Written by Mark Hudson, Spencer Herder Dec, 9th 2020
COVID-19 has engendered many changes throughout the retail industry. In this post, we’ll outline three major modifications which have altered the business landscape and forced retailers and suppliers to shift their strategies in order to remain competitive. These changes include the further emergence of e-commerce, the current positioning of global trade, as well as the future of sourcing products throughout Asia. These insights come from our Q4 2020 Sourcing Report which is filled with valuable information regarding the industry dynamics as they stand currently.
COVID-19, E-Commerce Accelerator
One of the bright spots that emerged through the COVID-19 pandemic is online retail. Already a growing force prior to 2020, world-wide implementation of physical-distancing and stay-at-home orders have accelerated the progression of e-commerce. To put it in perspective, according to Statista, (chart below) in 2015 e-commerce represented 7.4% of total global retail sales, and by late 2020 e-commerce’s share of total retail will be above 16.1%. By 2023, online retail should comprise 22% of total retail.
This pandemic driven fundamental shift in consumer behavior will bring lasting effects as consumers shop more online and retailers improve service levels. The cliché of “adapt or die” applies to retail more than ever. Online shopping trends we see now provide a sense of direction to where e-commerce is headed.
Lining the Nest
Nearly half of consumers shifted their spending across online verticals such as apparel and electronics, but categories such as health, fitness, groceries, and DIY did especially well as people spent more time at home. Online orders in most of these categories grew by two or three-times times year-on-year, with some retailers seeing increases of more than 20 times. (e-Marketer). Retailers that capitalized on consumer trends such as food preparation, online fitness, and home offices were rewarded. Those able to perfect online models such as home delivery (Amazon) thrived through the pandemic and will continue to do so after.
Platform vs Retailer/Brand
Another evolving trend that has grown through the pandemic is a customer focus on product availability in a competitive marketplace. Amazon has grown exponentially not because it is cheaper, but because they provide a platform for competing products, often direct from the source which are vetted (reviewed) by other consumers. Other marketplace such as Wayfair and eBay have also carved out niches, but traditional retailers such as Best Buy and Walmart are also betting heavily on their own marketplaces to drive growth.
The biggest takeaway from the shift in consumer retail behavior, accelerated by the pandemic, is that conventional forms of cost-cutting are less relevant. For example, historically retailers and brands placed a heavy focus on the input cost factors we cover in this report – labor costs, material costs, currency exchange, logistics efficiency and speed to market. Going forward, the biggest area where retailers and brands need to look at cost-cutting is not through the supply chain, but at the end of it – whether in store or online or a combination. As an example, companies such as Bed-Bath and Beyond have done well with their Buy-Online-Pick-up-in-Store (BOPIS) model which has allowed them to cut brick and mortar locations. Petco, a major retailer in the pet care space, has also fortified its BOPIS capabilities over the last two years in order to stay ahead of its online competitors, allowing Petco to employ its physical stores as a mode of positive traction to meet customers’ needs in ways that its strictly e-commerce counterparts have not been able to. Retailers which have found creative ways to utilize their brick and mortar locations in tandem with online efforts have seen positive results throughout the last several months as shopping experiences have shifted.
The Customer is Always Right
No doubt the elements that go into getting products to market quickly and at a reasonable price are still important. But the biggest long-term factor of success for retailers and brands is the ability to innovate and provide consumers with the holy grail of what consumers want. This is an ever-moving target but includes the right products (on-trend), meeting product quality and social standards, pricing/value that makes sense, and Amazon level service (question-free returns). Most importantly though, the pandemic has reinforced some marketing basics – retailers need to ensure customers can buy WHAT they want, WHEN they want it and WHERE they can get it – which increasingly means online.
No doubt the pandemic threw us for a loop, but the big question is what the playing field will look like through the remainder of Q4 and early 2021. Recent reports from the International Monetary Fund (IMF) and the United Nations Conference on Trade and Development (UNCTAD) suggest that we are on the road to recovery through Q4 and into 2021, but it could be a rocky journey.
Despite what looks like a pandemic recovery, UNCTAD data showed a 5% drop in world trade in Q3 compared to the same quarter in 2019. This is certainly an improvement over Q2, which saw a 19% drop year-on-year, but overall global trade is still expected to contract by around 7-9% relative to 2019. While not great news, these numbers reflect a better-than-expected outcome, with manufacturing in Asia recovering quicker than expected and demand for products continuing strong in North America and Europe, possibly as people spent more on goods versus services.
Asia is expected to fare better than the rest of the world, with the IMF forecasting a 2.2% contraction for 2020, based mostly on the greater impact from COVID-19 through Q3 on India, Malaysia, and the Philippines. China is one exception, with the IMF predicting growth of 1.9% for 2020 relative to 2019. Chinese exports plummeted in Q1 but picked up strongly through Q2 and Q3 and should reach year-on-year growth of around 10% (UNCTAD). Chinese imports also grew strongly through Q3, reaching 13% growth in September. The most dramatic decline in trade was in South and West Asia, where imports dropped by 23% and exports declined by 29%.
Certain sectors such as energy and automotive were particularly hard hit, while other sectors such a communication equipment, office machinery, textiles and apparel had robust growth. Exports in medical supplies from China, the European Union, and the United States grew from an average of US $25 billion to $45 billion per month from January to May 2020 and 50% per month in subsequent months. The concern revealed by the UNCTAD data is that wealthy countries have more access to medical supplies, especially non-PPE products – for example, a vaccine. The report stresses that once a COVID-19 vaccine is created, it is important for developing countries to have equal access to ensure a faster global recovery.
Navigating Asia Sourcing in a Pandemic
Asian economies continue to be heavily impacted by COVID-19 related lockdowns, given they rely on trade with each other as much as they do on consumer product exports to Western countries. Garment producing countries such as Bangladesh and Cambodia continue to be hard hit by cancelled orders and factory shutdowns which have resulted in mass unemployment and social unrest. The only Asian countries who are seeing growth, now and into 2020, are China and Vietnam.
Cambodia – Cambodia’s garment workers turned to the streets to protest the sudden loss of income due to Covid-19 factory related closures. Over 200 factories have closed, thousands of workers receiving dismissal notices and no severance pay – in violation of labor laws. The garment sector in Cambodia employs over 800,000 people, mostly women at an average wage of US$ 190/month ($1.30 an hour).
Indonesia – Indonesia is another country hit hard by the pandemic, with over 400,000 cases, leading to shutdowns and mass unemployment. The Indonesian government passed a new law in October opening the door to labor intensive manufacturing and foreign investment, aimed at creating jobs. Labor-intensive industry makes up less than 2% of Indonesia’s GDP, much lower than other Asian countries.
Philippines – The Philippines continues to experience a severe fallout from the pandemic with the International Monetary Fund (IMF) predicting a GDP contraction of 8.3% in 2020. To put it in context, Asian economies together are projected to contract by 2.2%. This is the sharpest projected contraction among South-East Asian countries. As of mid-October, the Philippines had almost 350,000 COVID-19 cases.
Thailand – In mid-October, Thailand’s new central bank governor predicted that the country’s economic recovery is expected to take at least 2 years to reach pre-pandemic levels. He warned that Thailand, South-East Asia’s second largest economy, could contract by a record 7.8% in 2020, partly due to the heavy impact of tourism. Anti-government protests are also reportedly limiting consumption and business confidence
Vietnam – Aside from China, Vietnam is one of the only Asian economies to report economic growth in Q3 and into the busy Christmas and 2021 pre-Chinese New Year season. Vietnam’s GDP rose by 2.62% in Q3, with exports increasing 11%, partly due effective management of the pandemic through strict lockdowns allowing for rapid business reopening. Vietnam also continues to benefit as manufacturers shift from China.
South and West Asia
Bangladesh – Manufacturing in Bangladesh continues to bear the impact of the pandemic, with order cancellations and factory closures resulting in layoffs and tough times for garment workers living on already sub-standard wages. According to the Bangladesh Garment Manufacturer’s and Exporters Association (BGMEA), 1,150 factories have been impacted, with $3.18 billion in pandemic related order cancellations.
India – India continues to be hit hard by the pandemic with around 8 million cases and over 100,000 deaths by mid-October. While average daily numbers are on the decline, India is still the worst affected country after the US. Given the substantial number of potential cases in a population of 1.3 billion, the government has enforced lockdowns to some extent, but is also trying to balance the economic fallout of halting the economy.
Pakistan – Despite a relatively low-number of Covid-19 related deaths, Pakistan’s economy is still set to contract through 2020. To stimulate their economy and create jobs, the Pakistani government is pushing hard for the $6.8 billion, 2.655 ML-1 railway project, part of the China-Pakistan Economic Corridor that will connect Karachi in the South to Peshawar in the North. This project will be 90% funded by Chinese loans.
Turkey – Turkey’s COVID-19 death toll reached 10,000 in mid-October with almost 370,000 cases, with new lockdowns in place as the country fights off a second wave. While Turkish President Erdogan focused on pushing a political agenda across the Muslim world, the Turkish economy went into a free-fall, with the lira falling to record lows against the USD, inflation at 11.7% in Q3 and economic growth reached a 10-year low.
The pandemic has rewarded retailers who have strengthened their ecommerce efforts through providing seamless and enjoyable buying experiences.
World trade has contracted overall, but China has still experienced growth and has picked up speed in Q3 and Q4.
Garment specific regions have struggled to stay afloat as factory shutdowns and a lack of demand from consumers has altered the apparel landscape. South and West Asia have experienced particularly harsh effects amidst the pandemic.