Foodservice Industry Continues to Suffer From Coronavirus Outbreak

The coronavirus outbreak will continue to impact the foodservices industry, as many of the foodservice stores, such as Starbucks, Haidilao, McDonald’s, and Yum China remain closed until further notice. With no clear sign that things will get back to normal soon, we estimate that the 50%-80% revenue losses felt during the Chinese New Year (see report Recent Coronavirus Impacts on Chinese F&A) could last longer. Table 1 below shows the industry’s 2020 sales growth based on the 50%-80% revenue losses model, lasting one to four months. According to National Bureau of Statistics (NBS), Feb 2019 foodservice monthly sales were at USD 103.6bn, the losses from Feb (using the 50%-80% losses rate) could therefore total USD 51.8bn to USD 82.9bn. (For February data, NBS combines January and February accumulated sales.) A one-month impact could bring the 2020 industry level growth to 1% (50% losses) to -4% (80% losses), based on National Bureau of Statistics data, trade interviews and Rabobank estimates. The same methodology is applied to two-month, three-month, and four-month scenarios. As such, 2020 is likely to be a difficult year for the foodservice industry.

The virus outbreak may also lead to a round of consolidation in the future. Larger foodservice companies have the chance to gain larger market share, considering that smaller foodservice operators will be cash-strapped and forced out of the market if that cannot be controlled in Q1 2020. According to the survey from Tsinghua and Peking University, 85% of the smaller operators’ can’t bear the cashflow losses from the virus outbreak for more than three months. (Tsinghua and Peking University co-developed the survey based on 995 small to medium-sized companies’ responses after the virus outbreak.) Large, chained QSRs could have better capacity to cope with cost/cash flows/supply chain, because of their scale (ability to spread risk) and stronger financial position. Due to stronger financing capabilities, those large chains are able to retain their workforce even for the closed stores, which in turn helps them to respond swiftly when outlets resume full operation.

Food and workforce safety will remain a key issue during the virus outbreak. A KFC Xian outlet employee was recently diagnosed with the coronavirus after working a full-day shift. This may trigger further food safety concerns over the spread of the virus through human contact.

In response to the concerns on food safety, foodservice operators, including McDonald’s and Yum China, have accelerated their ‘contactless’ services. In addition to the orders from the food delivery platform, they also rolled out pick-up food options in-store, in which there is no contact with staff.

E-commerce players, such as Alibaba and JD.com, are using their capabilities in logistics, supply chain, and technology to ensure continuation of food supplies. They are also taking other measures to help the foodservice industry:

1. ‘Shared employees’ scheme: Alibaba’s supermarkets Freshippo (Hema) and delivery platform ele.me introduced an employee-sharing scheme that allows workers in foodservice sectors to get temporary jobs. This does not only help to reduce the cost pressure for foodservice players, but also resolves the labour shortage issue in retail and delivery.
2. Subsidized delivery staff to increase logistics efficiency: Alibaba has set up a CNY 1bn fund for supply chain and logistics services. The fund is used to compensate delivery staff for their services. The purpose of this subsidy programme is to motivate delivery personnel and increase logistics efficiency;
3. ‘Foodservice players offer branded products in retail’: JD has initiated the online sales alliance programme that encourages foodservice players to offer branded retail products, e.g. prepared ready meals and sauces. According to JD online retail sales, the demand for frozen food/ready meals soared during the Chinese New Year. For instance, frozen food/ready meal sales through the JD Daojia platform increased by 790% YOY. Although hotpot chain Hai Di Lao suffered from store closures, its retail products, such as Hai Di Lao sauces, doubled their retail sales on the JD online platform. Because the retail products are selling well during the coronavirus outbreak, those foodservice companies are planning to work together with e-commerce players to develop more retail pack prepared ready meals, in the hope that retail sales can partially offset the revenue losses from the foodservice outlets.

In the mid-to-long run, the virus outbreak may reshape how consumers are getting their food e.g. through e-commerce and delivery. In addition, convenient cooking may become the new lifestyle even after the virus outbreak, which may drive the demand for convenient meal solutions (e.g. prepared or half-prepared meals). To catch up with those opportunities, foodservice players may need to consider:

1. Rely on the value of brand to develop retail products: Strong foodservice brands can leverage the value of their brand to offer retail products. Take Hai Di Lao for instance, with its well-established brand name among Chinese consumers; the company successfully distributed its retail brand across 1000 distributors, rising to fourth place in the cooking sauces domain in China, according to Euromonitor. It also developed a convenient hotpot ready meal that is selling extremely well online. This helps the company to compensate the foodservice sales losses.
2. Kitchen and delivery automation: Foodservice players may need to work together with Chinese tech companies to accelerate the kitchen and delivery automation (e.g. robots and drone delivery), in order to mitigate risks and reduce manpower costs.