11 June 2020 Luke Goldsworthy

Chinese consumers emerge from Covid-19

The Economist Intelligence Unit this week released its On the comeback trail? report into Chinese consumption recovery following the coronavirus pandemic. While that market differs from Australia’s, The Playhouse Group feel there is great interest and some overlap with our market for insights to be drawn as we also emerge from the Covid-19 crisis.

The report detailed changes in consumption trends for the first quarter of 2020, retail sales forecasts for the year, the effects of government stimuli, and the shift to online and digital.

Consumption Trends

Consumption expenditure incorporates spending on both services and goods, making it a more accurate reflection of household expenditure compared to retail sales data. Overall, urban consumption expenditure fell by 9.5% year on year for the first quarter of 2020, down from a 7.5% expansion in 2019.

Services consumption, in particular, dropped significantly, led by falls in education, culture and recreation spending (down over 35%), due to restrictions on physical attendance, coupled with movement restrictions and income loss. Clothing, transport and communication, household goods and services, and healthcare also saw 10% or greater contractions.

Two categories saw growth in the period: accommodation, and food, tobacco and alcohol – led by stockpiling early in the outbreak.

In Australia, some of these downturns have been lessened due to the JobKeeper program and boosts to JobSeeker payments. According to CEIC Data, Australia’s consumption expenditure in the first quarter of 2020 was US$181.314 billion. This is down from US$190.052 billion in the December quarter, representing a 4.6% downturn.

The latest figures released by the Australian Bureau of Statistics (ABS) showed a 17.7% plunge in retail sales in April – the steepest monthly fall on record. The following industries fell in seasonally adjusted terms in April 2020: Food retailing (-17.4%), Cafes, restaurants and takeaway food services (-35.4%), Clothing, footwear and personal accessory retailing (-53.6%), Other retailing (-14.4%), Department stores (-14.9%), and Household goods retailing (-0.1%). The May 2020 figures will be released on July 3.

Retail Sales Forecasts

Chinese consumers have a reputation for being highly risk-averse, and with the country facing its worst job market in decades, it is unlikely that consumption is going to be a driver of China’s economic recovery. 

Following a 19% contraction on retail sales in the first quarter of 2020, the EIU predicts that the second quarter will be less than 15% down year on year, with the third quarter only 2-3% down, while the fourth will deliver a 0.1% increase on 2019. Overall, this represents an 8% contraction from 2020.

The Reserve Bank of Australia, in its May Statement of Monetary Policy, stated: “The Australian economy is expected to record a contraction in GDP of around 10 per cent over the first half of 2020; total hours worked are expected to decline by around 20 per cent and the unemployment rate is forecast to rise to around 10 per cent in the June quarter. Headline inflation is expected to be negative in the June quarter largely as a result of lower fuel prices and free child care; underlying inflation is expected to decline notably.

“Beyond the first half of 2020, the outlook for the domestic economy depends on how long social distancing remains in place and its effects on economic activity. Other factors include how long uncertainty and diminished confidence weigh on households’ and businesses’ spending, hiring and investment plans. The initial phase of the recovery is likely to be primarily driven by the easing in restrictions, which will lead to an improvement in employment outcomes as businesses re-open, as well as a pick-up in household spending. In the latter part of the forecast period, business investment decisions will more strongly shape the recovery. It is difficult to be precise about the magnitude and timing of these effects, so it makes sense to think in terms of scenarios.”

Government Stimuli

The Chinese government has promoted the purchase of cars, which makes up the largest share of total retail sales. This includes subsidies for diesel truck upgrades, a reduction on their GST-equivalent for second-hand vehicles, and an extension of new-energy vehicle purchase subsidies. This is unlikely to have a significant impact due to a pre-existing slump in car purchases.

Additionally, several cities have issued digital coupons through online payment platforms, such as Alipay and WeChat Pay. The EIU report states it is difficult to know the success of this measure due to pent-up demand for purchases in the dining, tourism and recreation industries as restrictions ease.

In Australia, only one significant Commonwealth stimulus policy has been announced since the easing of lockdown restrictions, with the $25,000 HomeBuilder scheme. This is very limited but is likely just the first of many packages that seek to resuscitate the economy. 

Various states also have special grants during this time, such as the $10,000 New South Wales small business assistance scheme.

Consumption Shifts Online

The most universally agreed consequence of the coronavirus pandemic has been the acceleration of adoption of life online and the use of digital. For example, in Shanghai first-quarter purchases of fresh food online surged by 167% year on year, while active users increased by 127.5%. Retailers have also sought alternative sales channels through increasingly popular online streaming. Retail trade publication Linkshop found that a single live-stream session can bring as much exposure as six months of foot traffic. Post-pandemic many retail stores will operate primarily as a marketing tool rather than purchase point. 

Everything from grocery shopping to education to entertainment has increased online during the first quarter of 2020. The EIU report found: “For foreign retailers, online customer services need to be strengthened to compete with their Chinese counterparts, as local consumers expect prompt and tailored solutions to cater for their needs.”

IBISWorld’s analysis for Australia reported last month found: “Revenue for the Online Shopping industry is anticipated to rise by 11.1% compared with a previous anticipated 2.4% increase in the current year due to consumers increasingly shifting shopping activity online, including for necessities such as groceries.”

The Playhouse Group’s clients are already seeing significant growth from their online presence in food/grocery, liquor, furniture, fashion, music, entertainment, pharmaceutical, rental and consumer electronics. Customer interaction has also increased via social media significantly. Inquires have mainly been on any restrictions on shopping in-store, shipping times and product availability.

This combined analysis no doubt confirms your own experience during the pandemic. It is difficult to predict the rate at which consumer expenditure will return, but it is certain that it will – and as it does it will be increasingly online.

Get in touch with our team and we can talk to you about this or any eCommerce questions you may have.