China's Gradual Recovery from Coronavirus

As coronavirus eases across China, life is slowly returning to normal. Different sectors are recovering at different paces, but the impact of the disruption to foodservice and food retail will be ongoing. The slow recovery of China’s foodservice industry and the uplift in food retail sales can give other countries a glimpse of what might happen once the worst of the pandemic has passed.

Introduction

After nearly two months of lockdowns, life in China is slowly returning to normal. Ministry of Commerce data shows 99% of large manufacturing enterprises have resumed operations. However, the coronavirus changed, at least temporarily, some consumer habits, especially where and how to eat. A Nielsen survey indicates 86% of Chinese consumers said they would eat at home more often than before the virus. The implications in the short to medium term are clear: restaurants and out-of-home consumption will most likely recover more slowly than perhaps initially expected.

Foodservice Demand Continues to Suffer, Though Declines Will Be Less Drastic

Although more foodservice businesses have resumed operations since March, weaker consumer confidence and lower on-site customer traffic have led to lower sales in these stores. Yum China has announced that traffic is recovering slowly and remains well below pre-virus levels, with sales down around 20% in late March, compared with 40% to 50% in February. Hotpot player Haidilao’s table turnover rates only reach two turns per table on average, much below the pre-virus level of 4.8 turns, according to company reports and Rabobank estimates. Considering the circumstances, we expect the foodservice industry will experience a less drastic rate of decline but will continue to drop by double-digits in Q2. The industry is less likely to recover to pre-virus growth levels prior to Q4 2020, as consumer traffic and willingness to eat out-of-home will remain low for some time (see Figure 1).

China-back-to-life_Fig1

At-Home Consumption Continues to Uplift Food Retail Sales

Shifting consumer habits will continue to benefit food retail sales, and online food retailers even more so, as consumers continue to eat at home more often. In Q1 2020, food retail sales grew by 12.6% YOY and online sales of food items increased 32.7%, according to the National Bureau of Statistics of China. If consumers shift all their foodservice demand to food retail, a 44% drop in foodservice sales in Q1 could lead to an extra 12% in retail food spending. This indicates that every 10% decline in the foodservice channel in the future would bring in an additional 2.7% of sales to the food retail channel. Performances of different food retail formats will vary in the next few months. Small stores and community stores, like mini-supermarkets and convenience stores, are anticipated to outperform other grocery retail formats. We project community supermarkets and convenience stores to register 5% to 10% and 10% to 15% YOY growth, respectively, in 2020, while hypermarkets will retain a negative growth rate of -1% to -5% in 2020, as consumers choose to buy daily necessities at nearby community stores or through online delivery. In addition, in the new normal, consumers will cut their spending on non-essentials. As such, hypermarkets’ growth will be impacted, due to their higher percentage of non-essentials in comparison with supermarkets and convenience stores.

In reality, challenges come from the fact that not all the products and packaging supplied to foodservice are suitable for food retail. As such, food suppliers’ performances will vary. Raw materials that are mostly consumed at foodservice outlets, like oysters and mussels, are likely to suffer more than others, as many consumers lack the knowledge for at-home preparation, making the shift from foodservice to retail difficult. Some categories like ice cream are more likely to compensate foodservice losses with retail sales, as many ice cream players in China supply both the foodservice and retail channels. As such, it is comparatively easier for them to rely on existing production facilities to supply packaged retail products.

Conclusions

In the absence of a second wave, consumers’ lives in China are gradually returning to normal. However, some consumer habits have changed (e.g. increased at-home consumption), at least in the short to medium term. As such, foodservice-only suppliers will face more challenges than those with both retail and foodservice customers. In the future, we expect an accelerated expansion of community food retail stores that offer plenty of food-to-go products, as consumers will seek both convenience and at-home consumption. This will encourage food suppliers to set up a supply pipeline, for example a central kitchen to provide more retail food-to-go products.

Download-with-margin-1280px.png