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When reality hits: COVID-19 impact on retail

by Norbert Herzog , 03.03.2020

Last week, we discussed the impact of COVID-19 on the tech market and it was tempting to feel some sort of relief as promising news surface about Apple reopening 29 of their 42 Chinese stores, more and more recoveries from infections were being reported, new infections coming down and production sites seemed to be gradually restarting again. But then the coronavirus impact on retail started to become a hard reality.

The following hits came from outside of China: Samsung had to close a mobile device factory in South Korea due to an outbreak, and in Vietnam, the Ministry of Trade warns about supply chain issues delaying smartphone production. And on February 21st, the outbreak in Northern Italy led to a shutdown of “red zones” one day later.

COVID-19 impact on production drags down global distribution market by –5% in the last 4 weeks

“The consequences of the Italian shutdowns and further spread across multiple countries already affect supply chains and distribution markets heavily,” says Tatjana Wismeth, GfK expert on Global Distribution providing supply chain insights. GfK’s Distribution Panel is evaluating these effects by tracking the sell-through of distributors to retailers and resellers on a weekly level.

Italy, as one of the most affected countries in Europe, is currently showing one of the highest declines in volumes. In the last 4 weeks, distribution markets in Italy decreased by –9% on average which results in over 828,600 sales less compared to the previous year period. Other European countries like Great Britain and France are following this trend – however, at a weaker pace with –4%, respectively –2%. Sector-wise, the IT industry is currently contributing most to this picture. For Telecom, the downward trend is not yet clearly visible as stocks at the distributors level currently seem to be cleared since the demand of retailers and resellers is even higher given the fact that shortages are expected to reach markets soon.

Although stock levels might still mitigate effects, production halts and logistics restrictions (e.g. vessels unable to onboard/deboard goods, cargos canceling flights) are leading to the first signs of downsizing for the Tech and Durables markets and rising prices on the other side. Consequently, distribution markets on the global level have already declined by –5% in the last four weeks compared to the previous year period. This is especially supported by decreasing volume shipped by distributors in Western Europe where volumes dropped by –8% in the same weeks. In absolute figures, this means that around 10.4 million units have been shipped less in calendar week 5-8/2020. At the same time, prices have increased by around 19% on average.

Despite the first visible signs and downward tendencies in distribution markets, the COVID-19 impact on retail markets is still yet to be seen. Looking at our weekly retail sales data in the largest European markets over the last weeks, there is no indication of any general change in dynamics yet.

An oscillation from +1.6% to -3.5% for the past 6 weeks is within the usual norm originating from seasonal promotions, launches, price changes, etc. The more realistic question is: When and how will the drying supply chain hit these markets?

No drop of e-commerce in China for now but a full-year forecast is down

When the Wuhan shutdown was initiated in the week of January 20th, people immediately stopped moving freely and the footfall for physical retailers collapsed. In the following three weeks, the decline of sales in physical stores even exceeded 80% in some cases of our analysis in a product basket of smartphones, notebooks, TVs and fridges. Basically, this implies that no sales were made at stationary retailers in the seriously affected areas in China—and retailers probably opened their stores only in regions where the virus had not broken out.

In our blog on the coronavirus impact on tech markets, we flagged that a key area to watch for are the effects of e-commerce vs. traditional retail. Here are a few, very relevant insights based on the COVID-19 impact on retail sales we’re seeing in China right now :

  1. Online sales are not being cut by consumers generally which means consumers are not in a state of panic. They are continuing to purchase tech goods but are avoiding leaving their homes while they do so.
  2. Consumers are still engaged in tech launches: New products coming to the market in the past weeks led to significant sales jumps for the notebooks category in China—via e-commerce. This means that the usual market dynamics are still in place and consumers still want to get their hands on newly launched products even in times of COVID-19.
  3. Categories like fridges are suffering more. The ‘fan club’ and ‘exciting new features’ factor is lower so purchases which are not urgent (such as replacing a broken appliance) are being postponed even via e-commerce. The need to research or purchase offline—to touch and feel the product—makes all the difference.

Are consumers postponing big-ticket purchases and what does this mean for the rest of 2020?

Based on our analysis of the very latest data, we expect the COVID-19 outbreak to impact all sectors across the TCG market in China. The Major Domestic Appliances, Photo and Telecom sectors are projected to see the sharpest decline in the first half of the year as consumers are postponing or minimizing their total spending (offline and online combined), especially on consumer electronics and appliances.

GfK impact of COVID-19 on TCG China coronavirus

Looking further ahead, after a projected decline of -18% in the first half of 2020, we expect to see a rebound effect, resulting in a +6% growth in the second half of the year.

Overall, we are currently forecasting an overall decline of -6% in turnover for 2020, depicting the severity of the impact on tech markets in China. Still, we should keep in mind that this is only a temporary downswing that does not change the overall growth expectations for China in the mid- and long-terms (more information about it here).

More change to come with COVID-19 impact on retail

Once the supply of products or parts starts to dry (or seems likely to collapse), retailers will take action. When they do, it will almost undoubtedly lead to an increase in prices to live off the stock longer or cut in promotions to increase margins and offset the expected loss of revenue for 2020. As supply dependency differs so much by product segment and manufacturer, quick decisions are needed to optimize the assortment and product mix.

There are early signs that this may have started on a small scale already—and these will become more visible each week.

Data in this blog is from the following reports: GfK Weekly POS Tracking, GfK weekly Distribution tracking, GfK Consumer Life 2019, GfK Consumer Insights Engine 2019 and GfK Future Buy 2019.

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