Coronavirus Brings Risks for Foodservice
The coronavirus outbreak will impact foodservice revenues in the short term in China. Singapore, Thailand, and Vietnam are the most vulnerable markets outside of China. Foodservice players could face challenges such as supply disruptions and lack of personnel. Players will also have to consider strategic changes in the way they operate if they want to retain clients and secure long-term growth.
China’s Foodservice Industry Hardest Hit if the Coronavirus Outbreak Drags On
China is bearing the immediate brunt of the Wuhan Coronavirus outbreak, with Wuhan city under lockdown. Chinese consumers in other provinces are also encouraged to avoid public spaces to lower the probability of infection.
The impact of the outbreak is hard to predict at this point. In general, retail sales of daily necessities are relatively resilient to the impact of a virus outbreak, because consumers will continue to stock daily foods like vegetables, meat, and noodles. The foodservice and tourism industries are more impacted by the disease, as consumers will choose to protect themselves by not dining out or travelling.
Although it is still too early to measure the impact on foodservice growth in 2020, the SARS disease experience can offer somewhat of a benchmark. In Q2 2003, foodservice growth slowed more than GDP growth (see Figure 1), with May 2003 (the worst period of SARS) showing a -15.5% YOY decline. However, after the disease was controlled, the foodservice industry rebounded at a faster rate than other sectors in Q3. Besides the rebounded consumer demand, the efforts from foodservice players in providing a better experience, differentiation, and high-quality food, helped to restore consumer trust.
Compared with SARS, the government’s response to this virus outbreak has been swift and decisive. The government has taken aggressive measures to prevent the spread, like an early lockdown of the cities in which the disease has been reported. This may impact the foodservice industry even more than the SARS period in the short run. As such, we believe that Q1 2020 sales are likely to decline, due to more aggressive government measures to curb the disease and consumer concerns around dining out.
A Short-term Challenge for Chained Foodservice Operators
In response to the outbreak of the coronavirus, foodservice operators like Starbucks, McDonald’s, Yum China, and Hai Di Lao hotpot have temporarily closed some of their stores in China. This will affect revenues in Q1. Operators may also be confronted with supply chain disruptions and a shortage of labor once they reopen, as staff members may have difficulties returning to their jobs.
Foodservice players need to prepare to overcome these difficulties in order to reap the full benefits once customers return.
Longer-Term Changes Also Needed for Foodservice Players in China
It is clear that action is needed in the short term, but the current outbreak also provides some lessons for the longer term. Foodservice players in China would do well to:
1. Enhance their partnership with the delivery platformfood delivery players adopted some innovative ideas during the outbreak, such as launching contactless delivery. In the near future, food delivery will become more critical, due to its convenience and ability to cope with disruptions. Thus, foodservice players may need to co-develop the future strategy with the platforms to ensure a balanced ‘food plus platform’ ecosystem (See Rabobank to Go- Foodservice Outlook 2020).
2. Review the supply chain
Although it is hard to predict how much the supply chain will be disrupted at this stage, foodservice players and their supply chain partners should plan in advance for dealing with potential challenges and opportunities.
3. Safety and traceability will be the key to future success
The outbreak has generated some panic around food safety. Rabobank believes that foodservice players should take this chance to improve food quality, safety, and traceability to win and retain consumers going forward.
Tourism to Take a Hit and to Bring Foodservice Revenue Down With It in Southeast Asia
Reduced tourist arrivals are expected to affect foodservice in Southeast Asia. Tourist arrivals across Southeast Asia are expected to decline in the first quarter due to both outbound travel restrictions from China and visa restrictions imposed by destination markets on arrival from coronavirus-affected areas.
We expect foodservice revenue in the key Southeast Asian markets of Singapore, Thailand and Vietnam to be impacted in the first quarter of 2020. This is due to their higher dependence on arrivals from China compared to other key countries in SEA. Visitors from China accounted for 32% of all tourist arrivals in Vietnam, while it was 27.6% for Thailand, and 18.5% for Singapore in 2018 (sources: respective national tourism ministries/boards, Statistics Office). The general fear of travelling to these three countries, with a higher incidence of reported coronavirus cases, will reduce arrivals from other countries as well.
As visitor arrivals drop, the contribution of tourists to foodservice will as well. For example, according to the Singapore Tourism Board, tourists spent SGD 2,593m on food & beverage in Singapore in 2018. Assuming nearly all of that was spent on foodservice, with very little on retail purchases, tourists contributed approximately 30% to total foodservice sales in 2018.
As we discussed in our Foodservice Outlook 2020 (See Rabobank to Go - Foodservice Outlook 2020), the expectation in Thailand at the beginning of the year was for on-par or slightly better growth prospects in 2020 compared to 2019. However, expectations will have to be adjusted if the impact of the virus lasts beyond the first quarter of 2020. Likewise, prolonged uncertainty regarding tourism will reduce the expected 2020 foodservice growth of 2% in Singapore and 7.8% in Vietnam.