Will COVID-19 Lead to Accelerating Trends?
April 6, 2020 – COVID-19 is a worldwide emergency that will have a profound effect on the global economy as the virus rolled out in stages across the world. While China was the first to be hit with the outbreak, Wuhan, the city at epicenter of the disease, recently reported its first day without a new case of the virus. As the most severe effects of the virus start to lift in China, life is beginning to get back to ‘normal’ and some sense on what that new normal looks like is starting to be apparent. One major trend during the crisis was that the government lockdown changed the way consumers acted with more people transacting online out of necessity. One question for the future in China and one that will likely also become relevant in other regions, is whether the crisis has accelerated the trend for online transactions, or whether the increase was a short-term solution to ‘stay-at-home’ mandates. We look below at three sectors – online healthcare, ‘at home’ commerce, and online grocery —where we believe the crisis may have accelerated.
Both online and offline consultations are able to achieve health management for chronic diseases. Despite not being in the same physical location, some online providers use medical equipment that connect to patient cellphones via apps, giving online doctors the ability to monitor the heart rate and blood pressure of their patients remotely. Historically in China, online consultation is used as a supplement for physical hospitals and does not aim to replace offline consultations. Instead, it helps to redirect patients to the right departments in physical hospitals.
Before the COVID-19 crisis, online consultation was approved by the Chinese government and was used primarily for common diseases and chronic diseases (i.e., revisiting patients) as well as online prescriptions. Only the cities of Shanghai and Jiangshu had published online reimbursement support policies for Internet healthcare. Once the coronavirus comes under control, we believe this will change and Chinese government’s support to online reimbursement will increase.
During the crisis, Chinese online healthcare providers worked with local governments to offer consultations for patients, which helped prove the capability of online consultation teams and promote further cooperation with local government. In addition to increasing healthcare capacity in cities, Internet healthcare helped provide patients in remote areas with easy accessibility to drugs, which improved the efficiency in healthcare industry in the long run.
One outcome of the virus has been an explicit policy breakthrough from the central government on online reimbursement amid the virus outbreak. On March 2nd, China’s National Healthcare Security Administration and National Health Commission jointly released guidance on promotion of “Internet plus” medical insurance services during the prevention and control of COVID-19, promoting the reimbursement of qualified (1) online medical consultations services of common diseases and chronic diseases and (2) e-prescription filings for re-visit patients. The guidance urges cooperation between the provincial Healthcare Security Administration and Internet hospitals on direct online settlement by medical insurance. It also encourages detailed regulation and implementation to follow on the provincial level.
Based on the policy, online consultation and online drug sales will become more important and prevalent going forward, backed by policy tailwinds, as (1) online pharmacy is helpful, with better coverage and accessibility; (2) online consultation helps build a tiered medical system; and (3) Internet healthcare can save medical expenditures for the government in the long run on higher efficiency and transparency. While it still takes time to negotiate with individual municipal governments for reimbursement, we believe that more governments will be supportive of online healthcare after the COVID-19 outbreak.
In the U.S., a 2019 digital health survey found that 29% of consumers have used some form of virtual care, up nearly 40% from 2017 usage figures. A Sykes survey taken in the U.S. in March found that nearly three-quarters of respondents said they would consider using telehealth to be remotely screened for COVID-19 and two-thirds said the pandemic has increased their willingness to try virtual care. This rapid adoption is consumer led, i.e., healthcare consumers want these changes. Today’s consumers are able to fulfill many of their needs through a tap or a swipe, and are increasingly expecting their healthcare services to mirror that experience. Prior to COVID-19, the U.S. telehealth market was expected to double over the next five years.
At Home Consumption
The COVID-19 outbreak has led to multiple changes in consumer behavior. One change relates to where consumers shop. The population of e-commerce users has expanded from younger consumers to the middle-aged, and the shift from offline to online shopping is happening faster than was widely expected. Of particular note is the shift to online shopping in fresh food (where physical stores have a dominant share as a sales channel), big-ticket items like autos and real estate, and services such as travel and concert tickets. Our sense is that the upper limit on the rate of e-commerce adoption has been raised, opening up new possibilities for the online channel.
Another change involves how products are sold online. Since the Chinese New Year holidays, live commerce has expanded rapidly. Live commerce is a new type of online marketing that blends live-streaming and e-commerce, in which celebrities and influencers (also known as key opinion leaders, or KOL) live-stream about certain products, which viewers can ask questions about, comment on, and buy.
The live commerce market was worth nearly RMB450 billion (~$63 billion) in 2019. iiMedia Research estimates that the market will roughly double in size in 2020, to RMB960 billion(~$135 billion).
Live commerce is characterized by a high conversion rate and a high average spend. The most potent aspect of live commerce is its real-time, interactive nature. For consumers, live commerce provides the kind of product information that video and text cannot, and enables direct exchanges with live-stream hosts regarding how to use products and product functions. In a user survey conducted by iiMedia Research, ~70% of live commerce viewers said that a live-streams increased their propensity to buy. We attribute the growth of live commerce services in large part to a shopping experience that combines the convenience of e-commerce with the user experience that is historically the strength of physical stores.
We think the spread of live commerce has raised the upper limit for the rate of e-commerce adoption. In 2019, the rate of e-commerce adoption in the Chinese retail market was ~20%. Currently, the weighting of online sales is low for services across the board, and among goods, relatively low for big-ticket items and daily necessities. However, since the start of the COVID-19 outbreak, ~160,000 restaurants have begun to use the online sales channel. In February, the number of restaurants conducting live-streams was up 2.2x year-over-year. In addition, China’s eight major museums have all started offering online visits, and the Yiwu wholesale market (the world’s largest daily-necessities market) resumed operations through live commerce. Our sense is that the possibility of e-commerce expanding into consumption categories that have heretofore had little affinity for online sales has increased.
During an economic crisis, the food retailing sector is generally considered to be a safe harbor as even in the worst of times, people still need to go food shopping. But how they do that has changed recently with more and more consumers using food delivery services to get their weekly shopping instead of going down to the local supermarket. The COVID-19 crisis is exacerbating the level of demand for online grocery due to social distancing but is this shift to online grocery set to accelerate due to the crisis?
To the extent that grocers can meet the elevated levels of demand, we expect more customers to try online grocery and for some to carry on post the COVID-19 crisis, thereby accelerating what we see as an inexorable growth in online grocery penetration. The crisis may also prove to be a tipping point for potential retail partners presently considering their options. Tellingly, a Kantar survey conducted on February 15th of Chinese shoppers measuring the impact of COVID-19 found that 42% of respondents said they would use online more in the future while only 8% said they would reduce their use after the crisis. The same survey also suggested Chinese consumers will pay more to buy from socially responsible brands in the future and pay greater attention to sustainability.