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Jun
2015

The thought leadership essay The future of luxury retail in China, consumer habits and disruptive technologies

New challenges bring new thinking. China is a country of constant change, presenting those who are based here with both the challenge of coping with them, the opportunity to think differently about how to do this. We start a new series in this month’s Luxury Insights China called The Thought Leadership Essay, where we ask experienced practitioners working in China to give us their vision of how a particular sub-sector or attribute of the market will develop over the coming years. This month, we have asked our own publisher Ken Grant his vision of the luxury retail sector in China, and the interconnection between physical stores and electronic/mobile developments.

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The rate of change of everything related to the Chinese economy has by any standards been phenomenal, and for those of us based here we see these changes each and every day particularly in the very visible retail sector. The Chinese have naturally taken these rapid changes in their stride, adapted to them and integrated them into their daily lives, as they have digital and mobile technologies which for many are the centre of their world. One only needs to acknowledge the expansion of mobile coverage, or watch people constantly using their phones and tablets on the street, in coffee shops and bars, or in shopping malls, to realise that these are very well connected and tech savvy people.

Over the past 12 months, I have also watched and mused over the continued openings of luxury shopping malls. Like a huge oil tanker at sea, slowing down or changing direction for a shopping mall once the momentum has been established must be very difficult, and there must be a significant element of faith amongst the developers/owners that the space can be leased even under the slowing market conditions. In their 2013 retailer survey, property agents Savills reported that of all those they interviewed, 71% said their expansion plans for the year in China were ‘aggressive’, and 95% were concentrating on their current core locations rather than expanding more broadly across the country.

But even before these new malls had been opened there was already a great deal of existing retail space available, certainly in the major Chinese cities. There to satisfy most of the well established brands, and those in the process of entering the market. The presumption that there would be a continual in-flow of retailers wanting to take the space and, as importantly, that the growth of the luxury sector in China would continue at its then meteoric rise was surely short sighted by many developers? It wouldn’t have been that hard to foresee a cooling of the luxury fervour, because it realistically could not have continued at its previous rate. Having said this, the greatest challenge is for those malls not in the main shopping areas of major cities, but in locations that are more remote or those in lower tiered smaller cities. As the Savills data indicates, only 15% of retailers questioned in their survey were currently considering expansion into emerging locations. So do these become ghost malls, void of tenants and consumers?

The past year has also seen many luxury brands going through a period of adjustment; a time when they aim to improve the ROI they have already made in their retail networks, to leverage existing space and systems and to retain existing customers and as importantly, win new ones. Their positions remain under threat from new entrants, well-established competitors and above all, from digital technologies and rapidly changing consumer knowledge and attitudes. Brands must now be more flexible, reactive and creative in the ways they engage the consumer, and for some this is not an easy ask. The retail space in China is changing fast, from top to bottom, from physical to digital.

The growth of e-commerce, mobile technologies, and their affect on traditional physical retailing.

In many previous issues of Luxury Insights China we have reported and commented on the rapidly growing e-commerce sector in China, and that over the past year consumers have become more comfortable buying online, and their trust in certain e-tail sites has improved, particularly for the younger consumers; buying via the Internet and in particular the mobile phone is now the norm. The regular Chinese pastime of ‘showrooming’ has been embellished by m-commerce, and it would not be uncommon to see consumers browsing product in store and not buying. But to leave the physical space of the store only to access the electronic space on their phones in search of the best deal on something they have just seen.

So does this mean that all the efforts of luxury brands over the past 18 months to make their stores more experiential is wasted, and that consumers may continue to use them only as a showroom in which to see, touch and feel products rather than a place to actually part with their money? My view is ‘very probably’, especially as new technologies are commercialised that make the online shopping experience more enjoyable, a fact that will attract a greater number of younger shoppers over the coming years. Let’s not also ignore the current attitude amongst those Chinese who have an opportunity to travel overseas; they visit luxury stores in China to determine the product they want and then buy it in an international location where the price is lower.

This research and purchase model is already well established from the white-collar consumers to the HNWI’s, and its here to stay.

According to the Savills report, very few luxury brands plan store openings in 2013 and activity levels are expected to remain low through 2014, or until the market picks up. Their findings also support our previous predictions of a growth in the affordable luxury sector with new brands in this category aiming to enter China over the coming years, which will also includes boutique and designer brands.

But the bigger question still remains unanswered as to ‘what will the luxury retail environment will look like over the coming few years, and by the time the market picks up, will disruptive technologies have changed the retail experience for ever?’ Although luxury brands have been slow to adopt digital technologies, will they in China at least, be forced heavily in the digital direction by a more tech savvy group of consumers and a need to reach out across the huge expanses of the country to their rapidly growing consumer demographic?

According to the KPMG Technology Innovation survey 2013, China is likely to overtake Silicon Valley in terms of leadership of technological developments because ‘China’s mobile communications market – the largest in the world – combined with its quick shift to the mobile platform, and its tech-savvy urban consumers are all contributors’

The expansion opportunities and disruptive technologies

Web and mobile based services are not necessarily only a threat to luxury brands, as they offer an opportunity if correctly used, to expand brand reach and to enhance the customer experience that can be limited in the physical retail environment. The cost for any brand to establish and operate physical stores in tier 3, 4 and even 5 cities is likely to be prohibitive to many, even if the consumer demographics indicate a need for them. Yet the use of e-commerce via the Internet or mobile phone presents a cost effective method to reach consumers in all these locations.

Even without a physical store in a city, shopping online has the potential to provide the local consumer with original branded product, potentially a greater selection of items than they might find in a physical store if they had one, and the convenience of shopping from home or wherever they might be. Using mobile technology, the convenience and product choice available to a particular consumer could be tailored using features of the systems such as location services enabling purchase options to be tailored by customer or known preferences in that geography i.e. clothing choices in December in Tianjin will differ from those in Shenzhen at the same time of year.

E-commerce clearly offers a faster and more cost effective route to market for those brands new to China. Of course they still need to invest in brand positioning and communications to establish their name, but an integrated programme linking an e-commerce platform and a brand specific phone app would make the brand and its products available to the entire country, and provide a means to develop a specific customer following and the all important personal recommendation that comes from social media, especially among the younger and developing luxury consumer group. It is also important to acknowledge that this particular group of consumers are more open to new brands, ideas and ways of buying, so for those late to market disruptive technologies are a clear opportunity to make up for lost ground.

“E-retail can be seen as either a threat or as an opportunity. As with all new technologies, e-retail will most likely prove to be very disruptive. However, those companies, retailers and landlords which embrace these new tools
for reaching consumers will outperform those who shun them. E-retail will not replace bricks and mortar business, but it will change the way that physical stores are perceived and used.”

James Macdonald, Savills Head of Research for China
Savills 2013 Retailer Survey

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A vision of China’s future retail experience: zero stock or zero malls?

Under current retail market conditions in China, and in particular those related to luxury products, we have seen brands reducing or cancelling their expansion plans and focusing on enhancing the overall experience of their existing stores. Consumers are still showrooming, but now they are using their mobile devices to investigate products they have seen in a store in order to find them cheaper elsewhere. These consumers have become more knowledgable about the brands and the products, and more trusting of favoured certain e-commerce sites. Those who travel still buy the products overseas that they have seen in China if they have the chance, because they can save money and potentially buy something not available here, and/or that may in their eyes be more authentic than that sold by the same brand in China. Disruptive technologies are entering all our lives and changing the way we do things, and China in particular is at the forefront of global developments in new mobile technologies.

So what does this all mean for the future of retail in the country?

At first sight, all these changes and pressures may be seen as a huge threat to luxury retail, and as previously mentioned, luxury brands are traditionally not known as early adopters of new technologies. Unfortunately and particularly in China, the option to opt-out does not exist and the huge consumer base means that brands must step up and turn these challenges into an opportunity. The retail landscape in China will undoubtedly continue to change and adapt, so what might we expect to see in the retailing environment over coming few years?
Luxury brands will not be able to eliminate the showrooming habit in China because it’s an addiction of consumers of all classes including the wealthy. But they do have the chance to benefit from it themselves, and to channel showrooming customers in their own direction and not away to an alternative product source. The use of new and innovative technology will assist luxury brands to engage with their customers, rather than being something to shy away from. The core brand values do not need to change as a result of disruptive technology if used well, and it will smooth the relationship between the brand and its consumers.

In future the store will principally become purely a showroom in which consumers see, touch and try products because they want that physical shopping experience, but they also want to buy at the best price and get the best value. These consumers will be assisted by store staff to purchase via the branded online store within the physical confines of their own retail space, and offered the branded phone app from which they can both place orders, be sent special and tailored offers, or news of events and new product arrivals.

For the brand, the store does not need to hold stock in high volume as customer orders can be sent from a distribution centre remote to the store. Store staff take on a more advisory role and consumers don’t feel they are being sold to, the shopping experience becomes richer for the consumer and the brand is able to gather more personal consumer data as a result; the positive attributes of showrooming now benefits both parties. Mirrors will be fitted with recognition functionality that can read data from the bar code on any item a customer is trying and that can then present to them a selection of other companion items that work with it, or other pieces of a similar colour or style. This passive advisory approach fits with the Chinese culture, where the customer will not admit they don’t know what they want, but would actually like advice without asking for it.

In future the shopping experience will differentiate brands from one another, particularly in the luxury sector. Using technology to improve the overall store experience and enhance what is currently a weak service standard is an opportunity to be developed. Prompts to staff in terms of other product suggestions and alternatives, together with customer size and purchase preferences can all be stored and monitored via a mobile app, driving sales and customer engagement. Walk into the store and your phone will tell you what is new based on your preferences, and where to find them. Chinese luxury consumers will easily adapt to the use of new technology, particularly from those brands they know and trust, and the brand will gather consumer data via the mobile app in order to deliver better service to the customer in the future.

sddddssdThe virtual mall and shopping from home

For commercial property developers and mall operators, the changing face of retail in China presents them with a dilemma; in that many luxury brands have already made it clear that they will engage in little or no further expansion in China, so their reliance on the high profile anchors for their ground floor space is now in question. They also must recognise that the consumer habits are and will continue to change rapidly, and that unless the shopping experience is enjoyable, whether purchases are made or not, they will not visit a mall. The offer of F&B is always a carrot as far as the Chinese consumer is concerned, but spend on food, has no direct relationship to spend on product from retail space in the same location.

They are also now under threat from e-commerce sites reducing the overall spending in the hard retail environment, and cannot afford to become purely a showrooming destination rather than a purchasing one. So shouldn’t they recognise that if their mall was to become a showroom, they to are being presented with an opportunity to host their own e-commerce site from which to sell the products of the brands under their roof and in fact any others? Most malls already have their own website, so adding an e-commerce function would not be a major technical or marketing challenge. For the mall operator, they achieve economies of scale by representing a group of brands, and creating a platform with a locally recognised and established name, that could then be made available to other brands that do not want or cannot afford a physical space in that particular location in China.

Technology also affords a further option that offers potential in the next few years to the mall operator or the luxury brand; the virtual mall or retail store. A space that can be created to look and feel as though the consumer is in an actual mall, but in the electronic rather than physical format. Technologies exist in their early form to scan the interior of stores and replicate them electronically online or on a mobile platform, thus an entire mall, shopping street or individual store could be recreated to extend the current e-commerce experience and make it more representative of a physical one. Consumers could sit at home with friends and enter a mall, visit stores and make purchases without the hassle of traffic jams, delays on public transport, or aching feet.

I expect China to become a leader in new retail experiences that revolve around mobile and disruptive technologies. Consumers are not fased by using the latest technology, and in fact expect changes to happen quickly. They spend significant amounts of time on their phones and tablets which are regarded as facilitators in their lives, and retailers and mall operators will adapt to their expectations and practices or they will die. From early 2000 was the decade of physical luxury retail in China, and we are now at the cusp of a change to mobile luxury retail as the principal means of interface between the brand and their consumers. The physical space will not go away because it reinforces a brands credentials, but like a theatre, its there as the supporting space in which the principal players, the product and the technology work together.

 


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