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May 2020

FEATURE ARTICLE

Lessons from China's Road to Retail Recovery

Reopening Doesn’t Mean a Rebound

As the Chinese retail sector begins the road to recovery, it’s becoming clear that a reopening and a rebound aren’t completely synonymous. Despite China’s early start to the reopening phase, our Consumer Sentiment Study from May 2020[1] shows across industries, a large portion of consumers in China spent or planned to spend less than they did prior to the crisis. For instance, 35% of consumers spent or planned to spend less on apparel products after the crisis hit, while only 19% spent or planned to spend more, our research shows. In luxury, over half of consumers spent or planned to spend less.

Across Industries, Many Consumers Report Decreased Spending

% of consumers who spent or planned to spend more, the same, or less by industry after the crisis

Source: The NPD Group/China Consumer Sentiment Study
Fielded: May 4 to 7

With consumers reluctant to spend, even as the economy reopens, brands and retailers will need to take proactive steps to stimulate demand. Some have made engaging with consumers a priority by capitalizing on new forms of digital engagement, issuing promotions, and aligning offerings to meet the needs of the post-COVID-19 consumer. As China sets the stage for what a reopening looks like, the lessons regarding retail’s recovery in the country could be relevant for firms, regardless of geography, as they seek to understand what the future may hold.

[1]NPD’s Consumer Sentiment Study surveyed a representative sample of 1,000 consumers in 23 Chinese cities.

New Forms of Digital Engagement and Promotions Stimulated Online Spending

In the aftermath of the COVID-19 crisis in China, consumers spent more online. E-commerce sales of all physical goods were up 36% during China’s Labor Day period (early May) despite the fact that stores across the country were open by then, according to China’s Ministry of Commerce. In a number of industries, consumers showed a willingness to shift more of their spend online. In beauty, for instance, 58% of consumers said their preferred shopping channel shifted online, our May 2020 research shows.

Channel Preferences Shifted Post-crisis

% of consumers whose channel preference shifted online, offline, or stayed the same after the crisis

Source: The NPD Group/China Consumer Sentiment Study
Fielded: May 4 to 7

One way e-commerce shopping is transforming is through livestreaming — video streams where influencers, retail sales associates, or brand ambassadors promote and answer questions about various products online and in real-time.

Often, livestreamers can reach their audience through e-commerce platforms like Taobao (owned by Alibaba) that also serves as the point of sale for interested buyers. Until recently, this was a popular way for consumers outside major cities to learn about and buy products that their counterparts in big cities had easier access to. But as livestreaming grew more sophisticated, consumers in major metropolitan areas increasingly began to tune in — then COVID-19 hit. As stores began to close, livestreaming exploded nationwide. Taobao’s livestreaming platform saw a more than seven-fold increase in first-time business customers in February 2020. Experts estimate livestreaming e-commerce revenue is likely to double this year to US$135 billion, the South China Morning Post (SCMP) reports.

The SCMP describes the practice as a “mix between product education and entertainment,” with consumers enjoying the special giveaways and urgency of deals that are offered for a limited time. Major brands have taken note. To keep up with this online shopping trend, beauty brand L’Oréal hosted its own livestream in March, issuing giveaways and offers as a way to drive traffic to the content.

With store closures still in effect in March, digital engagement and promotions helped bolster online prestige beauty spending in China. Promotions tied to International Women’s Day on March 8 contributed to strong sales. Major brands used social media site WeChat to conduct livestreaming and social commerce that day. In March 2020, online prestige beauty sales were more than double September 2019’s volume, our e-commerce tracking data shows.

March Was a Strong Month for Online Sales of Prestige Beauty Products

Source: The NPD Group | China E-commerce tracker| May 2019 - March 2020

While livestreaming presents shoppers with an additional incentive to migrate purchasing online, not all industries have shifted at the same rate. In fact, out of all the industries we studied, consumers were least likely to shift their spending online and most likely to shift spend offline for luxury products after the crisis. (See “Channel Preferences Shifted Post-crisis” chart.) This offers an early indicator as to which stores may be more resilient to online competition as the recovery progresses. For luxury, this reiterates the importance of investing in robust in-store experiences in the future. This implication extends beyond China given that, in recent years, travelers from China have bolstered in-store sales of luxury products in Europe and North America.

In short, while changing consumer preferences and emerging digital shopping methods are likely to contribute to increased online penetration for a number of industries, much of this will depend on the specific industry being sought by consumers.

The ways in which consumers are engaging with brands are transforming. Monitoring digital shopping trends, while keeping industry-specific sentiment in mind, will be key to finding the right balance when allocating investments between online and offline experiences.

Despite Sluggish Spending, Shoppers Valued Quality over Price

Consumers in China have been cutting back on spending in the immediate aftermath of COVID-19 period, but brands and retailers should take a long-term view. Even amid worrying economic news, consumers still said quality, not price, was the most important factor when making purchasing decisions.

Quality Was the Top Factor That Influenced Purchasing

23% of consumers said quality was the top factor influencing their purchasing

Source: The NPD Group/China Consumer Sentiment Study
Fielded: May 4 to 7

Consumers born after 1990 (Post-90s), in particular, place heavy importance on quality goods. These consumers grew up in a much more affluent society than their parents. They have different values and attitudes toward brands and products than older generations. And given that Post-90s consumers have started joining the workforce and building their careers, they’ve been a major driving force of consumption, particularly for high-end goods, in recent years. Just a few months before the crisis an NPD analysis showed products at premium price points (RMB 1,000, about $140 USD) in the sports shoe category (popular among Post-90s consumers) outpaced the total category in both dollar and unit sales by a healthy margin. 

Premium Sport Shoes Outpaced the Total Category Pre-crisis (12ME Sept. ’19)

Source: The NPD Group/China, 12ME September 2019, Dollar Growth

How COVID-19 will impact the spending habits of young consumers in the long-term remains to be seen, however, our China consumer sentiment data from May offers some clues about the generations that will be more likely to contribute to retail’s recovery. Consider shopping trends in the footwear industry. Although shoppers across all generations tended to spend less rather than more for footwear after the crisis, younger shoppers, on average, displayed more resilience than their older counterparts. Looking at shoppers in the 15 – 24 age segment, 20% said they spent or planned to spend more on footwear after the crisis. That number was only 10% among shoppers aged 35 – 44. Across the board there has been a sluggish return to normal levels of spending, but focusing on young generations may be a good place to start the recovery phase.

In Footwear, Changes in Post-crisis Spending Varied by Age Group

% of consumers who spent or planned to spend more, the same, or less by age group

Source: The NPD Group/China Consumer Sentiment Study
Fielded: May 4 to 7

As the case of livestreaming shows, digital interactions and special promotions are among the ways brands can stimulate demand, especially among younger consumers. Thinking long term, however, product innovation will remain critical. As consumers cut back spending, simply pumping millions of dollars into e-commerce platforms likely won’t be enough to fully drive demand. Now more than ever, it’s critical for a brand to stay fresh in consumers’ eyes. One way Western brands, in particular, can appeal to consumers in China is by forming partnerships with popular brands in the country. For instance, prior to the crisis, footwear brand Puma formed a co-branding partnership with Hello Kitty, a brand that’s relatively established among consumers in China. Innovative ideas like this can help brands develop the momentum needed effectively weather the post-crisis period.

Health Becomes a Greater Priority

COVID-19 has reminded people of the importance of staying healthy. Evidence suggests consumers in China are looking to change their routines as a result. Our CREST data shows that compared to last year, health was the biggest mover when it came to the reason consumers chose a particular out-of-home meal choice.

Healthy Meal Choices Became More Important to Consumers

Most important factor in out-of-home meal choices in Q1 ’20 Indexed to Year Ago

Source: NPD CREST China Q1 2020 vs. YAGO

The trend toward healthy eating also impacted the types of groceries consumed. McKinsey research finds “demand for dairy, vegetables, and eggs was 25 – 30% higher during the initial recovery phase than it was before the crisis.” While it’s intuitive that the food industry should make health a priority, firms selling durable goods also have an opportunity to appeal to consumers’ increased emphasis on health. Consider the toy industry in China. As hygiene became an especially critical lesson to instill in children during the crisis, some toy brands — to parents’ delight — shared the importance of cleaning and sanitizing. Lego, for instance, held online classes where children could learn how to play with building blocks, but additionally, educational messaging around the importance of sanitization and hygiene was also stressed. Combining play and education was a strong way toy brands appealed to parents. Our e-commerce tracking data shows online sales of pre-school learning toys increased a whopping eight-fold during the first two months of 2020 as schools closed in China.

Moving the Recovery Forward

With consumers reluctant to spend, it’s clear the road to recovery is not just a waiting game. Instead, businesses must proactively create the conditions for recovery in their industries. The post-COVID-19 consumer has undoubtedly changed. In order to meet their needs, it will be critical to create enhanced digital capabilities; one way to do this is by staying on top of digital and social shopping trends as the case of livestreaming shows. Beyond digital and other promotional strategies, product and content innovation will also be important (as the cases of Puma and Lego show) to keep product lines fresh and relevant, encouraging consumers to re-engage with the products they enjoy.

As different countries — or even different jurisdictions within the same country — reopen at varying rates, China offers early indicators as to how consumer needs will shift in the new normal. While the trends and examples discussed in this article were specific to China, brands and retailers around the globe should apply these insights within their own market’s context in order to plan for recovery as their economies reopen.

Contributors

Stanley Kee leads NPD’s APAC business. Based in Singapore and Shanghai, Stanley is a frequent speaker at events that explore China’s consumer and retail landscape.

Ajay Shah writes and conducts research for npd.com. He is based in New York.

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