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The Naked Cowboy, a regular performer at Times Square, New York, puts on a protective mask in the deserted commercial district on March 19. New York state governor Andrew Cuomo ordered businesses to keep 75 per cent of their workforce home as the number of coronavirus cases rose rapidly. Photo: Bloomberg
Opinion
The View
by Nicholas Spiro
The View
by Nicholas Spiro

Will the coronavirus shock push the retail sector in the US and Britain to adopt the China model?

  • Coronavirus-related lockdowns and supply chain disruptions have dealt a severe blow to the retail industry in the US and UK, already grappling with the threat of online shopping
  • The retail sector in Asia – particularly China – is better placed to cope, but also faces challenges related to supply and must anticipate post-crisis demand patterns
Long before the Covid-19 pandemic took hold, the retail industry in the US and Britain faced what many experts believed was an existential crisis, as the rapid rise of online shopping upended the business models of traditional retailers, adding to the woes of a sector suffering from overdevelopment, high debt levels and outdated buildings.
Many investors saw the problems facing the industry as the catalyst for a major financial crisis, and began “shorting”, or betting against, the stocks and bonds of retail companies as some of the industry’s biggest names, such as Sears and Debenhams, two prominent department stores, fell into bankruptcy.

In the commercial property markets, the retail sector has been distinctly out of favour with institutional investors for some time. Last year, retail transaction volumes globally fell 3 per cent year on year, compared with a 24 per cent increase in deals in the logistics sector and 3 per cent rise in office transactions, data from JLL shows.

Yet, the challenges faced by the retail industry over the past several years pale in comparison with the generation-defining shock caused by the coronavirus crisis. The economic “sudden stop”, in which activity across the globe has abruptly halted due to lockdowns and social distancing measures, has hit the retail sector particularly hard.
While there is intense debate over the duration of the recession and its long-term consequences for the global economy, the crisis has already forced many retailers to shut their stores temporarily, giving new impetus to the shift to online shopping.
However, even the performance of online sales has varied greatly. While digital purchases of daily essentials, such as food and home hygiene products, have surged, online sales of non-essential items, such as apparel and luxury goods, have plummeted. What is more, restrictions on travel have created huge logistical and supply bottlenecks, resulting in empty shelves at many supermarkets, amplifying the effects of the crisis and fuelling panic buying.

How the coronavirus is revolutionising China’s consumer landscape

In a brief published earlier this month on the impact Covid-19 is having on the global retail industry, consultant Bain and Company said “the crisis is a defining leadership moment for retailers”, adding that the “changes to operations demanded by the situation are vast, touching on sweeping matters of continuity of supply and availability, rapid adaptation of online and offline channel operations, channel capacity and more”.

A woman walks past empty shelves in Sainsburys, Whitechapel, London, amid the coronavirus pandemic. Photo: Hilary Clarke
Asia’s retail sector is better placed to cope with the virus-induced acceleration of online shopping.

In China, e-tailing has been the norm for some time, in stark contrast to advanced economies, where digital disruption has severely damaged traditional bricks-and-mortar retailers. According to data from JLL, online sales in China account for roughly 30 per cent of total retail sales, compared with 10 per cent in America. Even in the Asia-Pacific region as a whole, e-commerce accounts for 18 per cent of all retail sales, compared with 10 per cent globally.

Online fashion stores invest in bricks and mortar ‘to bring brands to life’

With many local brands in China having existed only online, retailers have been more successful in adopting integrated omnichannel sales models – which combine e-commerce with a physical presence – that have been a key driver of leasing demand.

A report published by CBRE earlier this month noted that omnichannel platforms, especially in the grocery and fresh food subsectors, have reported a surge in sales during the Covid-19 crisis, with JD.com, China’s online shopping giant, posting a 400-500 per cent year on year rise in fresh food sales during the Lunar New Year.

A motorcycle courier wearing a protective face mask makes a grocery delivery on the first day of work after the extended Lunar New Year holiday in Shanghai on February 10. As Chinese-based manufacturers began to restart factories, it is still not clear when they'll be back at full speed. Photo: Bloomberg
Yet, even in countries where the migration of retail sales to online channels is most advanced, such as South Korea, retailers have to contend with unprecedented disruptions to supply chains.

Sharp slowdowns (and outright stoppages) in production and distribution centre activity due to quarantines and travel curbs have made supply “the biggest problem for retailers”, according to Bain, which notes that while 80 per cent of Chinese consumers expressed a preference for buying groceries online during the crisis, only half could make their purchases due to the lack of supply.

In a report published earlier this month, JLL noted that “many retailers [will have] to rethink their supply chains to ensure continuity of their operations and to mitigate risks of future shocks”.

Just as importantly, the retail industry, particularly in China where the government has contained the spread of the virus and will shortly lift the mass quarantine over Wuhan, must start preparing for the resumption of normal activity.

As I argued previously, “lockdown fatigue” is beginning to set in in several major economies – US President Donald Trump’s plan to reopen America’s economy by Easter is politicising the debate over how to manage the pandemic – which puts pressure on governments to relax social distancing measures.

Five trends to watch for as technology upends how we shop

Retailers will have to anticipate post-crisis demand patterns, ensure that measures that enhance safety and hygiene remain firmly in place, ramp up flexible omnichannel strategies and, perhaps most importantly, heed the lessons from the Covid-19 crisis to help plan for future shocks, including a new wave of infections if lockdowns are lifted prematurely.

In the coming weeks, China’s retail sector will be under the spotlight as Beijing seeks to restart economic activity. As far as defining leadership moments for the industry go, this will be one of the most important ones.

Nicholas Spiro is a partner at Lauressa Advisory

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