PwC is forecasting 2017 as a turning point for the retail and consumer products sector in China and Hong Kong, as the industry grapples with the disruptive pressures of a slowing Chinese economy, the rise of a new demographic of shoppers and a growing online ecosystem.
Michael Cheng, retail and consumer leader, PwC Asia Pacific, Hong Kong/ China, told a media briefing brands could better position themselves against these challenges by developing industry partnerships, mergers or acquisitions, building consumer trust through an online presence, increasing the focus on CSR and better understanding the ways data can be used in the customer journey.
Three key factors disrupting the retail and consumer products sector in China are:
A cyclical slowdown in the Chinese economy and government initiatives to transition towards greater personal consumption is seeing Chinese consumers reassessing their purchasing habits, says Cheng.
Millennials in China (those born in the ’80s and ’90s) make up roughly 30% of China’s population. This group is emerging as a key group as they shift demand to new products that promote experiences and healthy lifestyles.
Online sales are growing and China leads with innovative online and offline (O2O) marketing strategies and third party payment systems. Cheng says a robust online presence is important for brands as consumers research and interact with brands.
The report outlines five ways brands can use these disruptive forces to create opportunity in the Chinese and Hong Kong markets.
1.The rise of ‘coopetition’
According to PwC, 90% of CEOs in China are worried about new market entrants – especially non-traditional ones. For example, the consumer classification of ‘luxury’ goods in China now extends beyond bags and watches to include the ‘experiential’. The report cites traditional luxury heavyweights such as Prada and Chanel now increasingly competing with spas, restaurants and travel agencies for the affluent consumer’s disposable income.
As a result, PwC predicts ‘coopetition’ as a key trend for the region over the next five years as traditional competitors partner with each other for greater access to the Chinese consumer.
Macy’s expansion into China is one example of this. It partnered with Hong Kong group Fung Retailing Limited to open a store on Alibaba’s Tmall ecommerce platform in August 2015.
Prior to this, Macy’s had been selling goods to the Chinese market via its global website macys.com. Products sold through this channel are shipped to international customers from the United States. The deal with Fung Retailing allows Macy’s to warehouse goods in Hong Kong – reducing logistics costs and speeding up delivery times. It also gives Chinese consumers access to a broader range of Macy’s products.
2. Transformative mergers and acquisitions
Another trend is the use of M&A to move up the value chain and reach new customers. Earlier this year, Chinese brand Haier paid US$4.5 billion to buy GE’s appliance unit. The deal gives it access to the developed markets of the U.S. and Europe. Midea, another Chinese appliance manufacturer, took an 80% share of Toshiba’s home appliance unit in March. This gives Midea access to the Toshiba brand name and new global distribution channels.
Most recently, Alibaba made inroads into the Southeast Asian market with a US$1 billion investment for a controlling share of the region’s biggest ecommerce retailer, Lazada.
3. Creating trust online
A brand’s online presence does not have to be exclusively dedicated to making sales, but plays an important role in consumer engagement and building trust. This is especially important for the Chinese market where consumers do a growing amount of research online. For the luxury and personal care segments this is even more important, according to PwC. These consumers are more likely to research products online first with final purchases also being made online, but often from overseas online sites due to concerns over authenticity.
Omnichannel and O2O strategies therefore give brands the opportunity to engage with consumers at different parts of the purchase journey and allow for more seamless and customized shopping experiences.
Gucci’s online strategy for example, allows consumers to purchase online, but site content teaches consumers about the brand and how its products are made.
Data is well recognized as a tool for generating revenue and sales. The big question is how to use it effectively.
The report states: “The challenge is not only to identify what data is important to a company but also identifying how it can potentially change how retailers and consumer products companies target and retain customers over the long term.”
China’s well-established mobile payment systems in particular (Alipay and WeChat Wallet are two of the market leaders) give retailers the potential to track purchases.
As a result, Chinese ecommerce players are leaders in mobile personalization through their huge accesses to data. Alibaba, whose assets include C2C platform Taobao, B2C platform Tmall, Alipay and its financial services arm, Ant Financial, is a great example of this. By pooling consumer data from these platforms and financial arms, online shoppers can be presented with more targeted, personalized and customized marketing.
The ability to use data and analytics to personalize customer experiences is particularly important for targeting millennial shoppers, the report adds.
Corporate social responsibility should be considered a priority, says the PwC report. Food safety scandals and a prolific fake culture in China, has led consumers there to pay particular attention to where and how products are sourced, manufactured and packaged.
Chinese millennials’ purchasing power may deepen this trend, the report says. PwC therefore advises brands to take CSR beyond “piecemeal” initiatives, which often focus on a single cause or issue, to integrating CSR across a retailer’s entire operations. Companies need to demonstrate to consumers that a CSR strategy is at the core of the brand and any decision-making processes.
Importantly, offline activations are still important. Chinese consumers are increasingly researching products online – but many still visit a physical store to see the goods before purchase.
The report suggests soaring customer expectations could put a premium on retail employee talent. A point of differentiation could therefore be around more sophisticated delivery of customer service such as personalized advice, special after sales services, and demonstrated deep product knowledge.
In China, price is still king, adds Cheng. As a result, luxury retailers should take into account the greater accessibility to “affordable luxury” and adjust price bars accordingly.
Cheng’s final piece of advice to marketers: start getting talent ready for the retail upturn, today.
*Featured image courtesy PwC.