China’s innovative retail trends

With its signature yellow, red and brown coffee cups and clever social media marketing, Saturnbird has captured the imagination of young consumers in China, who have disposable income and an eye for quality local products.

The company opened for business only six years ago in Changsha, the capital of Hunan province, and has seen strong growth rates in the “specialty instant coffee” segment popular with the young, competing successfully with much larger foreign brands.

Its emergence is emblematic of wider trends in China’s retail sector that have taken hold since the country started to recover from the worst of the Covid-19 pandemic this year. The first is the rise of younger consumers, known as Gen Z, who are aged up to 25—like many of Saturnbird’s customers.

The second is the ongoing convergence of digital and physical channels, manifested in various ways. These include Saturnbird’s physical return points, which allow its customers an offline experience for what is essentially an online brand. This online-to-offline trend is also reflected in community group buying, where retail platform Meituan and other e-commerce companies are active, involving the online purchase and physical collection of groceries and other so-called “high frequency” consumer goods. This convergence was accelerated by Covid-19 as people saw the convenience of ordering online for a group, with individuals or small numbers of people using pre-selected pick-up points to collect items in person on behalf of fellow members.

These trends have built on a development that UBS observed early in the pandemic, which the bank calls “new retail”—a hybrid of e-commerce and physical shopping that has been a feature of Chinese retail for about the past four years—examined in an earlier UBS series.

“Last year was an inflection point for retail in China. It was transformative in terms of the migration to digital and we now see a number of implications that are likely to have lasting impact—chief among them are the behaviors of Gen Z and community group buying,” says Natalie Cade, Head of UBS China 360.

For companies engaged in new retail, community group buying (CGB) is a logical next step in the development of the business model, because the consumer goods associated with it—especially perishable goods—have been the least digitalized so far in terms of purchase and delivery.

Now the opportunity is to digitalize the whole shopping experience with these items as well, particularly in smaller cities where shoppers will already be used to the idea of making short trips to wet markets to buy food and other items.

For items such as fresh produce, grains and oil, community group buying overtook convenience stores during the pandemic, according to a survey conducted in the first quarter of 2021 of 1,000 consumers by UBS Evidence Lab, an alternative data provider. While the pace of expansion of community group buying has slowed in recent months amid regulatory scrutiny—in the 2Q survey, a net 43% of respondents said they would increase their usage of CGB in future compared to 52% in the March survey—the channel looks set to continue to expand in a more rational fashion.

Large e-commerce and retail groups such as Alibaba, Meituan and Pinduoduo are well-placed to take advantage of this trend, because they already have much of the logistics and warehousing infrastructure required.

They are busy investing in expanding their supply-chain relationships with farmers and negotiating with fast-moving consumer goods companies to build out their offerings, further cementing their dominant positions. “This whole value chain is being built out as we speak,” says Jerry Liu, China Internet Equity Analyst at UBS. He points out that some of Beijing’s key social policy objectives are also being met as farmers are empowered to sell directly to such platforms, and jobs are created.

While community group buying is certainly growing, Gen Z consumers—17 percent of the population—have become the backbone of consumption in China. According to an estimate by consumer research company Kantar Worldpanel during a recent “virtual tour” conducted by UBS, such consumers account for about 40 percent of the total market. This is supportive of Beijing’s policy objective to shift the driver of its economy more toward consumption, and away from investment.

While Gen Z may not necessarily be specifically motivated to contribute to this, its members are certainly embracing Chinese brands and feel a sense of national pride in doing so—enthusiastically buying products that match a preference for guo chao, or Chinese chic.

“We are also seeing that younger people tend to be more optimistic and consumption-oriented as opposed to saving for a rainy day,” says Thomas Fang, Head of China Global Markets, UBS Investment Bank.

None of this means that international brands are at a disadvantage. Opportunities are likely to be found increasingly in shopping malls, where UBS sees significant expansion in capacity. The number of China's shopping malls per capita is only one-tenth of the U.S. figure, one-sixth of Australia's and one-third of the levels in Singapore and Japan. The bank believes expansion will be propelled partly as a result of the under-penetration of luxury brands in tier two cities, and also by the development of more malls designed to be reached by urban transit systems, rather than cars, for environmental reasons.

Moreover, in UBS’s recent virtual tour, 12 experts in consumer brand management, and private companies selling beauty products, specialty coffee and food & beverage, it was the quality and design of Chinese brands, such as Li Ning and Anta in sportswear, that mattered.

“Domestic versus international is often perceived as a binary question, but it’s more nuanced and the competitive landscape varies across sectors,” says Ms. Cade. “International brands still have large opportunities for growth.”

Views correct as at 3 September 2021.