02/26
E-Commerce in China COVID-19

As the number of new cases of the COVID19 outside of Hubei has been decreasing in the last two weeks and is hitting record lows everyday (let’s hope it stays this way once more people will be allowed to return from their home region), one can start making first assumptions on what the effects of the current COVID19 crisis on commerce could be. 

As a lot of people in China are still working from home (some even under quarantine), schools are still closed and physical stores are only very slowly reopening, the crisis firstly and obviously has and is impacting services such as transportation, restaurants, travels, entertainment, beauty care etc. 

Chances are that these businesses will never make up later for what they have lost. People will probably not go to the hairdressers more often once the crisis is over nor is it likely that – after perhaps an initial surge – restaurant visits will stay up enough to compensate for weeks of closed doors.

Generally speaking, the crisis is impacting all offline businesses as people are still largely grounded at home. But what about E-Commerce? One could think that as people stay at home, E -Commerce would take over and benefit from the situation. 

But things don’t seem to be working out this way. 

Even if some consumers use online shopping as a therapy, many have switched to a more rational buying mode, which helps explains why 57 percent of high-income consumers have decreased their spending on luxury goods (Kantar). It also appears that consumers are sometimes worried that the transmission of the virus on a package might be possible. 

Business results will vary greatly by category, depending on the impact of behavioral changes triggered by the crisis and of course whether or not it relies on physical delivery.

Statistics from Chinese games database Gamma Data Corp showed the 10 best-selling games on the iOS App Store saw revenues jump more than 40 percent during the seven-day Chinese New Year holiday. And revenues of the top 10 to 60 games surged more than 100 percent during that period.

People stuck at home that initial week were more inclined to play online, and physical delivery is not an issue for online gaming.  Remote work apps and online consultation apps have also benefited from this situation the following weeks. 

On the other hand, if Apps selling online groceries such as Hema or Meiriyouxian have seen a huge increase in demand, they can only benefit from it up to a certain point: short term it is hard for them to cope with such a sudden increase in demand and as they can’t scale up their delivery capacity overnight. As a result, they are mostly overwhelmed. Nevertheless, they will probably benefit later from this quick acquisition of new customers.

Delivery problems is the first reason for which E-Commerce doesn’t benefit the way it could from the fact that people are staying at home. Deliveries are slow to come, because of the limited available workforce resulting from the large number of migrant workers which still haven’t returned from their home region after Chinese New Year and the quarantines imposed to those who have returned. Approximately 15 Million inhabitants of Shanghai and Beijing are still believed to be out of those cities, starting to return this week. Because of this and in order not to put too much pressure on the delivery chain, Alibaba discourages brands from offering large discounts and brands in return tend to postpone their marketing campaigns. Eventually, this tends to also make consumers delay their purchase. And as they can’t buy, they visit online stores less. Those who thought people staying at home would spend more time browsing, even without buying, were wrong.  We at Full Jet observe a slowdown in traffic on all our brands.

Some categories are also more affected than others by the behavioral changes the crisis generates.  As gyms are closed, people are less likely to buy sporting goods, but as they reopen over time, for sure people will make the purchases they have delayed. As the situation returns to normal, sport brands will therefore probably partly recover their losses. 

On the other hand some categories, just like services, will never make up for their losses later, as their products are recurring purchases for consumers.
For example, if you don’t go out, you are less inclined to use and therefore buy make up and lipstick. When things will get back to normal, you will not buy more. This is why categories such as beauty and cosmetics are and will be particularly affected. 

What about brands that sell to their consumers one or two products a year, such as fashion brands? This is where seasonality will play a big role. As the crisis started in winter, a brand that sells winter outerwear will obviously have suffered more than one that sells shirts. In one case the sale will be lost, in the other, it will probably just be delayed. As you don’t buy winter outerwear every year, it could be, nevertheless, that the brand selling winter outerwear will make a better year than usual the following year, but it won’t make up for the losses, as it could also be that by then your desire for this brand has vanished.

In this complex environment, the brands that are relying on E-Commerce in China will need to carefully plan their business. Correctly forecasting sales and marketing investments (and of course inventory for those who produce in China!) for the remaining 3 quarters of the year will be of crucial importance.  This will be even more true for those who have planned to enter the Chinese E-Commerce market this year.

They will need to find the right partner who understands that things will not simply get back to normal overnight, has the market knowledge to assess the extraordinary situation we are living in and the strategic ability to determine how it will affect each category and brand in a different way. 

Together, they will need to conduct scenario planning to understand financial and operational implications in the case of a quick restart or a prolonged shutdown.
As with all extraordinary situation, there will be risks, challenges, but there certainly will also be opportunities.