Hope is on the horizon, as Apple and Starbucks reopen stores in China now that COVID-19, officially classified as a global pandemic caused by the novel coronavirus, is starting to abate there.
While much of the country remains under strict government-forced quarantine to limit the virus’ spread, four provinces – Yunnan, Guangdong, Shanxi and Guizhou – have lowered their emergency response levels indicating that things can start getting back to normal.
On March 9, reported that China may soon have the disease under control thanks to its proactive public health measures. And some analysts predict government-imposed quarantine measures may begin to lift as early as the end of March.
China may have turned the corner
With the first quarter of 2020 in the tank, JP Morgan research analysts are hopeful for an economic recovery in the second quarter. According to China Daily, Jing Ulrich, the bank’s vice chairman of global banking and Asia-Pacific, predicts that the Chinese economy will grow 15% quarter-on-quarter from April to June, after contracting by 3.9% during the first three months of 2020, compared to the previous year.
“Although the resumption of work has been slower than anticipated, we expect that economic activities will rebound from late March and into the second quarter,” she said, adding that extensive factory shutdowns have created havoc in global supply chains.
The hard-hit luxury sector is beginning a slow recovery as well, according to reporting by Bloomberg. Within the hubs of luxury shopping, store traffic, which fell as much as 80% earlier this year, has begun to return.
Hermès International CEO Axel Dumas said he foresees “potential normalization” of operations with seven of its 11 stores in China beginning to resume operations.
Micaela Le Divelec Lemmi, CEO of Salvatore Ferragamo, reported a slow but measurable improvement to business, as well: “On top of the traffic, the mood of customers will also be relevant. After a month and a half of closures and restrictions, there is a will to come back and have a real life.”
In more positive news, Apple just announced it was reopening all 42 of its stores in China after being closed for a month. This follows news last week out of Starbucks that 90% of its roughly 4,200 stores in China have reopened.
Starbucks pulls back the curtain
In a letter to investors, Starbucks CEO Kevin Johnson and CFO Patrick Grismer were refreshingly transparent about how coronavirus disrupted “business as usual” in the Chinese market.
Though Starbucks doesn’t report sales in China, its 2019 annual report said that China, “contributes meaningfully to both consolidated and international net revenues and operating income. China is currently our fastest-growing market and second-largest market overall.”
The letter provides a look at the impact of the disruption to Starbucks’ business there and guidance for how other companies can prepare as COVID-19 continues to spread into other global markets.
“In recent weeks, the world has been grappling with an issue of enormous scale and human impact, and our hearts go out to all who have been affected by the outbreak of coronavirus disease (COVID-19),” they wrote.
“We will continue to be thoughtful and responsible in how we prioritize the health and well-being of our partners (employees) and customers, support local health officials as they work to contain the virus, and serve our local communities,” they said, and continued, “We believe that the impacts to our business are temporary.”
Preparing for the coronavirus spread
Johnson and Grismer reassured stakeholders that the lessons they learned from the outbreak in China will guide them in managing business in other markets where it rears its ugly head.
“We are prepared to respond to any situation that may unfold in any of our markets around the world, leveraging the considerable operational insights we’ve gains from our experience in China,” they said.
These protective measures include all Starbucks team members having daily temperature checks and required to wear masks at all times in the store. In addition, every Starbucks store entrance was equipped with a “safety station,” to automatically check customers’ temperatures as they entered and to provide masks for their use inside.
Team members were trained for a “Contactless Starbucks Experience” to avoid any direct contact with customers which encouraged the mobile-ordering capabilities. Enhanced store sanitizing protocols were put into place and seating was adjusted in the stores to maintain a safe distance between guests.
Six weeks of business disruption
As for its business, emergency health precautions caused Starbucks to close about half of its stores on January 29. Those closures, combined with already planned closures for Chinese New Year holiday, resulted in some 80% of its stores shuttered in early February.
Reporting that as of early March more than 90% of its stores are now open, they also said that a majority of its stores in China still are operating on a reduced schedule.
By month’s end, assuming no unforeseen reoccurrences of the disease, the company expects 95% of stores in China to be opened, but they will continue to operate with “elevated safety protocols and modified schedule.”
Short-term financial hit
The company has taken deep but short-term hits to its business in China. During the month of February, comparable store sales declined precipitously by 78% from previous year, with the sharpest decline occurring the second week of February.
However, by February 27 sales had begun to improve, with total weekly gross sales the last week in February rising 80%. Also in the last week of the month, mobile orders accounted for about 80% of sales.
In effect, the worst lasted only six weeks or so, with recovery expected to progress steadily through mid-year.
Overall, the company expects headwinds from COVID-19 to cost the company $400 million to $430 million in revenue from China in the second quarter of 2020 at month’s end.
At that time comparable store sales in China will be down approximately 50% over the previous year. By comparison last year, the China/Asia Pacific segment reported revenues of $1.3 billion, out of consolidated net revenues worldwide of $6.3 billion.
In closing, Starbucks also announced that planned store openings for fiscal year 2020 in China will be deferred to fiscal 2021, with more details to follow in its earnings call scheduled for April 28, 2020.
While the coronavirus contagion in China will have the biggest impact on the Starbucks’ second-quarter financials, the rest of the world will undoubtedly follow in the third quarter ending in June. Already business has been impacted in Japan, South Korea and Italy with store closures and reduced customer traffic.
And with its corporate headquarters in Seattle, the initial epicenter of the disease in the U.S., its impact threatens to spread across the country.
Already an employee in its Starbucks Reserve Bar there has been diagnosed with COVID-19 resulting in the store shutting down for a thorough cleansing. With plans to open the store shortly, the company’s elevated safety protocols will be put into place in that store, if not others.
This Starbuck’s update provides a clear picture of what the aftermath of the coronavirus will look like for any company with a major presence in China, as well as advance warning of what may descend on businesses worldwide in the next several months.
Retailers, in particular, need to get ready with advanced safety measures similar to Starbucks’ in anticipation of the need.
Until the pandemic subsides, all will have to hunker down and ride out the storm. But it is clear that the companies that will come out of it fastest will be the financially strong and best-prepared ones going into it, like Starbucks.