Asia Pacific (APAC) markets have been looking beyond the pandemic to focus on post-Covid-19 growth. Although geographically distant, the APAC region is not immune to soaring commodity prices and supply chain disruptions driven mostly by the war in Ukraine. Rising inflation and rising prices have also impacted consumer behaviour in Asia. In fact, as many as two in three consumers are more cautious when spending and have optimised value for money in their purchasing decisions, while retail companies tend to turn towards “premiumization” to justify increased prices where goods from food to fashion see creation of “premium” lines with seemingly improved quality.
Recent lockdowns in China have brought manufacturing hubs and the world’s largest container port to a standstill, creating further international supply chain disruptions and intensified global inflation. As a result, the growth forecasts for Asia are revised down from 5.2 percent to 4.6 percent for 2022, and to 5.2 percent for 2023. But Asia still represents the world’s largest e-commerce business-to-consumer market, with the retail industry being the third largest contributor to its GDP. This is largely driven by the region’s largest market, China, with the retail sector being one of its biggest GDP components.
The country has placed focus on expanding its domestic market and reducing dependence on foreign markets whilst rapidly evolving its digital ecosystem. Its consumer market is projected to reach 1.2 billion users by 2025, boasting technologically-savvy consumers and continuing to be the fastest growing e-commerce market. China’s online retail sales amounted to CNY 3.8 trillion (~USD 561 billion) in the first four months of 2022, accounting for 28 percent of total retail sales. Promisingly, according to the latest EY Future Consumer Index (FCI), Chinese consumers reported an optimistic economic outlook compared with developed markets, with over 60 percent of them expecting improvements in quality of life in the next three years as compared to only 12 percent assuming a deterioration. For Hong Kong, 13 percent of retail transactions originate online, and further growth of 13 percent is expected in 2022.
These data trends suggest that technology will continue to be the main driver of change in the retail industry. Companies that can navigate technological trends and lead via innovation will be the winners of tomorrow’s retail market. Industry leaders must hence adopt targeted business strategies and utilise data to predict consumer behaviour in anticipation of trends to sustain the speed of the fast-developing retail market and to unlock the full potential of their brands.
How is this global context influencing consumer trends in APAC in the second half of 2022?
EY FCI confirmed that consumers are increasingly aware of the psychological impacts of disruptive events and are more resilient to existing crises, but equally more cautious about potential new ones. This will drive consumption habits that prioritize value without compromising on quality, experience, and purpose. The digitalisation of customer experiences will be a natural answer to these expectations. In APAC, digital channels and 5G adoption have become increasingly widespread, primarily driven by millennials and generation Z (Gen Z). Spending 60 percent of their waking time on devices, these digitally-savvy, mobile-first-natives will be a driving consumer force, often willing to experiment new digital solutions. Importantly, they are expected to form 50 percent of Asia’s population by 2025, a larger percentage than in any other region.
Early adopters of Metaverse are targeting these young, tech-savvy consumers who already use digital channels to shop and interact. The Metaverse quickly became one of the most intriguing topics in recent years with APAC holding nearly a third of market share, and some estimates projecting a USD 800 billion market cap by 2024. The Metaverse in China alone is predicted to reach around 37 millon users by 2025. Whilst still a small proportion of the country’s population (1.4 billion), the market size potential is immense. Interesting examples of Metaverse adoption in China include a luxury fashion brand launching its first-ever Metaverse fashion show in April this year and an online retailer launching a Metaverse shopping venue for an annual e-commerce festival. Currently, brands are still experimenting with the Metaverse by using it as a marketing channel or digital revenue stream. The omni-channel strategy is no longer going to be sufficient and retail companies must move towards adoption of “meta-channel”, where physical and digital channels are seamlessly integrated to deliver an experience that brings additional value to both consumers and companies. This involves creating a universe where users can move seamlessly through digital and physical, and express their individuality via clothing, accessories, hairstyle etc. through their avatars. Some luxury brands have already proven that products sold in Metaverse are valued by customers, with prices of certain non-fungible tokens in the Metaverse skyrocketing. Metaverse is becoming an increasingly promising alternative for brands to generate sales, respond to consumer demand, and maintain their edge.
Another trend that has been developing rapidly in APAC is the use of virtual influencers, i.e., digital celebrities that first originated in Japan and are quickly becoming a hit in Asia. In China, this industry has more than tripled in size in just a year and is expected to further grow to CNY 333.47 billion (~USD 52.4 billion) by 2023. Technological improvements, the use of 5G networks, AR and VR are creating a fertile ground for new marketing tools. There are already numerous examples of virtual influencers in Asia; from China’s human look-alike virtual idol Ayayi who has promoted several major brands to Hong Kong’s Hazel, a major bank’s new virtual spokesperson for its digital banking brand, all attracting customers willing to pay a premium for products sold by their favourite idols.
An interesting application of virtual influencers in retail is in the livestreaming industry. Live commerce has become increasingly popular in Asia during the pandemic which pushed retailers to look for alternatives to engage customers and offer interactive shopping experiences. This new platform allows celebrities and influencers to showcase product features during live streaming, while customers can ask questions or share their comments about products “on air”. The experience is gamified as prices fluctuate and orders are placed in real time. Combined with the hype of a virtual influencer, the shopping experience becomes exponentially more exciting. In APAC, livestreaming is one of the fastest-evolving e-commerce business models with the highest growth potential, driven by its popularity in China during lockdowns, where it is expected to exceed CNY 2.8 trillion (~USD 438 billion) by the end of this year.
While mobile or contactless payments have been widespread in APAC before the pandemic, demand for scan-and-go options in physical stores have sky-rocketed. The queue-less experience not only saves customers time, but also reduces risk of infections by eliminating the need to have close contact with staff and other shoppers. Chinese retailers have utilised this technology since 2018, with multipurpose apps being used in numerous stores. Hong Kong on the other hand, is yet to see a wide-spread adoption of this customer-centric solution in physical outlets. As the Covid-19 reality is still present in Hong Kong, scan-and-go technology in physical stores could be a potential innovation to explore.
Another technology seeing a surge in adoption in recent years are super apps, used as a single entry point that fulfills every purchasing need, as well as other functions from coupon collection, payment to chat groups. In Korea and China, retail companies have recognized the importance of these super apps to consumers and are forging partnerships with e-commerce giants to reach shoppers at the early stages of their purchasing decisions.
Personalised customer experience
While artificial intelligence (AI) in retail is becoming increasingly important, leveraging it to perform improved user segmentation, advertisement optimisation and sales forecasting is particularly valuable in APAC due to its wide range of languages, cultures, and markets. Data obtained from AI-based applications provide companies with customer insights allowing improved personalisation and customisation of customer experience, enabling companies to save time and money whilst communicating more effectively with their customers. EY’s research shows that in APAC, three in five consumers expect a personalised shopping experience and are also willing to share some level of personal data to get a customized online experience. In China, Gen Z’s peculiarly make around half of all luxury goods purchases, despite accounting for only 15 percent of the population. This generation of 210 million people are interested in luxury with personalization, individualization, and bespoke experiences. While working on personalisation and customisation of marketing campaigns, it is imperative for retail companies to handle personal data diligently. Compliance with local data privacy regulations must be the foundation of any business strategy to maintain brand reputation and consumer trust.
Sustainability, brand image and consumer trust
Retail companies are experiencing increasing pressure from consumers to place sustainability at the forefront of their design. Sustainability can come from different angles, from reducing wastage during production processes and improving traceability of supply chain. As such, enterprises must deal with contrasting priorities from consumers. According to research by EY, whilst the majority of consumers recognize the importance of sustainability in their purchasing decisions, nearly half do not buy sustainable products due to prohibitive costs. In fact, price remains the number one obstacle to consumers and consequently only less than a third of consumers are willing to pay a premium for more sustainable goods.
China’s consumers, perhaps thanks to their optimism about the future, are willing to pay a “reasonable” premium for sustainable products and services. Similarly, the majority of consumers affirm to consider the amount of packaging when buying products, but also want more packaging to protect them from the risk of infection. Likewise, the majority of consumers want more information to help make better sustainable choices and say companies must be more transparent about their environmental impacts but only one in five consumers check sustainability claims made on packaging or in advertising. Given this complex and often contradictory landscape, retail companies must not only adopt sustainable practices to save costs but must also communicate their practices with consumers to build brand reputation and gain a competitive differentiation.
Demonstrating accountability and transparency over their environmental impact can gain consumer trust and encourage higher spending. Companies will therefore have to re-engineer their production, logistics and supply chains as well as recognize the third-party risk that, if not addressed, could erode their credibility.
It is more important now than ever for retail companies to embrace digitalization as part of their long-term strategy. Global growth has been hampered by the damage from the war in Ukraine. Inflation continues to accelerate while lockdowns in China intensify global inflation and supply shortages. Transport-related bottlenecks which disrupt supply chains will take time to recover. Despite or perhaps due to this complex global context, consumers expect to live different experiences than in the past whilst making their purchasing decisions. To accommodate consumers expectations, companies must adopt targeted strategies:
1. Focus on digitalization of consumer experiences
Retailers will need to focus on unique customer experience and seamless checkouts by making consumer lives easier through predictive and real-time operations and hyper-focused shopping experiences. Throughout all channels, availability, consistency, and seamlessness are key to ensuring customer’s convenience by integrating physical and digital channels, enforcing consistent business policies, and demonstrating commitment to organizational data.
Brands must understand how their product offering can align with their omnichannel strategy and prioritize technological investment towards a “meta-channel” strategy, while also considering the Return on Experience. Otherwise, unnecessary, and misaligned investments in technology will only waste capital resources.
2. Focus on creating personalized experiences
Retailers should create targeted consumer experiences by combining both digital and in-store customer care based on the holistic needs of the customer. To deliver this level of personalized experience, retailers need to combine data and immersive engagement that delights their customers. This could be done by solving customers’ needs through bundling products and services into personalized packages. To become indispensable, retailers will need to orchestrate a network of partners as part of an integrated ecosystem and create a holistic lifestyle solution, dynamically priced to ensure a fair share of value creation.
3. Importance of a strategic technological roadmap
For companies operating in the Chinese market, it will be imperative to have a clear technological roadmap specific to the China market, aligned with local technology partners, and congruent with the local purchasing demands and expectations of consumers. Most importantly, companies will have to comply with the strict regulations unique to the Chinese market.
(Source: Jasmine Lee, EY Hong Kong and Macau Managing Partner, Jarvis Ng, Managing Partner – Consulting, Ernst & Young Advisory Services Limited, Hong Kong & Macau)