The scale of the retail opportunity in China is overwhelming. Head of retail and leisure at HSBC UK Corporate Banking James Sawley breaks down how Western brands can approach a launch.
Action points for retailers: Five ways to tackle the Chinese consumer opportunity
The opportunity in China is impossible to ignore, but how to capitalise on the enormous but daunting opportunities in the region is less clear.
Arriving in Shenzhen with a group of retail and fashion clients, all of whom were interested in either beginning to trade with China or growing their existing exports in the region, the appetite and enthusiasm from my customers was unmistakable. And it wasn’t hard to understand why.
Just take a look at the stats: Chinese retail sales of $6.5trn (£4.6trn) are growing 10% year on year, outpacing GDP growth, which stands at around 6.5%, as the economy makes the transition from an existence as ‘the world’s factory’ to being consumption and innovation led.
With a population of 1.3 billion, only 42% of Chinese households have an annual income of more than $10,000. This is set to increase to 60% in the next three years, meaning that a consumer base the size of Germany will start to consume in a meaningful way from a standing start.
“Chinese retail sales of $6.5trn (£4.6trn) are growing 10% year on year, outpacing GDP growth, which stands at around 6.5%”
At a macro level, while headwinds to growth exist, these should be offset by strong global growth rates, a relentless level of investment in infrastructure and a determination to succeed.
Spending a few days on the mainland, it’s evident that the entrepreneurial spirit of the Chinese is extremely strong; inflation is controlled at about 2%, the economy enjoys high employment and consumer confidence is high.
Another factor supporting the prospect for future retail sales growth is the changing attitude towards debt.
The legacy left from the ‘one child policy’ means that some millennials can find themselves with multiple properties handed down from parents, so disposable income is high.
This, together with the introduction of social security, means that people are more confident in taking on a level of personal debt – something that the generation before was more cautious about.
If you’re a foreign business in China you want to be addressing either the infrastructure agenda or the consumption agenda.
Mass urbanisation is driving people away from rural areas (where farm land is being consolidated, driving greater efficiency), and into urban areas to seek work in the growing services and consumption sectors.
Second- and third-tier cities exist in the hundreds and boast populations equal to Manchester or Birmingham with exciting and dynamic retailing environments.
How China shops
China has roughly 5,000 shopping malls, and this number is expected to increase to 7,000 in the next few years.
Supply is required to serve the growing consumer base, especially in the second- and third-tier cities where leisure and cultural industries are less developed and shopping malls act as the key hub for socialising and entertainment.
Many shopping malls, however, still lack the sort of experience we now expect of this kind of retailing environment, and the industry is going through a similar revolution with new malls containing 40-50% food and beverage and entertainment.
For the more fashion-forward consumer, look to the more dynamic high streets on the edges of the central business districts where the trendiest groups tend to hang out. These retailing environments are increasingly thriving with independent stores and boutiques, showcasing the latest in global fashion trends.
If you find yourself scoping out a Chinese megamall, do not be disheartened to see lots of people shopping but very few spending – Chinese consumers just love to shop, order and pay for products on their mobile phone.
China is even ahead of the UK in terms of online shopping penetration, with online apparel close to 30% of the market and still growing at 30% per annum, and where an astonishing 80% of transactions are completed via mobile.
China’s biggest social platform is WeChat, with close to 1 billion active users who spend roughly 15 hours per week on the platform. WeChat is a multi-purpose platform where Chinese consumers go to discover new brands and trends and where ‘social shopping’ is commonplace.
Chinese consumers will discuss an idea to buy something with their friends as well as reading pages of reviews and forums before making a decision to buy.
WeChat offers brands an app-style ‘mini programme’, which empowers brands to integrate marketing and merchandising within WeChat – with big names incorporating everything from gaming and live-streaming to competitions to bring the brand to life.
Tmall on top
One can’t talk about Chinese ecommerce without mentioning Tmall, which occupies more than 50% of Chinese online sales.
Tmall features more than 70,000 international and Chinese brands from over 50,000 merchants and serves more than 500 million active users.
Since 2014, Tmall has enabled foreign brands to sell directly to Chinese consumers without the need to have a legal entity in China, nor hold any stock in the country.
International brands must access Tmall via a Tmall Partner, which operate on behalf of the brand, but simply being on Tmall is probably not enough to build momentum in this busy marketplace.
For brands looking to become a success in China, utilising Tmall or JD.com (the second-largest ecommerce site) is just one part of a multi-disciplined strategy to penetrate the market, which will include physical stores, pop-ups, online marketing and social media engagement.
“Like in most developed markets, omnichannel has quickly become the new normal for the Chinese consumer”
Like in most developed markets, omnichannel has quickly become the new normal for the Chinese consumer.
‘New Retail’ concepts such as 10 Corso Como combine men’s and women’s fashion with art exhibitions, a bookstore, a coffee shop and a bar. They are all about “making memories, not sales” in a nod to the experience economy.
More traditional routes to market such as wholesalers and distributors are less developed compared with other countries.
For example, the very concept of a department store is still in its infancy.
Physical presence is typically achieved via franchise partners or joint ventures with local Chinese companies until brands have the scale to go it alone. Burberry, for example, traded in China with a franchise partner for 20 years before buying them out in 2010.
While only 6% of Chinese citizens have passports, travel is big business, particularly in the luxury space.
Some big luxury brands focus their investment resources purely on brand-building in China in the knowledge that consumers will travel and buy products in London or Paris.
Changing tastes and influences
The Chinese consumer is very curious and will try anything once.
While this is good for getting an early read on whether your products are likely to succeed, your brand must stand out and its delivery of quality and newness must be consistent due to the abundance of choice.
Brands have historically been able to trade on the charm of simply being British, but those days are numbered. The UK is hugely under-represented in its share of Chinese imports – China is only the UK’s fifth-largest export market.
The Chinese consumer is very sophisticated and now much more focused on quality, authenticity, value and emotional connection, rather than brand origin.
“Chinese brands are particularly good at tapping into local consumers’ appetite for all things digital”
There is a growing trend towards local Chinese brands, even at the luxury end of the market. Chinese brands are particularly good at tapping into local consumers’ appetite for all things digital and succeeding by communicating with customers via virtual or augmented reality.
That said, foreign brands still have considerable appeal to Chinese consumers simply because of their heritage, history, and association with quality and Western celebrity culture.
International brands cannot ignore two of the most powerful and growing influencing tools available – KOLs (key opinion leaders) and Korean entertainment.
KOLs, just like influencers in the West, are growing in popularity. A simple social media post by actress Fan Bingbing, who has more than 60 million followers, can sell out products in minutes.
Successful brands should carefully plot out a strategy using the power of not only the mega-star KOLs, but also the up-and-coming influencers, which may be better suited to whatever niche or lifestyle the brand represents.
Chinese consumers are also obsessed with Korean soap operas and pop music, and there is a well-established product placement market, which can work wonders to launch a brand or product.
Five ways to tackle the Chinese consumer opportunity
1. Visit regularly – you have to see it to believe it. China’s consumer economy is vast and growing, but is also changing at pace. It is essential to visit frequently and adapt.
2. Localisation – China is more like a continent than a country. Have a strategy for the North, East, South and West as each has its own culture and climate, and will be at different stages of maturity.
3. Have people on the ground – if you’re going to make it big in China you need people in the country to represent your brand and keep on top of your social/digital profile. Look at teaming up with other brands if you lack scale.
4. Invest, invest, invest – the crowded nature of the Chinese market means simply dipping one’s toe in often leads to failure. You need to continually invest in the region to have any chance of success.
5. Omnichannel is the most successful model. Utilise partners to access online platforms, franchise operators to test store formats and local marketing agencies to maximise the impact of social platform marketing and KOLs.