In China, Offline Retail Isn’t Going Back to Normal
Apr 27, 2020
Nearly three months after large swaths of China entered lockdown over COVID-19, the country is gradually settling into a new post-lockdown phase of the crisis. But China’s struggling large-format offline retailers still face elevated pressure to shift to digital channels, potentially creating one of the first permanent changes in China’s economy to result from the novel coronavirus.
Before the crisis, offline retailers in China faced an uncertain future. Large shopping malls had already experienced three consecutive years of revenue decline from 2016 to 2019. E-commerce giants Alibaba and JD.com were encroaching into offline retail, bringing with them an arsenal of cross-channel consumer insights data and the flexibility of multiple online and offline purchase channels.
COVID-19 was no gift to offline retailers in China. Many stores closed, and those that remained open saw depressed sales. By mid-February, H&M had closed 64% of stores in China, and sales were down 89% from the same period in 2019.
As the number of new COVID-19 cases declined in March, offline retailers quickly reopened. A mid-April survey from the China Commerce Association for General Merchandise found that 81% of retailers had reopened 100% of stores, and a further 15% had reopened at least 90%.
But the data suggests that despite the removal of formal lockdown orders and rapid store reopening, the pain for traditional retailers has not yet abated. The same survey found that only 77% of retailers saw foot traffic above 50% of pre-virus levels. Anecdotal reports of Suning and Walmart stores also suggest that some locations received only half of the typical store traffic. This is rapidly improving—just a week prior only 61% of retailers saw foot traffic of at least 50%—but 50% foot traffic is still a far cry from full recovery. Nearly half of survey respondents estimated sales between 60% and 70% of 2019 levels, while a mere 3% claimed sales equal to pre-virus levels. By mid-April, H&M sales were still down 23%.
The shadow of a potential “second wave” of infections still haunts offline retailers in China. Facing anxious customers, electronics retailer Gome adopted a common strategy for combating the virus in its more than one thousand stores—all customers must undergo temperature checks, masks are mandatory, and the entire big box store will be periodically disinfected. Local beauty retailer Wow Colour similarly mandated that all employees undergo regular temperature checks and wash hands, and specified the disinfectants that will be used to regularly clean its stores. JD even mandated that only three hundred customers are allowed in a store at a time. Though necessary, these measures represent an additional cost for already strained offline retailers.
Confronting nervous customers, some retailers have also endeavored to publicize these efforts. In early April, Gome posted images of workers in full hazmat suits disinfecting a ten thousand square meter store on social media platform Weibo. Sephora rapped about its extensive safety measures in a music video shared on the brand’s WeChat account.
The sustained crisis proved the last nail in the coffin for British cosmetics retailer Space NK, which exited China in mid-April after an underinvested two-year attempt to gain a foothold in the market. Competitor Watson’s, which pioneered leveraging its three thousand physical stores for digital functionality and online order fulfillment, appears better prepared to weather the storm.
During recovery, e-commerce adoption has accelerated. Notable brands Prada, Tesla, and Ikea all recently launched official stores on Tmall. Louis Vuitton conducted its first livestream on social platform RED in late March, receiving over 150,000 views. Alibaba hosted an entirely virtual Shanghai Fashion Week, sharing clothing from 150 brands with 11 million viewers, and generating nearly USD 3 million in sales.
Gome now appears to be taking digital transformation much more seriously: on April 20, rising social commerce platform Pinduoduo (PDD) announced it would acquire a 5.6% stake in Gome, giving Pinduoduo access to global appliance brands “at competitive prices” and helping “GOME’s digitization strategy, extending PDD’s technological capability to help the retailer upgrade its supply chain and tailor its product range to consumer needs and preferences.” Gome joins the ranks of competitors Five Star and Walmart, which had formed similar partnerships with online retailers prior to the outbreak.
China’s post-lockdown reality is not a comfortable one for offline retailers, and the pressure is driving some to digital channels faster than normal in an already dynamic landscape. Businesses reliant on offline retail elsewhere in the world should follow the experiences of their analogs in China, and invest now in digital transformation.