Covid-19, E-commerce And New Retail In China
In a time of the “coronavirus economy”, China — the world’s largest e-commerce market (3 times the size of US e-commerce) is once again faced with accelerating growth.
Pocket Sun, Managing Partner of SoGal Ventures, spoke at an Asia House webinar on June 16 to discuss e-commerce trends in China post-Covid and what the future looks like as the economy recovers. Together with Pocket were Jeongmin Seong, Partner at McKinsey Global Institute, Andre Zhu, SVP of Strategy and Legal at Pinduoduo and Gang Lu, Founder of TechNode.
You can watch the full webinar recording here.
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Key E-commerce Trends in China Amidst Covid
“What Covid is doing is an acceleration or amplification of many existing trends.”
Jeongmin Seong pointed out three observations he had on China, highlighting that those were pre-existing trends that were already experienced pre-Covid.
1. The digitisation of the economy
Success stories on OTO (one-time-only), live streaming and social buying in China no longer come off as a surprise considering China’s long-standing leadership position in the consumer facing digital economy. E-commerce contributed to 25% of the total retail in China and mobile penetration was at a rocket high of 80%. All of these provided strong reason for the amount of innovation seen in China.
More importantly, Jeongmin brought up an interesting point on the digitisation of less digitised parts of the economy “because they have to”. Healthcare, telemedicine and online consultation services saw a rise as hospitals did not have the capacity to accommodate new patients. Taking virtual reality platforms in the real estate space for example, usage increased 35 times as property developers could directly engage with end consumers and not be limited to Covid restrictions.
2. Rising competitive intensity
Jeongmin touched upon the “superstar effect” as seen in large corporations. Citing the entertainment and sports industry as an example, he explained that a small share of celebrities would earn a much larger share of income.
In parallel to that are the top 10% of large corporations that make 70–80% of the country’s economic profit. This was even more prominent in China with a number as high as 90%.
Companies with strong tech background grew much faster and saw 200–300% growth during the Covid outbreak. He highlighted that strong customer engagement channels including retail accounts, OTO and e-commerce channels had been established by these companies way before the pandemic. According to a consumer survey conducted by McKinsey, more than 25% of consumers said that they had switched their primary source of purchasing during Covid while 50% were likely to stick to the new channel. This signalled the chances of more reshuffling in the competitive landscape as more companies become more tech savvy.
3. Importance of digital transformation
Only by transforming fundamental business processes across people and technology can digital transformation be managed well. China provides a good testbed for innovation with its well-developed digital ecosystem, data infrastructure and digital-savvy consumers. It serves as a helpful reference point and a playbook for the global companies.
China’s Leapfrog on E-commerce and New Retail
Pocket Sun of SoGal Ventures pointed out that the scale and universality of e-commerce are unique to China. China’s ability to leapfrog on e-commerce and retail was based off its success in: 1) skipping the use of desktops. Mobile devices in China generate 80% of the retail e-commerce sales, compared to 64% global average; 2) bypassing of credit cards. More than 80% of smartphone users in China use mobile payments compared to 27% in the US; 3) well-established logistics enabling cost-efficient and fast delivery across the country; and 4) world-class manufacturing and supply chain that are made to scale and respond fast.
On the concept of new retail, Pocket shared that “New retail is no retail or shared retail.”
Pocket explained, “No retail” stemmed from the increasing difficulties for offline retail to make money, especially on weekdays and because of Covid. Retail foot traffic in China did not recover completely post lockdown; malls were affected more than average. Offline retail is transitioning to serve as a brand engagement and positioning tool or a warehouse rather than a sales channel measured by revenue per square meter. The role of offline retail was shifting towards new concepts such as establishing brand vibes and lifestyles and moving beyond retail functions. For example, livestreaming could be created in store to effectively increase consumer engagement and become the next step for retailers to utilise their physical space and turn them into a digital mall.
“Shared retail” is a response to the increasing customer acquisition costs for consumer brands — 30% of revenue is typically feeding advertising and getting listed/featured on platforms such as Google, Amazon or Facebook. This is eating up profits and DTC brands have a hard time creating sustainable unit economics. Both online or offline, brands are starting to group with like-minded peers targeting similar demograhics to develop collaborative customer acquisition channels and reduce costs together. In the SoGal portfolio, quite a few companies have form alliances to share traffic with each other.
Jeongmin shared an interesting point that consumers no longer differentiate whether they are online or offline customers. The important issue was for businesses to integrate online and offline touch points in a customer journey. Jeongmin cited Amazon’s acquisition of Whole Foods, a healthy supermarket chain, all in the hopes of integrating the online and offline experience.
“If you don’t deliver this multifunctional experience, people might go somewhere else.”
Social Commerce in Asia — Pinduoduo Case Study
The change in consumer and e-commerce behaviour had also made way for the rise of social commerce platform Pinduoduo (NASDAQ: PDD), the largest interactive e-commerce platform in China and in the world. In 2019, PDD said it had 585.2 million active buyers — those that made at least one purchase on the platform during the year.
Andre Zhu, SVP of Strategy and Legal at Pinduoduo, highlighted the company’s shift away from the traditional searched-based e-commerce model — a solidarity and bi-lateral experience between one customer and one merchant. “Our goal is to bring more fun and interaction from the [offline] shopping mall experience to this digital marketplace.” The “Disney + Costco” business model that Andre elaborated on represents Pinduoduo’s successful attempt at combining world class entertainment with great savings at the same time.
Human interaction and the sense of connection and belonging online is a universal need. The pandemic has only pushed for people to go online to find this community.
When a user selects an item on Pinduoduo, they can choose to participate in group buying. The more people that join in, the lower the price of the item goes. Similar to crowdfunding campaigns on Kickstarter, the purchase will be refunded if the minimum number of buyers is not reached. Andre explained that with the social concept of group purchases and sharing discounts, shopping was going to be the new normal for shoppers to find and establish a community.
Experimenting Offline-to-Online
Livestreaming, virtual shopping tours and buying souvenirs through online museum tours are experiments that Pinduoduo has been implementing to better integrate offline retail into online. The idea is to bring businesses traditionally selling stuff offline to a digital marketplace.
There’s Still Room To Grow
Interestingly, many people were led to believe that e-commerce in China had reached its maximum potential when Alibaba and JD had established themselves as key market players a few years ago. However, it was proven otherwise with the rise of Pinduoduo (founded in 2015, went public in 2018). Panliest Gang Lu, founder of a tech media company TechNode, continues to believe that there is still potential to disrupt the gigantic space.
“China’s success in e-commerce is supported by a very mature system which consists of 5G networks, QR code payment systems, smart logistics, supply chain and various other infrastructure at their disposal. This as a whole makes it hard for such a business model to be simply copied and replicated to other parts of the world.”
Adoption by the Rest of Asia and Western Economies
The strong push towards digitisation is relevant to not only China but the rest of the world. Similar leapfrogging has appeared in the rest of Asia where innovation and change have been driven by customer pain points. The flow of ideas, capital and business models across the region has led to the overall rise of entrepreneurship. Jeongmin cautioned that while similar customer pain points and characteristics exist across the world, it remains a question whether or not other countries can expect the speed of development in China.
China’s infrastructure and manufacturing ecosystem cannot be simply built overnight.
Pocket Sun believed that e-commerce development in Southeast Asia is nowhere near China’s level. The pandemic had pushed many previously non-digital businesses to go online with many still reluctantly adjusting to the new reality. On the contrary, companies such as Grab, a ride-sharing transport service, had successfully proven to adapt to changes with their early preparation on expanding way beyond transportation into payment, e-commerce, delivery, groceries, and more. Their ability to shift from mainly a ride share service to a major food delivery and digital payment service is instrumental in establishing themselves as a clear market leader.
Livetreaming & Influencers Are Reshaping Brands
Pocket Sun brought up the other aspect of social commerce — influencers. Influencers, or KOLs (Key Opinion Leaders) have become a staple of consumer brands. They are an important link between brands and consumers, and many have set up their own brands. Coupled adaptable supply chain capabilities, influencers and brands are embracing the Consumer-to-Manufacturing (C2M) concept. With livestreaming and social media, consumer product feedback is collected both pre- and post-launch to reiterate the product, predict demand, and control manufacturing quantities. Big brands also look to influencers to receive timely real market reaction to decide what to do next.
The ability to directly incorporate feedback from customers and adjust manufacturing plans is both profitable and good for the environment (reduce waste inventory).
Long Term Brand Strategy is Key
Livestreaming has proven to be insanely effective as a sales strategy. In China, livetream e-commerce is a $60B USD market. The top Chinese livestreamer Viya has attracted 37 Million audiences (more than the Game of Thrones finale) and was able to make 3 Billion (425 Million USD) in sales on Singles Day (11/11, a shopping festival started in China).
With livestreaming, even farmers in remote villages are able to gain a sizable audience online and sell their farm produce far and wide, instead of to one traditional distributor. There’s also no shortage of traditional brands’ success stories — the prolific female CEO of GREE Electric Appliances sold 918 Million USD worth of products on June 1.
Pocket Sun then emphasized that brands need to carefully determine how much they rely on influencers for marketing and livestreaming for sales. After a successful influencer or livestreaming campaign, brands have to be able to win customers over for repeat purchase based on the quality, messaging and experience. It’s easy to get addicted to the one-time sales spikes but there’s no short cut to building a long-lasting brand.
What the Future Holds
The panel discussion very aptly summed up key points relevant to staying competitive and relevant amidst changing economic conditions.
Firstly, becoming part of the digital economy is the way to survive and thrive. Small and medium-sized enterprises (SMEs) need to understand the importance of digitization. Even mom & pop shops could take advantage of readily available digital infrastructure or combine forces with other small businesses to engage a much larger customer base. Furthermore, there is no doubt that online and offline retail will be further integrated. Businesses will need to examine current processes and strategies to create space for digital experiments. Finally, there is still much more room for disruption in the e-commerce and new retail space and we will see continuous intertwining evolution of online and offline. China has been leading the way, and the rest of the world can turn learnings on China into their own competitive advantage.
SoGal is the largest global platform for womxn and minority entrepreneurs and investors. SoGal Ventures = a female millennial-led early stage VC fund investing in next-gen companies. SoGal Foundation =a nonprofit with 55 city chapters on 5 continents & programs for startup success, mental health, and angel investing.
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