Lessons from Covid-19 Crisis: An Observation of the Consumers’ Behavior in the F&B Retail Sector

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By Boo Kok Chuon

Since the Covid-19 crisis hit the shores of Singapore, the consumption patterns of the city-state have experienced a drastic shift. This is particularly apparent in the already gloomy retail scene, the implementation of the Circuit Breaker by the government as an attempt to manage the outbreak, further aggravate the businesses of retailers. Many restaurants are faced with the challenges of business continuity, retail shops face tremendous pressures from servicing their rents. Notwithstanding which, there are businesses that ironically performed exceptionally well during this period: apparently Sheng Siong Group Limited could still declare bonuses for its staff as it records astounding Q1 profit and fast-food chain, McDonald’s, is also expecting to do well given the recent surge in demand after its month-long closure. On the surface, it seems rather contradictory, that if the decline in demands for restaurants were due to systematic factors, such as unemployment and recessionary pressures, then the promising outlook of Sheng Siong Group and McDonald’s, seems to be of an anomaly. This interesting phenomenon prompted the examination of the consumption behaviours of Singaporean consumers, or rather, most consumers as a whole.

Adverse Selection

In times of the Covid-19 crisis, the mode of consumption has, to a large extent, been forced to shift from offline to online, given that most shopfronts are forced to close their doors due to the Circuit Breaker. This modification in the mode of consumption changes how spending decisions are made. The availability of information on online shopfronts clearly differs from the brick-and-mortar model, which essentially affects how consumers perceive about the goods that they are buying. When a customer reviews a poster advertisement outside a restaurant, his decision could be influenced by other factors such as the aroma of the food, the crowd in the restaurant, and other experiential externalities that are deficient in the online context. Whereas for the ordering of food through the internet, the customer can only rely on reviews, images and past experiences. The lack of information results in consumers adopting the play-safe mindset, to go for what they perceive to be more value-for-money. Consumption decisions tend to be more price-elastic, and given the convenience and transparency of available substitutes in the online marketplace, it becomes relatively difficult to expect customers to make their purchase decision out of impulse. This perhaps explains, why eateries with products that cater to the mass market or have already established a matured market presence (such as McDonald’s) would end up performing better during this time. Whereas for eateries that rely on walk-in demands tend to suffer in such a situation.

Consumption decisions are often a composite of different values that the consumer desires. The decision to buy a pair of shoes often is not solely on the purpose to have something to cover the feet when walking; it encompasses a myriad of other considerations, such as durability, glamour, the portrayal of certain attitudes of the buyer, comfort, and many others. Similarly, in the context of a restaurant business, such decisions encompass the service and experience of dining-in, and the ambience and environment of the eatery, which usually accounts for the premium that consumers willingly paid for. With the absence of such experiential values, coupled with the asymmetry in the availability of information the relates to the quality of the food, consumers tend to end up going for the more conservative choices: food that they are familiar with and that are more affordable.

Moral Hazards

American economist and Nobel Laurette, George Arther Akerlof, developed the famous economic principle of “Lemon Law”, which examines how asymmetric information in the market leads to adverse selection and moral hazards. Moral hazard, in my personal view, is a weakness of human nature: when there is neither current nor prospective incentive for certain ambiguous considerations to be delivered, even they are implied and morally-correct, a reasonable or rational man, will tend to choose not to deliver at all. I call it a weakness because it can be subjected to exploitation. However, in our discussion, we shall not digress into how this weakness can be exploited. In the context of the restaurant business, moral hazards relate to incentives, that are not part of the deal. Incentives, such as good customer service by the food server, quality of the food, choice and quality of ingredients, presentation of the food, as well as minor details such as providing condiments and disposable cutleries. The reason is clear, in any case, if the customer has any dissatisfaction, the first person to be penalised is the food delivery rider. Waiters and waitresses no longer receive complains from customers, on the other hand, they would not receive tips even if good services are rendered either, so why bother? This soon develops into a vicious cycle, where such culture begins spreading across the whole industry in a speed more rapidly than the virus did. Eventually, the whole industry experience a deterioration in intangible values such as service and food quality. Ultimately, when it boils down to a reduction in incentives for consumers to order takeouts from restaurants, the overall demand would drive sales down even further. After all, consuming a takeout procured from a restaurant and a hawker centre, in the comfort of one’s own home, bears little difference, except for the pricing. When the differences converge to an extent where food quality between restaurants and hawker centres become indifferent (akin George Alkerlof’s analogy that the market is filled with “lemons”), in the long run, all the demand of the market will shift to favour the cheaper (and inferior) option, apparently.

Conclusion

It is certainly a challenging time, notwithstanding that various financial assistance measures have been rolled out by the government to ease the financial burden of the F&B sector, it is essential for business owners to be aware, that such assistance is after all, ephemeral. Therefore, whilst it is important for businesses to procure adequate cash flows to tide over this difficult period, businesses should also think ahead and consider what to do next. Eventually, costs of financing is still a mid to long-term reality that businesses have to face, even when this crisis is over.

About the Author

Mr. Boo Kok Chuon is the CEO and founder of our sibling company, Iconomy Holdings Pte Ltd. He joined our company in late 2019 as our advisor, and frequently advised our company on business development and strategy related matters. He is a serial entrepreneur and currently holds directorship in multiple companies, as well as a financial economist by training. Outside of his professional career, Mr. Boo is a classical and jazz music enthusiast, and he is a board member of a Singapore philharmonic orchestra.

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