Retailers that have been affected by the growing coronavirus epidemic can learn from how the sector has reacted to similar health scares in the past, a new report from Bain & Company has said.
The report, from Bain analyst Jonathan Cheng, studied the reaction to three major crises in the past couple of decades – SARS in China in 2003, the Japanese earthquake, tsunami and Fukushima nuclear disaster in Japan in 2011 and the MERS epidemic in South Korea in 2015 – and the medium to long term effect on retail from each.
Return To Stability
As he noted, in each case, the market in question managed to return to stability within a few months of the crisis' peak.
In the case of SARS, for example, the spread of the disease ended in May 2003, with the retail sector returning to stability by July of that year.
"Within retail categories, demand variations during and after a crisis tend to follow three patterns," Cheng writes in the report, entitled China's Retailers And The Coronavirus Outbreak: Lessons From The Past. "The first applies to staples such as fresh food and baby care products; demand in these cases tends to spike during the emergency because of panic buying, before resuming a more stable rhythm.
"Other products also see a spike in a crisis, but with a much steeper decline in demand when normality returns as hoarded items are gradually used up. Categories affected in this manner include health-protection items such as disinfectant or hand sanitiser, as well as home cleaning products."
The third group, he noted, follows a 'dip and rebound' pattern, "as shoppers defer purchases during the crisis and then return in droves when safe. Clothes and cosmetics are among the products subject to this sudden release of pent-up demand".
Lasting Legacy
In his report, Cheng notes that the COVID-19 outbreak has occurred at a "time of intense change" for the retail sector, and that some retail operators may be better placed to deal with both the current situation, and any 'new normal' that may result once concerns have dissipated.
Citing a recent Bain report, The Future Of Retail: Winning Models For A New Era, he noted that ecosystem players (retailers that are well-leveraged across multiple platforms), as well as dynamic traditional retailers or 'scale fighters' (namely those with a significant national or international presence) should be able to shoulder the financial and logistical burden that the outbreak presents.
At the same time, regional retail players may not "have the same capacity to absorb financial shocks" as their larger equivalents, while 'legacy laggards', namely those that have struggled to adapt to the changing retail environment, may be particularly threatened.
As Cheng notes, it was perhaps the SARS epidemic that prompted upstart entrepreneurs to embrace the potential of e-commerce close to two decades ago. The current situation could result in a further paradigm shift.
Budget Expectations
According to Cheng, when faced with such a potentially grave situation, current annual budgets have been rendered "meaningless", due to reduced consumer demand and heightened operating costs, and retailers need to take stock of this, while also putting primary focus on ensuring the health and wellbeing of their customers.
"Retailers should quickly adjust their annual forecasts with more realistic P&L estimates and reallocate resources as needed," he says. "Yet past crises have shown how vital it is to plan for an eventual resumption of normality, even as companies scramble to manage and quantify the disruption. That’s understandably hard to do (or even contemplate) when health concerns are still paramount.
"But when pent-up demand is released, unprepared companies can struggle to retain existing shoppers or form a lasting bond with new customers."
© 2020 European Supermarket Magazine – your source for the latest retail news. Article by Stephen Wynne-Jones. Click subscribe to sign up to ESM: The European Supermarket Magazine.
