Ways Brands & Retailers Should Face Unforeseen Shifts: Rethinking Strategies
The Chinese Government’s promotion of healthy consumption and the rise of e-commerce offer opportunities for innovation, but the normalization of the economy post-pandemic is complex. The Chinese consumer market is rapidly evolving, driven by information technology and public health awareness, with the sports industry experiencing a surge in demand.
Generative AI is transforming the Chinese consumer market, enabling businesses to differentiate themselves and regain customers by addressing operational issues and enhancing customer experience.
The report highlights trends affecting brands and retailers, emphasizing innovative strategies for long-term success, considering Chinese consumers’ low inflation concern and increased macroeconomic volatility.
Impact of Recent Economic Instability on China's Consumer Market
The Chinese consumer market faces challenges in 2024, with deteriorating morale, slowing retail sales growth, asset price volatility, and economic uncertainty. The savings rate remains high at 31.7% in 2023, slightly lower than the baseline of 33% in 2022. China’s inflationary pressures, resulting in a 0.8% decrease in Producer Pricing Indexes (PPIs) and a 0.2% increase in Consumer Price Indexes (CPIs), could impact price expectations and purchasing decisions. In June 2024, the food business grew 11%, while the automobile sector added 17%, with 37% more electric vehicle sales. E-commerce is strong, with an annual sales increase of 8.4% in 2023. However, China’s 1.4 billion customer base supports market stability.
Hong Kong’s retail industry experienced a 6.6% decline in Q1 2024, primarily due to rising northbound consumption and strong local currency, requiring swift adjustments and increased government policy support. Southeast Asia, including Vietnam, the Philippines, and Indonesia, is expected to experience significant economic growth in 2024, contributing to a 4.5% growth in the region’s economy. By 2030, the middle class is predicted to constitute two-thirds of the global consumer base, thereby increasing demand for luxury goods, cosmetics, and medical supplies in Southeast Asia.
China's Most Recent Policy Shift and its Anticipated Effects on Domestic Consumer Market
China’s New Quality Productive Forces (NQPF), introduced in September 2023, focuses on technological innovation, industrial transformation, production factors, and environmental sustainability, influencing the country’s evolving consumer market. The NQPF aims to boost productivity and expand digital and e-commerce in China, with online retail sales expected to increase by 8.4% in 2023 and over 14% in 2024.
The NQPF agenda prioritizes future industry planning, fostering emerging sectors, modernizing established ones, strengthening supply chain resilience, and optimizing industrial chains, particularly in the service industry. New consumption patterns are emerging due to the development of new industries and technologies, such as the rise of homegrown products and the popularity of city walks, which are likely further influenced by NQPF.
The NQPF promotes high-quality development by creatively distributing labor, capital, and technology, catering to the growing middle-class population’s demand for diverse goods and services. The NQPF is a crucial element in promoting sustainable and green development, enhancing economic growth, increasing disposable income, and consumer spending. The increasing demand for eco-friendly products and health and wellness services is driven by consumer values and government initiatives, with NQPF’s innovation expected to support this trend.
Growth based on Consumer Patterns
Chinese consumers are cautious about consumption, with modest growth in retail sales. The consumer confidence index fell, but they are more likely to increase purchases of necessities and non-discretionary items, indicating concern about the growing living expenses in China.
China’s high household savings rate is due to macro uncertainties, causing cautious spending and reconsidering buying habits. This raises concerns about retailers’ ability to control expenses and forecast demand shifts. Chinese consumers are becoming more frugal, seeking deals and discounts, and postponing purchases. E-commerce giants like Alibaba and JD.com are implementing new tactics to attract price-conscious customers.
Chinese retailers must adapt to economic changes by enhancing online presence, implementing dynamic pricing strategies, diversifying product offerings, and utilizing technology-driven efficiencies and local sourcing. Retailers are leveraging digital technologies to offer tailored products to specific client segments, enhancing customer experience through data analytics and consumer insights.
Outlook of China's Luxury Market
The global luxury market is expected to reach $464 billion by 2025 and $606 billion by 2030, with China set to dominate at $148 billion by 2030. Luxury brands in China, Hong Kong, and Macau are experiencing sales decline due to weakening RMB and economic uncertainties, while Japan’s appeal increases, despite LVMH’s sales decline.
Hong Kong’s luxury market is projected to stabilize at a 4.5% CAGR from 2023 to 2030, fueled by leather goods, jewellery, and watches, while China increases duty-free shopping. Young High-Net-Worth Individuals prioritize sustainability and product value over brand prominence in the luxury market, requiring businesses to adapt to meet their unique, individualized luxury experiences.
China’s wealthy consumers are shifting purchasing habits, with average consumers making larger luxury purchases online, with Chinese mainland consumers making up 45% of these purchases. Chinese customers are increasingly using online shopping platforms for convenience, product information, and affordability, leading to increased potential and challenges in the luxury e-commerce industry.
Chinese consumers prioritize savings and investments, leading to a rise in luxury goods purchases. Luxury firms should offer ultra-premium goods, focus on experiential retail, and leverage digital platforms for online luxury purchases.
Building a Compelling Brand Narrative both at Home and Abroad
Chinese brands must craft emotionally impactful narratives for younger generations, considering value for money, promotional offers, and innovation over brand loyalty, with 20% valuing trailblazer reputation and 30% valuing trendsetter reputation. Hong Kong consumers prioritize quality and reliability, while Chinese consumers are adopting social media and digital technology, relying on online evaluations and e-commerce, and appreciating innovative brands.
30% of Chinese consumers prefer domestic brands over the past year, indicating a significant home-field advantage due to perceived value and local purchasing patterns. Chinese companies should focus on innovation and market trends to retain and attract consumers, increase brand value, and make them more appealing.
Moreover, Chinese brands are increasingly entering foreign markets due to innovation, strategic alliances, and high-quality growth, successfully penetrating international markets by leveraging their technology, design, and cost-effectiveness, demonstrating the shift in Chinese business strategies.
Getting the most out of the Trust Reward
Businesses must comprehend regional consumer expectations to foster loyalty and trust, with China’s distinct social, cultural, and economic factors influencing consumer behavior and purchasing decisions. Chinese consumers place higher value on goods and services in various industries, with healthcare, airline, and technology being ranked as reliable.
Chinese companies’ trust in consumer goods and retail businesses is high, attributed to quality, innovation, worldwide recognition, and cultural resonance, despite lower trust in social media and entertainment. China’s retail industry faces challenges in gaining customer trust and converting it into recurring business, despite higher trust premiums than global average. Retailers should enhance trust enhancers.
Chinese consumers prioritize data protection, high-quality goods, and fair treatment of employees, despite reluctance to interact with international counterparts. China’s Personal Information Protection Law (PIPL) offers merchants data privacy opportunities. Chinese merchants must follow PIPL guidelines to maintain customer privacy and avoid legal repercussions, despite lower consumer demand for data protection, gaining customer trust and loyalty.
Taking Advantage of China's Increasing Interest in Sustainability
Chinese consumers are shifting their buying habits towards environmentally friendly products, indicating a growing understanding of sustainability. The Chinese tourism industry is experiencing a surge in ecotourism and wellness travel. Chinese mainland customers value brands adhering to industry and governmental sustainability standards more than global consumers, making cultural and socioeconomic factors crucial in brand communication.
Consumers in Mainland China value communication campaigns about trash management programs less than in Hong Kong and globally, highlighting disparities in their expectations regarding environmental, social, and governance (ESG) elements. Multinational corporations (MNCs) need unique sustainability communication plans for Chinese market, considering consumer expectations and awareness. Government-led campaigns offer opportunities for brands to highlight sustainability in products.
Chinese mainland workers support environmental impact reduction. Chinese consumers are promoting sustainable products and services, while Hong Kong consumers are less involved in climate initiatives, highlighting the need for increased sustainability education. China’s commitment to sustainability, aiming for carbon neutrality by 2060, necessitates retailers to adapt to legal regulations and stay competitive.
Using Channel Innovations to improve the Purchasing Experience
Channel innovation is crucial for brands to adapt to consumer demands in the evolving retail industry, enhancing customer satisfaction and brand loyalty across multiple platforms. China’s rapid digitization has influenced purchasing decisions, leading to increased online sales and requiring physical stores to adapt, with popular in-store experiences including digital tags and virtual reality (VR).
In-store businesses are utilizing augmented reality (AR) technologies to create immersive shopping experiences, combining digital and physical worlds, enhancing customer engagement and brand campaign engagement. Chinese consumers prefer online shopping for high-end items, suggesting that foreign brands can reduce purchasing friction by combining a strong online presence on China’s main e-commerce platforms with innovative in-store sales experiences.
The rise of artificial intelligence (AI) powered virtual try-ons, and predictive modeling can significantly reduce the likelihood of product returns in the retail industry, as these technologies are transforming both in-store and online shopping, thereby enhancing consumer satisfaction and loyalty.
Riding the Tide of the Chinese Healthcare Sector
Chinese consumers prioritize health, well-being, and convenience in food choices. The top three factors are general health, nutritional knowledge, and overall convenience. Chinese mainland consumers’ food preferences have shifted due to a healthy lifestyle and government programs.
China’s sports and fitness industry is expected to reach $55 billion by 2023, driven by increased gyms, fitness clubs, and health consciousness during the pandemic, particularly affecting Gen Z and Millennials. The Chinese government’s Healthy China 2030 Plan aims to boost health and wellness through sports participation, healthcare expansion, and public amenities.
Global consumers demand sustainable food production and improved diets, requiring food corporations to reduce environmental impact while boosting food supply. The health and wellness movement is gaining momentum as consumers adopt a diet rich in fruits, vegetables, plant-based foods, fish, and dietary supplements, indicating a fundamental shift in their nutritional and overall health perspectives.
Health-conscious consumers prioritize wholesome products over cost, making food manufacturers and retailers better positioned to meet this growing need by offering convenient, wholesome solutions that satisfy health-conscious customers.
Setting the Course for Intelligent Mobility and Generative AI
China’s smart device market is thriving due to AI advancements and government digitization efforts. AI’s diverse applications in smart devices expand product and service offerings, enabling companies to adapt to changing demands and boost productivity in retail. The growing trust in AI among mainland Chinese customers has significantly enhanced the opportunities for AI development in China, impacting businesses’ ability to market emerging products.
Chinese workers are using GenAI more frequently, reducing concerns about AI risks. Chinese consumers show low sensitivity to AI risks but are cautious about AI governance and data hallucination risks, highlighting the challenge for businesses in open markets. China’s growing technology adoption and government regulations offer a promising market for consumer brands to capitalize on the thriving autonomous vehicle and drone delivery businesses.
GenAI’s potential in consumer product operations like supply chain management, demand forecasting, customer support, and content marketing should be evaluated based on the retailer’s unique situation. Businesses must establish robust AI governance frameworks and ensure transparency to build trust in AI applications.
Enhancing the Value of Human Resources through Technology
Combining AI with human competencies is crucial for a robust workforce. Workers anticipate GenAI’s impact on careers, focusing on skill development, innovation, and work quality. They stress the need for retraining and upskilling to adapt to new technologies. AI integration enhances employee job satisfaction by automating repetitive tasks, allowing focus on interesting projects, and involving staff in decision-making, enhancing engagement and ownership in businesses.
Technological advancements like GenAI and robotics are transforming the work sector, fostering creativity, skill development, and quality work, but also raising concerns about biases and disinformation. Merchants can enhance customer service by integrating AI and human labor, enabling dynamic teams to handle repetitive tasks and analyze data, thereby improving service quality and satisfaction.
Retailers can create a dynamic workforce by promoting continuous learning and skill development, ensuring their teams are well-equipped to meet evolving customer demands. Retailers should focus on customer-centric AI design, creating user-friendly systems for seamless shopping experiences. Implementing ethical AI governance frameworks can enhance reputation and trust, addressing bias and misuse concerns.
Closing & Advice
China’s changing consumer landscape presents opportunities for innovative brands and retailers, requiring enhanced shopping experiences. Chinese retailers must adapt to economic changes by increasing internet visibility, introducing dynamic pricing, diversifying product offers, and cutting operating costs through local sourcing and technology-driven efficiency.
Luxury firms can leverage wealth transfers by offering ultra-premium products, leveraging digital platforms, and focusing on innovation to enhance brand appeal, foster loyalty, and establish Chinese brands as market leaders. Businesses should prioritize data privacy compliance to avoid legal repercussions and boost customer trust, while leveraging Chinese consumers’ increasing environmental awareness to promote sustainable products.
Retailers should adopt omnichannel strategies, especially in physical stores, to stay competitive and meet customer expectations, while food companies can capitalize on health-conscious consumers’ preference for convenience. China’s AI development and EV industry growth could boost AI-enabled goods and services. Retailers must integrate AI with human skills for success in AI-driven retail.
