COVID Lockdowns Test the Reputation of China’s Online Shopping Brands

As China looks to curb a rise in COVID cases, the difficulties of delivery during lockdowns has brought increasing pressure for online shopping brands.

It is no understatement to say that China has become a behemoth in the global e-commerce market in recent years. In 2022, the country registered USD 2.78 trillion in e-commerce sales, accounting for nearly half of the USD 5.55 trillion global e-commerce market.

The fact that by one count, 52% of all retail sales in China have taken place online, compared to 18% in the second-placed US, shows the enthusiasm with which Chinese shoppers have taken to buying online compared to their global counterparts. 

An E-commerce Giant Struggles with COVID

The appetite for online shopping among Chinese citizens reflect in the size of the firms and workers partaking in it. The country’s 7 million delivery riders handle the delivery of USD 45 billion worth of meals and other ready-to-eat foods to hundreds of millions of users across the country.

 
 

The country’s logistics network was already handling more than 30 billion e-commerce packages in 2016 before the market went on to grow by more than 17% every year for the next half a decade. The resulting network of delivery infrastructure in the country’s major cities has enabled products ordered online to arrive at their destinations within hours.

The latest COVID-19 outbreak is testing the resilience of this advanced e-commerce delivery infrastructure. As the 26 million residents of Shanghai are forced indoors by a citywide lockdown, demand for e-commerce has only increased as brick-and-mortar alternatives are shut down.

However, as the lockdown force workers indoors, restaurants that make the meals to be delivered, and the delivery riders that are supposed to deliver them, are forced to stop operating, straining the supply of food ordered online just as demand for it increases. The result is that, for those buying food and other essentials online, it is increasingly difficult to expect deliveries to arrive in a reasonable timeframe, if at all.

 
 

Leading Chinese E-commerce Firms Draw Controversy

The struggles of Chinese online shopping to handle the continuing lockdown in Shanghai and other major cities are reflected in negative news surrounding some of the country’s leading IT platforms.

On 14 April 2022, Jia Yangqing, the vice president of technology at Alibaba was reported to have “escaped” from Shanghai to the US. While Jia stated that he only went to the US for medical purposes, his move attracted criticism among netizens for flouting lockdown. JD.com was criticized for the so-called “suicide logistics” in which delivery personnel from outside Shanghai were sent into the city only to be stuck in lockdown after their assigned deliveries were completed.

The country’s 7 million delivery riders handle the delivery of USD 45 billion worth of meals and other ready-to-eat foods to hundreds of millions of users across the country.

Pressure to supply a populace facing extended lockdowns in major cities is bound to hit e-commerce firms’ bottom line as they face mounting costs and reduced profitability. In response to increased demand in locked-down cities, e-commerce platforms have been increasing the number of delivery personnel, shifting them from other parts of the country, and providing them with extra benefits such as free accommodation and extra pay to compensate for COVID risks.

All these measures increase operating costs that cannot be immediately shed after lockdowns are lifted. In the meantime, on 19 April 2022, Shanghai’s market supervision authority warned 12 major e-commerce platforms against raising prices for their delivery services. Extra costs cannot be easily made up with extra revenues.

Will China Lose Its Trust in Its E-commerce Firms?

The growing strain faced by e-commerce firms and the resulting shortages of supplies that residents can purchase online may be part of the reason that Shanghai has begun to lift the lockdown in some parts of the city, despite continuing to break records in the number of new infections.

As the lockdown continued and tech platforms for food purchases falter, residents are turning to more old-fashioned methods like bartering with neighbors, and there is growing concern that the less tech-savvy are at a disadvantage for procuring supplies. The offline struggles have occurred despite greater adoption of the internet by the elderly in China as a result of the COVID-19 pandemic.

The shift away from online to offline methods of procuring needed supplies will not be seen in headline figures. As brick-and-mortar stores remain shut in locked-down cities, many will continue to turn to e-commerce firms, boosting their short-term revenues despite uncertainties over service levels.

Image: Saunak Shah via Pexels

But in the long-term, the scrutiny facing the reputation and business models of Chinese e-commerce firms will only help entrench a continuing trend of higher losses and lower valuations that precede the current wave of lockdowns. The recent resignations of the founders of JD.com and Pinduoduo from leadership positions in their respective firms show that lifting lockdowns will not easily reverse the fortunes of some big tech players in China.

Moreover, the fortunes of Chinese online shopping brands will, as they experienced during COVID, be much more subject to government policymaking and regulatory changes. The continued pursuit of a dynamic zero-COVID policy by the Chinese government, along with closed international borders and scrutiny of domestic firms listing abroad, will force Chinese e-commerce brands to adapt their business models as well as funding and operating processes, to be nimbler and more aligned with volatile political goals.

For these brands to continue servicing the Chinese masses, they will need to be more flexible and perceptive of changes in their immediate business environment.

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