By Gary Symons, TLL Editor in Chief
An in-depth report on how COVID-19 is affecting the world’s second largest economy says companies wanting to sell into that market will face major challenges.
A report by McKinsey & Company entitled Understanding Chinese Consumers: Growth Engine of the World, says COVID-19 is accelerating already existing trends in the marketplace that will have huge impacts in 2021 and future years.
In their full report, McKinsey’s team of analysts identified five key trends that will impact manufacturers, distributors and the licensing industry for years to come. The five trends include:
- Digitization of business processes;
- Declining exposure to the global market;
- Rising competition within China;
- Changing consumer patterns domestically;
- Increased role of the private sector in the economy.
DIGITIZATION
McKinsey says COVID-19 has massively accelerated digitization of business processes, particularly e-commerce, in a country that was already a leader in that sector.
“Before COVID-19, China was already a digital leader in consumer-facing areas—accounting for 45 percent of global e-commerce transactions while mobile payments penetration was three times higher than that of the US,” the report states. “Consumers and businesses in China have accelerated their use of digital technologies as a result of COVID-19.”
For example, McKinsey discovered through a survey that 55 per cent of consumers are likely to continue buying their groceries online.
That trend means foreign companies will have to significantly up their game in reaching Chinese consumers online, whether it be through e-commerce, social media, or mobile apps. For example, the report says, “Nike’s first-quarter digital sales in China increased 30 percent on year after the company launched home workouts via its mobile app, while property platform Beike said agent-facilitated property viewings on its virtual reality showroom in February increased by almost 35 times compared with the previous month.”
As well, everything from B2B communications to health appointments moved online at a rapid rate, creating challenges for foreign companies dealing with a country whose internet firewalls and strict rules about content are notoriously tight.
DECLINING GLOBAL EXPOSURE
In a market of more than a billion people, foreign companies will be alarmed to learn that the Chinese market is turning inward. Just as US President Donald Trump adopted his America First policy, so too did China respond by pushing its production and distribution towards its own domestic market.
“A mix of geopolitical and economic forces was already driving a change in the relationship between China and the world, and COVID-19 appears to be accelerating this trend,” McKinsey says. “The US-China trade dispute raised risks and uncertainties, and about 30 to 50 percent of companies surveyed by various institutions in 2019 indicated that they were considering adjusting their supply chain strategies by seeking alternative sources or relocating production to other geographies.”
Even before the pandemic China had begun reducing its exposure to the rest of the world as the majority of its economic growth was generated by domestic consumption, rather than exports. Now that trade and the movement of people has become more restricted, the disconnect begun through trade disputes is widening, and McKinsey says foreign companies will have to work much harder … and smarter … to keep business relationships alive and thriving.
INCREASED COMPETITION
In the past the largest Chinese companies retained an outsized share of profits and return on investment, but the increase in privatization has created what McKinsey calls “cut-throat competition (that) threatens their position.”
The analysts see that increasing post-pandemic, saying, “COVID-19 will raise competitive intensity, creating even bigger rewards, and risks, for companies in China.”
CHINESE CONSUMERS ‘COME OF AGE’
China’s economic story has been one of almost uninterrupted growth since the Second World War, so China’s affluent younger generation had never experienced a domestic economic downturn prior to COVID-19, says McKinsey. “The virus has forced them to think harder about spending, saving, and trade-offs in purchasing behavior,” they add.
“One survey showed 42 percent of young consumers intend to save more as a result of the virus. Consumer lending has also declined, while four out of five Chinese consumers intend to purchase more insurance products post-crisis. Savings have also rocketed—the country’s household deposit balance increased by 8 percent over the first quarter to reach 87.8 trillion RMB. Meanwhile, 41 percent of consumers said they planned to increase sources of income through wealth management, investments, and mutual funds.”
As well, consumers are leaning away from indiscriminate buying of cheaper, often ‘throwaway’ items, and are seeking higher quality and healthier options that will stand the test of time.
“More than 70 percent of respondents in our COVID-19 consumer survey will continue to spend more time and money purchasing safe and eco-friendly products, while three-quarters want to eat more healthily after the crisis,” the report says.
THE PRIVATE SECTOR BEGINS TO DOMINATE
When the SARS outbreak struck China in 2003 it was primarily the government and State Owned Enterprises that led the economic recovery. Since then private enterprise has gained in size and influence.
“In the wake of the 2003 SARS outbreak, SOEs were the major driver of China’s economy, accounting for about 55 percent of China’s assets, and 45 percent of profits. Today, the private sector contributes close to two-thirds of China’s economic growth, and 90 percent of new jobs, illustrating a significant shift in the balance of economic power,” McKinsey states. “In the wake of COVID-19, joint efforts between government and large private companies have played a leading role. For example, Alipay and WeChat supported the Shanghai government’s “Suishenma” health QR code launch to help contain the spread of the virus.”
The Chinese government still retains an iron grip on national politics, but private companies and social institutions like the Bill and Melinda Gates Foundation or the Vanke Foundation have collectively contributed heavily toward the Chinese economic recovery, and those private groups are also gaining more influence with Chinese consumers.
With all this in mind, McKinsey recommends that consumer packaged goods companies wil need to “tweak their product mix to better reflect the current key demands of consumers, such as healthier products and basic daily necessities; and embracing channel structure changes, such as the shift to online.”
As well, they say there are a “a series of measures that should be implemented gradually to establish a more complete, precise, and large-scale RGM capability.” These include:
— Introducing targeted pricing adjustments and promotional plans to further stimulate consumption;
— Carrying out a greater number and variety of omnichannel promotions. To keep pace with the rapid increase in online demand, data analysis and consumer management capabilities will also need to be improved;
— Cooperating with retailers and distributors more effectively. At the same time, ROI must be accurately analyzed to improve the cost-effectiveness of joint investments;
— Conducting a full evaluation and revamp of product portfolios as needed to ensure they meet changes in consumer preferences post-crisis over and above the short-term tweaks in product mix;
— Embedding RGM discipline into corporate DNA to ensure the effective implementation of an RGM mindset and strategy. For instance, this could include establishing an “RGM academy” to regularly train new talents on core RGM skillsets and methodology, and incorporating RGM-driven growth as a key agenda item during business planning.
McKinsey concludes that companies who want to compete in China need to urgently adjust to the post-pandemic environment.
“Growth in consumer goods and retail markets has slowed, consumers are becoming increasingly mature, business models have diversified, and competition has become increasingly fierce,” the analysts argue. “It’s clear that for CPG companies in China, a transformation from scale-driven growth to more granular management of commercial operations has never been more urgent. High-quality, sustainable, and innovative growth is needed to move past the pandemic and lay solid foundations for future success.”