China is ahead of the curve in its recovery from the recent COVID-19 outbreak, with many provinces slowly returning to normal levels of activity. Factories are restarting production and consumers are beginning to spend again. However, the crisis has had a dramatic and lingering impact on the nation’s shopping habits, with implications for brands in China and globally.
McKinsey worked with MIYA, a leading mobile payment solutions provider, to analyze point-of-sale (POS) data from 31,000 stores and 500 million+ transactions, covering 150+ cities, including Wuhan and Hubei, and 100 million+ shoppers. The data reveals four key shifts that are persisting even as the peak impact of the virus abates.
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1. Offline shopping is slowly recovering, but discretionary spend, nighttime shopping, and epicenter spend are lagging
Offline consumption is slowly recovering, after falling to around 39 percent of normal levels during the peak period of the outbreak. Many local authorities loosened restrictions in the first week of March, giving shops an opportunity to welcome customers who had been isolated in their homes for as long as six weeks. Over the following days, activity picked up to around 79 percent of precrisis levels (Exhibit 1).
Despite the partial rebound, there were significant variations, amid continuing pressure on discretionary categories. Supermarkets, convenience stores, and drugstores saw a spike in activity during the crisis, as consumers stocked up on essentials and cooked at home. However, after the peak there was a divergence (Exhibit 2). Supermarket volumes fell, while convenience stores and drugstores continued to see positive momentum, driven by demand for medicines and a desire among many people to shop near their homes. Discretionary categories, such as food service outlets, apparel stores, and department stores were hit hard during the crisis and their recovery has been slow.
A notable trend across categories during the
outbreak was increased basket sizes in non-discretionary categories, reflecting consumer aversion to shopping trips and willingness to spend more per visit to reduce travel frequency. Convenience store basket sizes rose 120 percent during the crisis, and remained 45 percent higher as the crisis abated. Discretionary categories, such as department and apparel stores, on the other hand, saw smaller basket sizes (Exhibit 3). Department store basket sizes were 54 percent smaller during the crisis, and have recovered only slightly in recent weeks, to a level that is around 33 percent smaller than before the crisis. Again, this may be a reflection of people’s reluctance to spend too long in crowded environments.
Absolute traffic levels fell dramatically in all categories except drug stores during the crisis (30 percent lower for supermarkets and 88 percent lower for apparel outlets), and continued to be lighter than normal after the peak. Some 80 percent of apparel stores have reopened, but footfall in discretionary categories is still 40-50 percent below pre-COVID-19 levels. In non-discretionary categories it is around 30 percent lower.
The impact of the crisis on shopping habits was revealed through the times of day at which people ventured out (Exhibit 4). In normal times, weekend and evenings are peak shopping times in China—weekend traffic is generally 30 percent higher than weekday traffic, and evening traffic is 50 percent higher than day traffic. The traffic curves were much flatter during the height of the outbreak, with weekend traffic just 10 percent higher than weekday traffic and evening peak hours about 15 percent higher than daytime peaks. Again, the pace of recovery has been slow, with shopping patterns continuing to echo those at the height of the crisis. Daily transaction volumes have recovered by around 50 percent from the trough.
Tier 1 cities such as Beijing, Shanghai, and Shenzhen are the busiest in China, and these normally crowded environments have been slower to recover than lower-tier cities. Most channels have continued to see much lower spending, in the region of 25 to 60 percent. Cities at the epicenter of the outbreak (in Hubei province) have also seen sluggish recoveries. There has, however, been some variation across channels (Exhibit 5).
2. Channel shift to online, offline convenience, and drugstores
A trend that emerged from the crisis is the accelerating growth of the online channel, which benefited from the lockdown, store closures, and the continued reluctance of consumers to engage in-person with sales and service staff (Exhibit 6). In the grocery category, there was a spike in online shopping during the peak, with consumers spending more time and money online. Some 74 percent of consumers bought additional groceries online at the peak and 21 percent spent more. Chinese consumers were ahead of consumers in other countries in respect of frequency of online shopping, including South Korea (51 percent increased frequency) and India (40 percent). In recent weeks, online activity in China has moderated, but visits are still running at 15 percent above precrisis levels.
Another emerging dynamic is that convenience stores have performed well in the wake of the outbreak (as they did at the peak), with tier 1 cities seeing the biggest uplifts (Exhibit 7). CVS daily consumption in tier 1 cities has run at around 36 percent above precrisis levels (as at December 2019). Again, this is likely the result of continuing caution in respect of travelling and mixing in large groups. Some cities at the epicenter have seen the strongest rebounds in the hypermarket/supermarket channel, recording a 64 percent rise in volumes compared with December. This has been driven by relatively tighter restrictions on movement than in the rest of the country, and limited alternative sources of food. Drugstores have fared particularly well in provincial capitals, but have seen a drop-off in tier 1 cities as the impacts of the outbreak have diminished.
3. Health and fitness is here to stay
COVID-19 has emphasized the importance of staying fit and healthy, and changing attitudes are reflected in shopping behaviors that have persisted in recent weeks. Demand for dairy, vegetables, and eggs was 25-30 percent higher during the initial recovery phase than it was before the crisis. Supermarket and convenience store data shows that, aside from fresh food, popular items during and after the peak of the crisis included grains, ready-to-cook meals, packaged food, and snacks. This reflected a degree of “stocking up” and, again, travel aversion. Demand for these has softened of late but is still running above precrisis levels. There was a reduction in demand for personal care products and cosmetics in January and February, and these categories are only recovering slowly (Exhibit 8).
As shoppers have gravitated toward local stores, they have expanded the range of items they buy, adding more grains and fresh foods to their baskets (Exhibit 9). If the trend continues, suppliers in these categories may need to plan for a less centralized distribution model, in which individual CVS stores are likely to carry fewer brands in any single type of product.
4. Shock to loyalty offline, partly offset by online engagement
Given the physical constraints of the crisis, Chinese customers have been more willing to try new stores and new brands. After the peak, around 14 percent do not plan to revert to their precrisis store choices and about 6 percent do not plan to return to their previous brands (Exhibits 10 and 11). To engage with these dynamics, hard-hit categories such as apparel have ramped up their digital activities. One premium fashion retailer, for example, invested in online channels such as Tmall, store applications, and social media. Its offline sales fell by about 50 percent in March, but its online sales grew by 60 percent. A large grocery retailer saw a 300 percent spike in demand for its home delivery service and has launched a major effort to triple its online business in 2020.
In aggregate, the data shows that COVID-19 has had a profound and persistent impact on the nation’s shopping habits. The implications for brands in China, and other countries that may follow China’s path to recovery, can be summarized under four strategic pillars:
- Continue to protect customers and employees. COVID-19 is likely to have a lingering effect on consumer attitudes and sentiment. Assuming the virus is not eliminated in the near future, companies should redesign their protocols and operating models to reflect the new reality. This, for example, would include setting out exactly what should happen if a person catches the virus.
- Drive triple digital transformation. Digital has been one of the few real beneficiaries of the crisis. We see three ways in which companies can respond:
- Manage your business in real time and digitally. The POS data has shown that the outbreak has had a significant impact on geographies, channels, and categories. Businesses now operate at a very different cadence, with decision making required at much higher levels of granularity and shorter intervals to reflect increased uncertainty. This requires a digital-first approach and agile organizational capabilities. Many companies set up war rooms during the crisis, but had very limited access to information. In future, it will be critical to have a real-time view on inventory and a strategy for deployment across regions. Data and analytics will be important tools.
- Don’t just sell online; engage your customers digitally end-to-end. Chinese consumers increasingly demand an omnichannel experience, meaning they want more than to be sold to online. One premium apparel retailer has deployed a range of solutions, including enabling sales reps to use WeChat groups to reach out to VIP customers with individualized products (supported by a CRM system), launching social media shows with with Key Opinion Leaders (KOLs), and ramping up content marketing. The bottom line is that companies must engage the entire organization to prepare for an omnichannel world. This requires a digital network architecture, backed by a dedicated operational setup, KPIs, and objectives and key results (OKR) frameworks that can help the organization define goals and track outcomes.
- Transform your business model. To increase operating efficiency and effectiveness, companies should aim to incorporate technology across the business. Before COVID-19, retailers were already deploying digital use cases, including seamless checkout, pricing, promotions, assortment optimization, and robotic process automation in the back office. However, few retailers managed to scale across the value chain, typically because of factors including a lack of top-down ownership and ambition, insufficient capabilities, siloed ways of working, outsourced IT functions, and legacy systems. COVID-19 has shown the need to transform the business model to be more tech-enabled, which will both help the company operate under the constraints of pandemics and meet customer safety needs. The business case is there: tech can improve efficiency by 2-5 percent of sales and, depending on starting position, drive sales and make or break market share during a crisis. Retailers need to pursue a triple transformation of people (new capabilities and ways of working), technology (modularizing core tech and deploying software-as-a-service across the value chain) and business (delivering value for the customer).
- Align with consumer trends: healthy, local, and delivering value. The data shows that the trend toward healthier lifestyles accelerated during the COVID-19 outbreak. People also shopped local, both in terms of location and products. For companies with strong cash positions, there is an opportunity to respond, leveraging M&A and hiring to expand into adjacencies such as food services, or acquiring smaller brands that may be struggling.
- Transform your supply chain to be agile and resilient. Supply chains attracted a lot of attention during COVID-19 and we expect they will continue to sit high on executive agendas. During a crisis, it can be dangerous to have a large amount of working capital locked up in inventory and facing potential write-off (or sale at a deep discount). The acceleration of omnichannel also creates a real challenge for many consumer packaged goods brands and retailers, because of the prohibitive cost: growth in online does not imply growth in profits. Companies should use the coming period to transform their supply chains, accelerating decision making to become more efficient, agile, and resilient.
As executives consider their options, these strategies may help them support resilience and lay the foundations for the “next normal” in the months ahead. Retailers and consumer brands have been challenged in recent months, but those that can act decisively on all four fronts are likely to emerge ahead of their peers once the crisis is over.