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China has Set the Stage for the Digital Age of Retail

December 17, 2020

This article originally appeared in ACMA Currency Notes Dec 2020 Newsletter.

By Tom Meehan, CFI

Experts predict that for the first time in over a century, the United States will no longer be the largest retail market in the world. The United States and China were both deeply impacted by the COVID­19 pandemic, but the Chinese retail sector has been able to bounce back much faster, giving them a long-term advantage in growth.

Both consumer and producer growth in China has recovered from the pandemic, showing consistent growth and a 4.3 percent increase in retail sales in October from last year. This is a huge shift from the state of Chinese retailers earlier in March when half of them did not have enough cash to last the next sixth months after sales plummeted due to the pandemic. As China has become the only major economy in the world expected to grow in 2020, we can see that their success comes from their ability to capitalize on the latest retail trends. In recent years, retail has evolved to meet both industry and consumer demands for digitization. Let’s take a closer look at how the Chinese retail market has adapted to the digital age of retail.

Social Commerce

One of the biggest trends we should look out for is social commerce, where ecommerce meets social media to target young and engaged social media users. Social commerce sales are expected to make up 11.6 percent of all retail sales in China by the end of the year. Douyin, the video-­sharing app similar to TikTok and also owned by ByteDance, encourages user participation, so users create content rather than simply scrolling through a feed. This has created an opportunity for brands to monetize Douyin content by enabling users to click a video and follow a link to a third-party retailer to purchase a product.

Retailers are also investing in entertainment­-driven content to connect brands with consumers. Think of this like QVC and the Home Shopping Network, but updated for the digital age: Online retailers integrate with social media and digital payments to produce live video streams where hosts sell products. Amazon has adopted a similar strategy in the American market with Amazon Live, where livestream hosts demonstrate different products, just in time for Black Friday last week.

The livestreaming model also targets a younger audience and relies on key opinion leaders (KOLs), the Chinese equivalent to “influencers,” to demonstrate and review products in an authentic way. Not only do the livestreams have thorough product demonstrations, but they also have successful livestreamers, whose viewers trust their opinions, to promote the product to consumers. Because it is estimated that China’s livestreaming market will reach $16.3 billion by the end of 2020, they have the highest population of social buyers in the world.

Cashless Transactions

Spurred by baseless irrational fears about exchanging cash, cashless payment methods have become even more popular in China, despite many studies showing that cash is not a major transmitter of the virus that causes COVID­19. Regardless of how contactless payment services such as Alipay are already widespread throughout the country, many retailers have started only accepting cashless payments.

Much like the opening of Amazon Go stores in the United States in recent years, the Chinese supermarket chain Hema has also adopted a cashless self­checkout system. However, this posed a problem for consumers such as the elderly, overseas visitors, and people from rural areas, all of whom are either unfamiliar with or unable to access this technology. Eventually, the Chinese authorities had to intervene and require Hema to install cash registers.

Other retailers, such as the automated convenience store chain BingoBox with locations in Beijing and Shanghai, have taken the contactless shopping experience even further by not staffing their stores with people at all. Instead, customers scan QR codes to identify themselves and select their purchases, then pay with their mobile wallets, powered by WeChat, the multipurpose social media and mobile payments app. The shelves are equipped with sensors to detect when products have been removed, and each item is connected to the shopper’s ID in the app to prevent theft.

Mobile payments are especially challenging for short-­term visitors to China: Most payment apps require a bank account in the country and a Chinese phone number. I have traveled to China 12 times in the past three years, and on many occasions, I have been unable to purchase food or essential items because I cannot access Chinese contactless payment methods.

As we have seen in many arguments against a cashless society, refusing to accept cash also excludes unbanked consumers who do not have accounts with traditional financial institutions and make all their transactions in cash. In China, where only 56 percent of its population used the internet in 2017, the rural population is much larger, and these people often do not have the technology required to “tap to pay” at the grocery store, which has become more popular during the pandemic.

In July of this year, the Chinese government started cracking down on retailers who refused to accept cash, due to widespread complaints about retailers discriminating against cash users. Even credit cards are sometimes not accepted by retailers and restaurants, as smartphones become the main method of payment in the country.

As the retail industry continues to adapt to the changing expectations of consumers, we can expect many retailers to embrace up-and-­coming trends such as social commerce, livestreaming sales and contactless payment methods to set themselves ahead of the curve. Even as technology progresses, the authorities in China must continue to protect cash inclusion in the payments ecosystem.