The Top 8 Retail Trends in China To Watch
The only major economy in the world estimated to grow in 2020 is China’s. As a result, China’s retail sector is expected to be less impacted by the COVID-19 pandemic than others. This year will also mark the year when China’s retail sales surpass the size of retail sales made in the United States for the first time. With a large consumer base and some of the largest retailers in the world China’s retail sector has become the one to watch. Here are eight retail trends you should pay attention to as they provide a look into the future of retail.
1. China’s retail sector becomes the largest in the world
For more than 100 years the United States has had the largest retail sector in the world. That is poised to change in 2020. This year China is expected to surpass the United States to become the largest retail market in the world. While both the United States and China were impacted by the COVID-19 pandemic China has recovered faster. China will lose this advantage next year as consumption in the United States returns but long-term, China is in the driver’s seat. China’s dominance this year will continue even though China is expected to experience its first decline in retail sales ever. China’s retail sales will decline by an estimated 4% in 2020.
China’s retail sector is also characterized by some of the savviest and most advanced retailers in the world especially when it comes to eCommerce. Ten years ago only one or perhaps two of the top retailers were from Asia Pacific now three Chinese companies, Alibaba, JD.com and Pinduoduo are among the top ten largest retailers in the world. During the pandemic as seen in other countries around the world eCommerce sales grew quickly. eCommerce as a percentage of total retail sales in China has increased from approximately 19% of retail sales in 2019 to 25% this year. Driving this growth is an expanding middle class. Middle class households in China have grown tenfold in the past decade and now compromise over 180 million households. That’s more the number of households in the United States, the UK or Germany. As China’s retail sector continues to grow in dominance retailers around the world will work hard to win over Chinese consumers.
2. Social commerce apps like Douyin (TikTok) pick up steam
Social commerce (think eCommerce meets social media) is a big business in China expected to reach $242 billion in 2020 up 30% from last year. By the end of the year social commerce will represent 11.6% of retail sales in China.
Douyin is a very popular social commerce app in China with 690 million users globally. Outside of China consumers are familiar TikTok which is Douyin’s sister app also owned by ByteDance. 60% of Douyin’s users in China are young, under the age of 30 making the app popular with brands looking to monetize Douyin’s large and engaged user base.
Douyin allows users to create and share video clips up to 15 seconds long of dancing, lip syncing, or other activities, with music on top of the clip. Think Vine 2.0. It is more authentic, raw, and filled with real-time emotion than other social media apps like Instagram. Rather than seeing content through rose-coloured filters from personal connections, or friend circles, you see a more realistic take of what’s popular and trending.
Unlike Instagram, which encourages passive scrolling, with occasional liking of content, Douyin encourages participation. Many users comment on popular and trending videos by creating their own version of a video. User-generated content, and its rapid spread, represent a gold mine to brands and advertisers. "It's entertainment plus shopping," says Kitty Fok, managing director with market research firm IDC. "This is huge ... it's an extremely big market."
In 2018 Douyin entered a partnership with Alibaba to allow creators using the site to market their merchandise. This partnership enabled app users to click on links in videos so they can make purchases on third party sites like Alibaba’s Tmall. Recently Douyin banned links to outside eCommerce sites ensuring that all eCommerce sales stay within the app.
The success of Douyin is one of the reasons why Walmart is investing in the english version of Douyin, (TikTok). “If you're watching a TikTok video and somebody's got a piece of apparel or an item on it that you really like, what if you could just quickly purchase that item,” says Walmart CEO Doug McMillon. “That's what we're seeing happen in countries around the world. And it's intriguing to us, and we would like to be part of it.”
3. Livestreaming continues to fuel social commerce
Shopping while watching a host sell products during a live event is not a new concept, think QVC. But shopping this way has been updated for the digital age. In China, digital payments, live streaming and eCommerce functionality are completely integrated within a single eCommerce platform like Taobao or Tmall, both owned by Chinese eCommerce giant Alibaba. It would be analogous to Amazon, Instagram and Paypal being part of the same platform. Viewers can easily purchase products through links while viewing a live stream. This seamless integration has fuelled the growth of live streaming and social commerce in general in China.
It is estimated that the size of the livestreaming market in China will reach $16.3 billion in 2020. “China's population has the highest share of social buyers globally.” “Many of the country's most popular ecommerce platforms are heavily integrated with the most popular social networks, boasting innovative services like Mini Programs [light apps] and live streaming commerce. These and other services frequently offer the best deals on products, and they make social buying extremely engaging and convenient,” says Nazmul Islam, eMarketer junior forecasting analyst.
In categories like beauty & personal care, packaged foods and apparel, more than half of consumers discover products through entertainment-driven content. In China KOLs which are Key Opinion Leaders, which are like influencers, are one of the best ways for brands to connect with consumers. Another benefit of live streaming for brands is that unlike QVC live streaming in China reaches a younger audience as well.
Live streaming has also become an important part of Alibaba’s Singles Day shopping event. During last year’s Single’s Day which was held on Nov. 11, 2019 live streaming generated $2.85 billion or 7.5% of Alibaba’s gross merchandise volume sales on that day. Taobao’s most successful live-streamer, Viya, live streamed for 8 hours on Singles Day with 43 million consumers watching. The “Lipstick King” Li Jiaqi spent more than 6 hours live streaming with 37 million consumers watching. Viya even did a live stream with Kim Kardashian for Singles Day last year to sell KKW fragrances. 150,000 fragrances were sold within seconds.
Speaking about live streaming, Remi Blanchard, a Project Leader at a Chinese market research firm said "product safety and security scandals have made Chinese consumers particularly suspicious towards brands and products, especially when sold online." “[Through a video live stream] Chinese shoppers feel reassured by the in-depth product introduction and testing that KOLs provide them in a live and ‘no filter’ environment."
Live streaming became even more popular during the pandemic while consumers spent more time at home in front of their screens. “Before the pandemic, livestreaming was only seen as an option for brands to reach Chinese consumers,” says Jialu Shan, economist and scholar in Asian and Emerging Markets at the International Institute for Management Development. “But now it (has) become very integral to how people shop,“ she said. “To me, it is going to be a new normal channel to drive new sales, create new revenue streams. But that is not to say that every foreign brand should (jump) into livestreaming without doing everything else.”
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4. Social commerce goes to the next level with Pinduoduo and group buying
You may have heard about Chinese eCommerce giant Alibaba but what about Pinduoduo? Founded five years ago by an ex-Google engineer, Colin Huang, Pinduoduo is a Chinese eCommerce company that sells a wide range of products including household toiletries, groceries, apparel and electronics. Pinduoduo had revenues of $4.3 billion in 2019 but the total value of products sold on its platform was $144.6 billion last year. Pinduoduo is growing faster than rival eCommerce giants, Alibaba and JD.com and last year it had 585 million active buyers. That’s more buyers than JD.com but less than Alibaba which had 362 million and 711 million buyers respectively last year.
So what makes Pinduoduo so special? For one it has cracked social commerce. The growth of the platform is largely due to recommendations from friends to take part in group purchases which then drive down the price of items for sale. If Groupon introduced you to the concept of group discounts Pinduoduo is the one that has really taken that to the next level. When shopping on Pinduoduo merchandise features two prices, one price for the item if it is purchased individually and another price if it is bought as part of a group.
To enact group buying all a customer has to do is share a link with the item they want to buy with family and friends via WeChat, China’s largest social network. Once enough people have decided to join in customers can get a “team discount” that provides a discount of as much as 90% off. This strategy has been particularly effective in attracting new customers to Pinduoduo who have discovered the site via friends and family. Since WeChat, which has more than one billion monthly active users, blocks links on its platform from rivals like Alibaba it has played a central role in Pinduoduo’s growth.
While Alibaba and JD.com have grown by focusing on affluent customers in cities such as Beijing and Shanghai, 65% of Pinduoduo’s customers are from tier three and lower cities. These cities (tier three and lower) represent 73% of China’s population. These consumers have lower disposable incomes motivating them participate in group buying in order to get the best possible price. For example, the average transaction value on Pinduoduo is $6 versus $60 on JD.com and $30 on Tmall and Taobao (Alibaba).
5. China’s luxury sector shows its resilience
During the pandemic China has been a bright spot for luxury retailers. While global luxury sales are estimated to drop by 45% in 2020, luxury sales in China are supposed to increase in China by 30% in 2020. By 2025 an estimated 50% of luxury sales will come from China alone. Many luxury retailers including LVMH and Kering experienced double-digit growth in the second quarter of 2020 in China speaking volumes to the resilience of high-end brands in that market. LVMH’s sales in China were up 65% in the second quarter of 2020. In stark contrast, LVMH’s overall global revenue was down 38% in the second quarter. Kering’s sales in China were also up, by 40% in the second quarter.
Part of the growth luxury brands are experiencing in China is due to travel restrictions which have forced luxury shoppers to purchase goods from their home market. “They are visiting luxury stores in Shanghai more, such as Hermès, Louis Vuitton, and Chanel. They are finding it a better experience than before, with broader inventory, so there is some evidence that luxury shoppers may begin to develop more local relationships with sales associates in their own city, at least for some purchases,” says Malinda Sanna, founder and CEO of market research company Spark Ideas.
Luxury brands which have traditionally been slow to embrace eCommerce were forced to change their stance in the wake of the pandemic. Prior to the pandemic there were 150 high-end brands selling merchandise on Alibaba’s Tmall Luxury Pavilion, that number will pass 220 this year, a significant jump from last year.
While luxury brands are performing well in China, mass market brands like Adidas and Sketchers are struggling as seen by analysis Bloomberg completed on high and low end retailers in China.
“The pent-up demand from nearly two months of lockdown between February-March likely led local shoppers to purchase more aspirational brands than mass brands,” says Catherine Lim, a Bloomberg Intelligence analyst. “Consumers are definitely looking to treat themselves following the scare from the outbreak.”
Similar to countries around the world lower income consumers in China were harder hit than the wealthy. That also contributed to the poorer performance of some lower end brands. The pandemic “deals a bigger blow to the low-income consumers who have to further tighten their belt.” “That’s why the performance of consumer brands in China has polarized in the last few months,” says Luo Yixin, a consumer analyst at Huatai Financial Holdings.
6. Brick and mortar stores continue to show technological advances
China is considered to be two to three years ahead of the United States when it comes to merging digital with offline retail. Two years before Amazon purchased Whole Foods eCommerce giant Alibaba opened its first Hema supermarket in China in 2015 and now there are 170 of these supermarkets in China.
The shopping experience at Hema supermarkets begins by downloading the store’s shopping app. Using the app customers scan a product’s QR code to receive nutritional information, recommendations for complimentary items as well as product reviews.
Following this trend in 2018 Chinese eCommerce giant, and Alibaba rival, JD.com launched 7FRESH, a chain of supermarkets. Similar to Hema grocery stores the shopping experience is also heavily reliant on mobile. Customers scan product barcodes using their mobile phone to receive nutritional information, details on how to cook the item as well as the percentage of customers that recommend the item. Within the produce section, sensors detect when a customer has picked up an item and product information automatically appears on a “magic mirror” screen above the produce section.
In an attempt to change the way consumers shop for groceries in the future, 7FRESH supermarkets provide customers with smart shopping carts. These shopping carts follow the customer around the store so that the customer can shop hands free. Self-checkout, which is offered at both retailers allow customers to pay via mobile and in some cases using facial recognition. Taking a page from the eCommerce space, both Hema and 7FRESH offer customers super fast delivery of their purchases. Customers living within three km of either of these stores can have their purchases shipped to their homes within 30 minutes. JD’s vision is to have “boundaryless retail” – a scenario where customers can buy whatever they want, wherever and whenever they want it – online or offline.
7. COVID-19 drives higher demand for healthier products
In a country like China which is on the other side of the pandemic, the quick and lethal toll of the virus has consumers focused on their health and wellness like never before. As with any life-threatening situation it makes people pause and take stock of their life. In China, purchases of vitamins, minerals and supplements quickly spiked after the onset of the pandemic. Now that consumers are more aware of their mortality it is likely they will continue to be more health conscious in the future. For example, 75% of Chinese consumers surveyed said they will adopt a healthier lifestyle as a result of the pandemic.
Speaking about changes in consumer behaviour post SARS (which took place in the mid 2000s), Ryan Zhou, Vice President, Consumer Packaged Goods, Nielsen China said “health and hygiene is a natural habit shift post epidemic, and we observed a continuous boom in this area after SARS. Now is a key time for brands to consider upgrading for health and hygiene concepts.”
52% of Chinese consumers surveyed also said they will look for foods or medicines that will strengthen their health and boost their immunity. It is also expected that there will be a demand for more clean products in China.
8. High mobile penetration rates drive the adoption of many trends
Underpinning many of the retail trends in China is mobile. China is the only market in the world where digital payments dominate. In 2018 more than 80% of consumers in China used mobile payments. By contrast in the United States adoption of mobile payment apps is less than 10%.
In 2020 more than an estimated 1 billion consumers in China will use mobile payments. There are several popular mobile payment options in China, with WeChat Pay leading the pack.
Even struggling artists playing music outside on the street in China looking for donations take digital payments. The two main mobile payment platforms, WeChat and Alipay have more than 900 million and 500 million monthly active users respectively. In contrast, Apple Pay which comes pre-installed on the iPhone has 30 million users in the United Sates. The widespread use of mobile payments in the Chinese market makes it easier for newer retail trends such as social commerce to take off. Chinese consumers are already comfortable using their mobile phones for a wider range of activities and can easily make the leap to new technology driven retail formats.