China's Next Retail Disruption
Global Consumer Insights Survey 2018 China Report
China’s next retail disruption: End-to-end value chain digitisation
www.pwchk.com Foreword China’s retail market outlook Source: PwC analysis
CAGR Michael Cheng 2017 – 2021 Asia Pacific & Hong Kong/China 8.05 9% Consumer Markets Leader 7.38 6.77 6.21 5.70 5.17
6.21 6% 5.87 5.52 Hardly any week goes by without news on the invention or adoption of new consumer technology, 5.18 4.85 videos of some internet celebrities (Wanghongs1) going viral on social media, or major 4.50 announcement by retailers to redefine customer experiences – this is the intensity and speed at which China’s consumer landscape is evolving. 1.83 21% 1.25 1.51 0.67 0.86 1.03 In August of last year Amazon announced it was buying Whole Foods and, as many investment analysts and retail leaders rushed to make sense of the deal, USD 11.6 billion2 was wiped off the 2016 2017 2018 2019 2020 2021 market value of other competitor grocery retailers in just under 24 hours. Those in the US may eCommerce retail sales (USD trillion) Offline retail sales (USD trillion) have been left surprised by this move but that shouldn’t be the case. The strategy of internet giants acquiring offline retailers was already happening in China. The future of global retail is happening here now. China’s eCommerce penetration by category Sheer scale makes China a must play, must win market. China has eclipsed the US as the largest Source: Goldman Sachs, Euromonitor and PwC analysis retail market in the world. China’s National Bureau of Statistics reported that for Q1 2018, total retail sales of consumer goods reached USD 1,436.8 billion, up by 9.8 percent year-on-year3. In the Electronics and 60% appliances US, the estimated quarterly retail sales for Q1 2018 was USD 1,306.7 billion, an increase of 4.5% 55% 4 55% Clothing and year-on-year . 51% 49% shoes 47% China is also the world’s biggest eCommerce market with online sales in Q1 2018 reaching USD 43% 44% 40% 307.4 billion, an increase of 35.4% year-on-year. In the US, online retail sales in Q1 2018 reached 39% USD 123.6 billion, an increase of 16.4% year-on-year. Singles’ Day continues to break records, with 35% 38% Beauty 33% Gross Merchandise Value (GMV) increasing 39% to USD 25.2 billion in 2017, versus a combined 31% value of USD 11.6 billion for Black Friday and Cyber Monday in the US. Yes – scale makes the China 30% 26% opportunity strategically significant but it is retail innovation that truly puts it in a category of one. 23% 21%
1. Wanghongs, meaning internet celebrities, are Chinese key opinion leaders that have attracted 15% FMCG & grocery a large fan base through relying on social media. They typically monetise this fan base through 12% endorsements, brand sponsorships and also selling prdoucts via their own eCommerce stores. 10% 13% Luxury 8% 2. Amazon’s new Whole Foods discounts wipe out nearly $12 billion in market value from grocery 7% 6% 11% sellers, 24 Aug 2017, CNBC https://www.cnbc.com/2017/08/24/amazons-new-whole-foods- 10% discounts-wipe-out-10-billion-in-market-value-from-grocery-sellers.html 6% 8% 3. Total Retail Sales of Consumer Goods in March 2018, National Bureau of Statistics of China 5% http://www.stats.gov.cn/english/PressRelease/201804/t20180419_1594992.html 4. Quarterly Retail E-commerce sales, 1st quarter 2018, The U.S. Census Bureau 2016 2017 2018 2019 2020 2021 https://www.census.gov/retail/mrts/www/data/pdf/ec_current.pdf
China’s next retail disruption: End-to-end value chain digitisation 2 In 2017 we first discussed this theme in our report “eCommerce in China to have up-to-date information on them and personalise their experiences – the future is already here” which identified how digital had transformed accordingly, compared to 42% globally. We are also now seeing the the front-office of retail: sales channels and marketing. It also revealed application of AI technologies that enable more effective targeting, however, that mobile commerce, secure platforms, and big data analytics, among brands must be careful to strike the delicate balance needed to protect data others, were becoming key investment areas for global retailers to thrive. privacy, consumer trust and network security.
This shift from Digital Retail to “New Retail” is being characterised by data- New retail is not just transforming consumer engagement but the entire value driven and customer centric approach, further enabled by digitalisation through chain. Retailers are building smarter, more flexible and multiple-purpose the entire value chain. As we saw with eCommerce, China’s internet giants are supply chains capable of orchestrating inventory across online and offline the primary drivers of this trend pushing traditional retailers into a new period channels. Data is being used to make product development more demand- of disruption through rapid capability building strategies via build, partner and based and also shorten time to market. Sourcing traceability, particularly acquisition models. via blockchain, is also becoming increasingly important to enable greater consumer trust. As the world’s biggest and arguably most important consumer market, China is now home to 784 million smartphone users and now social media, mPayments E-commerce has disrupted retail and to stay competitive in the industry and and eCommerce are ubiquitous parts of the shoppers journey5. uphold the brand credibility, retailers could invest more in various channels to enhance convenience, improve customer experience and strengthen personal PwC’s latest Global Consumer Insights Survey 2018 (“GCIS”) found that in data protection. While retailers and brands identify business opportunities terms of shopping habits, 50% of Chinese consumers (compared to the global through the data driven shopping habits and capture economic value through average of 22%) buy products online weekly and 59% of them are likely to buy data, it would also be wise to not lose sight of the core competencies of your grocery online (compared to global average of 21%). Chinese consumers are brand that maintain its competitive advantage. After all, complacency is a also leaders in mobile payments as 86% of them have used mobile payments recipe for being disrupted. Proactive focus on maintaining and building the to make purchases (compared to the global average of 24%) thereby creating distinctive capabilities to deliver on the value proposition is a disruption-proof a near cashless society. Our research also finds that Chinese consumers winning strategy. continue to be first movers at the forefront of new innovations: 44% would consider a drone as a delivery method for a low value product versus 22% I strongly urge you to read this insightful report which explains the evolution globally. from Digital Retail to New Retail. For businesses already operating in China it explains the ways to play in this rapidly changing consumer environment, and This intense digital connectivity has led to proliferation of big data which is for those looking at inspiration it offers a perspective of China as the future of being used to optimise how brands create compelling customer experiences global retail innovation. and also transform retail business models. On the consumer side, data driven marketing has now become so common that it is changing expectations of engagement. Our research found 67% of Chinese consumers expect retailers
5. PwC’s Entertainment and Media Outlook 2018
China’s next retail disruption: End-to-end value chain digitisation 3 Content
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27 Key takeaways 24 – 26 28 Contacts 16 – 23 What it takes to succeed in New Retail 5 – 15 Digital retail matures into New Retail Key growth trends in China’s retail market • S-Curves of retail innovation • Post 80s and 90s • Digitisation of the shoppers value chain • Categories: Health, • Platforms and walled premiumisation, lifestyle gardens: online and and interactivity offline • Urban clusters and mega cities China’s next retail disruption: End-to-end value chain digitisation 4 1
Key growth trends “in China’s retail market
Looking beyond the macro headlines for breakout growth At the macro level China’s” retail market is forecast to grow at a compound annual growth rate of 9% from 2017 to 2021, still robust but slower than 12% from 2012 to 2016. Below these macro figures significant growth opportunities still exist. Here we explore the Post 80s and 90s generations, products and services catering to the trends of health, premiumisation, lifestyle and experience, and key growth opportunities with city clusters.
China’s next retail disruption: End-to-end value chain digitisation 5 I. Digging deeper to understand the post 80s and 90s generations
Over the past 5 years a lot of emphasis has been placed on the Chinese To really understand the Chinese consumer businesses need to invest in millennials. There are good reasons for this, with a population of proprietary analysis that blends both traditional quantitative research approximately 410m there are more millennials in China than the with qualitative insights. Brands are taking inspiration from the design- entire population of North America. Almost every brand is looking to thinking approaches pioneered by the internet companies and we target the Chinese millennials and as a result there is a fierce war for are now seeing a greater emphasis on techniques like: ethnography, a share of their attention and wallet. In order to engage consumers behavioural economics and gamified consumer testing. These we need to understand them. Typically we see three main challenges approaches help to gain a richer, fuller and more bespoke understanding with how brands or retailers are approaching this in China. of consumer behaviour, desires and paint points.
Over the last 12 months, PwC has helped many brands in this way and has interviewed more than 1,200 consumers from across all city tiers • Firstly, the term millennials – covering birth years of early and regions. For a global fashion retailer with over 150 stores in China, 1980s to early 2000s – is a Western segmentation model and it is PwC interviewed ~100 young female shoppers and identified their important to take a localised approach which divides generations demand for shopping experiences that are entertaining and practical, by decade e.g. post 80s and 90s. beyond “just another in-store + digital app combination”. Based on the insights, PwC designed a gamified community-based retail experience • Secondly, some companies are still focusing on the “digital that addresses directly the personas’ needs and wants, which made the savviness” of the Chinese millennials, trends which are now clients revisit their vision and assumptions. so pervasive that they have become truisms. While traditional demographic segmentation methods could be useful in providing directional insights and structuring quantitative market sizing, they often fail to capture the underlying rational and emotive motivations that really drive decision making.
• Thirdly, there is no such thing as “an average 28 year-old female young professional”. Without the life and colours of personas, it is very difficult for brands to practically design products and services with the Chinese consumers’ needs and wants in mind.
Key growth trends in China’s retail market 6 We are increasingly seeing that viewing the Chinese shopper through the lens of the Innovators (21% of consumers), Fast Followers (52%) What online media do you regularly use to find inspiration and Laggards (27%) enables us to identify some of the most significant for your purchases? differences in behaviour. Innovator personas are those that are the earliest Source: PwC’s Global Consumer Insights Survey 2018 to uncover new trends and take pride in inspiring those around them – typically the fast followers- through sharing on social platforms. Laggards Innovator Fast Follower Laggard are those which are slow to adopt new fashions or technologies.
For example, Innovator personas are ferocious consumers, 41% expect to 53% spend much more in the next 12 months (versus 18% average) and 23% Social networks shopping on their mobile daily (versus 9%). They are also much more likely (e.g. WeChat, 57% to use multiple digital platforms and formats to find inspiration for those Q zone, Sina Weibo) purchases, with livestreaming and blogs particularly popular. 42%
31% Visual social networks (e.g. Youku, Bilibili, 18% Do you feel confident about your personal financial situation in terms Ingkee) of your shopping spend plans for the next 12 months? 7% Source: PwC’s Global Consumer Insights Survey 2018 30% Don’t know Multibrand websites 44% 4% No, I am already holding back spend (e.g. Tmall, JD) 4% 3% to see what happens 18% 30% 12% No, I expect to spend much less
No, I expect to spend slightly less 31% 27%
Price comparison 32% websites 39% 43% I expect to spend around the same 35%
24% 48% Blogs 9%
3% Innovators look for 41% 32% Yes, I expect to spend slightly more inspiration across a wide 21% variety of social platforms 14% Individual retailer 5% Yes, I expect to spend much more 20% websites Innovators Fast Laggards 19% 19%“ Followers Key growth trends in China’s retail market ”7 There is obviously no single Innovator persona however, our research finds them within multiple demographic segments or contexts. Here are three examples of post 90s and 80s personas which we see as being indicative of the innovative modern Chinese consumer.
JR and Sophia The Wellness Explorers Ying The Sassy Modern Mandy New Mom The Post-90s Trend-setter
Key growth trends in China’s retail market 8 JR and Sophia
Age 27 and 28 The Monthly disposable Both around RMB 16,000 income Relationship Wellness Both single status JR is originally from Xiamen and currently living in Guangzhou, Explorers City Sophia is born and raised in Guangzhou “Help me understand Education College (in Tianjin and Beijing) how I could live a JR works for an internet advertising company and Occupation healthier lifestyle Sophia is a secretary at and have more fun real estate agency Running, outdoors, training.” Interests healthy eating, following sports • Loves “learning through socialising” – actively share experiences and learning from the workout JR and Sophia met through their local groups and sports fan clubs they belong to Persona • Follows and attends events hosted by gyms e.g. ASICS running group, and have been identifiers training together with their close- SuperMonkey and Versus and sports brands to workout in a social setting and learn about new knit group of wellbeing-enthusiastic wellness trends friends. • Live a well-balanced life and be a well-being role Goals model amongst their peer groups • “Buys for a purpose” – it’s not just about the Purchasing products, but also how the products fit into their behavior lifestyle and their pursuits, supports sustainable products and brands that are socially conscious • Lack of more bespoke sports brands that fulfils their Pain points expectation of looking good while working out • Sharing their experience with new fitness programs, Moments and their analysis of a China Super League soccer of delight game on Baidu forums and Dongqiudi. • Highly values recommendations from fellow Purchase wellness enthusiasts in the running group based decision on their personal experiences influencers • Informative, educational brand-sponsored content
Key growth trends in China’s retail market 9 Ying
Age 29 The Sassy Monthly disposable Household RMB24,000 income Relationship Modern Married with a new-born status City Born and raised in Shanghai New Mom Education Studied marketing in Shanghai Ying is a finance manager at a multi-national consumer Occupation “I believe I could have goods company, currently on it all – family, career, maternity leave An avid organiser, enjoys and friends” organising playdates, family outings, weekend trips to nearby provinces for friends. Ying is a young mom who just had Interests • Family-first, but also cares about and Teaching herself principles willing to invest in her own interests and Persona her first child. As dedicated as Ying of interior design in self-love identifiers is to her son, Ying also makes sure preparation of renovating • Quality conscious, willing to pay a premium she leaves enough time for and their dream home. for the quality-guaranteed products investment in herself. • Having it all – happy family, successful Goals career, and fun social life • Connects with other young moms on LaMaBang (辣妈帮) to follow useful Purchasing threads on looking after a new born, and to behavior receive tips and deals for baby products • Casually browses Tmall and JD.com as daily habits – opportunistic buyers Pain points • Time-poor: lack of time to look after herself • A family holiday in the Philippines that gave her plenty of time of rest and stroll on the Moments of beach delight • Documenting the child’s infancy through daily photos shared in the family WeChat group • Trusts her own decision making, but Purchase will reference reviews in mom groups decision (LaMaBang, BabyTree) when it comes to influencers baby products
Key growth trends in China’s retail market 10 Mandy
Age 20 Monthly The Post- RMB 6,000 (monthly allowance from disposable family) income Relationship 90s Trend- Single status Originally from Beijing, City setter currently studying in Shenzhen Education Studying in Beijing “Fashion is a hobby Occupation Student Online shopping, fashion, Interests and passion” music, food and weekend trips • Trend-setter amongst her friends, makes up her own mind Persona • Style lover, master of online clothing Mandy is passionate about fashion. identifiers shopping – knows every brand, merchant, daigou that is available and has mastered She is a smart shopper and sees her the art of buying limited edition items investment in style not only as a • Establish her own style, build up a collection way for her to express, but also to Goals of signature items, and be seen as a trend establish herself as a trend setter setter amongst her peers amongst her social circles. • Uses daigou to purchase from brands that are not available in China, and to buy imported products (from Korea/the US/ Purchasing Europe) at the lowest price possible behavior • Sells her own second-hand items (clothing, handbags) on Xian Yu, and resells face masks she bulk bought from Daigou to her friends • Finds it difficult to find unique pieces Pain points on main online shopping destinations – “everyone is wearing the same thing” • Successfully buying a limited edition Supreme suitcase after months of saving up Moments of and finding a family friend that could queue delight up for her and purchase from the flagship store • Follows fashion influencers on WeChat (e.g. Baoxiansheng, Becky Li) for styling Purchase inspiration and to discover new brands. decision influencers • Browses Net-a-porter, Farfetch, LaneCrawford, Xiaohong Shu (Little Red Book) daily for fashion inspiration
Key growth trends in China’s retail market 11 II. Growth categories: premium, Compound Annual Growth Rate of various products and services in China, 2016 – 2021 health, lifestyle and interactivity Source: PwC’s Entertainment and Media Outlook, Euromonitor
Many of these trends are similar to what brands Premium vs Mass Interactive vs traditional and retailers have seen globally however, as is Premium beauty 14% Livestreaming 29% often the case in China, the speed and relative and personal care impact of the change is more dramatic. For Mass beauty and Traditional media 5% example, our Global Consumer Insights Survey personal care 6% consumption shows that during the last 12 months 52% Salon professional 9% E-sports sector 24% of Chinese consumers have spent more on hair care experiences versus last year (e.g. travel, dinning Video games/ 6% out and events) compared to 26% in the United Shampoos 3% Consouls States. Within the “Experience Economy” we also see that while in the United States eating Premium jeans 5% Mobile / O2O 20% advertising out and travel dominate, Chinese consumers have a much broader perspective. Similarly, Economy jeans 2% TV advertising 1% culinary classes (40% versus 7%) and self- improvement / education (34% versus 17%) are priority areas that have relatively limited demand in the United States. Lifestyle vs Necessity Health vs Unhealthy
Fresh coffee 17% Sports nutrition 25%
Instant coffee 4% Carbonates 4%
Sports footwear 12% Fresh food 12%
Footwear 6% Ready meals 2%
Eating out 12% Air purifiers 12%
Grocery 7% Cooling 8%
Key growth trends in China’s retail market 12 How retailers are transforming to cater to new consumer trends
These demand side shifts are having a transformative impact on how retailers are Grocery Shopping Malls eCommerce reinventing their overall customer value proposition across merchandising portfolio, Clear shift to imported packaged food Existing luxury malls in Tier 1 cities Luxury brands are finally embracing and hard-to-find products with unique and first mover high quality malls in eCommerce as consumers become format and environment. Below are some flavours or attributes. Tier 3 are some of the key archetypes comfortable buying premium goods of the key changes we see across grocery, outperforming the sector. online. shopping malls and eCommerce. e.g. Ole’ is a new banner under the China e.g. Grand Gateway Shanghai Mall e.g. JD is expanding its presence in the luxury Resources Vanguard and targets white-collar undergoing a renovation and increasing the by launching Toplife with experiences that Premiumisation workers with high quality imported products. luxury brand penetration rate to ~45% from include in-house fashion consultants and 30%.6 premium delivery services with couriers wearing suits and white gloves.
Increasing fresh food assortments and Strengthening positioning as family Health and nutrition product categories organic ranges as traffic drivers and value spaces by promoting clean air and countries with associated provenance proposition differentiation. environments. (Australia and New Zealand) booming on cross border eCommerce.
e.g. Yonghui, one of China’s best performing e.g. Wanda worked with air purification e.g. Blackmores, an Australian health grocers, generates 45% revenue from fresh companies and keep shoppers up-to-date on supplements company, saw direct sales to Health food, highest amongst industry peers7. indoor air quality with digital screens. China increase 71% 2016-178.
Upgrading physical environments and Increasing tenancy area given to activities Content shifting from purely transactional in-store ambience. New formats now like culture and art, cooking classes, to blending social engagement, brand include: cooking stations, eating areas children’s care and theme parks and storytelling and education, and lifestyle and coffee shops. other entertainment. aspirations.
e.g. 40% of Alibaba’s Hema supermarket e.g. Commerce accounts for only 25% of the e.g. Little Red Book acquired 60m+ area is given over to cooking and dining 470,000 sqm Nanning Wanda mall which registered users through building a social areas. includes an interactive children’s park, a commerce fashion site that helps consumers Lifestyle movie theatre and an indoor pedestrian discover new products and brands based on street with a five star hotel. in-depth customer reviews and high quality imagery. 6. High-End malls in top cities are where the Chinese go to buy luxury, offline, 5 Sep 2017, Jing Daily Emergence of omni-channel grocery Integrating “Experiential Retail” Retailtainment now firmly established https://jingdaily.com/malls-in-chinas-first-tier-cities- (especially ship-from-store) and digital- technologies (e.g. VR, AR, facial with interactive shopping festivals that are-where-offline-luxury-spending-really-happens/ only retail innovations including: staffless recognition) to offer unique interactive use emerging technologies like AR and 7. Yonghui Superstores – the vanguard of China’s stores and manless shelves. experiences. VR to enable consumers to interact with grocery market, Nov 2017, Fung Business celebrities and interact with games. Intelligence https://www.fbicgroup.com/sites/default/files/New_ e.g. All of the products in Alibaba’s Hema e.g. Guangzhou ZhengJia shopping mall e.g. 11/11 gala show attracted over 400m Retail_in_Action_issue10.pdf Interactivity store can be activated with digital content or establish VR experience center with over viewers – nearly 4 times the number of 8. Blackmores, Swisse and the battle of China’s keyboard warriors, 3 Jan 2018, The Australian added to basket. Estimated 50% of total sales 1,000 square meters. viewers who watched Super Bowl. Financial Review via eCommerce, 10x industry average. http://www.afr.com/business/health/blackmores- swisse-and-the-battle-of-the-keyboard-warriors- 20171214-h054ck
Key growth trends in China’s retail market 13 III. Urban clusters and City clusters are separate regional economies with varying degrees of opportunity mega cities of opportunity Source: National Bureau of Statistics of China
Harbin-Changchun China key city clusters In 2017, 800m people (58% of the population) lived in cities10, numbers too large for practical (versus economic) Harbin China’s cities – the largest urban population in the world. purposes. Secondly, China is a geographically large Changchun Urbanisation has been a key macroeconomic trend fuelling and culturally diverse country with each region having growth and many retailers and brands have responded by distinct consumption habits and preferences (similar Central-Southern of developing go-to-market strategies through a city tier lens. to Europe), none of which are captured through a city Liaoning For example, McDonald’s has over 2,5009 stores in China Beijing Shenyang tier lens. As a result, we are seeing more focus on Beijing-Tianjin-Hebei but differentiates the format by tier. Large premium stores strategies that view the China market through the lens Tianjin under the concept of “Future 2.0” are often in Tier 1 cities of city clusters – one through which opportunities are Shandong Peninsula and include high-tech experiences including a self-order captured at the intersection of region and city tier. Yantai machine with functions that include the ability to customise Shijiazhuang PwC’s recent Chinese Cities of Opportunity 2018 Qingdao flavor choices, while smaller and simpler formats are found report, jointly released by the China Development Central China elsewhere. Likewise, Decathlon’s stores in Tier 1 cities are 11 Luoyang Zhengzhou Research Foundation, identified 12 key clusters Guanzhong Plain Yangtze River Delta typically 4,000 sqm and include experiential environments which represent ~80% of China’s GDP and will urban cluster Xian Nanjing Hefei like a children’s playground area but lower tier stores are form the basis for future economic growth. Shanghai Wuhan smaller and simpler at 1,500 sqm. Here retailers and brands look to localise go-to- Wuhan Hangzhou market strategies (typically channel, format, Chengdu Wuhu Going forward developing effective strategies to capture merchandising and supply chain) at the Chongqing Nanchang growth in lower tier cities will be increasingly important. cluster level which take into account more Chengdu-Chongqing Economic Zone Morgan Stanley estimates that between 2016 and 2030, specific economic opportunity and regional Changsha Fuzhou 92% of future consumption in China will come from infrastructure, competitive landscape and Changsha-Zhuzhou-Xiangtan outside Tier 1. In our experience, while city tier strategies Western Taiwan consumer preferences. Straits Economic Zone offer a practical lens through which to align resources Guangzhou Shenzhen with population size and wealth their simplicity can also Hong Kong be a limitation. Firstly, while there are 4 Tier 1 cities there are approximately 45 Tier 2 cities, 70 Tier 3 and 90 Tier 4 Pearl River Delta
City Tiers Retail Sales Growth (2016-17) 9. McDonald’s to double number of China restaurants, 8 Aug 2017, Financial Times https://www.ft.com/content/ae5b2e96-7c1c-11e7-9108-edda0bcbc928 Tier 1 >10% 10. Top 15 ‘new first-tier’ cities in China, 15 May 2017, China Daily Tier 2 7-10% http://www.chinadaily.com.cn/business/2017top10/2017-05/15/content_29343927.htm 11. Yangtze River Delta, Pearl River Delta, Beijing-Tianjin-Hebei Region, Western Taiwan Straits Economic Zone, Shandong Peninsula, Tier 3 <7% Central China, Wuhan, Changsha-Zhuzhou-Xiangtan Region, the Guanzhong Plain urban cluster, Chengdu-Chongqing Economic Zone, the Central-Southern of Liaoning and Harbin-Changchun urban cluster. Bubble size indicates the % of National GDP
Key growth trends in China’s retail market 14 The food sector has been one of the first to adopt a cluster In addition to urban clusters, China is also home to four influence they have on setting national, regional and global approach. Taste preferences are highly dependent on mega cities: Beijing, Shanghai, Guangzhou and Shenzhen. trends. For example, Adidas’ revenue in Greater China grew regionally defined cultures, and supply chains must be built Mega cities are significant as symbols of the country they’re 29% year-on-year12, and sales in Shanghai during the first to maximise penetration and minimise wastage within store located in but also for their significant economic and six months of 2017 were EUR 100m, more than Austria and clusters. For example, KFC offers spicy and chilli powder cultural influence at the regional, national and global level. Switzerland combined13. when consumers purchase a burger in Sichuan whereas Some brands are responding to this by putting mega cities in Guangdong province, herbal teas are provided to suit at the heart of their global go-to-market strategy. Here a regional tastes. Similarly, Youyou, a spicy snack brand, disproportionate focus of investment is put on a limited sells sour flavouring in Eastern China, numbing sensations number of cities with localised marketing, merchandising Western China, and red oil in Chongqing Province. In and research and development. The aim is to more quickly the fashion sector we also see brands introducing greater respond to shopper needs and build direct-to-consumer flexibility in both merchandising and product development to engagement. Winning in these cities is seen to be significant cater to distinct buying patterns in North and Southern China given both the direct opportunity size and also the as a result of distinct weather patterns and fashion trends.
12. Adidas delivers strong operational and financial performance in 2017, 14 Mar 2018, Adidas Group https://www.adidas-group.com/en/media/news-archive/press-releases/2018/adidas-delivers-strong-operational-and-financial-performance-2017/ 13. Sporting goods manufacturer Adidas focuses its marketing on six major cities, 17 Aug 2017, ISPO.com https://www.ispo.com/en/companies/id_79710992/new-marketing-strategy-adidas-is-focusing-on-chosen-cities.html Key growth trends in China’s retail market 15 2
Digital retail “matures into New Retail
Over the last 5 years China’s retail market has experienced a digital growth miracle but its impact has mostly been on the front office:” sales channels and marketing. We are now entering a period of new retail which will be far more transformation, digitising the entire value chain.
Digital retail only impacted the front office, new retail will transform Product Sourcing and the entire value chain eCommerce Digital marketing Supply Chain development production
Digital retail
China’s next retail disruption: End-to-end value chain digitisation 16 I. S-Curves of retail innovation
Over the last 5 years China’s retail market has experienced a digital growth miracle. Smartphones, social media, mPayments and eCommerce have quickly become ubiquitous in most urban areas. The impact of these technologies on consumer behavior has forced companies to change how they sell and market to shoppers. Yes, the digitisation of China’s retail market has been dramatic but it has mostly been one of front-office transformation.
From where we sit today, these changes have felt like we are accelerating along a linear trajectory however, innovation is an arc. The time between hot new trends turning into platitudes is collapsing and these experiences reflect where we sit on the S-Curve14 of innovation. At 5 years old, digital may feel like a new trend but it is already reaching maturity. Mobile, social and eCommerce are now reaching the top of their S-Curves and so too is digital retail.
mCommerce and mPayments are no longer trends, they are ubiquitous characteristics of retail in China The end of Digital Retail is the Source: PwC’s Entertainment and Media Outlook and iResearch beginning of New Retail
Mobile commerce as % of Mpayment users % of ecommerce smartphones
84% 85% 81% 83% 80% 81% 77% 79% 76% 73%
61% 55% The end of the beginning New retail
45%
33% Digital retail 29% Performance
Where we’ve What’s next been 14% Where we’ve What’s next been Old retail
2013 2014 2015 2016 2017 2018 2019 2020 2013 2014 2015 2016 2017 2018 2019 2020 Time
14. S-Curve is a measure on the speed of adoption of an innovation. It is often used in the technology industry to describe a product lifecycle.
Digital retail matures into New Retail 17 PwC’s New Retail digitisation transformation framework
Integrated/immersive digital and physical II. Digitisation of experiences the value chain Retail as entertainment
We shouldn’t misinterpret the end of digital oduction and retail to mean change will slow however, Manless stor staffless shelves as one era matures so another emerges IoT and machine analytics to replace it. This is new retail. Whereas oduct es and Modular pr digital retail was mostly a front-office mass customisation domain new retail will be far more Omni-channel fulfilment Blockchain pr transformative, impacting the end-to- traceability ce end value chain. We see New Retail Sales Sourcing and being characterised by 3 key areas: channels production cing B2B digital commer and co-sour • genuine consumer-centric operating models; Short form video, livestreaming and ehousing consumer participation Automated war obotics • digitisation and integration of and r the entire retail value chain; Consumer
• and using data to enable AI demand planning and Category of one Supply replenishment Marketing smarter, faster decision targeting and chain making and business impact. personalisation
Supply chain infrastructur
e sharing Dynamiceative content optimisation and Product Unified online and AI cr development offline inventory
Online market testing and pr
Rapid pr digital/3D design e-launches Multi-channel attribution and end-to-end ROI
oduct ototyping and r
eation models
Partner/consumer co-cr
Data driven p development
Digital retail matures into New Retail 18 Sales: Channels become integrated, formats more diverse
What interests you to shop during the major online shopping festivals (e.g. 6.18 and double 11)? Source: PwC’s Global Consumer Insights Survey 2018 Digital Retail New Retail Examples
Alibaba’s Singles’ Day Product price deductions 82% Transaction orientated, Entertainment led with an transforming from a Shopping focused on serving value increasing emphasis on discount-led shopping missions and convenience buying hard to find, distinctive or season to an entertainment occasions niche products and brands Exclusive services for festival (e.g. no festival interest installment, product 37% customisation) Hyper growth new Large platform increasingly Large pure-plays and platforms: Kaola (Cross- Festival-only exclusive eCommerce curate content and new 27% market places dominate by border), Xianyu (Second- products and packaging landscape players emerge which providing endless choice hand) and Pinduoduo focus on distinct niches (Daily discounts)
Access / pre-ordering of new products 24% 7FRESH, JD.com grocery Online and offline largely Connected payments store, is a combination of independent channels and logistics at the core Channels supermarket, restaurant, linked only through mobile of integrated online and distribution center and Brands creative marketing campaigns 20% O2O marketing offline formats online store15
New features and technology launched by eCommerce platforms 17% (e.g. like Virtual Reality, Augmented Reality or Online-to-offline)
Festival specific events 9%
Interacting with friends through social 6% media (e.g. via Social media campaigns) 15. JD.com opens its first offline fresh food supermarket, 5 Jan 2018, Xinhuanet, http://www.xinhuanet.com/english/2018-01/04/c_136871853.htm
Digital retail matures into New Retail 19 Marketing: Exponential increase in content, targeting more precise
Chinese consumers are much more willing to share data and have high expectations they will receive a personalised experience because of it Source: PwC’s Global Consumer Insights Survey 2018 Digital Retail New Retail Examples
59% L’Oreal generates 33% Focusing on value and Agree Prioritisation of top- of China revenue online performance media line growth: reach, (versus 8% globally16) and 29% Metrics including end-to-end Happy for a retailer to engagement, traffic and has a razor sharp focus ROI and multi-channel identify when I am nearby conversions on ROI across media mix, and send me personalised attribution offers buying and creative 14% Disagree 37% Exponential increase in Douyin, a short form Brand and product digital content emphasis video app, with powerful Formats and content all optimised for on ultra-short formats (<5 editing capabilities reached content the intersection of mobile, seconds), live broadcasts 100 million monthly active 67% social and video Agree and consumer participation users within 1 year I expect a retailer to have up 34% to date information across all channels (e.g. in-store, Kuaizi, a marketing online, social media, home Category of one targeting, technology start-up, uses delivery etc.) 5% Demographic or behavioral hyper personalisation AI to generate creative Targeting Disagree segmentation and targeting and delivery of dynamic content and then optimise 33% content combinations to increase marketing effectiveness
61% Agree
I am comfortable for a 34% Chinese consumers are much more willing to retailer to monitor my shopping patterns and share data and have high expectations they will purchases 8% receive a personalised experience because of it Disagree
38% 16. CAGNY Investor Conference presentation, 23 Feb 2018, Loreal Group “https://www.loreal-finance.com/_docs/0000000175/Presentation_JP_Agon_Cagny_2018.pdf China United States (US) Digital” retail matures into New Retail 20 Product development: Bigger Sourcing and production: use of data analytics, shorter Demand planning, modular time to market production and sourcing traceability
Digital Retail New Retail Examples Digital Retail New Retail Examples
Yili, a Chinese dairy company, uses digital Cainiao forecasts Data driven demand analytics derived Forecasting based on demand volatility Medium-term product management Emphasis on data from multiple owned historicals, POS data, and provides data development cycles Forecasting including joint forecast Time to analytics, demand and third-party and marketing / sales intelligence to logistics using historical data and with customers, market signals and shortening sources to inform judgment; very limited partners’ to optimise to inform future planning application of machine of R&D cycles product development, co-planning with inventory levels at projections learning for advanced reducing time to supply chain partners warehouses and demand forecasting market from 18 to 3 delivery nodes months
Mars collaborated Greater data Mondelez enables with Alibaba’s “New availability enables In-house R&D Co-creation models Focus on scale consumers to Research Manufacturing” unit differentiation via with emphasis on including partners efficiencies and unit customise the and to co-design and Production approaches like localisation of global (eCommerce) and end costs as basis for colour and design of development develop a unique modular production for China consumers competition special edition Oreo chilli-infused Snickers methods and mass packaging on Tmall bar17 personalisation
Kraft developed JifJaf Alibaba, Fonterra and Niche and occasion a new cookie sold Compliance as Traceability becoming Large campaign Blackmores create based segmentation exclusively online and hygiene factor created as a differentiator Testing and launches coupled with Quality and a blockchain food with use of online as a targeting young adults through brand equity, enabling complete launch mass distribution on trust traceability solution testing bed or to grow who wanted a unique packaging and assurance of origin all channels to enhance consumer buzz taste from a quirky product quality and supply chain confidence challenger brand18
17. Alibaba now product designer, as well as seller, for brands, 19 Apr 2018, Alizila http://www.alizila.com/alibaba-tmall-innovation-center-brands/ 18. Kraft Heinz’s new chocolate sandwich cookies might seem familiar, 25 Apr 2018, Adage http://adage.com/article/news/kraft-heinz-a-chocolate-sandwich-cookie-brand/313251/ Digital retail matures into New Retail 21 Supply chain: Minimising costs while maximising flexibility and value
Retailers may offer various options for For the majority of your online how you receive your goods. Which of purchases, how soon do you expect the following services are most attractive your goods to arrive? to you if offered at no extra cost? Source: PwC’s Global Consumer Insights Digital Retail New Retail Examples Source: PwC’s Global Consumer Insights Survey 2018 Survey 2018 Operations enable new Sourcing and Li & Fung’s digital customer value through logistics support supply chain service expanded offerings and 34% customer expands to focus on 29% Operation services; operations Same day experience through pre-production and design is integrated into delivery Same day speed, efficiency, design including virtual 39% new business model and low costs product development 6% development
24% Free return Vendor integration, Danone partners with 36% shipping Minimal physical shared infrastructure JD.com to improve 20% Next day footprint to models and multi- coverage in southwest support low fixed purpose assets, focus China including Infrastructure 8% costs, focus on on customer experience building a shared 19% Delivery at high utilisation of / value, warehouse as warehouse in Chengdu a specific fixed assets a showroom and pick to optimise online and time slot 8% up place offline distribution19 18%
Two days 13% JD.com and Walmart’s Package 29% Optimising Inventory planning, integrated inventory tracking inventory visibility, and availability and order management 18% management for which comprehends system optimise Inventory efficiency and and supports all fulfilment by ships 12% velocity in the channels flexibly and online customer orders 2.7% Three to five online channel effectively from central warehouse In-store business or Walmart stores20 pick-up days 7.7% 43% 19. JD Logistics, Danone Join Hands to Build Shared Warehouse, Optimize Distribution, 22 Nov 2017, Yicai Global https://www.yicaiglobal.com/news/jd-logistics-danone-join-hands-build-shared-warehouse-optimize-distribution China United States (US) 20. Walmart and JD.com expand strategic cooperation, 25 Jul 2017, JD.com http://ir.jd.com/phoenix.zhtml?ID=2288419&c=253315&p=irol-newsArticle
Digital retail matures into New Retail 22 III. Platforms and walled gardens: Value chain share breakdown for Chinese tech players, 2017(%) Source: Stat counter; emarketer; china internet watch; Tech node iresearch china; online and offline Alibaba group; Website Research; PwC Analysis
Alibaba Tencent & JD Baidu China’s internet giants were at the heart of digital retail and they have also been the ones Others to usher in the New Retail era. New Retail is an Alibaba term but both Tencent and JD also pursue similar strategies described as Smart and Borderless Retail respectively. In order to move into offline retail the internet giants are not going alone but pursuing a number of highly publicised build, buy and partner strategies. Tencent video We are still in the early days of New Retail but the competitive strategies of the internet Alibaba 24% players help us understand how the market might evolve. There are two internet 32% QQ ecosystems in China: Alibaba, and the Tencent and JD alliance. While each have evolved music 41% Cainiao from different core competencies they have built independent ecosystems that span the Tencent Ele ma Alipay 48% entire value chain of online consumer experiences. Consumers in the Tencent ecosystem Tencent 52% 54% 54% can seamlessly move from the discovery of a product endorsed by their favorite KOL on 57% Tmall 60% WeChat to a transactional environment in JD. That same consumer would be blocked from Youku transferring across WeChat to Alibaba’s Tmall. In China, seamless consumer experiences 23% Baidu Tencent (and data) only exists if we stay within the “walled gardens” of the internet giants. We also 78% 12% expect the internet giants to continue to enforce the walled garden approach offline. For example, Walmart, which has a strategic partnership with JD, recently announced that it was no longer accepting Alipay in Western China in favor of WeChat Pay describing the choice as “offer the best all-round shopping experience for our customers”21. JD Baidu 5% 19% KuGou 28% Solving big problems and removing inefficiencies is at the core of how the internet giants iQiyi NetEase 24% look at opportunities and the only way for them to move the needle on USD ~500bn market 14% Other Suning eCom valuations. China’s offline retail market is worth around USD 4.5 trillion and presents a 5% 18% significant opportunity, however the aim is not to become retailers in the traditional sense Meituan but rather identify opportunities in the retail value chain where they can solve problems, Waimai build solutions and create new business models. For example, Alibaba’s Hema has emerged Weibo 30% 30% Kuwo Tenpay as the iconic example of the modern grocery shopping format: consumer orientated, digitally 10% 38% JD.com connected and smart logistics enabled. The expertise and capabilities developed here are 25% Others Baidu now being deployed in Sun Art Retail Group, a leading hypermarket operator with over 450 Shenma 38% music 4% Others stores, as part of a USD 3bn equity investment. We also see similar strategies being deployed 9% Others 35% Non in the shopping mall and homeware sectors. It is not hard to foresee a future whereby the 29% eCom 29% Chinese internet giants create Retail as a Service vertical-specific (Grocery, Fashion, Home, Haosou 6% Others vip.com Others etc.) business models for the retail sector. In this scenario, brands and retailers plug into Others 17% 4% 16% 14% Others cloud-based solutions to enable next generation applications in: supply chain, product Others Others 8% development, and production and sourcing. These strategies are similar to the Industry 4.0 7% 6% approaches being developed by companies like GE’s Predix or Siemen’s MindSphere. Search Digital Social Online Online Online B2C O2O Mobile Logistics Advertising Media Video music gaming Commerce Commerce Payments Advertising 21. Walmart ditches Alipay in western China for Tencent’s WeChat, 27 Mar 2018, Financial Times https://www.ft.com/content/cd9a6546-31a8-11e8-b5bf-23cb17fd1498 Demand generation Entertainment Commerce Fulfilment
Digital retail matures into New Retail 23 3
What it takes “to succeed in New Retail ”
China’s next retail disruption: End-to-end value chain digitisation 24 1. New retail is full stack digitisation. See everything through the lens of business impact, customer experience and technology enablement 2. We are still in the early days of New Retail. Separate vision All brands and retailers need to consider how digitisation will impact their total value chain. Of course technology from reality, aspiration from and data will be part of the solution but jumping in too early risks digitising existing ways of working versus unlocking opportunities for breakout innovation. We recommend companies first look to consider how this new execution, and PR (Public era of retail enables them to do things differently. This could mean transforming how they connect and serve Relations) with ROI (Return consumers, where they play in the value in the chain, and the new profit pools they can capture. Doing this on Investment) typically means bring together individuals and teams that have different perspectives: strategy, creative and design, and innovation and technology. These teams also need to be backed up by leadership and organisational roles needed to drive the effort. For example, when Li & Fung – a global supply chain company with over 100 years of history – was developing its 3-year plan it brought together business, technology and creative teams to ideate a vision that would radically transform its business model, versus simply digitisation existing processes. The result We are constantly bombarded by press announcements was an asset-light strategy that integrated all elements of the supply chain into a new digital platform and partner and case studies of innovation in China’s retail economy. In ecosystem. Here data is captured, shared and analysed across the value chain enabling Li & Fung to provide this environment it is easy for brands and retailers to feel customers with the insights needed to make smarter, faster and more effective business decisions. anxious they are not keeping up. It is true that innovation and competition is relentless here but it is also important to not mistake PR with ROI. In reality, most of the claims like: 360 degree view of the consumer, online-to-offline channel attribution, or real time inventory optimisation etc. are either small scale pilots or product brochure wear. Most brands and retailers in China are still struggling with massive challenges of data fragmentation, quality and completeness. As we know however, things move incredibly fast in China and vision can quickly turn to reality. We recommend that companies do not leap frog to emerging technologies until the fundamental building blocks of cloud, mobile, eCommerce and analytics are in place. There are also huge opportunities to be captured through changing how brands operate in the era of new retail, not just what technologies are used. For example, one leading sportswear brand is responding by completely reorienting content creation, campaigns and new product launches around China’s eCommerce calendar.
What it takes to succeed in New Retail 25 4. Ecosystems and partnerships are 3. Internet players have the becoming increasingly important but ambition (and cash) but not all don’t neglect to build core capabilities the answers, collaborate early that create competitive advantage but be careful about picking sides
Previously digital retail meant the front-office activities The internet giants have unprecedented consumer of eCommerce and digital marketing. For many brands reach, digital talent, and technology and analytics and retailers in China this meant outsourcing most of capabilities, but they are still newcomers to offline the execution to Taobao Partners / Third-parties (TPs) retail. The last 4 years have shown us that the brands eCommerce services providers and digital / media that have benefited most were those that collaborated agencies. For example, a leading sportswear brand with early and helped shaped the future. For example, USD ~1bn eCommerce revenue has 100+ team outsourced 5. Everyone in the organisation back in 2016 Nestlé was the first to use Alibaba’s big to a TP. As digital now comes to define everything a brand needs to be digital, in everyway data platform to personalise the shopping experience or retailer does it is critical to assess what capabilities on Tmall – a solution that is now almost ubiquitous. (existing or new) need to be built in house; otherwise what Nestlé’s eCommerce growth in China outpaces the food is left? Agencies and partnerships will always be part of and beverage average with some categories like coffee the delivery model but not at the expense of outsourcing and biscuits growing 50% and 80% during the first half competitive advantage. PwC recently worked with a leading Digital retail is retail. Instead of the prior decade’s of 201722. We believe the winners in New Retail will consumer brand on helping them tackle this strategic obsession with business-IT alignment, brands and retailers be those that also collaborate early to shape the future question. First we helped them breakdown the opportunity must now pursue a more balanced approach to digital of their category. For example, we recently supported landscape into a limited number of clear priorities: O2O transformation, one that now puts the organisation and a multi-category retailer and an internet company platforms, personalisation marketing, and B2B digital employees at the centre. All functions, departments and design a shopping mall experience for the modern commerce. We then built a capability-driven strategy that grades need to be supported to enable them to develop a Chinese consumer. As we have seen in the grocery identified the operational and technology requirements fundamental of digital competence. This means creating sector however strategic relationships with the internet needed to execute. Future considerations to how the a culture of innovation, constant learning and technology giants often come at the cost of exclusivity. There is no business operates included: investments in eCommerce- adoption. For example, Nestlé’s Digital Acceleration Team one size fits all answer here but we would recommend specific supply chain capabilities, development of an in- (DAT) takes young leaders from international markets – a cautious approach, particularly to long-term house data management platform for programmatic media, including China – into the global headquarters where they agreements in a market that is as dynamic as China. and new partnerships with B2B aggregators. receive immersive training and work on innovative digital projects for period of 8 – 12 months. These leaders then return into their home markets where they help to drive change and spearhead digital transformation. In a similar way L’Oreal has put digital at the heart of the organisation’s DNA transforming culture, talent and daily operations. L’Oreal now has over 1,700 digital specialists and has up- 22. Nestlé Investor Seminar, 26 Sep 2017, Nestlé skilled 16,000 employees globally. https://www.nestle.com/asset-library/documents/library/presentations/investors_events/investor-seminar-2017/wan-ling-martello.pdf
What it takes to succeed in New Retail 26 Integration of strategy, creativity and innovation will help you to achieve your value proposition Key takeaways Technology and data will be part of the solution but don’t neglect to apply strategy, creativity and innovation expertise to rethink 1 Prioritise structural growth how this new era of retail enables brands to connect and serve opportunities The emergence of New Retail in consumers in a completely new way. Develop an ecosystem China is impacting retail at the global strategy that prioritises partnerships as a mechanism to build Capture double digit growth level. This report describes the trends capability or develop new go-to-market models. Continuously opportunities through aligning 2 that are visible to us. Here are five scan the horizon for new innovations by working with China's the customer value proposition takeaways for your consideration. vibrant start-up community including those internet giants. behind key demand side drivers: premiumisation, health and wellness, lifestyle and experiences, and interactivity. Focus on consumer-centric innovation Look for opportunities to further tailor go-to-market Take inspiration from the internet companies by combining customer insights with models by city cluster or design-thinking approaches to develop new products and services that cater to the modern create hyper localisation by Chinese consumer. Focus on catering to a limited number of personas and solving for 3 developing specific strategies specific pain points, or moments of delight. for China’s mega cities.
Don’t neglect to build and maintain core Build a digital organisation capabilities that create competitive advantage Instead of the previous decades obsession In the past, digital execution meant outsourcing with business-IT alignment, we must now While digitalisation has clarified most tasks to eCommerce services providers (TPs) 4 pursue a more balanced approach to digital 5 the consumer’s needs and wants in and digital / media agencies. However, as digital transformation, that puts the organisation, terms of personalisation, brought now comes to define the entire value chain, employees and the customers at the centre. efficiencies to operations and brands need to assess what critical capabilities It should be viewed as the means to deliver accelerated gratifications, brands (existing or new) need to be built in- house. enhanced products and services which must not lose sight of their core Consider the impact of digital transformation the consumer values and at the enterprise products and services that built across the entire retail value chain. Continue level, it is to ensure agility and adaptation its identity. Catering to consumers to invest in digitising sales and marketing but to change. Invest in developing digital that make their lives better is a also focus on using data analytics to unlock talent across the entire the organisation. sound strategy through adapting to greater speed, innovation and efficiency This is likely to include up-skilling all change, embracing innovations and within supply chain operations, new product employees to a minimal level of Digital being trendsetters, however, having development, and production. IQ, embedding analytics expertise into sound fundamentals and embracing existing functions like marketing and the right partner is key to longevity. eCommerce, and creating entirely new domain areas in cyber security or digital supply chain.
Key takeaways 27 Contacts
Michael Cheng Author PwC Asia Pacific & Hong Kong/China Consumer Markets Leader Tom Birtwhistle +852 2289 1033 [email protected] Special thanks Rachel Chan Sally Huang Kelsey Lau Artin Lin Esther Mak Tom Birtwhistle Sanjukta Mukherjee PwC Digital Consulting Director Jan Nicholas +852 2289 6358 Kanon Wong [email protected] Echo Wu Cindy Yen Jennifer Yep Frank Yu
Methodology
In this year’s survey, we reached out to more than 22,000 online shoppers across 6 continents in 27 territories across the globe. This report draws on insights from our quantitative study of the shopping behaviours of 901 Chinese consumers and over 1,200 consumer interviews as part of various project work. In addition, we also bring perspectives from our experience working with international and local retailers, brands and internet companies. Our China survey sample was slightly skewed towards males who represented 55%. From a demographic perspective 58% were aged between 25 and 44, 79% have an annual household income above RMB 70,000 (US$10,000), and 66% are in full-time employment. From a regional breakdown, 32% live in Tier 1 cities, PwC’s Global Consumer 47% in Tier 2, and 21% in Tier 3. The study is part of PwC’s Global Consumer Insights Survey (formerly called Insights Survey 2018 Total Retail Survey), which in 2018 is our seventh consecutive study of online shoppers.
28 www.pwchk.com
This content is for general information purposes only, and should not be used as a substitute for consultation with professional advisors.
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