The coronavirus chaos came first to Lunar New Year sales in China and then to the supply chain, travel, Milan Fashion Week and now the stock market.
Next up could be the consumer in Europe, where Italy is still smarting from a sudden outbreak a week ago, and the U.S., where officials say it’s a matter of “when” and not “if” the disease starts spreading more widely between people with no apparent connection to the initial outbreak in China.
That process seemed to have started.
Over the weekend five people with no known connection to outbreaks abroad were diagnosed with the coronavirus in Washington State, indicating more community spread of the virus. Similar cases were reported in Northern California and Oregon. And the U.S. also saw its first death from the illness, while Rhode Island registered its first case.
Workplaces have forced changes in the regular routine with editors and buyers returning from Milan Fashion Week asked to work from home for two weeks in many cases, while both Delta and American Airlines suspended flights from the U.S. to Milan.
As cases increased in France, the Louvre closed its doors, while Chanel and Louis Vuitton were said to have barred their U.S. staffs from going to Paris for the shows because of the virus.
Many people who do get the coronavirus experience only mild symptoms, but the understanding of the disease is still developing. So far, 87,509 cases of the coronavirus have been confirmed, while 42,670 people have recovered and 2,990 have died, according to a tally by Johns Hopkins University.
All of that — and endless media coverage — will make the coronavirus more real to millions, who will more and more start to recalibrate how they act and where they go.
Already shoppers were pulling back — an ominous sign for retailers that limped out of 2019 and need at least a steady environment to retool for a new age.
A survey last week by Deborah Weinswig’s Coresight Research found 27.5 percent of the 1,934 respondents in the U.S. were avoiding public areas and changing travel arrangements. And 58 percent said they are likely to do the same if the coronavirus outbreak worsens in the U.S.
The picture is even starker at the mall.
Coresight said 47.2 percent of those surveyed are already avoiding malls and shopping centers, a portion that the survey suggests would rise to 74.6 percent if the outbreak worsens.
Likewise, the University of Michigan’s Surveys of Consumers, which tracks sentiment, said shoppers in the U.S. were feeling better in February, but started to take note of the coronavirus as the month came to a close.
“The coronavirus was mentioned by 8 percent of all consumers in February when describing the reasons for their economic expectations,” said Richard Curtin, chief economist of the Surveys of Consumers. “However, on Monday and Tuesday of [last] week, the last days of the February survey, 20 percent mentioned the coronavirus due to the steep drop in equity prices as well as the CDC warnings about the potential domestic threat of the virus.”
If the virus spreads in the U.S., Curtin said consumers were likely to limit their exposure to stores, purchase some items in advance, shop online and possibly forego much of their discretionary spending.
“To be sure, there is no reason to anticipate that consumers will engage in such extreme measures at this time,” Curtin said. “It is a fine line that needs to be drawn to encourage people to take normal steps of preventive hygiene but not to engage in panic reactions. Panic is best avoided by a strong sense of confidence in the government’s responses that aim to control the potential spread of the virus and limit any resulting damage to the economic welfare of consumers.”
But anecdotal evidence indicates that numerous people are already on the edge, stocking up on pasta, canned goods and water just in case an epidemic takes firm hold.
This together with the two surveys point to the impact that the coronavirus is already starting to have on consumer psychology. Even if the main outbreaks are abroad, the turmoil certainly has come to the U.S. and Wall Street, which saw the Dow Jones Industrial Average fall 357.28 points, or 1.4 percent, on Friday to 25,409.36 — an ultra-fast drop that recalled the financial crisis and set the market back 12.4 percent for the week.
That stock market rout, which has hit luxury particularly hard, only increases the pain already felt by the industry — although many are looking for things to return to something much closer to normal next year.
Altagamma, in partnership with Boston Consulting Group and AB Bernstein, recently presented the “Coronavirus outbreak impact assessment on #luxury industry” survey. The luxury goods association said 40 percent of members expect an impact worldwide but mostly in China, although Chinese travelers are also a concern, with the majority of respondents expecting an impact in the next three to six months.
It also stated that 61 percent of chief executive officers and chief financial officers expect to reach pre-virus revenue targets in 2021. Altagamma also expects a potential earnings before interest, taxes, depreciation and amortization decline of around 10 billion euros in 2020 and a sales decline of between 30 billion and 40 billion euros in the personal luxury market.
Also, the survey forecasts that between 10 million and 15 million units of potentially unsold products destined for China will cause a potential sustainability issue — one more problem for the industry to wrestle with.
And as the virus spreads farther — which it will — the impact it will have on consumer sentiment is only likely to increase.
“Any sort of fear or tragedy tends to freeze up spending,” said Kit Yarrow, a consumer psychologist at Golden Gate University. “We see that even when there are earthquakes and natural disasters in other countries, people here just go into a little bit of a shock mode.”
Consumers are focused more on the health aspect of the threat right now, but Yarrow said their anxiety could start to show up in their spending — and that might not be bad for all brands.
“There’s anxious shoppers, people who are home, maybe even alone, they feel anxious and shopping is really a magnificent distraction for a lot of people,” Yarrow said.
“Even during times of stress, I’ve always found an ample supply of shoppers who manage stress through controlling what they can control, which is buying,” she said. “If you look at shopping that way, shopping is something where I get to pick, I get to choose, I get to examine everything, I feel in control.”
If consumers are stuck at home, or grow more wary of the malls, that could have them clicking away more at e-commerce.
The infrastructure powering e-commerce — which still accounts for just 11.4 percent of total retail sales — would not be able to pick up all the slack if people abandoned stores, but certainly retail could now be moving into an even more web-centric period. That in itself could prompt some shifts in consumer habits and attitudes.
“I’m not seeing massive changes, but changes at the margin can be very important and they can have a lot of impact,” said Joel Rampoldt, a managing director in AlixPartners’ retail practice.
He’s keeping an eye out to see if shoppers start to gravitate more toward order-online, pick-up-in-store programs that retailers have been pushing.
“Categories that are discretionary and categories that rely on browsing are ones that are going to feel the impact of any changes in consumer psychology,” said Rampoldt.
Erik Lundh, senior economist at The Conference Board, said, “This is a challenging period,” noting there is still little data to indicate how it will all play out economically.
“There’s a lot of uncertainty at the moment that consumers are beginning to grapple with more and more,” Lundh said.
The same goes for businesses.
“A company can decide not to deploy capital right now or not make an additional hire,” he said. “There are going to be ramifications from this, certainly in things like business spending, and that will trickle into broader economic kinds of consequences.”
Stores can step up online personalization efforts and communications to capture e-commerce shoppers. Consequently, they’ll have to rethink fulfillment and delivery capacity, and meet increased demands for home deliveries. Retailers could encourage consumers to actually enter their brick-and-mortar stores with new discounts, speedier checkouts with additional registers, and sanitizers.
Companies such as Macy’s Inc. and J.C. Penney Co. Inc., while closely monitoring the spread of the virus, have yet to bake in the impact of the disease in their 2020 forecasts, waiting to see what happens. They have already forecast business being down, based on recent selling trends and expectations. What will hurt them is any public panic from the coronavirus and people being reluctant to leave their homes, more so than the disease itself.
“As concerns of the coronavirus outbreak heightened, more retailers are providing negative guidance,” said Jharonne Martis, director of consumer research for Refinitiv, which provides financial markets data and infrastructure. “Now, discussions of the coronavirus have taken place in 66 earnings calls and that might not be the end of it. To date, there have been 16 negative EPS preannouncements for Q1 2020 compared to five positive preannouncements. Likewise, there have been 16 negative revenue preannouncements for [first-quarter] 2020 compared to eight positive.”
As of Friday, in the U.S. there were 60 confirmed cases of the coronavirus in six states. The Centers for Disease Control confirmed the first possible community spread, meaning someone who contracted the disease from an unknown source, in California on Wednesday. The virus started in Wuhan, China, and has so far infected more than 80,000 people and killed at least 2,700 globally. The World Health Organization has yet to declare the coronavirus a pandemic.
But Nancy Messonnier, head of the National Center for Immunization and Respiratory Diseases at the Centers for Disease Control and Prevention, on Tuesday said the U.S. should be prepared for the spread of the virus.
According to Cowen research, “the luxury sector will feel the most pain in the first half of 2020 as we expect a combination of store closures and traffic declining by more than 50 percent in Mainland China as well as other neighboring countries can lead to substantial top-line and bottom-line declines…We also think broadlines could see some pressure, but there could be a surge in near-term demand if customers decide to stock up on essentials and groceries before a drop in traffic. Traffic could be a concern and discretionary spending could be at risk if consumer confidence wanes.”
For the first quarter of 2020, Cowen indicated, “retailers likely have already received inventories, and therefore, there should not be an immediate shortage…Industry-wide, we believe the coronavirus impact could be material in first-quarter 2020 for retailers with high sales exposures to China. Also, note that the March ending quarter typically benefits from higher sales volume from Chinese New Year, and sales exposure to China could be larger than other quarters.”
But the longer the coronavirus — and the attendant worries — linger, the harder it will be for stores and consumers to react and recover.