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The impact of Covid-19 on the food sector in China – June 2022

Jade Cullinane, Global Business Development

From the start of June, following more than two months of strict lockdowns across the country, China is cautiously re-opening. In Shanghai, where the outbreak was largest, most of the city’s 25 million residents were restricted to their residential compounds for April and May. But across the country, even more people have been affected by partial or full lockdowns over the last two months.

The government is committed to a ‘zero-covid’ policy, opting to restrict movement and conduct regular PCR testing of citizens in affected areas, prioritising the reduction of cases despite the significant economic costs. Strict COVID-19 prevention and control measures will continue to be implemented for all citizens and business operators.

We look at how the lockdowns have impacted various aspects of the food industry.

Logistics

Logistics has become a serious headache for most importers to China. Though Shanghai port, the largest in the world, is reportedly operating at close to full capacity this week, a significant backlog of shipments has built up over the last two months. These will take several weeks to clear.

Inland logistics is where the most significant challenges lie. During lockdowns, truck drivers struggled to enter and leave affected provinces, and many drivers were caught in lockdowns themselves. This caused a severe shortage in truck drivers – up to nine out of ten drivers in Shanghai at its peak (Pilkington & Rechtschaffen, 2022).

Only a relatively small range of essential food and drink suppliers were able to operate normally during lockdowns. Many smaller operators in locked-down areas have had no access to their warehouses, and so substantial stocks remain untouched.

Re-imagined channels

A new channel that burst into mainstream during the lockdown is the ‘group buy’. Facing logistical constraints across the city, retailers and individual suppliers turned to offering bulk orders to residential compounds, whereby residents placed one large order and then divided the goods amongst themselves. Almost every residential compound in Shanghai now has its own WeChat group chat, where residents can suggest brands and club together to place orders.

With group buying neighbourhood WeChat groups now firmly established, it will be interesting to observe to how this channel evolves beyond lockdowns. For now, it has created a viable channel for direct-to-consumer bulk orders.

Retail

Retail sales, China’s main gauge of consumer activity, slumped 11.1% nationally year on year in April. While retail sales declined overall, staple foods registered a 10% growth (Mintel, 2022). Across China, the population has been stockpiling essential food and drink, fearful they may become the ‘next Shanghai’. Food prices in Shanghai during lockdown were heavily inflated, contributing to this increase.

Covid impact in China IMG1.PNG

Foodservice

China’s catering sector revenues fell 24% in April 2022 vs April 2021 (Mintel, 2022). This hit comes as Shanghai restaurants have either been shut or operating delivery only since early May. As of early May, Beijing banned ‘dining in’ in restaurants in the country’s capital. Meanwhile, across other regions of the country, while incomes are stable, consumer confidence is falling (Mintel, 2022). People are becoming more cautious about participating in out-of-home activities and appear to be saving more.

Despite the reopening, most restaurants in Shanghai are presently only permitted to take online orders and offer take-away meals. When China emerged from its initial lockdown in 2020, foodservice revenues took ten months to fully recover. With the more infectious Omicron variant, disruptions may be more frequent, and recovery this time may take longer.

 

Manufacturing

With food designated as an essential product, large food manufacturers have been able to continue operating through a “closed-loop system”.

Large companies are looking to build resilience into their supply chain, with plans to hold additional stock, and distribute it to multiple warehouses across the country, thereby minimising disruption to national sales in the event of a lockdown in any one location.

Implications for Irish food and drink exporters to China

Of the key channels, the hit to foodservice is likely to impact Irish food and drink exporters the most, and demand for this channel may take many months to recover. A significant backlog continues to affect logistics both into and within China, which will take time to clear despite the easing of restrictions. This may also drag on demand.

Normality is returning to China, but exporters should be prepared for potential further disruptions and increased volatility of demand. With China adhering to a strict zero-Covid strategy and more infectious Covid-19 variants emerging, lockdowns are likely to continue popping up across China for the foreseeable future.

 

References:

Mintel. (2022). Impact of COVID 19 on Chinese consumers: May 2022.

Pilkington, S., & Rechtschaffen, D. (2022). China lockdowns prompt domestic shortages, global supply chain disruption. Controlrisks.com. Retrieved 8 June 2022, from https://www.controlrisks.com/our-thinking/insights/china-lockdowns-prompt-domestic-shortages.