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Coronavirus and the Effects on the Retail Industry

Growth & Marketing

The 2019 coronavirus, now known as COVID-19, is major news across the entire globe as it hits over 200,000 cases in 176 countries. While the number of cases and deaths is still a massive concern, many are now looking at the direct impact it is and will continue to have, on the world’s economy. Nobody can fully appreciate just how much of an impact COVID-19 will have, particularly on the retail industry.

The Outcome

The latest figures from Morgan Stanley showed that the total retail traffic fell by 9.1%, apparel retail traffic by 3.9%, and luxury retail traffic by 14.7%. The food and beverage sector, as well as those offering personal care goods, have witnessed a small increase, however, this is mainly due to people panic buying and stocking up on protective items.

For many significant names such as Starbucks, Nike, and Apple, the decision to close stores has been beyond difficult but the end result is the need to put the health of consumers and employees first by restricting the gathering of people in public places.

The effects are equally challenging for small and medium-sized businesses. That being said the main obstacle many are facing is the disturbance with the global supply chain.

Wuhan has dominated the news for the location of the outbreak, but this area of China is critical for a great number of things including the manufacturing of automobiles, technology, chemicals, life science, healthcare, and retail. China’s crude oil and natural gas imports rely on Wuhan.

Here are just a few statistics to show the significance of Wuhan

  • In 2018, $213 billions of GDP came from Wuhan
  • Over 50% of Fortune 500 companies operate in this zone
  • Apple, Starbucks, and Costco Wholesale have significant operations here

On a positive note, while consumers are steering clear of physical stores, online retails are seeing an increase in sales as people switch to online purchasing. Compared with this time last year, JD.com (China’s largest online retailer) has experienced 4 times more sales of common household staple goods. Flipkart, Amazon, Bigbasket, and Grofers have also seen an increase in online sales of between 20-30%.

Sanitizers, soaps, and cleaning products are some of the products we would expect people to buy more of, but the aforementioned companies are also noticing more consumers buying fresh fruit and vegetables, milk, rice, and lentils. This is just what we saw with China’s online buying habits.

For many, the Great recession of 2008-2009 still plays heavily on our minds. It took a huge toll on savings, destroyed the credit market and prevented retail growth for many years. While the economy managed to gradually move forward, consumer spending certainly slowed down.

The Estimated Global Economic Cost of SARS

When COVID-19 began, people were comparing it to SARS (severe acute respiratory syndrome, especially as it also originated in China and then spread to other countries. SARS infected approximately 8,000 and caused nearly 800 lives across the globe. Experts calculated that the worldwide costs of SARS reached around $40 billion. The financial consequences went beyond the sectors that were affected by the disease. Travel, trade, and finances had primary and secondary effects.

What do the Economists at Bloomberg say?

In 2003, China only accounted for 4% of global GDP. Now, nearly 20 years on and this figure has increased to 17%, so if China’s growth doesn’t remain at this level, we will see a much larger impact. China has gone from the 6th largest economy in the world to the 2nd largest. In 2019, China contributed 39% of the global economic expansion.

Looking at the recent statistics of COVID-19, we can already see that the economic fallout is going to be far greater than that of SARS.

What are the Potential Effects of Coronavirus on Global E-commerce?

Here’s what we know so far:

  • The assumption that Coronavirus, social distancing and staying home will boost e-commerce is widely held among digital marketing experts.
  • There is early evidence of increased online sales especially for e-commerce associated with brick and mortar retailers.
  • For the foreseeable future foot traffic drop-off to stores is a big concern for brands and for those that do not have a strong online presence yet, this situation might be a strong trigger to rethink their digital strategy.
  • Supply chain issues, product shortages and potentially declining consumer demand could also blunt e-commerce growth – if the economy falters or goes into recession.
  • Of course, e-commerce has multiple flavors: from fashion and cosmetics to travel and music, videos or movies; from food, supplies, and groceries to furniture, appliances, and equipment.
  • Short-term, the winners are online retailers that sell household necessities including health products which have increased 52% compared with the same time frame a year ago.
  • According to the SaaS platform provider Quantum Metric, the number of online shoppers has increased by 8.8% since the Coronavirus began.
  • Long-term, 47% of retailers expect some downside in revenue due to the coronavirus. According to a survey conducted in March 2020 of 304 retailers by Digital Commerce 360, 33% of retailers say it’s too early to tell. However, a majority of retailers, 58%, say the virus will impact consumer confidence, and 22% say there will be a significant impact.
  • Markets have crashed hard these weeks: Shopify (-28%), Amazon (-17.75%) and Alibaba (-15.8%).
  • To put things into perspective, airline stocks have been one of the worst-performing sectors in world markets over the past month – American Airlines shares dropping 55.3%, the biggest decline among U.S. airlines.
  • On the other side of the spectrum – pharmaceutical, consumer goods and communications solutions companies are winning.

On the surface, it appears that e-commerce has the advantage of being able to not only remain in business but also possibly benefit from panic buying and even comfort buying. Trends show that when natural disasters hit, or people are restricted to their homes.

But what about the supply when the demand goes up?

Nobody can deny the fact that China is the king of manufacturing with a massive number of worldwide products that we buy online are made in China. But, with more than 33 million people in quarantine, it’s hard to imagine how the country is going to cope with the increased demand for online products.

Although the news in China relating to new cases is positive, there is still a chance that the quarantine could be extended and an even greater concern of a second wave of the virus.

Major cities are still on high alert and some manufacturing plants face the possibility of closing down. If production hasn’t come to a complete stop, it will definitely have slowed down. The result of this will be a backlog of products not being shipped and purchase orders not being fulfilled.

Many of the larger e-commerce sites like Amazon may not be affected too badly. Nevertheless, the third-party sellers will suffer as will any SME in the world that depends on the Chinese manufacturing industry.

Sourcing and the Coronavirus

There is never an ideal time, but COVID-19 has hit the Chinese nation at possibly one of the worst. Many workers went home for the Lunar New Year which means they were unable to return to Wuhan, also a transportation hub. And the problems don’t stop here. Anyone who carries out business in China won’t be able to visit their factories, centers, or contacts because of the travel ban.

Products that were supposed to be launched have been delayed and companies shut down productions. Nike is just one of the companies that have adjusted its earning targets and postponed launch dates.

Restrictions on travel have caused problems in both ways. Not only are workers struggling to get to work, but some are facing problems getting into their own homes. Apartment blocks and even entire cities have closed their doors to people trying to return.

Sourcing products from China is slowing down, and that includes complete products and product parts that are also made in China. The problems that companies are having with product sourcing will last for weeks, and possibly even months.

Issues for E-commerce

As we have discussed before, companies are going to have problems with product sourcing, travel and meeting contacts. Those who drop ship or run e-commerce businesses might be able to work remotely, but this will only resolve a small fraction of the issues.

Some companies might try sourcing in other countries but there isn’t a great deal of hope. These countries are already trying to cope with the increased demand, particularly in Southeast Asia. These companies probably aren’t going to have the capabilities to provide more products, not when you consider the spread of COVID-19 to these areas.

The “wait and see attitude” isn’t going to work here.

If you are drop shipping, it is crucial that you deal with the issues head-on. Now that most of the world is in the same situation, if you can’t contact your suppliers, you should at least contact your customers and explain your business situation. Today, excellent customer service is what is going to help your business survive in the long run. Do what it takes to make sure your clients remain loyal to you.

If your dropshipping or e-commerce business hasn’t been affected yet, you are one of the lucky ones. But don’t assume that you have escaped. The situation that all e-commerce and drop shipping companies are trying to handle is not going to get better any time soon. As more and more borders shut, we can expect more problems.

What to Expect after Coronavirus

At first, most of us, and even the professionals, thought that the coronavirus will be a severe issue for a few weeks. As time goes on, it is more likely that these weeks could become months and the aftereffects will undoubtedly go on for months. As the supply chain from China is weakened, companies will begin to look elsewhere. Many won’t completely abandon the idea of getting their supplies from China, but a Plan B is going to be necessary.

The GDP isn’t only going to suffer in China

The United States and Europe are going to see significant hits to GDP. We are prepared for the short-term ramifications of coronavirus, but the longer it goes on, the more we have to start preparing for the long-term negative effects.

For many retailers around the world, the COVID-19 outbreak is now a reality rather than a looming threat. In the short-term, retailers that sell supplies like toilet paper, face masks and water bottles are having significant sales gains due to the coronavirus. Long-term, however, retailers are concerned the coronavirus will negatively impact their 2020 revenue.

There seem to be three types of retailers with different sets of needs

  1. Retailers with no or under-developed e-commerce strategies
  2. Online retailers activating in verticals that are expected to struggle due to a decrease in consumer demand.
  3. Online retailers commercializing household necessities that will be sandwiched between supply chain issues and increased demand volumes.

Because our mission at MorphL is to help e-commerce companies with AI adoption, we asked ourselves: “how can we help our clients and partners in the e-commerce space in these difficult times?”

Most of our machine learning models are user-facing, in the sense that they have been architectured to help our e-commerce clients with revenue growth and increased conversions by enabling hyper-personalization of the customer experience on their e-commerce website.

Being an e-commerce AI platform means that we have a responsibility towards both online retailers and consumers. That’s why, in the short-term, MorphL can help online retailers manage their operations through demand predictions andcost optimizations capabilities. For online shoppers, we’re making sure our machine learning models are capable of facilitating relevant recommendations while ensuring that we’re respectful of their personal data.

It’s times like these that we turn to our WHY.

At MorphL we believe that making AI open, accessible and easy-to-use is the most valuable currency there is. And what better way to prove our core belief than by helping our customers, online retailers, overcome this crisis.

As a result, we decided to open-source the E-commerce Marketing Budget Optimization model here: https://github.com/Morphl-AI/Ecommerce-Marketing-Spend-Optimization

The business problem can be expressed in the following manner: given a total budget B, what is the optimum monthly budget allocation {B1, …, B12} across multiple channels (and potentially campaigns {C1, …, Cn}) in order to maximize revenue R.

Here’s a very basic Marketing Budget Allocation Planning that assumes Year to Date (YTD) average Cost-per-Click (CPC), Conversion Rate (CVR) and Average Order Value (AOV) for each channel. For advanced marketing budget allocation optimization using AI & Machine Learning please refer to the FREE and open-source initiative on our Github.

Hope this helps, please make sure you reach out if you have any questions or suggestions.

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