Global Consumer Insights Survey 2018 China Report Chinas next retail disruption: End-to-end value chain digitisation pwchkForeword Hardly any week goes by without news on the invention or adoption of new consumer technology, videos of some internet celebrities (Wanghongs 1 ) going viral on social media, or major announcement by retailers to redefine customer experiences this is the intensity and speed at which Chinas consumer landscape is evolving. 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 billion 2was wiped off the market value of other competitor grocery retailers in just under 24 hours. Those in the US may have been left surprised by this move but that shouldnt 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. Sheer scale makes China a must play, must win market. China has eclipsed the US as the largest retail market in the world. Chinas 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-year 3 . In the US, the estimated quarterly retail sales for Q1 2018 was USD 1,306.7 billion, an increase of 4.5% year-on-year 4 . China is also the worlds biggest eCommerce market with online sales in Q1 2018 reaching USD 307.4 billion, an increase of 35.4% year-on-year. In the US, online retail sales in Q1 2018 reached USD 123.6 billion, an increase of 16.4% year-on-year. Singles Day continues to break records, with Gross Merchandise Value (GMV) increasing 39% to USD 25.2 billion in 2017, versus a combined value of USD 11.6 billion for Black Friday and Cyber Monday in the US. Yes scale makes the China opportunity strategically significant but it is retail innovation that truly puts it in a category of one. Michael Cheng Asia Pacific & Hong Kong/China Consumer Markets Leader 1. Wanghongs, meaning internet celebrities, are Chinese key opinion leaders that have attracted a large fan base through relying on social media. They typically monetise this fan base through endorsements, brand sponsorships and also selling prdoucts via their own eCommerce stores. 2. Amazons new Whole Foods discounts wipe out nearly $12 billion in market value from grocery sellers, 24 Aug 2017, CNBC cnbc/2017/08/24/amazons-new-whole-foods- discounts-wipe-out-10-billion-in-market-value-from-grocery-sellers.html 3. Total Retail Sales of Consumer Goods in March 2018, National Bureau of Statistics of China stats.gov/english/PressRelease/201804/t20180419_1594992.html 4. Quarterly Retail E-commerce sales, 1st quarter 2018, The U.S. Census Bureau census.gov/retail/mrts/data/pdf/ec_current.pdf 5.17 5.70 6.21 6.77 7.38 8.05 4.50 4.85 5.18 5.52 5.87 6.21 0.67 0.86 1.03 1.25 1.51 1.83 2016 2017 2018 2019 2020 2021 eCommerce retail sales (USD trillion) Offline retail sales (USD trillion) Chinas retail market outlook Source: PwC analysis Chinas eCommerce penetration by category Source: Goldman Sachs, Euromonitor and PwC analysis 60% 55% 38% 15% 2016 2017 2018 2019 2020 2021 40% 43% 51% 44% 30% 10% 47% 39% 26% 8% 55% 49% 35% 23% 7% 31% 21% 6% 5% 6% 8% 10% 11% 12% 33% 13% Electronics and appliances Clothing and shoes Beauty FMCG & grocery Luxury CAGR 2017 2021 6% 9% 21% 2 Chinas next retail disruption: End-to-end value chain digitisationIn 2017 we first discussed this theme in our report “eCommerce in China the future is already here” which identified how digital had transformed the front-office of retail: sales channels and marketing. It also revealed that mobile commerce, secure platforms, and big data analytics, among others, were becoming key investment areas for global retailers to thrive. This shift from Digital Retail to “New Retail” is being characterised by data- driven and customer centric approach, further enabled by digitalisation through the entire value chain. As we saw with eCommerce, Chinas internet giants are the primary drivers of this trend pushing traditional retailers into a new period of disruption through rapid capability building strategies via build, partner and acquisition models. As the worlds biggest and arguably most important consumer market, China is now home to 784 million smartphone users and now social media, mPayments and eCommerce are ubiquitous parts of the shoppers journey 5 . PwCs latest Global Consumer Insights Survey 2018 (“GCIS”) found that in terms of shopping habits, 50% of Chinese consumers (compared to the global average of 22%) buy products online weekly and 59% of them are likely to buy grocery online (compared to global average of 21%). Chinese consumers are also leaders in mobile payments as 86% of them have used mobile payments to make purchases (compared to the global average of 24%) thereby creating a near cashless society. Our research also finds that Chinese consumers 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% globally. This intense digital connectivity has led to proliferation of big data which is being used to optimise how brands create compelling customer experiences 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 to have up-to-date information on them and personalise their experiences accordingly, compared to 42% globally. We are also now seeing the application of AI technologies that enable more effective targeting, however, brands must be careful to strike the delicate balance needed to protect data privacy, consumer trust and network security. New retail is not just transforming consumer engagement but the entire value chain. Retailers are building smarter, more flexible and multiple-purpose supply chains capable of orchestrating inventory across online and offline channels. Data is being used to make product development more demand- based and also shorten time to market. Sourcing traceability, particularly via blockchain, is also becoming increasingly important to enable greater consumer trust. E-commerce has disrupted retail and to stay competitive in the industry and uphold the brand credibility, retailers could invest more in various channels to enhance convenience, improve customer experience and strengthen personal data protection. While retailers and brands identify business opportunities through the data driven shopping habits and capture economic value through data, it would also be wise to not lose sight of the core competencies of your brand that maintain its competitive advantage. After all, complacency is a recipe for being disrupted. Proactive focus on maintaining and building the distinctive capabilities to deliver on the value proposition is a disruption-proof winning strategy. I strongly urge you to read this insightful report which explains the evolution 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 for those looking at inspiration it offers a perspective of China as the future of global retail innovation. 5. PwCs Entertainment and Media Outlook 2018 3 Chinas next retail disruption: End-to-end value chain digitisationContent 5 15 16 23 24 26 27 Key takeaways 28 Contacts Key growth trends in Chinas retail market Post 80s and 90s shoppers Categories: Health, premiumisation, lifestyle and interactivity Urban clusters and mega cities Digital retail matures into New Retail S-Curves of retail innovation Digitisation of the value chain Platforms and walled gardens: online and offline What it takes to succeed in New Retail 1 2 3 4 Chinas next retail disruption: End-to-end value chain digitisation1 Key growth trends in Chinas retail market” “ Looking beyond the macro headlines for breakout growth At the macro level Chinas 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. 5 Chinas next retail disruption: End-to-end value chain digitisation 5 Firstly, the term millennials covering birth years of early 1980s to early 2000s is a Western segmentation model and it is important to take a localised approach which divides generations by decade e.g. post 80s and 90s. Secondly, some companies are still focusing on the “digital savviness” of the Chinese millennials, trends which are now 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. 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 millennials. There are good reasons for this, with a population of approximately 410m there are more millennials in China than the entire population of North America. Almost every brand is looking to target the Chinese millennials and as a result there is a fierce war for a share of their attention and wallet. In order to engage consumers we need to understand them. Typically we see three main challenges with how brands or retailers are approaching this in China. To really understand the Chinese consumer businesses need to invest in proprietary analysis that blends both traditional quantitative research with qualitative insights. Brands are taking inspiration from the design- thinking approaches pioneered by the internet companies and we are now seeing a greater emphasis on techniques like: ethnography, behavioural economics and gamified consumer testing. These approaches help to gain a richer, fuller and more bespoke understanding 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 and regions. For a global fashion retailer with over 150 stores in China, PwC interviewed 100 young female shoppers and identified their demand for shopping experiences that are entertaining and practical, beyond “just another in-store + digital app combination”. Based on the insights, PwC designed a gamified community-based retail experience that addresses directly the personas needs and wants, which made the clients revisit their vision and assumptions. 6 Key growth trends in Chinas retail marketWe are increasingly seeing that viewing the Chinese shopper through the lens of the Innovators (21% of consumers), Fast Followers (52%) and Laggards (27%) enables us to identify some of the most significant differences in behaviour. Innovator personas are those that are the earliest to uncover new trends and take pride in inspiring those around them typically the fast followers- through sharing on social platforms. Laggards are those which are slow to adopt new fashions or technologies. For example, Innovator personas are ferocious consumers, 41% expect to spend much more in the next 12 months (versus 18% average) and 23% shopping on their mobile daily (versus 9%). They are also much more likely to use multiple digital platforms and formats to find inspiration for those purchases, with livestreaming and blogs particularly popular. Do you feel confident about your personal financial situation in terms of your shopping spend plans for the next 12 months? Source: PwCs Global Consumer Insights Survey 2018 41% 39% 18% Innovators 32% 5% 43% 12% 3% Laggards Dont know No, I am already holding back spend to see what happens No, I expect to spend much less No, I expect to spend slightly less I expect to spend around the same Yes, I expect to spend slightly more Yes, I expect to spend much more 14% 48% 31% Fast Followers 4% Social networks (e.g. WeChat, Q zone, Sina Weibo) Visual social networks (e.g. Youku, Bilibili, Ingkee) Multibrand websites (e.g. Tmall, JD) Price comparison websites Blogs Individual retailer websites 53% 57% 42% 31% 18% 30% 44% 30% 27% 32% 35% 24% 9% 3% 21% 20% 19% 7% Innovators look for inspiration across a wide variety of social platforms” “ Innovator What online media do you regularly use to find inspiration for your purchases? Source: PwCs Global Consumer Insights Survey 2018 Fast Follower Laggard 4% 19% 7 Key growth trends in Chinas retail marketThere 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 New Mom Mandy The Post-90s Trend-setter 8 Key growth trends in Chinas retail marketAge 27 and 28 Monthly disposable income Both around RMB 16,000 Relationship status Both single City JR is originally from Xiamen and currently living in Guangzhou, Sophia is born and raised in Guangzhou Education College (in Tianjin and Beijing) Occupation JR works for an internet advertising company and Sophia is a secretary at real estate agency Interests Running, outdoors, healthy eating, following sports “Help me understand how I could live a healthier lifestyle and have more fun training.” JR and Sophia met through their local ASICS running group, and have been training together with their close- knit group of wellbeing-enthusiastic friends. JR and Sophia The Wellness Explorers Persona identifiers Loves “learning through socialising” actively share experiences and learning from the workout groups and sports fan clubs they belong to Follows and attends events hosted by gyms e.g. SuperMonkey and Versus and sports brands to workout in a social setting and learn about new wellness trends Goals Live a well-balanced life and be a well-being role model amongst their peer groups Purchasing behavior