Emerging from COVID-19: Lessons from China’s E-Commerce Economy

by | 01 April 2020

As parts of America are entering their third week of lockdown, the stock market continues to tumble on uncertainty. Now that the number of cases of COVID-19 in the U.S. are exceeding double the reported number in China, the true personal and economic ramifications of the pandemic are beginning to sink in. How long this will last is unclear, but if we look to China —who is on the other side of the pandemic for the time being —we can see some semblance of how this has impacted their world, and how they have evolved from it. As China steps closer to a new normal, some of the changes that have taken place over the past three months will be incorporated into the new normal.

The first lockdown in China due to the coronavirus occurred in Wuhan, Hubei Province on January 23rd, 2020. As part of the authoritarian government regulations, many citizens in Wuhan were only allowed out of their house once every two days in an effort to quickly isolate victims and prevent the further spread of the virus. Things quickly came to a halt and people were no longer seen moving about their business in the community.

Although the reaction seemed severe, the Chinese economy in some ways was already more prepared for the sudden shift in buying patterns when people were forced to migrate all of their shopping online. In China, e-commerce sales are already more than 36% of the nearly two trillion-dollar retail market transacting online in 2019. The adoption of e-commerce is growing faster in China than in the United States and by 2021, e-commerce is predicted to account for over half of total retail sales in China and only two short years later are on track to comprise of nearly two-thirds of all retail sales. Perhaps the outbreak of SARS in China in 2003 helped companies like Alibaba and JD.com prepare for moments like this when consumers need alternative channels for everyday commodity items. In contrast, in the United States e-commerce represents about 11% of annual total retail sales, with a peak month of December where e-commerce sales hovered around 14.6% of retail sales.

Food Delivery is Key

One area in both China and the United States that has been positively impacted by the pandemic is food delivery. In China, fast food retailer YUM Brands developed a contactless delivery model to augment sales as instore revenues plummeted. In the U.S., as consumers were suddenly forced to explore alternatives to traveling to their local supermarket for groceries, supermarkets ramped up their home delivery options as well as companies, like Instacart, saw a huge surge in business. This sudden spike forced Amazon to temporarily halt its Amazon Prime Pantry service, as many of the items are either no longer in stock or are unable to meet delivery times. And it’s not just Amazon, companies like Walmart, Kroger and Instacart are feeling the pain as they struggle to keep up with the nearly 14% increase in sales from March 2019. Many of these new orders require home delivery as well, and food and home delivery companies are part of the anomaly of companies in this crisis that are hiring, to a tune of more than 700,000 additional employees. Many of the current workforce is getting pay increases or retention bonuses as well to keep the product moving. It will be interesting to see how cyclical this hiring will be once the U.S. turns the corner on COVID-19.

Delivery speed is another area where the U.S. is looking to China to catch-up. Whereas in the United States, we see Amazon’s push to get deliveries faster to customers, including 24-hour delivery times (from leaving warehouse to customer) as the new objective, China already performs nearly 90% of e-commerce shipments within 24 hours of order placement. It has been said that China’s e-commerce economy is at least four to five years ahead of the United States.

Additionally, China has embraced a cashless society where retailers —including roadside fruit stands — only accept payment via web apps, like WeChat Pay, for all transactions. This trend will likely be adopted by a greater extent in the U.S. post COVID-19. In China, even when dining at a fast food restaurant, it is common to order inside the restaurant on your phone, pay via WeChat and then just pick up your food.

For others who do not want to go out to get food, companies like YUM Brands (KFC, Taco Bell, Pizza Hut) have developed contactless encounters for fast food deliveries where a sterilized driver notifies the customer when nearby, drops the order on the doorstep and the customer picks up their delivery with a receipt attached indicating who the delivery agent was and his/her temperature reading (to confirm there is no fever). In the U.S., companies like Instacart and other food delivery companies are providing a similar service where they can inform customers that their items have been left on their doorstep; another service that is expected to grow post COVID-19.

Continued Trend Towards Online

Consumer buying habits are also shifting. With malls reopening, consumers are coming back, but not in droves. Mall traffic is light as consumers are not spending on non-essential retail. In the U.S., as retail sales have quickly nosedived, there is a conversion rate stabilized around 16% from brick-and-mortar to online sales according to Global Data. This represents a significant tightening of belts for U.S. consumers, which is already impacting many retailers, as stores have been announcing considerable layoffs over the past several weeks, with more to come. Some of these retailers were already in dangerous territory, so the COVID-19 outbreak may have been the catalyst which puts them out of business. Many traditional retailers are still looking to invest in their online capabilities, somewhat as an existential answer to the current crisis.  Looking forward, new retailers may find it a better investment to sell exclusively online and find a third-party logistics partner for distribution rather than invest in a physical retail store.

Even as China begins to get back to their new normal with ships leaving ports full of goods, there is still a general apprehension in the air. It will take time for their lives to adjust to the new world around them, but some lifestyle changes that occurred out of necessity during their lockdown will be adopted going forward out of convenience. Rather than focusing myopically only on the near-term challenges, we need to embrace this disruption as an opportunity that compresses the changes of a decade into a period of several months.

Similarly, as the United States braces for a bumpy ride over the next several weeks to months, we will arise out of this a changed society. What our nation will look like is still unknown, but to commercial real estate, it probably means that more people will look to alternatives to in-person shopping and will find more options online than ever before. It means that our supply chains will have to quickly adjust to the dynamic nature of fulfilling requests with greater complexity and any number of combinations for mode and timing for delivery.

About the Author:

Gregory Healy, senior vice president, leads the Supply Chain and Logistics Consulting team in the U.S. for Occupier Services. With over 20 years of global manufacturing and supply chain experience as both a senior executive in the corporate world, as well as owning a supply chain consulting practice and a third-party logistics business, Gregory has real world experience that brings a unique perspective to the Colliers team.