As the Wuhan coronavirus spreads around the globe, spurring speculation about its epidemiological and financial impact, particularly in China, it’s natural to compare it with the SARS outbreak of 2003.
China has changed a lot in the interceding years, most notably the structure of its consumer economy. How people find, select, purchase and consume products is vastly different.
For example, when Severe Acute Respiratory Syndrome struck China and spread around the globe, Nokia and Motorola were the top-selling handset brands and the smartphone had yet to be invented. Alibaba introduced its Taobao marketplace that year, and getting a taxi meant making a phone call or hailing one on the street.
Those differences matter because today smartphones are at the center of China’s economy in ways that far surpass use in both North America and Europe, and Taobao is now a core component of consumer spending. Additionally, as my colleague John Authers notes, “China’s economy simply matters far more to the world than it did during SARS in 2003.”
Three companies encapsulate today’s Chinese consumer economy: Alibaba Group Holding Ltd., Tencent Holdings Ltd. and Meituan Dianping. While other names, such as Baidu Inc., ByteDance Ltd. and JD.Com Inc., are significant players, I’d argue that China would function just fine without them. I don’t think the same could be said if Alibaba, Tencent or Meituan were to be brought to a halt.
Much of China’s online commerce, deliveries and payments are done through Alibaba’s stable of offerings, and it has a delivery business called ele.me. Tencent is not only an important payments provider but occupies a lot of consumers’ time and attention through content that includes games, news, streaming and instant messaging.
Share price declines for U.S.-listed shares of Alibaba and Tencent reveal that investors see the Wuhan coronavirus as bad for business. That’s a reasonable assumption. Lunar New Year is when citizens travel across the country, or overseas, and spend lots of money. Any disruption is not likely for the better. Thanks to today’s online-shopping infrastructure, though, consumers don’t need to step outside their door to buy daily necessities, clothes or even luxury goods.
There are also anecdotes of people spending a lot more time online playing video games and streaming content as they stay indoors for their own safety, a phenomenon known as nesting. That may end up being good for Tencent, which derives half its revenue from online games and social networks. To be sure, online games were big in 2003 and the same thing happened during SARS, but games and TV shows weren’t in the palm of every hand as they are now.
Then there’s Meituan Dianping, perhaps the perfect example of China’s internet-connected consumer economy. The company has two main services: food delivery and bookings for restaurants, hotels and travel.
Food delivery accounts for 57% of revenue but just 32% of gross profit. The bookings business is the reverse, a minority of sales but most of its gross profit.
If consumers choose not to go out, then home delivery will becomes a more enticing option. The first quarter tends to be a lull for this business, so any upturn would be welcome. But a downturn in bookings could hurt, especially during the Lunar New Year period because it’s such an important moneymaker. It’s tough to make a net-net analysis this early on, especially considering factors such as the availability of delivery drivers because many may have returned to their hometowns for the holiday.
But investors might want to look beyond Feb. 2 — the new extended end of the Lunar New Year holiday (it was originally Jan. 30) — and consider the impact this pandemic fear will have on consumption habits in coming weeks. I am already hearing anecdotes of on-demand drivers, through booking app Didi Chuxing, being far less busy this New Year than in the past. That indicates customers aren’t heading out to visit friends, relatives or restaurants.
The net impact on hotel reservations could be minimal because many visitors will have already returned from travels, yet fewer people will be pulling out their smartphones to book a restaurant. The week or two immediately after New Year is a season for friends and colleagues to gather in more casual settings such as at restaurants and bars, but a mask tends to be a buzz kill, so expect a lot of those plans to be canceled.
People still need to eat, though, and many will have returned from their home provinces to big cities such as Beijing and Shanghai, which means delivery is likely to be a big spending item in ways it wasn’t 17 years ago. If the contagion is controlled quickly and anxiety fades, then things could return to normal pretty quickly. One calendar item, Lantern Festival on Feb. 8, could offer a good benchmark from which to sense any turnaround in sentiment.
As investors compare the fallout from the Wuhan coronavirus with the SARS outbreak, they ought to consider that consumption habits have evolved and the Chinese economy has adapted.
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