Your Roadmap to China’s consumer market
The COVID-19 worldwide pandemic has not only affected the economies
of most countries, but it has also changed the way consumers think
and behave. This latest health crisis has forced companies in China to
embrace a more creative approach by establishing flexible work
policies, and maximizing technological tools and marketing strategies to
allure consumers and reactivate businesses.
Though the number of new coronavirus cases in China has dropped significantly compared to the thousands of infections recorded at the beginning of the pandemic, the country’s economy has been slow to recover.
The outbreak precipitated China’s first quarterly economic contraction in decades, but the recent first-quarter data also shows an improvement in retailing and factory activity compared with the first two months of the year.
The unprecedented lockdown measures that forced millions of people to shelter in place had a deep impact in the way consumers choose to spend their money, and what kind of products they purchase. This radical shift in consumer behavior is one of the most important changes that companies had to adjust to.
As workers return to their offices and factories, and stores slowly start to reopen their doors, businesses in China are quickly adapting to a new sense of normalcy by implementing creative marketing strategies and a more digitized approach.
The peak of the pandemic coincided with Chinese New Year, one of the most lucrative seasons of the year, when millions of people travel all over China to celebrate the holiday with their families. In February, provinces and cities resumed work, but demand for tourism and business travel remained subdued.
In March, as the virus came under control, the economy started slowly to reactivate, though shifts in consumer behavior because of the crisis became more apparent.
In the past few months, there has been an accelerated focus on health and well-being; basic hygiene, but also home exercise. People are paying more for fresh products and healthy food options. Cleanliness is also a major concern these days.
Consumers are looking for healthier products, with a higher quality and the backing of established brands. This shift could be long lasting as people build in the habit of consuming higher quality products.
The move from physical to online shopping has been obvious, though it will likely bounce back a bit after the crisis. People will return to offline stores, but mobile ordering behavior is probably staying. Online shoppers’ category mix is different from consumers on the street—they have higher spending power and are more health conscious.
On the other hand, people have become more cautious about spending due to the global economic recession, and the impact it has had on household and personal finances. Companies have been forced to rethink their brand image and message in order to differentiate themselves from the rest and attract consumers’ attention once they return to stores.
In the meantime, digitizing the consumer experience has been a priority for most businesses. Companies have increased spending significantly on digital and online-to-offline (O2O) and have fully embraced the opportunity to offer their customers a different buying experience.
Since the start of the COVID-19 pandemic, practically all business interactions have been digital. This will become more the norm in the future. Recovery demand generation is primarily driven through digital; while training has been conducted on digital platforms and most meetings continue to be hosted online.
The health crisis accelerated a digital transformation that had been ignored in the past. Since February, many companies shifted their focus from offline to online to proactively engage new customers to generate incremental digital revenue. The use of creative marketing strategies on social media proved that the power of building an authentic relationship with consumers can go beyond the transactional.
Many of these initiatives will become the “new normal” in the recovery period. Contactless services such as online grocery delivery and education will remain popular for the foreseeable future.
According to the Ministry of Commerce, approximately 90% of restaurants and commercial facilities have been back to business across the country since early April.
The Chinese government is hoping consumers will reboot its economy, without igniting a second wave of infections, which have dwindled to zero in almost all provinces. The first three months of the year were devastating, with retail sales down 21% in January and February, and 16% in March, compared to last year.
Businesses and officials have been monitoring the retail sector, and they’ve been struck by a particularly worrying trend. Despite the abundance of shopping options, and the freedom to go out, consumers are not buying.
Several local governments and companies decided to issue coupons for billions of yuan to citizens to stimulate spending. The money could be used at stores and restaurants. While the United States sent cash to consumers, China felt coupons would force its notoriously savings-obsessed consumers to spend more.
Chinese are using the vouchers to purchase basic products that they would otherwise buy anyway, according to local information, such as groceries and medicine, rather than the discretionary products policy makers had envisioned. Instead, local-level officials under pressure to revive their regions are seeing vouchers supplant household cash that would have gone towards essential items but is now being stashed away.
The unemployment rate threatens a much-needed consumers’ revival. The official 6.2% figure for January-February was the highest ever recorded. It dropped slightly to 5.9% in March, but it captures mainly urban employment, leaving out millions of migrant workers and others in less formal sectors.
China’s youth, both recent graduates and entry-level employees who are easy to let go, are among the struggling jobseekers. The irony is that they happen to be a demographic group eager to spend money and reactivate the economy, especially the consumer sector. Alibaba CEO, Danial Zhang, called them “the main consumption power” in China.
A World Economic Forum report observed that apparel and tourism are the two main consumer industries suffering worldwide. Apparel consumption is currently 40% to 50% lower in China than before the pandemic, it added.
In the United States, the travel sector experienced an 81% revenue drop for April and May, according to Oxford Economics. “A $519 billion decline in travel spending in the U.S. this year will translate into a total economic loss of $1.2 trillion in economic output. This is more than nine times the impact of 9/11 on travel sector revenue,” it said. Worldwide, about 50 million jobs in the sector may be lost, mostly in Asia, according to the World Travel and Tourism Council.
Before the COVID-19 pandemic, China was on a quest to double its GDP from its 2010 level. Total retail sales of consumer goods in China in 2019 reached RMB40 trillion ($5.8 trillion), and the country was on its way to surpass the United States to become the world's largest consumer market.
In addition, China has the largest and most complete supply chains in the world, and its GDP growth rate is more than double that of the United States.
The three major industries that have supported China's rapid economic development in the past have been traditional manufacturing, construction, and real estate. These will be replaced by three new pillar industries: strategic emerging industries, services, and modern manufacturing.
This change can be seen from the slowdown of the traditional automobile industry and the rise of new energy vehicles. Tesla's Shanghai plant, the largest foreign manufacture, has been put into production, while Tesla sales in China have been steadily climbing every year.
For nearly a century, Chinese people have relied on biking, walking, and public transportation for mobility. It has only been the last 10-15 years that private cars have become available in China. Driving a car hasn’t been the most popular means for the average Chinese person to get around. This health crisis has increased people’s consciousness of mobility privacy as a means to avoid crowds in public spaces.
People are exploring new alternatives to buses, subways, taxis, and ride-hailing. Chinese customers accustomed to public transportation are adopting this new mobility privacy trend.
Ten years ago, many Chinese brands made an effort to look like they were a foreign product to attract local customers. Now, things have changed, and more brands are molding themselves in Chinese traditions and style. One of the most popular shoes by Chinese shoe company Li-Ning in 2019 was the ‘Wu Dao’, which was launched at New York Fashion Week.
In 2020, China’s middle class will become the main force behind consumption. In 2019, consumer retail spending increased 8 percent year on year - higher than the income growth of 6 percent. People born during the 1990s are more enthusiastic about paying for purchases in instalments, and they maintain this higher level of current spending by not buying a home.
Despite all these trends and significant shifts, 2020 will still be a year full of challenges and opportunities for companies operating in China. Local companies are becoming stronger, competition is getting fiercer, and consumers are becoming more discerning.
According to the McKinsey Global Institute’s China-World Exposure Index, China’s exposure to the rest of the world in terms of trade, technology and capital, is falling, while the world’s exposure to China is increasing.
While the pandemic has created unprecedented challenges for businesses, many valuable lessons have been learned.
Companies willing to adapt to the new normal and are not afraid of making the necessary changes will most likely survive the economic storm. Disruption, when embraced, can be the best stimulus for transformation. Change is usually hard but in a moment of crisis, it is a given.
This crisis has given business professionals a unique opportunity to make changes that under normal circumstances would have been impossible.
Should you have questions about your roadmap to Chinese consumers, complete the below inquiry form with your questions and comments.
DISCLAIMER: All information in this article is verified to the best of our ability and is assumed to be correct at time of release; however, Woodburn Accountants & Advisors does not accept responsibility for any losses arising from reliance on the information provided within. The information provided is for general guidance and does not replace specialized advice.