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COVID-19

Back to Business: An update on how China’s consumer market is recovering from COVID-19May 2020

PwC | An update on how China’s retail and consumer market is recovering from COVID-19

Table of Content

2

1The path to business recovery: A macro-view

2Reconfiguration of manufacturing and supply chain

3 4China’s retail sector in response to the pandemic

5Business implications for retailers and brands operating in post-pandemic China

Post-pandemic changes in consumer behaviour in China

Observations in a snapshot Broad and substantial recommencement of business activities in China’s

consumer sector although pace of recovery differs widely across categories. The rebalancing of global supply chain will continue to prevail in a current climate

prompting businesses to diversify their supply chains to minimise over-reliance on specific markets.

Consumers are set to unleash their purchasing power on luxury and discretionary products in what is dubbed as “revenge shopping” after prolonged period of lockdowns.

Retail sales posed strong recovery during Labour Day Festival (May 1 to May 5) and "Double Five Shopping Festival“*. New opportunities will revolve around the theme of “new consumption, “omni-channel retail”, “pursuit of health and wellness assets”, and further “consolidation and optimisation of supply chain”.

The crisis has exposed the urgency for many brands and retailers to adopt or accelerate their digital transformations. Retail businesses with strong online presence and e-commerce setup are better equipped to take the economic shock.

* The Double Five festival was announced by the Shanghai municipal government on April 23 as part of measures to revive domesticconsumption and boost consumer confidence.

The path to business recovery: A macro-view


Since the onset of COVID-19, China has experienced an unprecedented halt of economic activities in January and February, after the pandemic situation in Wuhan ignited a wave of city lockdowns in Hubei and other parts of the country. Transportation systems and flights were suspended. Streets were cleared. Shopping malls, restaurants, cinemas, and other public places were ordered to close.

In response, the Chinese government has rolled out multiple rounds of stimulus measures to support and revive the economy, including a guideline in March aimed at boosting consumption and unleashing the potential of the domestic market to cushion the blow on economic activities. A number of Chinese cities have launched voucher campaigns to boost hard-hit domestic consumption. Statistics from Alipay has shown that more than 40 cities across the country have issued coupons since March 13 to encourage citizens to spend more. The move has already leveraged consumption worth over 10 billion yuan.

With the effectiveness of the epidemic prevention and control, we have seen broad and recommencement of business activities and production, with notable improvement in manufacturing, service industry, investment, import and export. Outputs of consumer goods, particularly necessities and non-discretionary products, have steadily recovered – the scale and scope of business recovery have well surpassed that of many affected areas in the US and Europe.

As of April 15, the national work resumption rate of small and medium enterprises was 84%, while large industrial enterprises above designated size have officially resumed operation at a rate of around 99% with more than 94% of workers returning to their posts. The rate of work resumption in a number of regions is showing an uptrend across the board, with 25 provinces exceeding 80% including Hubei Province, where the economic shock was most intense.

5

From COVID-19 outbreak to work resumption

PwC | An update on how China’s retail and consumer market is recovering from COVID-19 6


China's finance authorities allocated 47 billion yuan for coronavirus prevention and control work

Zhejiang province as the first province launched “epidemic prevention and health QR code"

China's daily output of face masks reached 116 million yuan, 12 times the figure on 1 Feb

Authorities in Hubei announced to postpone school opening

WHO declared global emergency

During the outbreak

Huoshenshan and Leishenshan hospitalsin Wuhan started to build for COVID-19 infected people, offering 2,600 beds. Construction completed in around 10-12 days

Many companies have rapidly adopted local productivity solutions to communicate and deliver weekly meetings, training, and lectures. Many multinational firms accelerated roll-out of productivity solutions

China's daily number of newly recovered infections surpassed that of newly confirmed infections for the first time

China implemented travel bans,Wuhan authorities closed all transport hubs including airports, railway and bus stations.

China's tax watchdog unveiled a guideline, involving 12 detailed items to reduce financial pressure in key sectors

Start of the outbreak

23Jan

25Jan

31Jan

1Feb

2Feb

10Feb

11Feb

19Feb

17Feb

2Mar



Shanghai and 25 provinces have lowered down the emergency level

General office of the State Council announced the opinion on measures to stabiliseemployment

Ministry of transport announced a circular on orderly resumption of transportation services

The average operating rate of Industrial Enterprises above Designated Size has reached 99%, and 94% employees have returned to work.

After the outbreak

3Mar

10Mar

13Mar

18Mar

19Mar

24Mar

8Apr

28Mar

14Apr

The number of newly COVID-19 cases in China dropped to double digits for the first time since Jan 20.

Preferential tax policies were newly issued for epidemic prevention and control, including 17 policies in four aspects.

The State Council issued a circular ordering local governments and ministries to further streamline approval procedures and optimize services to advance the resumption of work.

The Ministry of Commerce issued a joint circular to support the work resumption of retailing, wholesaling, catering and hotel industries.

The Ministry of Commerce issued a circular to speed up the restoration of normal business order of shopping malls and department stores.

President Xi Jinping inspected Wuhan, pledging a continuous fight toward victory as prevention and control efforts have "turned the tide".

mainland China reported “0” increase in domestically transmitted COVID-19 cases.

6Mar

President Xi Jinping chaired the meeting of the Standing Committee of the Political Bureau of the CPC Central Committee, the first time the leadership meeting mentioned “fully advancing work resumption”

Wuhan lockdown lifted



In retrospect, it was hard to imagine only a few months ago, the country was all hands on deck dealing with the health crisis whose negative impacts had translated into the broader economy. The Q1 GDP in China contracted by 6.8% from a year ago, marking the first registered decline since the economic indicator was first released in 1992. From January to March, total retail sales of consumer goods reached 7,858 billion yuan, down 19% year on year – first time in the negative growth territory over the past 28 years. The quarantine period effectively eroded between 20-90% of all key sectorial indicators including sales in retail and consumers sector.

8

-6.8%

-19.0%

-25%

-20%

-15%

-10%

-5%

0%

5%

10%

15%

20%

2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 Q12020

China GDP and Q1 Retail Sales (YoY % growth) from 2010 to 2020

GDP (yoy % growth) Retail sales in Q1 (yoy % growth)

Pandemic-induced economic impacts are widely seen

28%6% 10%

Real estate sales

-36%

Finished residential

works

-24%

Industrial production

-14%

Car sales

-79%

Traffic ofpassengers

-88%

Hotel occupancy

-90%

Retail sales

-21%

Online channel sales

+3%

Real Estate & construction

Industry & auto

Tourism, transportation and logistics

Retail

Severely impacted sectors

Main activity indicators by sector in China – impact after 55 days of quarantine

Sectoral weight in China's GDP

28%14%

Source: National Bureau of Statistics of China

Source: National Bureau of Statistics of China; Ministry of Industry and Information Technology of China


Signs of steady recovery across multiple indicators

% of Chinese consumers’ attitude in economy recovery

Neutral**Postive**

Negative**

1% 6%

55% 45%

44% 49%

0%

20%

40%

60%

80%

100%

21-24 Feb 20-23 Mar

9

As the first country absorbing the impact of COVID-19 and recovering from this health crisis, China has shown exceptional resilience and adaptability. In a matter of weeks, the country’s immune system is swiftly fighting back – completely locking down multiple affected areas, constructing hospitals in record time, and providing lifeblood to the economy and citizens through a series of stimulus measures. The country seems to be ahead of the global curve when it comes to restarting the economy in the aftermath of the epidemic.

The number of newly confirmed cases has diminished drastically since the spike in February, receding after 50-60 days of the implementation of sanitary countermeasures. Meanwhile, domestic stock markets remained largely stable as seen by the recent strength of the Shanghai Composite index and Hong Kong Hang Seng Index relative to other markets.

0%20%40%60%80%

100%120%

Feb Mar Apr

Nationwide work resumption rate (%)

Industrial Enterprises SOEs SMEs

Source: Ministry of Commerce of PRC

Note: Industrial Enterprises above designated size; during the period of mid of Feb, end of Mar and mid of Apr

China starts to recover while others are still suffering from COVID-19

Source: McKinsey “M&S COVID-19 China Consumer Pulse Survey”

-19%-14% -14%

-8%

-15%

-21%

-15%

-22%-27% -25%

JapanNikkei 225

KoreaKOSP

TaiwanWeighted

Index

Shanghaicomposite

index

Hong KongHang Seng

Index

StraitsTimes of

SingaporeUS S&P

500GermanDAX30

FranceCAC40

UKFTSE100

Major stock markets YTD performance (1 Jan to 21 Apr 2020)

Source: WIND

1st country to recover from COVID-19 (Daily New Cases in 2020)

Source: World Health Organisation

Reconfiguration of manufacturing and supply chain


The manufacturing sector has made a swift comeback to near-normal activity level, in terms of production and work resumption. As of April 14, the average operating rate of industrial enterprises above designated size nationwide reached 99%, while 94% employees have returned to work.

The headline PMI rose above the neutral level of 50 in March following the nationwide reopening of factories and production plants. This indicated a stabilising manufacturing sector after significant contraction in February (an all-time low of 35.7). The output index fell from 51.3 in January to 27.8 in February, before rebounding strongly to 54.1 in March, showing output growth in March after production cut in February.

There has been a revival in both domestic demand and export demand lately: The new orders index returned to positive growth in March, increasing from 28.7 in February to 46.4 in March, indicating a slower decline in new export orders. However, the March figures might have merely reflected latent demand stemming from the order backlog of January and February. The April and May figures are likely to tell a better story about external demand conditions, when US and Europe were hard-hit by the first wave of the pandemic.

The production and supply of electricity, heat, gas and water in March decreased slightly by 1.6%, which was 5.5 percentage points narrower than the decline in January-February. The recovery of energy consumption mirrored the steady increase in production outputs in factories as workers in most cities returned to work after the extensive lockdown period.

On the downside, it is worthwhile to note that the pandemic situation in overseas countries has added to the uncertainty of the manufacturing industry at home. Insufficient demand in international markets, difficulty in capital turnover, and poor cross-border logistics have caused a number of recovering enterprises to face production cuts and shutdown risks.

Manufacturing and energy consumption rebounded on greater demand though full-on recovery could be a prolonged journey

11

-15%-10%-5%0%5%

10%15%20%25%30%35%

2017Q1

2017Q2

2017Q3

2017Q4

2018Q1

2018Q2

2018Q3

2018Q4

2019Q1

2019Q2

2019Q3

2019Q4

2020Q1

Import

China's import and export growth rate fell sharply in January and February

Source: General Administration of Customs, WIND

Export

30.035.040.045.050.055.060.0

PMI（%）

China's manufacturing PMI index (2005-2020)

Source: WIND

59.2

38.8

52.0

35.7

PwC | An update on how China’s retail and consumers market is recovering from COVID-19


The global supply chain is in a state of flux following the COVID-19 outbreak. In China, supply disruption of raw materials has affected factory outputs of various consumer categories, especially high value-added items involving upstream and downstream supply such as consumer electronics and medical equipment.

The Institute for Supply Management found that supplier lead times across different categories have increased by 222% on average in China and 200% in the U.S. because of the ongoing effects of the pandemic.

In response to the supply chain disruption, we have seen that manufacturers and retailers are increasingly adopting a “China + 1” strategy as a way to diversify their supply chain risks while retaining their exposure to China’s market opportunities. This strategy involves dual or multiple supply chains – with the core one catering to the Chinese market (also known as in-China for-China strategy), while others diversified outside of the country based on benefits of specific operations.

With increasing digitisation of the production processes, some enterprises have started to implement more efficient and larger-scale manufacturing models shaped by customer driven demands, or the C2M (Customer to Manufacturer) model, and have achieved considerable benefits in cost savings and improved customisation.

According to a recent survey conducted by PwC and Amcham China, 84% of American companies operating in China had no plans to move production or operations outside the country due to COVID-19 and 72% said they had no plans to shift sourcing. 68% of surveyed companies said they expect China operations to recover from coronavirus-related disruptions within three months, while all respondents take the view that their business will completely resume normal within 12 months, if the pandemic situation does not deteriorate further.

We expect that, despite the eventual recovery of production capacity, the de-risking and refining of global supply chain will continue to prevail in a current climate of China-US trade relations, geopolitical tensions, and the overall trend of businesses “diversifying supply chains to minimiseover-reliance on specific markets.” One in five respondents said they believe that COVID-19 would accelerate the process of economic rebalancing.

Industry supply chains are in the process of reconfiguration

12

0%

4%

12%

84%

0%

4%

24%

72%

12

Q. Do you have plans to move production and/or supply chain operations to other regions of China or outside China due to the COVID-19 epidemic?

Q. Do you have plans to move sourcing to other regions of China or outside China due to the COVID-19 epidemic?

No

Yes, adjusting production and/or supply both domestically and partially outside of China

Yes, move production and/or supply operations out of China

Yes, continue to produce and/or supply in different/additional provinces

No

Yes, adjusting production and/or supply both domestically and partially outside of China

Yes, move production and/or supply operations out of China

Yes, continue to produce and/or supply in different/additional provinces

N=25Source: PwC, AmCham China, AmCham Shanghai


Post-pandemic changes in consumer behaviour in China


China’s massive population of 400 million middle class consumers have always been the engine to fuel domestic consumption. The crisis has effectively pushed the pause button on this spending machine. Now they are back with a deep pocket to spend on high-end and luxury products in what is dubbed as “revenge shopping”.

In fact, the increased money supply following massive monetary easing over the past decade have prompted consumers to snatch properties and other physical assets to fight inflation; and now with housing prices at all time’s high, they are turning their attention to alternative assets as a store of value such as antique, paintings, and luxury watches.

Chinese consumers at large are resilient and upbeat about future prospects. The affluent middle class, who have greater job security, still shows strong willingness to spend given their desire to pursue a better life and the overall trend of consumption upgrading. The confidence of Chinese consumers is also rooted in the improved coverage of social security and welfare and the numerous policies recently introduced to expand consumption.

Overall, while there have been instances of shopping spree following the easing of lockdown, the COVID-19 outbreak has kicked off a trend where consumers are not only spending on luxury items but also increasing expenditure on activities that build knowledge and soft skills or safeguard their health. The younger generation, in particular, are reassessing their spending pattern and revalue certain things such as personal health, family relationship and sustainability.

There is also an apparent trend of “dislocation” of consumption patterns, where overall consumption in rural areas has seen an uptrend partly supported by migrant workers who are still in their hometowns and not fully back to work in cities. Meanwhile, event, occasion, and travel-driven spending is facing downward pressure due to movement restrictions and people’s reluctance to move around and congregate.

Chinese consumers are unleashing subdued demand after extensive lockdowns, but in a more cautious way

14



Consumer Confidence Index126

119

122

114116118120122124126128

Jan-20 Feb-20 Mar-20

Q1 2019 VS Q1 2020

8,908

5,808

8,561

5,082

4,0005,0006,0007,0008,0009,000

10,000

Disposable income Per capital consumptionexpenditure

-3.9%

-12.5%



A host of new industries, new formats, and new models have experienced rapid expansion and development during and after the outbreak, including smart home appliances, online education, unmanned delivery, and Internet based medical services and health care, to name a few. The recent lockdown has encouraged a ‘forced experimentation’, where consumers are buying different products online, consuming online services for the first time, or exploring different ways to access or substitute products.

Online educationOne of the biggest beneficiary sectors during the nationwide lockdown has been in online education and learning –a niche category that is seeing a boom.

The number of daily active users of education apps surged by 46% from 87 million to 127 million during the epidemic, according to Internet big data company QuestMobile. In addition, daily active users of K12 education grew by 23 million, compared to pre-pandemic level. Such growth is expected to accelerate during and after the lockdown as parents and students realise benefits of home-schooling such as flexibility and time saved.

Entertainment and gaming The heightened demand for indoor entertainment and gaming induced by lockdown or stay-at-home orders has been felt across the country.

Online entertainment and games giant Tencent, owner of big hit titles like Honour of Kings and PUGB Mobile, has clearly benefited from measures to prevent the spread of COVID-19. Downloads of mobile game globally jumped 39 per cent in February, with China taking lion share of the boost, data from Sensor Tower suggested.

Chinese consumers are rediscovering new spending patterns

15

Contactless servicesNon-contact delivery services will increasingly be the most preferred option amid the more stringent hygiene standard now demanded by consumers.

To achieve zero human-to-human interaction, tech companies have increased their use of automated delivery services. For instance, Online retailer JD.com has been utilisingdrones and robots to distribute medical materials in Hubei province, while Baidu has deployed autonomous vehicles to serve various purposes in the epidemic area.

Remote office and video-conferencingThere has also been a massive shift to business software and services that enable remote working, which are critical to business continuity for most companies. Remote work technology supports new modes of working and productive communications, which enables people and businesses to stay connected during periods of lockdowns and confinement. This can be video conferencing, webinars, cloud hosting, as well as team collaboration and communication tools.

It is estimated that the remote office market in China will reach 36.8 billion yuan by 2020 and 60 billion yuan by 2024. This relatively new segment is still a vast blue ocean with only 1% penetration compared to around 20% in western countries.

China’s retail sector in response to the pandemic


The retail sector has already shown signs of recovery as the decline of overall retail sales continues to narrow since the outbreak. In Q1 2020, total retail sales of consumer goods in China reached 7,858 billion yuan, down 19% year on year, of which the online retail sales reached 2,217 billion yuan, down only by 0.8% year on year.

In particular, online retail sales of physical goods in Q1 expanded 5.9% year-on-year to 1,850 billion yuan, accounting for 23.6% of the total retail sales in the first quarter, as consumers turned to online channels for different purchases during the lockdown, from bulk-buying sanitary products to ordering delivery of fresh meals.

Compared with manufacturing, however, the recovery of the retail service industries are relatively slow, especially for catering and accommodation which showed a substantial decline in the first quarter. Although most catering companies, shopping malls, and hotels have reopened to the general public, the offline demand and the number of customer flows are still far below the pre-crisis level.

The retail sector is bracing for a faster-than-expected recovery

17

Q1 2020 RMB billion

Q1 2020 YoY %

Total retail sales of consumer goods $7,858 -19%

Online retail sales of goods and services $2,217 -0.8%

Of which: Online retail sales of goods $1,854 +5.9%

Online retail sales of services $363 -21%



Labour Day and Double Five Festival driving the return of customer flow, both online and offline

On April 13, the China Commerce Association for General Merchandise released a survey report on the resumption of business in the retail industry, which showed that the resumption of business in retail enterprises continued to improve, and more than 80% of retail enterprises achieved 100% resumption.

In terms of customer flow, 77% of consumer goods enterprises saw more than 50% of their customer flow recovered, an increase of 16 percentage points from the previous week. 24% retail enterprises with 60% customer flow recovery increased by 6 percentage points from the week before; those with 80% customer flow recovery accounted for 10%, a weekly increase of 7 percentage points. At the same time, sales in shopping malls have gradually recovered. It is expected that the majority of retail enterprises will return to the normal level by Q3.

61%

18%

3%

77%

24%

10%

0%10%20%30%40%50%60%70%80%90%

Recovery rate>50%

Recoveryrate>60%

Recoveryrate>80%

Recovery of customer flow for consumer good enterprises in April, 2020

Average Shopping Malls Traffic Recovery Rate in Key Cities

The recent holiday spending spree demonstrated a better story about the status of recovery in the retail sector following the gradual lifting of control measures.

During the Labour Day Festival from May 1 to 5, the average daily sales of key retail enterprises increased by 32.1% while daily traffic at major shopping malls was up by 1.5 times compared to that of the Qingming holiday (April 4 - 5), showing an accelerated recovery driven by festive sales. The online retail sales of goods increased by 36.3% year-on-year, with some large-scale e-commerce companies exceeding 40% in sales year-on-year.

The "Double Five Shopping Festival“, initiated by the Shanghai government, achieved sales of more than 58 billion yuan, with combined sales from online and offline channels exceeding 10 billion yuan just 20 hours after the event launch. Top sellers including, Walmart, Starbucks, Muji, H&M, and Lyfen were using WeChat’s mini program to give away coupons worth a total of 2 billion yuan.

Shanghai: 67.2%

Guangzhou: 53.1%

Shenzhen: 51.9%

Wuhan: 39.9%Hangzhou: 66.9%

Xi’an: 52.9%

Chengdu: 58.4%

Changsha: 68.7%Xiamen: 58.1%

Shenyang: 62.8%

Beijing: 46.7%

Nanjing: 70.1%

Source: China Commerce Association for General Merchandise

The week of March 30

The week of April 6

Source: Winner Technology


Retail consumption was also enhanced by a largely recovered transportation and logistics networks across the country. The domestic road and rail restrictions have been lifted in phases, with roads in and out of Wuhan reopened on April 8, while delivery lead time are gradually back to normal. However, citizens travelling between the mainland, Macau, and Hong Kong still need to observe strict quarantine rules.

In general, enterprises with a relatively high degree of digitisation and automation have defied the industry downtrend and featured a faster rate of work resumption. On the contrary, traditional brick-and-mortar enterprises with little or no online presence suffered the largest hit with a much slower recovery rate.

19

Resumed transportation networks led to improved flow of people and goods

0%

30%

60%

90%

120%Trend of recovery in logistics flow within and beyond Hubei Province

domestic inbounds to Hubei outbounds from Hubei to rest of China

Jan Feb Mar Apr May



The retail and consumer sector experienced a slowdown in deals, with refocus on New Retail transformationsM&A activities in the retail and consumer sector saw a major slowdown in Q1 2020 with 70% decline in disclosed deal value and volume as compared to the same period in 2019. Nonetheless, there has been some cases of significant deals such as PepsiCo, Heytea, Perfect Diary and Junlebao - demonstrating investor confidence in the overall retail and consumer sector.

Companies considering M&A in this sector need to have a clear purpose and the right deal strategy in place, let alone the financial strength to follow through transactions. Retailers may consider M&A opportunities to achieve strategic targets, including New Retail transformations, vertical integration, glocal expansions, digitisation of product and service offerings, and synergies between online and offline operations.

In the short term, consumer goods companies will likely face issues with closing in-progress deals as they evaluate projected cost and revenue synergies and immediate liquidity needs in this uncertain environment.

We hold a long-term optimistic view about the deals market in China’s retail and consumer sector. We expect a rebound in 2020 M&A volume given the pandemic situation does not further deteriorate globally. More investment opportunities will revolve around the theme of “new consumption, “omni-channel retail”, “pursuit of health and wellness assets”, and further “consolidation and optimisation of supply chain”.

M&A activities in the retail and consumer sector

20


While the public health crisis has swept across the retail arena with unprecedented intensity, retailers who survived the first wave of the impact are keen to get back on their feet in anticipation of a strong recovery. A closer “health check” on consumer goods companies across sectors has revealed what needs to be done to thrive in the post-COVID ecosystem.

A health check on retailers across industries

21

Luxury and discretionary products The luxury goods segment would well turn out to be more resistant to the economic shock than most analysts predicted. Luxury brands are counting on the swift recovery of the mainland Chinese market to recoup their losses in Europe and US, where impacts of business closure and bans on traveling are still being severely felt.

Also, mainland visitors originally contributed large proportion of luxury sales in Hong Kong; now they are shifting their spending back to the mainland to take advantage of lower consumption tax, weakening yuan, and prevalent e-commerce.

Hermès reported record-breaking sales of $US 2.7 million at its second-largest flagship store in Guangzhou just the day the store resumed to business after the lockdown. LVMH’s April sales of its top brands went up by 50% across major cities in mainland China.

Most luxury brands are exploring digital solutions to bring their products online and offset revenue loss from physical stores, particularly via e-commerce and live-streaming. The quarantine has prompted many traditional luxury brands to hop onto the e-commerce channels, namely WeChat pop-up shops. Sales associates became brand ambassadors who swiftly communicate with their clients online.


LVMH utilised their omni-channel platform to allow customers in China to order and receive products promptly. It was the first luxury brand to launch an official account on Little Red Book with more than 130,000 followers. They even conducted the very first show re-see on WeChat where celebrities shared their favorite items.

Similarly, Prada built an e-commerce system that incentivises sales personnel to virtually interact with their clients, leading to higher commercial impact than WeChat ads alone. MCM is actively training their sales associates to be livestreamers while participating in livestream sessions at the mall level.

“The impact of the epidemic on the luxury industry has been huge, affecting not only the revenue of offline stores, but also the supply chain, the global economy, and consumer confidence,” Jennifer Ye, PwC China Consumer Markets Leader, said. “Therefore, digital marketing, channel transformation and upgrading, and digital capacity building play an increasingly important role in luxury brands, and major brands need to build digital strategies centered on Chinese consumers.”

22

Food and beveragesThe impacts on F&B segment diverged widely by category. Restaurants, café, and gift items such as alcohol and beverages suffered considerably, while convenience food and groceries with longer shelf life fared better due to lockdown and stock-piling. Fresh food e-commerce also gained in popularity with surging online orders.

Carrefour reported six-fold growth in vegetable delivery increasing 600 year-over-year during the Lunar New Year period. JD.com saw an increase of 215% in online shopping grocery sales to 15,000 tons in just the first 10 days of February 2020.

According to Neilson study, home quarantine has further cultivated consumers’ online shopping habits, with 89% of consumers saying they will be more willing to buy daily necessities / fresh products online once the pandemic is over. Additionally, 80% said they would pay attention to eating healthy in the future.

FMCG and supermarkets FMCG has seen steady demand throughout the COVID-19 outbreak thanks to the prevalence of e-commerce and the country’s resilient logistics network. Some retailers are even topping up their investment in preparation for the lifting of movement restriction measures. Walmart China announced in early April, it will invest 3 billion yuan ($US 424.5 million) in Wuhan city, with plans to open four Sam's Clubs, 15 hypermarkets and more community stores in the next five years.



Tourism, hotel and travel According to Ctrip data, the number of tickets booked by Ctrip platform passengers during the Labour Day Festival (Golden Week) has increased substantially. In terms of booking for scenic spots, Ctripticket sales increased by 94% month-on-month, and scenic spots + hotel package sales more than doubled. During the Labour Day Festival period, the number of scenic spots opening across the country has reached a new high, with a total of more than 4,000.

Shanghai Disneyland park reopened on 11 May — the first of its kind to resume business amid the pandemic, although capacity was capped at one-third of its pre-crisis level. The theme park’s experience might be an encouraging sign for other scenic spots operators to make the case for resuming large-scale occasions.

Domestic flights are on track to recover. Shenzhen airport has resumed 70% of its flight capacity in contrast to 85% cancellation of domestic flights in mid-February. With the reopening of domestic travel and favorable policy support, the number of Labour Day visitors has showed a acute rebound, doubling that of the Qingming holiday.

Star-rated hotels (four-star and above) with relatively high safety standards have seen strong pick up in occupancy rate since March. According to data from Qunar.com, the number of occupants in four-star hotels and above fell by 87% in February, when the epidemic was at its worst. As the hotel industry picked up in March, the occupancy rate in four-star and above hotels increased by 2.16 times from February.

23

Domestic Tourists (100 million people) Outbound Tourists (100 million people) Inbound Tourists (100 million people)

2018 2019e 2020e 2018 2019e 2020e 2018 2019e 2020e

10.8%11.1%

16.01

53.37(Epidemicforecast)

55.3961.56

-13.3%

69.38(No epidemic forecast) 13.5%

16.4%

0.66


1.621.89

2.20(No epidemic forecast)

-1.85%

1.2% 3.0%0.48


1.41 1.45

1.50(No epidemic forecast)

-30.0%

Predicted value under the 2020 epidemic Growth rate Projected value without epidemic in 2020 (100 million people)

Source: Wind, National Bureau of Statistics, PwC Strategy& Analysis

Business implications for retailers and brands operating in post-pandemic China


Retailers are answering the call of digital transformation and reinventing their business modelsThe COVID-19 outbreak has inevitably challenged the model of cross regional allocation of resources. A more “glocal” strategy is considered a long term “vaccine” to counter supply chain disruptions and diversify risks. Consumer goods enterprises need to take serious notice of the restructuring of the international industrial ecosystem to shift from a global strategy to a more “glocal” one.

Many global enterprises, including Apple and Samsung, are already making the shift from a more geopolitical perspective to a greater emphasis on the global synergy and resilience of their supply chains. In the revisiting of their strategies, many Chinese enterprises need to combine their innovative and technological strength with how they can optimise their global resources and advantages.

On the other hand, this crisis has brought new learnings to many retailers that they have to stay agile and innovative. The various disruptions brought by containment measures and physical workplace closures have given many retailers a kick in the pants that they need to pedal harder on the road of digital transformation.

According to a recent internal pulse survey by PwC, 75% of enterprises recognised a strong need to accelerate digital transformation within their organisations, while 70% expected a negative impact of up to 30% reduction on their bottom line, if their strategies remain unchanged.

25

Source: PwC CPSG Customer Survey Result

Staff can’t return back to work on time

Enterprises need to accelerate digital transformation

Negative impact on revenue and profit is within 30%

Order declined

Enterprises need more than 2 months to get back to normal operation level

85%

75%

70%

65%

60%

Immediate impacts of COVID-19 on businesses


In fact, brands who had the foresight to carry out their digital transformation now have a major edge over their peers, as seen by their ability to better contain loss and capture more opportunities from the prevalence of e-commerce and emerging tech. More than ever, Chinese brands need to prioritise on digital channels and outlets to stay relevant in the world’s biggest consumers market, where digital-savvy consumers are increasingly discerning.

Athlete apparel companies Nike and Lululemon stayed engaged with their customers throughout the epidemic period by offering free exercise courses and encouraging at-home workouts via their social media apps. Nike reported that its activity apps have induced strong customer engagement and translated into 30% growth in digital commerce business for the company. Meanwhile, Lululemon enabled its community to connect and access online fitness and health resources through its newly-created “Community Carries On” content portal.

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IKEA recently debuted a flagship store on Alibaba Group’s B2C online marketplace Tmall, marking the first time the Swedish furniture giant is selling its products on a third-party platform. Also, it invested heavily in digital channels and new retail formats, including smaller outlets closer to customers in urban centers as well as a mixed-use shopping center.

Another digital innovation can be seen in K11 Art Mall in Guangzhou. As a project of New World Development, the mall brought alive the concept of virtual reality shopping in February, where customers visited the virtual stores of Tory Burch or Emporio Armani stores through their phones, while interacting with staff via WeChat.

Hong-Kong-based Li & Fung has become a pioneer in digital transformation by building a tech-driven supply chain model through 3-D product design. It involves using digital prototypes, which help suppliers eliminate physical samples and reduce markdowns — while also saving time and money.

In a nutshell, we saw that successful retailers who have emerged strongly after COVID-19 tend to be those who are ahead in their digital transformation journey with the following traits.

• Automate certain financial reporting process, such as invoice checking and booking keep with the use of robotic tools.

• Enhance online transactions and accelerate operations using cloud based solutions for warehouse and supply chain reengineering, cash and working capital management, rapid production realignment with limited supply of talent and labor due to the crisis.

• Provide digital tools for remote communication and collaboration to improve client’s and employee’s overall experience, performance management and other technical aspects.

• Build an unified middle tier platforms connecting online channels with offline business operation to improve efficiency and generate data driven business insights.

PwC | An update on how China’s retail and consumer market is recovering from COVID-19 27PwC | An update on how China’s retail and consumer market is recovering from COVID-19

The way forward in the post-COVID world There are encouraging signs that the COVID-19 outbreak is being contained in mainland China and Hong Kong as the number of confirmed cases continues to decline and more retailers are “back to business”. Recent market trends have revealed that the consumer segment in China has emerged stronger and healthier after a swift recovery from the public health crisis.

We expect the growth of retail sales will mimic that of the overall economy, although the pace of recovery will differ largely across sectors and categories. The consumer market looks set to stage a considerable rebound by the fall of 2020 as the movement restrictions continue to relax, followed by steady return of consumer spending on discretionary products and services, high-ticket items, and luxury goods.

How long the recovery of the retail sector will last depends on economic uncertainty at home, exports and domestic demand conditions, financial health of China’s private sector, coupled with complex international relations – all of which will continue to weigh on growth prospects of the sector.

Nonetheless, we are certain that the pace of digital transformation has accelerated; New pockets of economy have opened up; Consumers are back to shopping sprees after long period of lockdown, while many retailers have come up with new or revised business models amid industry consolidation.

Unprecedented challenges has brought unparalleled opportunities. In retrospect, the SARS outbreak in 2002 fueled the boom of internet based services, such as e-commerce and online shopping. Similarly, the COVID-19 crisis has created a very different New Retail ecosystem calling for consumer enterprises – whether they like it or not - to speed up their digital transformations.

At PwC, we have developed a pandemic preparedness and response action plan for the world’s countries, including pandemic response management framework for governments, issues to be considered at each stage of a pandemic, and measures to be considered in pandemic response management.

We have quickly mobilised industry experts across different cross line of services through our Global Crisis Centre to provide the most update and practical information to help businesses stay ahead of the next wave of disruption. To this end, we are keen to listen to your challenges and concerns and be part of your journey to navigate the uncertainties ahead.


Contact us

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Michael ChengAsia Pacific, mainland China & Hong Kong Consumer Markets LeaderPwC Hong KongTel: +852 2289 1033 Email: [email protected]

Jennifer Ye China Consumer Markets LeaderPwC ChinaTel: +86 21 2323 3325Email: [email protected]

Phil LaiConsulting PartnerPwC ChinaTel: +86 21 2323 5347Email: [email protected]

Steven ZhongConsulting PartnerPwC ChinaTel: 86 (21) 2323 5349Email: [email protected]

Waldemar JepConsumer Markets Deals Lead PartnerPwC Hong KongTel: +852 2289 1892Email: [email protected]

Ken ZhangDeals Advisory PartnerPwC China+86 21 2323 3120 [email protected]

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This content is for general information purposes only, and should not be used as a substitute for consultation with professional advisors.

© 2020 PricewaterhouseCoopers Limited. All rights reserved. PwC refers to the PwC network and/or one or more of its member firms, each of which is a separate legal entity. Please see www.pwc.com/structure for further details.

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