Decoding COVID-19: The Impact on China’s FMCG & Retail Market

Since early 2020, the novel coronavirus outbreak, officially named COVID-19, has been a worldwide concern. Compared to over 5,000 SARS cases diagnosed within six months, it took only one month for confirmed COVID-19 cases to exceed 70,000. During this nationally fierce fight against COVID-19, changed consumer behavior is igniting a transformation of China’s FMCG & retail market.    

1

Learning from History

Although different from COVID-19, the SARS outbreak can still offer some indication of what we can expect.

The tertiary industry was impacted for a longer period of time. The three main industries all witnessed growth decline, but the tertiary industry saw a slower recovery. It accounted for 54% of GDP in 2019 compared with 42% in 2003.  According to historical data, transportation, catering, and tourism were more vulnerable to short-term impacts, while wholesale and retail were relatively less affected.

Fig.1  Growth Rate by Industries 

Nielsen research revealed that different categories of consumer retail goods were influenced to varying degrees. In the short run, luxury and durable consumption goods like clothing were affected more heavily than daily necessities like food and beverages during the SARS outbreak. Over the long haul, FMCG also recorded strong growth momentum due to rapid development of China’s economy.

Fig.2 Sales Growth Rate by FCMG Categories

Below are some key impacts on FMCG categories from Nielsen research:

Disinfectants Led Personal and Household Care Products 

The sales of these goods didn’t experience significant fluctuation during SARS outbreak, but presented obvious differences among various categories in the long term. According to Nielsen research, the sales of disinfectants fell by 29% in 2004. Therefore manufacturers of products in high demand during a short-term period should adjust production and inventory plans after the epidemic and improve emergency capacities. Some product categories and segments saw robust growth for a long time after SARS, such as antibacterial personal care products and sterilizers which increased by 22% and 19% respectively. Relevant manufacturers should take the chance during epidemic periods to focus on long-term business, advocate consumption habits and make appropriate investments, all of which are key to seizing future growth.

Milk Beverages saw 

Rapid Growth after SARS

Despite the limited short-term influences of SARS, health and nutrition categories gained rapid growth over the long-term. In 2004, the sales growth of yogurt was up 40%, mainly driven by more nutritious yogurts while liquid milk increased by 20%, owing to pure milk with high protein. Nielsen also found juice sales increased by 22% in 2004, suggesting a huge demand on healthy beverages after SARS.

Fig.3 Sales Growth of Disinfectants and 

Healthy Milk Beverages after SARS (2004 vs 2003)

Food Sales Became Stable

after Rapid Growth

Most food categories showed stable sales soon after temporary influence, but Nielsen still noticed another story among different categories. For instance, instant noodles skyrocketed quickly due to consumer stockpiling during SARS, but unlike disinfectants, the sales returned to be stable instead of dropping rapidly after Q3 2003. This proves products in frequent demand are highly resilient to the epidemic.

2

Reflection on Today’s Transformation: 

What should manufacturers learn from the epidemic?

01

Keeping an eye on the epidemic situation, manufacturers need to focus on the fundamentals of China’s economy; and constant investment is advised as long as Chinese government sticks to deep economic reform.

02

Since the tertiary industry, especially tourism and catering were heavily impacted, impulsive consumption and “on-the-go” consumption will predictably risk losses. Therefore, relevant manufacturers must track the epidemic dynamics in order to resume corresponding sales as soon as possible. Meanwhile a “plan B” should be available to invest in other consumption scenarios like non-impulsive consumption.  

03

After the epidemic, the outlook for various consumer goods categories will be different. Appropriate production and sales plans are required for the goods that were stockpiled during the emergency period, but categories will see sales recovery. Smart manufacturers will pre-schedule post-epidemic production and sales to seize future market opportunities while leveraging e-commerce platforms and O2O to offset influence on sales during the outbreak.

04

Consumers developed new habits in health, nutrition and sanitation to counter the epidemic, leading to constant demands and growth of relevant categories. This is an opportunity for manufacturers to further strengthen consumer awareness on health, nutrition and sanitation, so as to capture and amplify consumption demands. Moreover, manufacturers should enhance long-term investments to relevant categories from R&D, innovation to marketing & sales, underpinning prolonged growth.

Fig.4 Four Revelations to Manufacturers

3

Explore the Unknown: where will the retail market turnaround after the epidemic?

Thanks to a huge tenfold increase of per capita GDP over 17 years, China has solid economic strength to support material supplies against the outbreak and recover consumption activities afterwards. Fast-growing diversified retail channels, especially e-commerce and O2O, enable consumers to purchase at home safely, and contribute to epidemic control. 

Nielsen predicts three accelerated areas for upgraded consumption  in China’s retail market after the epidemic:

1

Online-offline integration will be accelerated.

The current retail market pattern will be further challenged. Nielsen found soaring registration numbers on major fresh foods and O2O platforms, with sales doubling, during Chinese New Year 2020. During this epidemic, existing e-commerce players lack capacity to meet all customers’ demands, which indicates more market space for new entrants. Additionally, fresh foods and O2O platforms take a remarkable edge in business operation, and will shock the offline retailers who solely deal with fresh foods. More importantly consumption behavior has changed. During the extended holiday, many older newbies and younger loyal customers of meal delivery have turned to grocery shopping online. This will change the consumer composition of online and offline retail platforms and shopping purposes.

In the face of the changed retail landscape, the manufacturers need to re-orchestrate channel strategies in order to adjust their product portfolio, specifications and pricing according to different channels with different consumer groups and shopping purposes. 

2

Escalated supply chains and logistics may incur changes in the manufacturer landscape

Despite great improvements since economic reform and opening-up, China’s supply chain and logistics systems are still inadequate to combat such emergencies as this epidemic. However driven by this outbreak, it’s also a good time to further upgrade supply chains and logistics, involving flexible production, direct procurement, front-end warehouse, cold chain, non-contact delivery and direct-to-home services. The improvement will be expected with the support of blockchain and 5G.

These improvements will help manufacturers to explore new segments with new consumer groups. On the other hand, manufacturers will be pushed to perfect their production plans to improve cost efficiency and provide more customized products for increasingly diversified demands of Chinese consumers.  

3

Social media gains a bigger influence and inspires accelerated upgrading of retailer, manufacturer and media landscapes

The media landscape is changing. Nielsen research has revealed various social media contributions far beyond simple entertaining content Social media now has higher credibility and a larger audience than traditional media, largely due to up-to-the-minute of information and live broadcast from authorities and government organizations. Social media highlights fast communication in a popular format, attracting more less-educated and older users.

Because the advertising ROI of social media is increasing in these new situations, manufacturers need to review capabilities of various media channels and correspondingly optimize advertising plans. But they are also challenged to innovatively leverage social media to fully satisfy demands of complicated audiences.

Fig.5 Three Accelerated Areas for Upgraded Consumption 

in China's Retail Market

In conclusion, all three of these upgrading areas are backed by big data. Companies that embrace new technologies and leverage big data for key strategic decisions will be first to capture emerging opportunities from China’s evolving market landscape.