TheJakartaPost

Please Update your browser

Your browser is out of date, and may not be compatible with our website. A list of the most popular web browsers can be found below.
Just click on the icons to get to the download page.

Jakarta Post

How to address inevitable contraction in retail spending

  • Diogo Granate and Cipto Herlianto

    -

Singapore/Jakarta   /   Wed, April 8, 2020   /   03:36 pm
How to address inevitable contraction in retail spending A woman wearing a face mask walks past empty shelves in a supermarket in Singapore on April 3. (REUTERS/Edgar Su)

The COVID-19 pandemic continues to spread across the globe at an alarming pace. Since the first reported case in late 2019 in China, the virus has infected more than 1 million people all over the world.

The full economic toll of the outbreak has yet to be seen, but a recession is the consensus among economists. Retail is one of the industries currently dealing with severe economic repercussions of the outbreak. As the epicenter of the outbreak has shifted from China to other regions, Indonesian retailers can draw lessons from other countries on the impact and on ways to sail through the crisis.

As we have learned, China saw retail sales in January and February contract by more than 20 percent compared to the same period last year, despite healthy annual growth of 8 percent in 2019. Similarly, Indonesian retail is likely to experience a 5 percent to 10 percent contraction in the second quarter, but more importantly, the impact will be felt differently across categories.

Some retailers will experience a rapid decrease in demand, while others will see demand increase for some of the categories they carry. Retailers for nondiscretionary items, such as groceries and healthcare/pharmaceutical goods, are already experiencing a spike in demand due to increased efforts of protection and some panic-buying. Retailers for discretionary items, such as consumer electronics, cosmetics, fashion and accessories, will see a rapid drop in sales due to supply disruption and reduced consumer spending. In Singapore, for example, fashion and accessories sales declined more than 30 percent year-on-year in the month of February.

The second type of impact, beyond asymmetrical demand shocks, is an accelerated shift of retail demand to digital channels and digital payments as people avoid store visits and the use of bills and coins due to the risk of virus transmission. In the first 10 days of February, China's largest online retailer, JD.com, saw an increase of 215 percent in online grocery sales, while China's UnionPay reported a 45 percent increase in its digital payment business. We are beginning to see similar effects in Indonesia, albeit on a smaller scale, where online retail and digital payment transactions surged by 20 percent-30 percent since epidemic outbreak. We believe the trend is likely to accelerate, promising benefits to all digitally prepared retailers and pure digital players.

Third, globally interconnected retail supply chains will see widespread disruption. Categories that are locally sourced or produced in Indonesia, such as packaged goods and instant food, will see less disruption than categories that rely on imports from other countries, such as consumer electronics. Production and distribution activities in many countries have slowed down significantly due to mandatory closures and quarantined workers, prompting retailers to either find alternative sources or reduce their SKUs. Travel restrictions, closed borders and a surge in demand for essential items will further aggravate supply chains bottlenecks for inbound and outbound goods in the coming months.

Learning from the COVID-19 crisis in other countries, Indonesian retailers should adopt four key measures to minimize the economic impact and ride out the storm:

Set up and empower emergency task force

Retailers need to mobilize a dedicated emergency response team with direct access to key executives and empower them to make cross-functional decisions in key areas related to store operations, inventory management, workforce safety and consumer sentiment. Concrete action plans with clear leadership communication across organizations is critical to navigate the crisis.

Adapt to new consumer habits

Retailers need to adapt their operations to changing customer preferences that are focused on safety and convenience. Online channels and digital payments have been making headlines in Indonesia for the past decade, but these technologies are more promising now than ever given the drastic shift of consumer choices toward digital solutions. As such, marketing spending needs to be reallocated toward digital channels. Further, retailers need to provide assurance that customer safety is the utmost priority in physical stores, through measures such as regular temperature check at entrances as well as minimizing human contact through self-service checkout and noncash payments.

Revamp and optimize supply chains

Retailers need to diversify their supplies to minimize the risk of stock outs, which creates new opportunities for local suppliers in Indonesia to take a share of the pie. We also expect new consumer demand to put pressure on retailers to source from environment-friendly sources. Shelf-space usage needs to be reprioritized for high-moving essential SKUs – yes, less choice will be one of the legacies of COVID-19. Further, retailers need to immediately step up new or enhance existing online capabilities to cope with the growth of e-commerce, either through in-house logistics or 3rd-party providers.

Prudent cost reduction and containment

Cost reduction and containment levers, such as workforce redeployment, flexible working arrangements, rental renegotiations, reduced operating hours or delayed spending on nonessential purchases could help retailers enhance margin to sail through the pandemic. These measures should not be so excessive that they jeopardize retailers' long-term recovery.

***

Diogo Granate is a partner at strategy consultancy Roland Berger, Singapore. Cipto Herlianto is a principal at strategy consultancy Roland Berger, Jakarta.

Disclaimer: The opinions expressed in this article are those of the author and do not reflect the official stance of The Jakarta Post.