As part of our ongoing focus on APAC, RETHINK Retail Editor-in-Chief Julia Raymond spoke with Shaun Rein, founder of the China Market Research Group, about innovation, technology, and the Chinese market.
Julia Raymond:
What are some innovative ways you’ve seen companies respond to the COVID-19 pandemic?
Shaun Rein:
I think it’s important to remember that, in 2019, China became the largest retail market in the world. And already last year, China was ahead of the United States, and ahead of Western Europe when it comes to eCommerce and mobile phone services. Whenever I go back to the United States, I feel like I’m in the dark ages. In China, they’ve really embraced what I like to call a mobile-first strategy. And so, at the height of the COVID-19 in China, people weren’t panicked. And I think one of the major reasons why China has been able to contain the coronavirus is because people were able to buy online.
Shaun Rein:
People had already been accustomed to shopping on groceries on Alibaba’s home retail store or buying electronics from Jingdong and jd.com. When COVID-19 hit, everybody just sat in their homes, watched online videos on Tik Tok and bought things through eCommerce. They were accustomed to it and I think that’s one of the things that helped China contain the spread because people didn’t feel like they needed to go outside.
Shaun Rein:
The second part involves China being a cashless society. It’s contactless. People use Alipay or WeChat Pay and scan QR codes. There’s no touching like with cash or with credit cards even. And I do believe that this early adoption has enabled retail sales to continue to grow in China despite the coronavirus and has helped us contain the problems. And that’s why retail stores in China were only shut for five weeks. Now we’re opened. Now, in the United States, many retail stores are entering week eight of essentially being closed.
Julia Raymond:
In China, are there self-checkout kiosks or is it all Apple Pay, mobile pay, Amazon Go type technology—is it contactless everywhere?
Shaun Rein:
Yes. Pretty much anywhere you go you can post up your QR code.
Julia Raymond:
Anywhere?
Shaun Rein:
Anywhere, or you just pay online through your mobile app. When people say that WhatsApp, or some of the payment systems owned by eBay, is similar to WeChat Pay or Alipay, it’s really not. That would be like comparing a Ford to a Ferrari. China’s mobile service payments are really light years ahead of the United States. I just don’t carry cash anymore. You can pay for your parking in an office building through an app. You can pay for food; you can pay for clothing. And I think in the United States, if you look at it, Apple Pay only accounts for less than 1% of all retail transactions.
Shaun Rein:
I’ll give you a story. I was meeting with a very large, Spanish-owned retailer two, three years ago in China. I can’t say the name, but you probably know what it is. And the retailer’s country head was telling me that he was having problems convincing his headquarters in Spain to accept WeChat pay in China. And their reasoning was that in the United States, so few people use Apple Pay, everybody uses cash and credit cards. They didn’t want to roll out WeChat and Alipay in China. I think it’s important for your readers who are senior decision-makers to understand China really is far ahead of the curve when it comes to mobile services technology.
Shaun Rein:
You have to adopt the best of breed digital payments. If you don’t, you’re going to end up losing a lot of share. Starbucks, I believe, lost a lot of share in the last couple of years because they didn’t accept WeChat Pay until about a year and a half ago in all of their outlets.
Julia Raymond:
And Luckin Coffee is the big competitor there. Correct? And they probably had that payment set up.
Shaun Rein:
Yes. But Luckin is having problems now. Their stock dropped out 80% last month because there are some questions on their numbers. There was some fraudulent activity and I think the numbers were not real with Luckin. But they really did revolutionize food delivery and payment systems in China because you could only order on an app to buy Luckin coffee. And so a lot of consumers said, “You know what, instead of waiting for 10, 15 minutes in line at Starbucks, I’m just going to order on my lap or Luckin or on KFC coffee, which started rolling out the same type of app.
Shaun Rein:
And it was only in September 2019 that Starbucks even rolled out its own app where you could order drinks online. So, Starbucks has had weak sales in China for the last couple of years because they didn’t have the quick-ordering app and payment system that Luckin and other Chinese competitors had.
Julia Raymond:
Why do you think China is leading the space when it comes to AI and payment system technology? Is it cultural? Are there other factors?
Shaun Rein:
There are a couple of factors that have made China become the lead in artificial intelligence and big data. The first is the government has been actively supporting it. They have pushed the “Made in China 2025” initiative where they wanted to have Chinese companies focus on indigenous innovation, help create the global technology standards that will power the world for the next 100 years, and really ensure that Chinese companies don’t have to rely on American innovation and American technology companies in case the US government puts economic sanctions against Chinese companies. That’s one part.
Shaun Rein:
The second is the Chinese people don’t have the same concerns about privacy that Americans do. If you think that the United States and Facebook have a privacy issue, wait till you come to China, companies like Tencent, Alibaba and Huawei have so much more for data on what every day Chinese are doing on a day to day basis. They know where you’re buying things, how you’re buying things, what bicycles you’re taking, what taxis you’re taking, and where you’re going. And the Chinese government is supportive of being able to collect this type of data because they want to ensure a safe, more stable society. And they do tend to prefer to have more oversight of what the population is doing than in countries like the UK or the United States that focus more on individual rights rather than the collective rights.
Julia Raymond:
I’ve heard that some of the Chinese people feel like the data that they’re collecting enhances their lives because they tailor things to the individual. Do you feel that way or how has it been for you personally?
Shaun Rein:
Well, I think all of the big brother type oversight has goods and bads.
Shaun Rein:
Now obviously there are some concerns about whether or not too much data can be bad and have malicious intent. And I think there are some concerns about that. When we interviewed Chinese consumers, they don’t really consider that. When we tell them how the data can be used, then they start to get a little nervous. But people don’t think about it right away. Now for me, I’m probably one of the few people who still carries cash once in a while because I don’t want Jack Ma to know what I’m doing 24 hours a day.
Julia Raymond:
You said that most people do not carry cash. Why would they when it’s more convenient to use the other payment systems that you have in place. But is there also a concern about the virus spreading and people not wanting to carry cash at this point?
Shaun Rein:
Yes, I haven’t carried cash since January. Mostly because of the concern about the coronavirus. I’m a huge believer that China has been able to contain the spread of the coronavirus, aside from wearing masks and self-quarantining, because it’s a cashless society, and because Chinese take their shoes off in the home while many Europeans and Americans leave the shoes on. I feel that the cashless society, and especially the eCommerce infrastructure, has reduced the spread. Too many Americans are still running off to Whole Foods or Costco to buy groceries. In China, brick-and-mortar grocery supermarkets were empty, like virtually empty during the height of the pandemic.
Julia Raymond:
Because you were all ordering online for delivery?
Shaun Rein:
Yes. Everybody in China orders online and pays online through food delivery sites like Meituan or Ele.me or on grocery stores like Houma. Now, I’ll give you an example. My father lives in Florida and I told him to register a Whole Foods account and get delivery setup. He did that and he was able to pay, but he still wanted to open that door to tip the delivery guy in cash. China doesn’t have that issue because China pays everything online and there is no culture of tipping in China like there is in the United States.
Shaun Rein:
In fact, when the food delivery guys were delivering at the height of the crisis, they weren’t allowed to knock on the door, open the door and give you the food. They had to actually drop the food off, knock and then run. There was a lot more distancing in China.
Julia Raymond:
Right. And it’s culturally more acceptable. And if we’re talking about the States, I’m a bit concerned because the federal stimulus that people can receive for up to four months is actually significantly more pay than you would receive working full-time at your typical grocery store. What are your thoughts on this?
Shaun Rein:
The pandemic has clearly shown some problems with the United States. I think it’s outrageous that 16 million people lost their jobs or were furloughed in the first two, three weeks of the pandemic in the US. You see that it’s almost more beneficial to lose your job in some cases, as you mentioned, and get money from the government rather than working. There really needs to be, I think, a revolution in how people are treated as employees and how people are paid.
Shaun Rein:
You haven’t seen the mass layoffs in China as you saw in the US. The only mass layoffs that hit China were basically from companies that went out of business. It wasn’t from the company and they were going to furlough, that’s why consumer confidence is much higher in China, especially the middle income and wealthier levels. There weren’t mass layoffs. Most of the layoffs were in the manufacturing sector, the lower-income collar workers. And that’s why Q2, Q3 for retail brands, your growth driver most likely is going to be China. It’s not going to be elsewhere. The consumer, I wouldn’t say is back, but it’s coming back very strong.
Julia Raymond:
I’ve spoken with a few people based in China and they said the middle class is growing there substantially. And there’s a lot of spending power within the middle class, which is very significant because of the population size. Is that something you’ve heard as well?
Shaun Rein:
Yes. We estimate there are about 350 million people that fall into the middle-class segment in China. Historically, there are about 750-850 million in the low-collar, low-income emerging middle class that actually has always held a lot of excitement for retail brands. Because people in the blue-collar world were getting 10-20% salary increases annually. Even if they weren’t middle class this year, in two, three years, they would be. I think brands really need to understand what the emerging blue-collar income, middle-class consumers think. That’s how you’re going to be able to get a lot of your sales. But again, the blue-collar sector has been hit a lot harder in the last three months than the white-collar.
Julia Raymond:
Right. But is there an opportunity for retailers just based on cultural differences? Should retailers really be investing in China right now if they haven’t already?
Shaun Rein:
This is what we say to our clients: If you’re generating 5-20% of your global revenue in China, then you should be investing here because you are going to most likely rebound here and China’s going to be large enough to offset some of the weakness in sales in Europe or in the United States. And since the second half of March, our clients who fall into this type of rubric are actually investing and my own personal consulting business has rebounded. However, if you are a company that currently has 0-5% of your revenue coming from China, you probably don’t want to be investing here right now. It’s going to be too expensive and too difficult to build up marketing when brick-and-mortar isn’t active and when there are still a lot of difficulties in internal transportation. If this is the case, then it’s probably better to conserve your cash and self-preservation for your American business.
Shaun Rein:
If you look at it, to me, a company like L’Oréal, Estee Lauder, Nike, Adidas—they should be doubling down on their China operations. They have great potential. Companies like Crocs or Ugg, they also have a lot of potential in China. But if you’re a company like Everlane, or if you’re a company like Birkenstock, then you probably don’t want to be investing here right now. Your operations just aren’t large enough.
Julia Raymond:
That makes a lot of sense. And Shaun, I know you are the founder and managing director of The China Market Research Group. Is there anything that you would have done differently with your firm in hindsight if you knew the pandemic was coming?
Shaun Rein:
No, we’re actually hiring right now. Our business is okay. It’s not booming, but it definitely rebounded. But we’re trying to get aggressive. I think a lot of people are scared. They’re scared out of their mind about what’s going to happen politically and what’s going to happen to the global economy. And I think, in difficult times, smart executives don’t just rush in and invest and try to expand stupidly, but they should not let fear overcome them. For my own firm, we’re actually going to be moving and upgrading our global headquarters in July. We’re actively hiring because I think that China’s going to rebound quicker than anywhere else.
Shaun Rein:
I guess the takeaway is: I understand the fear, but don’t let fear stop you from thinking logically. There are still very good opportunities out there in the marketplace. ♦
Shaun Rein is the Founder and Managing Director of the China Market Research Group, the world’s leading strategic market intelligence firm focused on China. He works with heads of states, senior executives of Fortune 500 & leading Chinese companies, private equity firms, SMEs and long/ hedge funds to develop their China growth, political and investment strategies. Rein is also the author of the international best-selling books “The War for China’s Wallet: Profiting from the New World Order,” “The End of Cheap China” & “The End of Copycat China.”
