Post-Coronavirus China: Will the Power Spenders Keep Buying?
11 million RMB in just 5 hours in one single mall!
By Deja Du, Cosmose Client Success Team
This is a true story that happened in Hangzhou Tower, a premium shopping center in the Chinese city Hangzhou (home to many internet companies including Alibaba), on its first business day (Feb 22) after the temporary suspension due to COVID-19.
Many laughed about the big heart and fat purse Hangzhou people have got while the coronavirus is still not yet contained. For a lot of retail brands suffering the loss in the pandemic, the surprise came unexpectedly. Not just not long ago an 80% of drop in retail footfall was detected and 30+ fashion brands suspended stores nationwide. From the end of Jan to mid-Feb, industries like fashion, tourism, F&B, and hospitality are the ones that suffered the hardest.
Below using Cosmose’s offline data, we can have an overview of the footfall index of both Chinese travelers in HK and consumer visits in supermarkets in China:
The outbreak of Coronavirus 2019 has cast a shadow over the Chinese economic growth (4% of Q1 GDP growth estimated) in 2020. The retail sector is especially in the gloom as half of the population in China has been limited outdoor activities to prevent a larger spread of the epidemic. Overall retail sales are being stripped of US$144 billion a week, according to China’s Evergrande Think Tank.
As figures out of Hubei Province (where Wuhan is the provincial capital city) is getting more promising by days, people started to wonder what the post-Coronavirus time will look like.
It’s not a bad idea to take notes of some macroeconomic learnings from the recovery of SARS in 2003.
SARS: Short-term fluctuations in the retail growth, but recovered quickly
At the end of 2002, the SARS epidemic broke out in Guangdong Province, China. Due to a combination of factors such as insufficient domestic awareness of the disease and the Chinese New Year migration tides, the epidemic quickly spread to Southeast Asia and the world from March to May, and finally got calmed down in June 2003. According to the National Bureau of Statistics and the Ministry of Civil Affairs, in total 5327 cases were reported in mainland China during the SARS period, resulting in 349 deaths and a direct economic loss of 93.3 billion RMB.
COVID-19: A greater impact on China’s society and the economy expected
According to the latest forecast from the WHO, the epidemic will not turn around until April 2020, and it will only begin to gradually decline in June (even in the second half of the year). The turn-around in China came earlier and so may the recovery in the retail sector, as the whole country was shutting down and people were being amazingly cooperative with the containment measures.
China International Capital estimated that China’s retail sales could shrink 2 percent year-on-year in January and February, following an 8 percent rise in December.
The impact of the COVID-19 this time might be greater than SARS 2003:
1 Compared with the peak of SARS with large-scale infection in the Q2 2003 (March-May), the peak of COVID-19 concentrated during the Chinese New Year, the most important season of the year for retail sales and travel, resulting in a bigger impact.
2The number of infected far exceeds SARS and geographically it spread the whole nation
3Quarantine measures adopted nationwide, not much during SARS
4Externally, China had just joined the WTO in 2003, and the economy had grown rapidly. The trade war between China and the United States from 2019 to 2020 had caused percussion in the economy. The GDP growth rate today has slowed down significantly.
5The tertiary industry is now accounted for a much larger portion in China’s economy
A V-shaped rebound in the retail sector anticipated? It might be a U-shape instead
The growth rate of total retail sales of consumer goods experienced trough from April to May 2003 to 3.6%. After the epidemic gradually subsided in July, the retail growth rate quickly recovered to a high level of 9.8%.
According to the annual data that year, the retail growth rate in 2003 was 9.1%, which was dragged down by Q2, was 2–4 percentage points lower than the 11.8% / 13.3% in 2002/2004. And in the months that followed, the retaliatory rebound even bounced far beyond normal levels
To put it in simple words, the epidemic prevents people from consuming, as soon as the alarm was off, everyone started to make up for it.
The evidence of a short-term rebound is already here — Hangzhou Tower’s 5-hour record-breaking sales starting with a pair of Dior earrings in the price of 6000 RMB, and more than 250 Giorgio Armani lipsticks were sold!
What does it say?
Compensational spending is forming its shape after people spent almost 4 weeks at home foot grounded, not able to travel or shop intensely during the Chinese New Year and Feb 14th as they used to every year.
However, as the post-coronavirus China is recovering from a larger scaled pause economically, the rebound might happen less dramatically, but in a more possible shape of U.
“This outbreak has reminded everyone, from individuals to business owners, about the crucial importance of having an emergency fund.”
Becky Li, a top-tier Chinese influencer, told the fashion and luxury insight media Jing Daily while being interviewed.
There are factors lingering around unclear for the luxury retail sector:
1Compared to those FMCG products, entertainment, and service of much lower prices, it is less easy for luxury products to experience a sudden boost of buy, whose price is about more than 10 times higher.
2Middle-class buyers might be more cautious about spending as they realize the importance of emergency funds and cash flow to one’s household in sudden epidemic situations as such. As a result they will try to allocate a larger proportion of their disposable income in health and fitness, personal care, savings and financial investment including insurance.
According to the online survey conducted by Rong360.com, a Beijing-based firm providing financial and credit information and products, 31.4% of respondents said they would not increase consumer spending for short term spending, 68.6% of respondents said they would increase expenditure after the epidemic, especially on entertainment, cosmetics, catering, movies, massages, fitness, and sportswear.
More importantly, nearly two thirds, or 64.4 percent, said they would be more “restrained” in spending in the long term, while another 12.6 percent said they would cut spending, with only 11 percent saying they would increase expenditure. The remaining 12 percent said they would keep their lifestyle unchanged.
3The consumer habit of shopping online is further cultivated during the epidemic. Some argue that online e-commerce platforms had already provided the outlet for Chinese consumers to release their sentiment during the foot grounding, that the potential of the irrational compensational purchase at a larger scale thus is unlikely to happen.
Is that the case?
The stock market indexes might reveal a general sentiment of the public and a certain level of consumer confidence, which are now indicating “cautious optimism”.
Social listening of Weibo and Wechat sentiment is also an interesting sensor of consumer sentiment.
Being one of the most important social platforms netizens in China express their opinions and thoughts, Weibo is witnessing flooding flow of feeds hoping the epidemic would be over soon. The Weibo topic #Where do you want to go after the Coronavirus epidemic were trending with more than 18,000 reads. Weibo posts about what people want to do and purchase are filled with the sentiment of hedonistic “life is short so enjoy while one can” attitude.
WeChat is a Whatsapp equivalent chat and communication tool in China with the largest user pool. WeChat search enables users to search related posts on their WeChat moments (a flow of feeds where all your friends share thoughts and contents) and other platforms like Zhihu (the Chinese Reddit) and Sougou (another Chinese search engine).
Left: A 90-day change in the search volume of the Chinese word “luxury” shows that people stopped searching the word “luxury” in the period of COVID-19 outbreak, but returned the attention around Valentine’s Day creating the second highest peak in 90 days compared to the one at the beginning of 2020.
Middle and Right: The 30-day and 90-day changes in the search for the words “Chanel”(green) and “Dior”(purple) in Chinese, together with Louis Vuitton (yellow) in abbreviation, and Gucci (blue) in English. Those search forms are chosen according to the Chinese consumers’ habit referring to those brands. We can see the percussions of consumer attention to those brands responding alongside the epidemic, without being too sadly shocking.
Some bold estimates here:
In the short run, the “Buy” mentality of the riche is not going anywhere out of the picture. And yes the mature middle-class buyers tend to be more selected in what they buy, on the other hand, the emerging “less is more” cost-efficiency philosophy might influence their buying decisions to lean towards items of better quality and that can be used for a longer duration, such as luxury products from big brands, despite that the price of which could be multiple times higher. The Gen-Z trend settlers, who are now a major power in luxury buying, are more likely to have a stronger post-epidemic attitude of “enjoy while one can” and this likely “work hard and party hard” spirit may also show up in their consumption behavior patterns.
What else has been changed? I will guide you into the head of Chinese consumers further on their “go green” thinking revoked by COVID-19 and the landscape change of online/offline channels.
Stay tuned for the next story from Cosmose.
Offline, Online, Equal.
For media interviews or press-related matters, please contact: Kari Wu at kari@cosmose.co.
