by Ker Zheng
This article originally appeared on SmartBrief
This year China is expected to surpass the United States as the world’s largest retail market, with eMarketer expecting annual retail sales to jump 7.5% to $5.6 trillion.
But the world’s largest retail market is also the most competitive one. Brands from all around the world – Japan, Australia, Europe, the US, and, of course, China itself – are looking for a foothold in the Middle Kingdom.
Because of the intense competition and China’s notoriously fickle consumers, brands and retailers have had to step up their efforts to engage and retain customers.
Here are a few trends that show how China retail is ahead – and how American retailers and brands can proactively adapt to emerging global retail trends to stay competitive and relevant.
QR codes are making transactions happen faster
QR codes are everywhere in China. In every retail shop, convenience store and restaurant, you can use QR codes to pay with pervasive mobile payment apps WeChat Pay or Alipay. At the register, all you need to do is scan the QR code with your WeChat Pay or Alipay app, enter a six-digit pin code, and the money is withdrawn from your bank account. No need to swipe your credit card or sign a receipt.
How could this be?
For one, China is a mobile-first internet market that developed later than its global peers; people went straight to purchasing cheap smartphones and skipped desktop computers, which many couldn’t afford.
China’s financial services system also developed later. The Chinese government has been slow to open the China market to global card networks such as Visa and MasterCard, and Chinese people are averse to personal debt, which explains why credit cards never really took off in China.
The security of QR code technology made it possible for people to pay random strangers and small businesses. QR codes are much cheaper for small businesses than the near-field communication (NFC) credit card terminals that US merchants use. It’s because of these small merchants that WeChat Pay and Alipay adopted QR codes.
Social commerce is lowering customer acquisition costs
In China, user acquisition costs are sky high. It takes 200-300 RMB ($29-$44) to acquire a new customer on e-commerce platforms such as Alibaba’s Tmall and JD.com, and there is no equivalent to Facebook in terms of low-cost advertising tools for small brands.
As a result, brands in China have turned to social commerce to help them acquire new customers. Instead of using ads to reach and engage new users, they leverage their current base of customers to market their products for them by creating alluring content and incentives to share with friends or family.
With social commerce, new customers discover products through their existing community, which enables brands to build trust with and educate new customers faster.
One example is group-buying social commerce. Chinese marketplace platform Pinduoduo is a marketplace of third-party sellers, similar to Alibaba’s Taobao platform. Pinduoduo provided steep discounts for current customers to pull in friends and family on group-buying deals. The reasoning was that the discounts were still lower than the marketing costs needed to acquire new customers through ads.
This Groupon-like strategy wouldn’t have been successful if it weren’t for popular social media platform WeChat, as its billion-plus user base and Pinduoduo group-buying mini-program made it easy for existing users to share promotions with new users across their social networks. Through this tactic, Pinduoduo was able to scale to over 300 million registered users within just three years, enabling it to go public in New York just last year.
Another example is content-driven social commerce. China’s Xiaohongshu, or Little Red Book, platform is the most prominent example, as a standalone app with over 100 million registered users. Its photo-centric layout is similar to Pinterest's platform, with products and locations tagged and commentary written below.
The main difference is that it is mobile only and centers around female users' everyday experiences. These could be cafes they've visited, exotic travel locations, or apparel and beauty items they've purchased online.
In fact, Little Red Book began as a travel diary platform and gradually transitioned towards e-commerce for monetization - its pictures can be tagged with items that can be bought within the app. Little Red Book also has a separate shopping tab that aggregates brand accounts and enables users to browse the online Xiaohongshu store like they would on Tmall or JD.com.
But what's important to note is that its users go online to discover and browse content first. The content posted by the community could be posted by fellow users or influencers, and its neutral reviews help to engage and educate customers until they're ready to make a purchase.
Influencers are shortening the customer journey
In China, influencers, or key opinion leaders (KOLs), play an important role by acting as a go-to resource for customers looking to learn more about a brand or how a certain product works. Popular platforms include Twitter-like Weibo, short-video platform Douyin, Little Red Book, and, of course, WeChat.
Why is influencer marketing so important in China? Influencers shorten the customer buying journey, which is much longer in China; McKinsey research shows that Chinese consumers require eight touchpoints with a brand before they decide to buy (vs. four for Western shoppers) due to:
- Greater mistrust of e-commerce goods in China. The prevalence of fake or shoddy goods and the frequent occurrence of product quality scandals in the media have made Chinese consumers more wary and discerning.
- Overwhelming choice, as there are simply too many brands to choose from. Brands from all over the world are looking for a foothold in China. But it's hard for a customer to make sense of which brand is better through a marketplace platform like Tmall or JD.com, so people look to places where they can get independent, fair reviews of products. This is where influencers come in.
Lastly, content + commerce is more integrated in China, thanks to China’s mobile-first internet economy. Mobile payment apps such as WeChat Pay and Alipay are integrated, so customers can pay for items inside their respective apps without having to take out a credit card.
Now China’s social media and content platforms are experimenting with linking users to KOLs’ own e-commerce stores. KOLs like Mr. Bags are selling luxury handbags through their own WeChat stores. E-commerce platforms Mogujie and Taobao have QVC-like livestreaming shows where viewers can make in-app purchases on the spot.
Even short video platforms Douyin and Kuaishou are rolling out e-commerce features, making it easier for KOLs to hawk goods through their videos. Such features make it easier and faster for customers to go from browsing content to making purchases.
Key tips for US retail companies to sell in China
These innovative market developments are a byproduct of China's ultra-competitive retail environment. Retail is a commodity industry where barriers to entry are low and it's very difficult to differentiate from competitors. In such a competitive environment, retailers and brands have to do more to engage and retain customers. Here's some tips for US retailers and brands:
1. Make the transaction process as seamless as possible. If a customer wants to make a purchase, he or she should be able to do so within 2-3 steps. In China, people can sign into most platforms with their WeChat account, which is automatically equipped with WeChat Pay. For the US, repeat customers should be able to log in automatically with their payment details already filled out, and the transaction process should be short.
2. Look for ways to involve consumers’ family and friends. In China, social commerce is hot because it gives smaller brands a way to acquire new customers without spending on ads. US retailers and brands should think of creative ways to leverage their current customer base as marketing tools, and use them to pull in their friends and family.
3. Look for new ways to engage the customer and make the customer journey fun and interactive. In China, brands are using influencers to livestream products, shoot short video ads, and even host offline events such as pop-up stores. The future is trending towards video, as it creates a sense of urgency and raises conversion rates significantly.
Franklin Chu, managing director of Azoya USA, is an expert and speaker on China cross-border e-commerce. Franklin also serves as president of Sage Capital Group Inc. a private equity and investment management firm and is a graduate of Yale University and Harvard Business School.