Matthieu David: Hello everyone, today we are going to look into the beauty sector in China, and the report we published a few days ago, maybe two weeks ago about how Covid-19 impacted the beauty sector in China. How it impacted during the epidemic and after the epidemic. I’m here to talk about the report with Allison Malmsten who has worked on the report and we will like to share today with the audience a few conclusions we had on the report, especially Alison you mentioned, an overview of the beauty sector before Covid-19 and some of the trends which came out of this and which were a change in the sector. What kind of changes and differences did you see before Covid-19 and just after Covid-19 in China.

Allison Malmsten: Right, hi – so I am Allison, one of the marketing managers at Daxue Consulting. So, first, China’s beauty market is by no means small, it’s the second-largest in the world at over 300 billion renminbi in annual revenue. Skincare taken 54% of the beauty sector in China and some trends that we saw before Covid-19 were – 1] the high-end segment was growing proportionately faster, so high-end brand segment was growing at 18% year on year while the mass brands were only growing at 5% year on year. 2] Second is that social commerce is blossoming, this is Xiaohongshu and also WeChat has its own platform called 有赞 (youzan) and what we saw is on these platforms, especially for the beauty sector in China the conversion rate is pretty high, and so this is kind of a new way of shopping and the year on year growth for Xiaohongshu was double in 2019. Lastly, there’s a rising preference for a domestic brand. Looking at the top 20 beauty brands in China, in 2012 only 7.6% of them were Chinese while in 2018 14% of the top 20 beauty brands in China were domestic Chinese brands, so this growth is pretty significant.

Matthieu David: Very interesting, it seems that the Covid-19 accelerated some trends which were already happening before such as social commerce, Xiaohongshu being one example, that’s what existed before, and the epidemic was let’s say a time where people had more time to spend online and to do social commerce. Do you have the same analysis at the trend that is not necessarily new, whether they have been accelerated with Covid-19?

Allison Malmsten: Right so out of the three trends I mentioned, yes, the social commerce is definitely even more significant now because obviously during the pandemic people were less willing to go to offline stores and they were doing more live stream shopping and more shopping on Xiaohongshu and KOL marketing is definitely very important during this time. There is one trend that might take a turn and that is the high-end segment was growing very fast before and we might see the slowdown as people will be preferred – they’ll be looking more at ingredients and less at brand names, so this could give a chance to any brands that focus on natural ingredients and focus on skin health and skin repair.

Matthieu David: Very interesting to see indeed, in the report we mentioned that Chinese consumers online were looking at the ingredients and at the quality of the beauty product they were buying, more than before and I think within the report we found out that not all the categories went up and for instance make up went down if my memory is correct and specifically some beauty products and financing on natural ingredients grew faster.

Allison Malmsten: Yeah so, cosmetics were hit the hardest. A McKinsey survey showed that 44% of respondents purchased less make up, while 31% purchased less skincare but then also 25% of people purchased more skin care so it’s kind of balanced out but yeah and then within makeup, obviously lipstick pretty much because everybody is wearing a mask, so there’s a beauty style now called the ko [inaudible 05:00] its makeup for wearing masks, so the focus is really on the eyes and also the skin and so the skin care sector, it did take a bit of a hit but it’s also doing pretty okay and a lot of the focus when people are at home – our social listening showed that a lot of people are talking about its time to be at home and they’re wearing less makeup so they see that their skin is getting healthier so they’re very excited about those results and it inspires them to purchase more skincare products, while at the same time wearing a mask for a long time can be very damaging to the skin, so a lot of people are searching for products that have skincare repair functions and also skin sensitivity is a big keyword now. A lot of people are finding that they have sensitive skin and they’re looking for skincare products that can help repair their skin damage from wearing a mask including anything like natural ingredients are really popular right now.

Matthieu David: And some of the comments we found online through social listening were saying that people were switching from makeup to skincare instead of putting makeup to take more care about their skin with specific products, I would say more natural products. I’d like to go back on the Chinese brands – you mentioned that Chinese brands took off during the Covid-19 lockdown and after the Covid-19. Do you see here long-term trend or it’s just short term and was during the epidemic, or do you see a substantial change which is going to stay?

Allison Malmsten: I think that this is going to – the preference for domestic brands, I think this is going to be a long-term trend. I think this is a trend that was accelerated from Covid-19 and the reasons are 1] because patriotism is a very high right now in general, 2] because also domestic brands really understand Chinese consumers and they understand how to reach them. They’re usually very proactive about social commerce and also, they are familiar with like some Chinese herbal ingredients that are very in right now and so they include those in their ingredient list and yeah, I think that a lot of Chinese brands are gaining momentum right now.

Matthieu David: And we looked into a very specific brand called Perfect Diary in the past and it’s a very, very Chinese company which is doing very well. In a topic, we’d actually like to talk about which is product traffic and Perfect Diary has been an example of being very good at product traffic. Product traffic being something very specific to china where e-commerce started with marketplaces like Taobao and then Tmall and then JingDong and many other marketplaces where having your own website and selling through your own website was not mainstream and now its becoming more the case – not selling through your own website, but your website, your WeChat groups, your WeChat channels and your live streaming. So, using a marketing platform to convert on your own asset, your own digital asset, and not through a marketplace. What did you see in terms of digital changes during the pandemic and after?

Allison Malmsten: So, I saw some digital changes, one like you mentioned private traffic and then two is also live streaming. Live stream obviously ballooned under lockdown, while everybody was at home they spent more time on their phone and inevitably they spent a lot of time shopping on their phone or looking at products and so some statistic for that was that as of February 18th, the monthly number of live streaming events on Taobao ballooned by a 110% year on year. Also, Douyin, also experienced around 70 to 100% growth during the lockdown period, so a lot of brands are using live streaming now. And then also one case, in particular, is [inaudible 09:10] which is an Australian beauty brand, during the coronavirus they directed its offline stores to all sell on WeChat, so that is over a 1000 stores that would normally have offline sales, offline staff, they all went online during that period and they actually had sales of 6.3 million renminbi during a live stream event that happened during the coronavirus lockdown in china.

Matthieu David: I believe that the next step is to see those trends now continuing or if it was just a short-term trend during and after the pandemic.

Allison Malmsten: Right, yes that will be very interesting to see because once stores open up, I’m sure people are very eager to go out shopping again but at the same time they might be a little bit more cautious to hit the stores.

Matthieu David: Thank you, everyone, for listening and we will continue with new reports, we will go through together online.

Find the full beauty sector in China Report 

This article Market Tidbits transcript #1: Major changes in the beauty sector in China after COVID-19 is the first one to appear on Daxue Consulting - Market Research China.

China has been the world’s largest automotive market for years. That is why carmakers around the world are fighting to sell their cars to Chinese consumers. However, in a market mainly dominated by Chinese brands (42%), what are the trends and growth drivers that international carmakers can follow?

The automotive sector is one of the top pillar industries for China’s economy and a major employer. In 2019, for example, the automotive sector contributed 9.6% of the total retail sales of consumer goods. The sector also accounted for around 10% of total employment in China.

COVID-19 impact on the automotive industry in China: decline in sales

COVID-19 placed significant burdens on the automotive industry in China. Hubei Province where the outbreak started, accounting for about 9% of the country’s auto production. Wuhan, Hubei, as one of the key development cities of the country’s six major automobile industrial clusters, not only gathers many vehicle manufacturers, but also has more than 500 automobile parts enterprises.

The auto industry is especially facing major challenges both on supply and demand side—new passenger car sales in the Chinese market slumped by over 80 percent in February 2020. Forecast shows that China’s automotive market will decline 15.5% in 2020.

Data Source: Statista, PwC, China’s auto market size

China’s first quarter vehicle sales saw the biggest impact. According to the China Association of Automobile Manufacturers, sales of passenger cars declined 42.4% year over year during that period. SAIC, one of China’s largest manufacturers, reported a 44.9% percent drop year to date in April. Its SAIC-Volkswagen and SAIC-General Motors joint ventures, dropped 50.4% and 47.7% year over year in retail sales from January to April respectively.

Government policies to help the automotive industry in China

To stimulate the automotive market, government launched some policies. 10 cities released incentive schemes. For instance, Guangzhou announced a subsidy of 10,000 RMB for New Energy Vehicles sold between March and December. Additionally, a State-level subsidy to New Energy Vehicles was extended until 2022.

Epidemic highlighted imbalance of car brands in the Chinese market

The epidemic has exacerbated the imbalance between the various car brands. From January to March 2020, the total sales volume of the top ten enterprise groups was 3.295 million units. It had a year-on-year decrease of 41.7%, which was 0.7 percentage points lower than the industry decline. It accounts for 89.7% of total car sales, which is 1.1 percentage points higher than the same period last year. This shows that under the impact of the epidemic, the market share of small brands has shrunk even more.

A phenomenon worth noting is that compared with last month, the sales of major foreign brands also showed a rapid growth, of which the growth rate of Korean brands is particularly significant.

COVID-19 boosted electric cars market

China’s reaction to the crisis shows a commitment to new technologies, signaling how the crisis could build resiliencies moving forward. The real opportunity after COVID-19 lies in the shift from internal combustion engines to cleaner, electric vehicles in China. China is set to keep its long-term strategic goals for automobile electrification and meet climate change goals set by the Paris Agreement.

In March 2020, the production and sales of electric vehicles were also significantly better than that of the previous month. The growth rate was rapid and the year-on-year decline was narrower than that in February. For example, electric car maker Wei Lai released the delivery data for March 2020. The delivery volume reached 1533 units, an increase of 11.7% year-on-year and an increase of 116.8% month-on-month.

The auto industry in China slowly rebounds back

On February 2020, due to China’s recovery from the coronavirus outbreak, car companies ushered in the first wave of resumption of work. They include Geely Automobile, Great Wall Motor, Changan Automobile, Xiaopeng Automobile, Weilai Automobile, Tesla Shanghai Super Factory and so on. The outbreak of the epidemic has also made car companies pay more attention to the online car sales model. Many brands have launched online car purchase activities during the epidemic, thereby stimulating consumers’ desire to consume.

In March 2020, as the industry’s orderly resumption of production, the monthly production and sales volume rebounded significantly, but still did not reach sales level of 2019.

Data Source: China Association of Automobile Manufacturers (CAAM), China car sales 2019/2020

Retail sales of light passenger vehicles also surged ahead in March, as reported by the China Passenger Car Association. Year over year, March 2020 sales were still below 2019 levels, but 26%, not the 80% drop seen in February. Sales in April 2020 have begun to catch up with just a 2% drop year over year.

Automotive brands show signs of recovery

From the perspective of different brands, Changan Automobile sales reached 119,000 in April 2020, an increase of 32% year-on-year, ranking first. In April, the company achieved sales of 105,400 units, an increase of 44% month-on-month and 2% year-on-year. Great Wall Motor sold a total of 81,000 new cars in April, an increase of 35% month-on-month.

Chery Automobile increased by 15% month-on-month in April 2020, but continued to show negative growth year-on-year. 

Volkswagen’s China terminal sales in April 2020 were 16.57 units, an increase of 9.9% year-on-year and an increase of 41% month-on-month.

Weilai (also known as NIO) delivered 1,533 vehicles in March 2020, an increase of 117% QoQ.

Data Source: China Automobile Association, Weilai sales January-March 2020

Therefore, key automotive brands show the signs of recovery, however this process will take time.

In 2020, mainstream automakers supposed to have many new models launched on the market. However, due to the impact of the coronavirus epidemic, it is difficult to carry out offline listing activities such as test drive, auto show, and press conference.

Data Source: China Automobile Center, Summary of originally planned models to be launched in the first quarter of 2020

Chinese auto industry still has big potential

Despite the significant impact of COVID-19 on China’s automotive industry, the market potential is still quite huge. China is still expected to become the largest vehicle market with around 260 million units in operation. At 173 units per person now, there is room in China for more light passenger vehicle purchases.

However, after COVID-19, the market will definitely not simply snap back to where it was before the pandemic. According to a forecast from IHS Markit , light vehicle sales will decline 15.5% in China for 2020.

Why 2018 was a turning point for car manufacturers in China?

For the first time in twenty years, sales in the automotive industry in China are declining

In 2018, for the first time in 20 years, China saw its new car sales decline by 2.8%. In 2017, 28.88 million cars were sold in China compared to only 28.08 million in 2018.

Sales in most provinces of the China declined in 2018 except Guangdong, which saw an increase of 5.3% compared to last year, which can easily be explained by the rapid development of the local economy (Guangdong has had the highest GDP for 29 years in China).

Despite this decline, China remains the world’s largest automotive market, accounting for about 30% of total global car sales in 2018. Compared to the 28 million cars sold in China in 2018, only 5.2 million cars were sold in Japan, 16.5 million in Europe and 17 million in the United States in 2018.

But then what explains this decline in car sales in China?

Alternatives to cars are increasingly successful in China

One of the main reasons for the decline in car sales in China in 2018 is that there are many relevant alternatives. Chinese car shoppers are increasingly value minded and open to the alternatives to buying new cars. Moreover, the younger generation of Chinese is increasingly sensitive to environmental issues and tend to consider more environmentally friendly options.

In recent years, car-hailing apps have been gaining popularity in China. By the end of 2018, there were more than 100 car-hailing platforms in China, and the total number of car-hailing app users has exceeded 330 million.

This is the success of car sharing apps such as Didi Chuxing or bicycle sharing apps such as Mobike, which have seen their number of users increase in recent years:

Didi Chuxing

Didi is now one of the main alternatives to owning cars in China.

The business model of this Chinese transportation network company can be compared to Uber’s model. The cost of fares is very low and the simplicity of the service, easily ordering a fare on the app, make China gradually becoming the largest ride-hailing market in the world, with a value of US$30 billion.

In 2018, Didi held more than 80% of China’s ridesharing market.

Mobike

Mobike, a fully station-less bicycle sharing company in China, also offers a great alternative to private cars in China, especially in big cities.

Bikes are often used to connect to buses and subway stations, what we can call intermodality. For example, in Shanghai, approximately 1 in 5 users take bikes to make subway and bus connections (Mobike, 2018).

Thus China has now become the leading country both in terms of ride sharing and bike sharing in 2018, and this can be bad news for car manufacturers in China.

Second-hand car market shows growth in China

The Chinese craze for used cars is also an essential reason for the decline in car sales in China in 2018.

In 2018, second-hand car sales in China rise with a growth of 11.5%. Sales are even expected to reach over 20 million in 2019.

As consumers prioritize value for money, they become more price conscious and lose confidence with spending. Online marketplaces for second-hand cars, like Renrenche (人人车), Uxin (优信) or Guazi (瓜子), are also developing fast and allow customers to find the best price quickly without having to visit multiple brick and mortar shops.

Despite this, consumers continue to buy private cars in China, whether for practical reasons or for pleasure. According to the graph below, 58% of them buy a car to travel comfortably on holidays. Driving has been a very popular way of travel (average 300km) in China. In Tier-3 and Tier-4 cities, the school bus hasn’t been very popular, so many parents also need safe and convenient transportation for their children.

New-energy vehicles in China have become very trendy

Electric cars sales are increasing

Electric or hybrid cars have been very successful in recent years in China, thanks in particular to the support of the Chinese government but also because buying an electric vehicle avoids the cost of purchasing a license plate, which is a considerable saving.

In 2018, the sales of new energy vehicles in China consistently grew reaching 1,25 million units sold.

Buyers of new energy cars in China are mostly urban and young: 40% of China’s electric car sales in 2018 came from 6 large Chinese cities which are Beijing, Shanghai, Shenzhen, Tianjin, Hangzhou, and Guangzhou because of the awareness of the pollution problems inherent to combustion vehicles and the gasoline-car restrictions that have been implemented in these cities. Most of them are also the first person in their family ever to own a car.

China’s biggest electric carmaker: BYD

BYD Company Limited was China’s top-selling electronic car manufacturer in China in 2018. Created in Shenzen in 2003, the brand launched its first electric car model, the E6, in 2011.

In 2018 BYD sold a total of 520,687 cars in China including 247,811 electric vehicles, achieving a year-on-year jump of 25%.

The best-selling BYD model in China in 2018 is the Song, 91,426 units sold, for an average price of $28,000.

BYD’s marketing strategy in China is to develop a flexible and segmented offer to reach a wider audience: BYD then decided to go on all-in on hybrid rather than pure electric with one of its model, ‘Qin.’ It is a more flexible option for consumers, who can drive it as an electric car for their daily commute and reach much farther distance without having to worry about charging.

Thanks to its various plants in China the company also has a competitive advantage to integrate all of the key components in-house. And with the help of subsidies, BYD has been able to build economies of scale, pushing down their cost per unit and allowing them to spend more on research and development.

High-connectivity: Cars in China have to be mobile-first

Connected vehicles in China have to be mobile-first

A connected car is a vehicle connected to the Internet through its communication system. It allows the driver to connect his smartphone to the car, but also the car itself to connect to the surrounding cars and infrastructure.

Since China is a mobile-centric nation with mobile commerce representing a quarter of the country’s overall retail market ($1.5 trillion in sales in 2019), it is normal to find this requirement in the 2018 car trends in China.

Thus the global connected-car market in China is expected to grow 270% by 2022 and 41 million people will make use of in-car connectivity by 2021.

According to a 2017 Kantar TNS study, 79% of Chinese respondents plan to buy a connected car in the future, compared to about 50% for Americans and Europeans.

According to Jack Ma, Alibaba’s chairman, there is no doubt that the future of cars in China is high-connectivity:

‘’Today, 80% of your smartphone’s functions are not relevant to making phone calls or conversation. I believe that in the future, a car will have 80% of its functions not related to just transportation.’’

But Chinese consumers are more and more difficult to please in terms of connectivity services; they are seeking innovative in-car services and are even ready to pay subscriptions for content.

Which is why automakers and tech giants are all racing peers to new tech horizons!

Integration of Alibaba’s Tmall Genie in BMW vehicles

The partnership between BMW and Alibaba is an excellent example: Alibaba Group’s smart assistant, Tmall Genie, will launch in select vehicles from the BMW Group in China by the end of the year.

Tmall Genie will be fully integrated into BMW vehicles, offering drivers several entertainment and shopping options in the car. Drivers will be able to use Tmall Genie to buy online, watch movies, listen to music, check the weather or make appointments appointments in BMW.

Top innovative car brands in China

Volkswagen in China has delivered its 30 millionth car to Chinese customers

For the company which connection with China started in 1978, 2018 was a real milestone. They achieve sales record with 4.21 million vehicles delivered to customers in China including 196,300 imported cars, which corresponds to a + 0.5 % evolution compared to 2017.

The best-selling Volkswagen model in China is the Lavida with 504 000 units sold in 2018, a 4-door sedan which has been sold exclusively in China since 2008. Depending on the generation, its price is between 110,000 RMB and 160,000 RMB.

Because Volkswagen was the first foreign car manufacturer in China, it can now compete directly with Chinese competitors. And the brand’s communication strategy is really to emphasize this authenticity and improves its reliable brand image.

To do that, SAIC Shanghai Volkswagen wants to show how close to Chinese consumers it is.  At the end of 2018, a campaign announcing the launch of new models then revealed a desire to align the brand’s image with China’s powerful economic growth:

The timing of the publication, that was the 40th anniversary of the policy of openness and reform, was ideal.

To attract the growing target group of young, middle-class customers, Volkswagen also decided to launch JETTA as a brand in February 2019 (it was only a Volkswagen model before). The idea is to target first-time buyers, who account for 81% of the customers in the entry segment, by offering high quality, safety, stable value, and fresh design. In 2018, the brand also announced the launch of the SOL brand in partnership with the Chinese auto manufacturer Anhui Jianghuai Automobile, whose first model is an electric SUV.

Geely in China: ‘’Making Refined Cars for Everyone’’

Geely enters the automotive industry in China in 1997 and is now among the 500 largest companies in China. In 2010 Geely group bought the Swedish carmaker Volvo.

In 2018 Geely sold 1,500,838 units in China, an increase of 20.3% from 2017 and had a 6.9% market share.

The brand has a very young customer base with 51% of customers born in the 1990sor later, it’s a new generation of young innovative consumers who have a global vision and a global mindset. Thus, Geely communicates on high connectivity and ultra-modern design to directly target this audience. They often highlight their design teams and the famous designer Peter Horbury they work with to show their modernism.

The best-selling Geely model is the Bo Yue, a compact crossover SUV with 255 695 cars sold in China in 2018.

Geely is now trying to expand internationally by developing its battery manufacturing business with CATL Geely Power Battery Co. Ltd and acquiring new foreign brands like Proton’s Norwich-based subsidiary Lotus or Daimler recently. The brand also invests heavily in new energies cars with its ambitious project Blue Geely, wanting 90% of its sales to be consist of Evs in 2020.

Landrover in China: designing ‘’China SUV of the Year’’

Jaguar Land Rover entered the Chinese automobile market in 2010 and has witnessed exponential growth each year until 2018. A total of 492,388 Jaguar Land Rover units were sold in China in 2018.

Land Rover’s strategy in China is to demonstrate a commitment to the Chinese market by offering unique designs and models that meet consumer requirements and preferences. That is why in 2012, JLR entered a joint venture with Chery Automobile Company to manufacture Range Rovers to build vehicles designed specifically for the Chinese market (Jaguar XFL and XEL are good examples). Thanks to this, Land Rover in China has won numerous awards that allow it to raise brand awareness:  recipient of the 2018 ‘China Reputation Award’ for the second time, Range Rover Velar wins ‘China SUV of the Year’ and ‘China Car Design of the Year.’

How do carmakers promote their cars in China?

Offline promotion: How to keep a substantial brick and mortar presence for car manufacturers in China

Offline promotion remains very important in the automotive industry in China today. Indeed, despite the development of the massive development of e-commerce and m-commerce in China, nearly 90% of car purchases were made at 4S stores in 2018. This means that Chinese consumers still appreciate contact with sellers and want to be able to go to offline stores to get information and buy a car.

• 4S stores in China

4S stores are today the most popular distribution channels for the vehicle brands in China. There are more than 28,000 4S stores in China. They have dominated the offline purchase channels in tier-1, tier-2, and tier-3 cities; now they are expanding to tier-4, tier-5 cities and rural areas.

Consumers choose 4S stores as they provide all in one service: ‘‘4S’’ means Sale,  Spare part, Service and Survey. So, they cover all business related to vehicles such as sales (new cars and second-hand cars), maintenance, car wash, auto finance, car rental, etc.

It is also interesting to note that the competition among 4S stores is increasing, trying to fight on price, discount activities, test-drive services and insurance.

• Exhibitions, events, and shows: the entertainment marketing strategy

There are more and more events and exhibitions in China that attract millions of people each year. For instance, Auto Shanghai, the Shanghai Motor Show which has made its mark among international shows, host every two years more than 900,000 visitors from 18 countries. The 2019 edition is currently being held (April 23-28).

Automotive shows are an excellent way to stand out from the competition and showcase its best models to demonstrate the brand’s research and development capabilities.

Despite their international scope, the domestic players are most active at these shows with more than 70% of new products produced by Chinese carmakers.

• Showrooms, storefronts and flagship stores

Car manufacturers in China are now investing more and more in showrooms in major cities to impress consumers: stores are no longer just places to buy cars but luxury spaces to live a real experience.

In 2018 NIO invested CNY80 million (USD11.7 million) in a store in the iconic Shanghai tower and paid more than CNY100 million annual rent.

The brand also pays a yearly rent of about CNY80 million for a shop in Beijing’s Oriental Plaza mall.

Online promotion: Using KOLS and social media to boost your sales in China

In China, websites and social media are dominating the promotion channels for vehicle brands in 2018.

With a perfect online service layout, automotive E-commerce platforms have real marketing advantages. Automotive E-commerce represented by Youxin, Emao, and Taobao makes full use of the business sector (new cars, used cars and auto finance). They are user-centric, E-commerce data-based, product and service innovation-oriented, aiming at creating a  full life cycle Eco-marketing platform. It is a good source of information before buying a car in China.

Also, almost half of consumers obtain information about cars from automotive websites, since those websites usually have comprehensive knowledge about car brands and models.

On social media, young auto enthusiasts (post-90s and younger) have a stronger willingness to share content about vehicles with others. Half of the auto enthusiasts spend 5-15 minutes on every online post (website and social media) about vehicles.

Social networks have therefore become strategic for car promotion in China. This is why many brands now use KOLs (Key Opinion Leaders) to convey messages in a more subtle way. Indeed, more than 70% of vehicle consumers follow at least three KOLs, their purchasing behaviors are highly influenced by KOLs’ opinions and experience.

New retail: How the Alibaba strategy applies to the Chinese automotive market

New retail in the automotive market in China is more consumer-centric.  This is a trend that has been widely followed by car manufacturers since the success of Alibaba’s New Retail strategy launched in 2016.

By collecting consumers’ data (such as interests, price and design preferences), vehicle brands are able to provide cars, auto-configuration and services based on consumers’ requests. Thus, the consumer’s journey is shorter because the touch points are blended: for example, Wechat content is now a touch point for each step of the car buyer journey in China.

This is the strategy that Ford decided to implement in partnership with Alibaba: they launched the Super Test-Drive Center in Guangzhou to allow people to buy a car from a staff-less machine in under 10 minutes.

Customers just have to go to the Tmall app and choose the model they want to test-drive via the online catalog. To register, customers must take a picture of their face and once in the store, once the customer shows their face to facial recognition,the car chosen online arrives from the multistory structure. Then, the customer can test the car for a few days (3 days max) and order it online.

How could international carmakers improve their marketing strategy in the Chinese market?

Target a young audience

New cars buyers in China are young and connected consumers. As they gain purchasing power, they are the future of the Chinese automotive market.

Do not neglect offline communication channels

The paradox of the explosion of e-commerce in China is that buyers are still demanding physical presence or human contact. Thus, offline channels must be up to the task.

Keep a close eye on your online reputation

Control your reviews and comments and opt for an influence marketing strategy because brand reputation plays a vital role in the buying cycle of a car in China.

Rely on well-made design

Content and design provide an important first step in customer experience in China in 2019: work on a modern and sophisticated design for your website, your products, and your communication.

Leverage to e-commerce and new retail

For automakers, innovation linked to the e-commerce platforms and deepening relationships with end users will be key to benefit from the increasingly technology-enabled car market in China.

Author: Steffi Noël

Daxue Consulting offers further analysis of the automotive market in China with a forward-thinking approach to topics such as digitization, high-tech implementation, artificial intelligence, and many others. To know more about the evolution of the automotive industry in China, do not hesitate to contact our project managers at dx@daxueconsulting.com.

This article Automotive industry in China: How carmakers compete for first place is the first one to appear on Daxue Consulting - Market Research China.

Click to jump to sections of the guide on clothes distribution in China

• Fashion market overview
• E-commerce
  • Taobao and Tmall
  • JD.com
  • Pinduoduo
  • Brand owned channels
  • Social commerce
• Offline stores
• COVID-19 impact

China’s fashion market growth is not slowing anytime soon

The fashion industry in China has performed well over the past five years. Industry revenue grew at an annualized 5% over the five years through 2019, to total $324 million. Forecast shows that the performance of clothes industry in China will increase to $359 million in 2021.

Data Source: Statista, Revenue in the clothes market in China

Clothing occupies 1/3 of all online shops. The three most popular e-commerce websites for clothes distribution in China are Taobao, Tmall and JD. Forecasts show that 52% of total revenue will come from online sales in 2020.

Data Source: Statista, Sales channels in the clothes market in China

Though offline channels attract less traffic than online, they play a more important role in the purchase stage, accounting for 60 percent of all transactions. Offline conversion is almost 4.5 times as high as online. Chinese consumers buy 43 percent of unbranded clothes online. However, they tend to buy branded clothes in physical retail stores. When it comes to branded clothes distribution in China, offline channels account for 80 percent of sales.

E-commerce market is an essential channel for clothes retail

Taobao and Tmall – the key e-commerce players for clothes distribution in China

There are three major types of clothes brands sold in Taobao: designer brands, commercial brands, and fast fashion brands. In recent years, international apparel brands have accelerated their expansion into the Chinese market. In general, Taobao targets the fast-fashion category of middle-income consumers seeking diversified fashion. For example, Zara is also developing rapidly in the Chinese e-commerce industry.

From the perspective of key brands, in December 2018, the online sales growth of most listed apparel companies continued to decline year-on-year mainly due to the fierce online competition.

Luxury clothing distribution on Tmall and Taobao

Luxury fashion has trouble differentiating from counterfeits on Taobao

There are no official stores of luxury brands on Taobao platform, as it focuses on fast-fashion. Besides, luxury brands worry about counterfeiters, which are hard to regulate on Taobao. In 2015 Gucci, Yves Saint Laurent and other brands filed a suit accusing Alibaba of being a conduit for counterfeiters. Starting in 2016 sellers of luxury products have to upload an invoice or authorization letter from the luxury brands, for examination by Taobao.

Tmall is an ideal alternative for luxury brands

51% of 45 top global fashion brands now have official flagships on Tmall. It’s a big uptick from previous years. Luxury brands that now sell on Tmall include Valentino, Versace, Isabel Marant, Coach, Bottega Veneta, Givenchy, and Burberry. At the end of September 2019, online fashion retailer Net-a-Porter and its men’s site, Mr. Porter, opened a shop on Tmall too. They are offering more than 130 luxury and designer labels. However, luxury’s mega-brands, such as Louis Vuitton and Gucci, haven’t come around to Tmall just yet. But for independent brands and so-called affordable-luxury labels such as Coach and Michael Kors, the reach Tmall provides is particularly beneficial.

Data Source: Quartz, Share of brands Luxury China Index selling on Tmall

Fast fashion distribution on Tmall and Taobao

E-commerce accounted for 20% of Uniqlo’s sales in China accounted in the first half of 2020, an increase of 30% over the same period last year. The brand expects e-commerce to account for more than 30% of sales in the fiscal year of August 2021.

The growing middle class in China are mostly seasoned shoppers who have a long-standing relationship with online retailers like Taobao. If we look at top selling clothes brands on Taobao, Uniqlo occupied the top position in the brand store category. In 2019 on 12.12 they got around 5 million yuan revenue in one day.

Up to now, Tmall has attracted 90% of the world’s fast fashion brands. Taking Uniqlo as an example, the financial report released in 2018 showed that thanks to the strong growth of the Chinese e-commerce market, the performance exceeded expectations. Co-operation with Tmall brought Uniqlo space for lane change and overtaking. In 2019 during 11.11 festival after 16 minutes, the turnover was around 5 hundred million RMB. Uniqlo became the leading Tmall apparel brand.

Data Source: Zhiyi Technology, Top ten brand stores on Taobao

Does Tmall and Taobao have more domestic or foreign brands?

Domestic brands are key on Taobao

Despite that foreign brands started actively participating in selling on Taobao, domestic brands still play a key role. In 2019 among top 5 best-selling brands on Taobao during 12.12. festival four brands were Chinese. For example, Semir brand established in 1996, has become a leading brand in China’s casual clothing industry. It made around 600,000-yuan revenue during the 12.12 festival.

Unlike Taobao, Tmall’s top brands in terms of sales are mostly foreign brands. Good performance shows Handu Group. In April 2019, the number of followers of the HSTYLE Tmall Flagship Store exceeded 20 million.

Foreign brands turn to Tmall

Foreign brands like Levi’s, GAP and Uniqlo actively distribute through Taobao and Tmall. Adidas also established an online store on Taobao and Tmall. Adidas claimed while most of its sales still come from offline stores, the company’s online sales in the country has seen rapid growth.

Tmall has become the core position of global brands in the Chinese market. According to Tmall data, the number of global brands that have entered Tmall has exceeded 50,000. Such foreign brands as Uniqlo, ZARA and Monki participated in Spring/Summer Tmall Fashion show, bringing nearly one million new products to the Chinese clothes market.

Data Source: Yunguan data, China’s top clothes brands on Tmall

Clothing distribution on JD.com

The data shows that JD.com clothes industry went online in 2011. It became the second largest occupant of clothes categories in China’s B2C market in 2014. It has now become one of JD.com’s fastest-growing categories. JD.com’s key brand layout has attracted many well-known international and domestic brands to settle in.

Luxury fashion: JD can help with brand awareness, but not all brands use it

Louis Vuitton Group has no official store on JD platform. However, other luxury brands in China actively cooperate with this e-commerce giant. In 2017 JD.com and Farfetch announced a strategic partnership that created the premier platform for luxury e-commerce across China. Farfetch has well-established operations in China and is already the partner of choice for 200 luxury brands. JD will help drive further brand awareness, traffic and sales for Farfetch in the market. Such brands as Armani, Swarovski and Zenith have their official stores on JD platform.

Fast fashion is not a focus of JD

As JD.com initially specialized in tech, there are not so many fast-fashion brands on the platform. The key players are Vero Moda and Only. From the brand lineup, JD.com bags, watches and jewelry account for a higher proportion, while Tmall focuses on clothing and beauty.

Domestic vs. foreign brands on JD

According to JD’s clothing brand ranking, domestic brands prevail in different categories of clothing. Taking the category of “women’s dresses” as an example, we can see that the top 5 products are Chinese brands.

Source: JD.com, Top 5 products in “women’s dress” category

Pinduoduo – discounted clothing with group buying

Founded in 2015, the Chinese e-commerce platform Pinduoduo offers a wide range of products from daily groceries to home appliances. Counting 536.3 million active buyers and 7 billion products sold in the first half of 2019, the platform is essential for retailers and brands.  When looking at a product, users have two price options, a standard price to buy directly and a discounted price. Discounted prices are unlocked when users form ‘teams’ of at least two buyers.

Luxury fashion slowly join Pinduoduo

For most brands, Pinduoduo is not going to be as good of a fit as a platform like Tmall or JD.com. This is particularly true for premium or luxury brands, which after years of resistance have turned in droves to Tmall’s Luxury Pavilion but are as resistant to discounting and promotions in China as they are elsewhere. However, in 2018 such luxury brands as Armani and Givenchy joined the platform. It can give other luxury brands in China an impulse to cooperate with Pinduoduo.

Brand owned channels

Brand.com is key for luxury

With higher platform fees and increasing user acquisition costs, only 10-20% brands are making profits on Tmall. Thus, building brand-owned ecommerce channels may be more worthy of investment. Besides, the issue of fake goods sold on public marketplace is a common concern of Chinese ecommerce consumers. Brand-independent ecommerce platforms in China can ensure brands full control on the whole retail process. 

Louis Vuitton in China – like Gucci and Hermes – has ventured online but on its own terms. In 2017 it launched a standalone e-commerce site. The site will let customers buy Louis Vuitton leather goods, shoes, accessories, watches, jewelry, luggage and perfume. Vuitton is fiercely protective of its distribution as a means of controlling prices and supply.

Many fast-fashion brands using their own website for clothes distribution. For example, UNIQLO has its own web-based store in China. Customers can also receive the latest information including the weekly mail magazine and the latest UNIQLO campaigns.  Customers will be able to choose from approximately 500 different items of UNIQLO mainstay products.

Using own website is more common for foreign than domestic brands

Most of global foreign websites such as Zara, Uniqlo, H&M, Nike, etc. have their brand-owned websites in China. For example, Zara in China launched an online store back in 2012. The website offers online shoppers the same full range of merchandise for women, men and kids as the one found in physical stores.

As Chinese companies are aware of rising costs of e-commerce in China, they actively distribute clothes using brand-owned websites. For example, Chinese company Peacebird launched a variety of sales models during Spring Festival, such as discounts and live broadcasts on its online shopping platform. It invited fans to “cloud shop”.

Social commerce in clothes distribution in China

Xiaohongshu- the fastest growing social media platform for shopping review

Xiaohongshu is a startup that’s part e-commerce portal and part social media platform. It also has its own e-commerce mall to which the posts on its site can link. The company is backed by Alibaba and Tencent, and has 220 million users. The top 10 content are the categories of “clothes”, “hairstyle”, “skincare”.

With the rising of Xiaohongshu many domestic brands started using it to achieve sales breakthroughs. For example, in June 2020 the domestic women’s clothing brand Zhizhi and the Orange Desire held a brand day event in Xiaohongshu. 12 different fashion bloggers shared live broadcast, promoting clothes of these brands. After this event, both brands saw rapid growth in sales.

Using hashtag “fitting room” on Xiaohongshu, most of results will show popular fashion bloggers taking photos of themselves trying on clothing in a store changing room. Zara, H&M, Uniqlo and COS are the most mentioned brands with fitting room hashtags. The article will give a description of the items, what the KOL did or didn’t like about them (such as material and fit), the prices, and which items the Chinese KOL suggests buying.

Source: Media Production, A typical ZARA fitting room try-on post

Luxury fashion use Xiaohongshu for brand awareness

Luxury brands like Dior and Chanel actively use Xiaohongshu to increase awareness. The number of mentions of luxury labels such as Hugo Boss and Max Mara by users has increased quickly on the platform. In 2017, users mentioned Chanel 2.24 million times, with Dior following after at 2.14 million mentions. Meanwhile, Hugo Boss recorded a 271 percent jump in mentions, with Bally and Max Mara both achieving growth of 133 percent.

Xiaohongshu shows fast growth in Fast-fashion

In 2019 the search volume of brand specific information on Double 11’s Eve brand has skyrocketed. In recent years, Uniqlo, a clothing brand that repeatedly created sales campaigns during the Double Eleven period, has also increased its search volume by 148% during this period.

Clothes brands embrace WeChat e-commerce

WeChat is a key channel for Luxury fashion

Since Louis Vuitton became the first luxury brand to open a WeChat public account in November 2012, other luxury brands have also rushed to open service numbers.

For example, on Chinese Valentine’s Day 2016, Dior launched an online customization campaign for its Lady Dior handbag. Users could choose the accessories for a small Lady Dior bag and directly purchase it using WeChat’s payment system or Alipay. 

Data Source: LadyMax, Top luxury brands in WeChat by number of followers

Uniqlo set the pace of WeChat for Fast fashion

UNIQLO was the first brand to test the WeChat mini-program store in China. At the same time, it introduced smart shopping guides Xiaoyou and Xiaoyou Zongsha to provide consumers with a better-quality experience and make its omni-channel closed loop more complete, thereby targeting more consumers. Uniqlo has taken the lead in WeChat, a traffic pool with 1 billion users, and has introduced offline self-promotion and LED digitization in all e-commerce channels and physical stores.

Domestic brands

Domestic brands use WeChat to increase awareness and communicate with customers. According to statistics, such brands as Eichitoo and Li Ning have the best results in WeChat promotion of their clothes.

Data Source: Sino-Fashion, Top domestic clothes brands in WeChat

Foreign brands

Nike, Adidas, Tiffany&Co, H&M and many other foreign brands launched WeChat accounts in China in order to expand clothes distribution. Users are staying on WeChat more frequently and longer, but for domestic brands, it is easier to attract traffic, gain customers, and convert sales on WeChat. For foreign brands, wanting to enter the Chinese market towards it requires a lot of capital investment and months of account opening.

Offline stores still make 60% of the total transaction volume

Despite the enthusiasm of Chinese consumers for online shopping, most still prefer purchasing luxury products at bricks-and-mortar stores. These enable them to see, touch, feel and try out products. Besides, it helps to enjoy high-end customer experiences such as refreshments, invitations to private lounges, and other customized services.

Particularly in the luxury sector, offline stores are still an important marketing and sales channel, where consumers are engaged in a highly experiential way through activities and events that reflect the brand image of the retailer. According to a report by Tencent, in 2017, 95% of luxury purchases were made offline versus merely 5% of luxury purchases done online. Taking Louis Vuitton as an example, China has the third place in the ranking of countries with the biggest number of LV physical stores. It shows the importance of physical clothes distribution in the Chinese luxury sector.

Data Source: Louis Vuitton, Number of Louis Vuitton stores per country

However, between 2015 and 2017, 138 new leading luxury brand stores were open in China, yet 144 stores were closed, therefore the aggregated number of the leading 20 luxury brand retail stores fell slightly down to 1,119 in 2017, compared to 1,125 shops in 2015. It can reflect the growing importance of the e-commerce in China, as more and more consumers choose to shop online.

Fast fashion brands continue to open offline stores

Companies with ambitious expansion plans include European company C&A Mode, which has more than 40 stores and plans to have 150. The Japanese brand Uniqlo, one of the first entrants into the scene of the fast fashion industry in China, plans to open 100 new fashion stores in China and already holds 2.4% of all apparel and retail footwear values.

Foreign fashion brands focus on offline ‘flagship stores’ in China

A number of players have expanded local store networks and launched their first/ largest global flagship store in the country. For example, in June 2019, Spanish fast fashion brand Mango signed a cooperation agreement with Hangzhou Jingzhe Clothing Co., Ltd. to accelerate its development in Asia, especially in the China market. Under this cooperation agreement, the brand will further develop both online and offline channels – it plans to open 16 physical stores in China.

Brand stores in China dominate in terms of clothes distribution in China

At the moment, in Asia – and in China in particular –mono-brands dominate the market. More precisely, 95% of the market in China is mono-brand retail stores. Adidas alone has 11,281 stores in China. The only exception in Asia is Japan, which already has a mature market. Nevertheless, the multi-brand trend is constantly evolving.

Multi-brand stores are rising in China

Department stores in China are still an important channel for clothing sales. According to the statistics, in 2005, the monthly sales of clothing in the top 100 shopping malls were 4.9 billion yuan. 44% of the total amount, with an average sale of 100 million yuan, indicating that despite the rapid development of the apparel wholesale markets in various regions, large department stores is still the main channel for clothes distribution.

COVID-19 impact on clothes distribution in China

Data Source: McKinsey, Traffic fell during COVID-19 outbreak in China

COVID-19 outbreak in China influenced the clothes industry in China. Discretionary categories, such as food service outlets, apparel stores, and department stores were hit hard during the crisis and their recovery has been slow. Absolute traffic levels fell dramatically in all categories. Some 80 percent of apparel stores have reopened, but footfall in discretionary categories is still 40-50 percent below pre-COVID-19 levels. To engage with these dynamics, hard-hit categories such as apparel have ramped up their digital activities. In February, when coronavirus struck China hard, Taobao saw the number of livestream sessions on its app double. It is a sign to the e-commerce platform that brands are relying more on livestreaming to get customers.

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A pop-up store is a short-term, temporary retail space that brands occupy. Regardless of whether the brands previously adopt a physical presence or not, it can be used for sales promotion purposes or for simply building connection with their existing and potential customers. Pop-up stores are usually designed or decorated creatively with the intention to provide a unique, engaging and memorable experience that can generate buzz in the short-term. It is apparent that pop-up stores are an effective marketing method, but what does it take to run a successful pop-up store in China?

Pop-up stores in China: An innovative new retail format to penetrate the market

Pop-up stores are often considered as a form of guerilla marketing that can help a brand to achieve strong short-term growth in sales, engagement or awareness.

Luxury brands open pop-up stores in China to connect with consumers

Brick-and-mortar stores play a very important and essential role for luxury retail brands as it is where brand story and consumer experience meet. While a long-term physical store is able to achieve so, a temporary pop-up store will be able to generate more excitement and a more unique experience for customers.

Chanel successfully launched a pop-up store in Shanghai named ‘Coco Game Centre’ two years ago. The Chanel arcade clearly went viral as people waited for over 2 hours outside only to get a peek inside. The store featured a make-up bar for customers to try on new Chanel beauty products, a series of arcade games for customers to win gifts such as lipsticks, lotions etc., and a few picture-worthy spots for customers to take pictures and upload on social media.

Chanel seeks to establish a closer connection with its customers through a pop-up store interaction. It is a fun and creative approach for the brand to create a unique, immersive and personal experience to the customers. The big Chanel logos upon the wall, and the red, pink and black colors all comes together in the pop-up store to communicate and convey the brand’s story and its core value.

With digitalization incorporated in the store, customers can scan QR codes and pay online at ease. In this way, they are not forced to make purchase, but are invited to experience the brand and make conversion in a more natural setting. Moreover, Chanel can also generate buzz around product launch and receive feedbacks on its new products. Big brands like Chanel usually has clear and defined target customers, in which utilizing a pop-up store will help attract right customers to give right feedback.

Online brands seeking an offline presence through pop-up stores in China

The best way for online brands to bridge the gap between their online and offline presence is a pop-up store. Pop-up stores are not only much more cost-effective, being 80% cheaper than a long-term physical store, but also is a great marketing tool in China to increase visibility and direct publicity.

In 2018, one of China’s biggest E-Commerce platforms, JD.com, tried their own version of pop-up retail in China —— ‘JD Fashion Space’. Its main object is to mix and match fashion, high-tech and Art Space. Consumers are invited to interact with the brand via digital dressing machines, shopping machines, games, and a designated selfie area.

Although consumers are becoming more digitalized than ever before, online brands like JD.com still seeks to create a cohesive brand experience offline to gain customer loyalty by opening pop-up shops in China. Consumers expect more different and engaging high-techs like immersive VR to become entertained in a technology-centric era. JD.com cleverly offered an interactive offline experience to their consumers’ taste, utilizing its digital strength, from VR fitting rooms to digital shopping windows.

As pop-up stores can generate short-term buzz, online brands can constantly remind customers their existence via both online and offline channel. This will be a chance for these brands to gain more potential customers offline and remind existing customers their online presence.

Other brands open pop-up stores in China to increase awareness

Other brands, regardless small or big, open pop-up retails in China to generate popularity in the short term and top-of-mind awareness in the long-term.

Last September’s pop-up buzz was all about a milk tea brand ‘Machi Machi’ because of its feature in famous Chinese singer Jay Chou’s music video “Won’t Cry.” The store in Shanghai, which will only be around for a few months, generated hundreds of people lining outside. The resale price of a cup of bubble tea was 10 times more than its original price.

The store has a photo-worthy wall for people to take photos and upload on social media. Many smaller brands like that will especially decorate its interior to make it more Instagram-worthy and hence more sharable on internet. These brands wish to create as much buzz as possible to bring popularity and boost sales in the short term, and the best platform to spread buzz is of course social media platforms.

Given that Machi Machi is planning to open an official store in Shanghai in the near future, pop-up retails in China are no doubt a fast, efficient and cheap way for small brands to test- new products and examine the decision to enter or expand the market. Just a few days ago, on June 25, an official Machi Machi store was opened in Hefei, Anhui province in China. The brand has positioned itself as a high quality and high face value beverage brand that has become a hot topic on social media platforms such as Xiaohongshu and Weibo. Regardless of what intention these brands hold, achieving awareness through a temporary pop-up store will be the key to further success.

Pop-up stores in China emerging as a major marketing tool for brands

Attribute to the success of many pop-up stores in China, increasing number of brands are seeking to generate more awareness and engagement through implementing this type of marketing tool in China. Although harder to breakthrough clutter in the recent years due to fierce competition, nevertheless pop-up stores are becoming one of the main forms of new retail in China.

According to a survey from storefront, 80% of global retail companies have opened a successful pop-up store and 58% willing to reuse the tactic. Pop-up stores are indeed a great way to fulfil excitement in those highly demanding Chinese consumers. However, if not properly executed or implemented, they will easily fall short and even generate an adverse effect then intended to. Customer expectation can skyrocket due to wrong location, failure to communicate brand value, improper execution or implementation etc. Therefore, it is important to carefully plan every step in order to open a successful pop-up retail in China.

How to set up a successful pop-up store in China

Define the goal

Defining  a clear goal for a pop-up shop in China is always the hardest. Although goals like increasing awareness, popularity, buzz etc., are essential, the decision to focus on sales promotion or just for pure marketing purposes will be the key to success. This decision is especially important to foreign than local companies because they subject to more regulations. Therefore, they need to be well-informed about China’s legal rules regardless which decision made.

Those who aim for direct sales, but do not adopt a corporate existence in China, will require partnerships, agents or distributors in order to engage in actual sales activity. On the other hand, pure marketing pop-up retails in China are much more simple to run, ruled under much less regulation.

The decision to sell the products or to market the products should depend on many aspects of company such as market share in China, presence in China, awareness in China etc.

Know your target customers

Millennials and Generation Z are becoming the most powerful consumers that all brands seek to understand. They are also a group of consumers who prefer experience over anything, which has lead the market evolving into an experiential-centric one. Therefore, opening pop-up shops in China that can engage with Chinese Millennial and Generation Z is a key to success. Brands should tailor the pop-up store to offer these customers different and personalized experiences and create an event that is both surprising and exciting to show them that they are no longer Dad’s Oldsmobile.

Find the right venue

The right pop-up store location is extremely important despite that it is often overlooked. The location can be anywhere: on a vacant street, in malls, in another store or event spaces. Regardless of where pop-up stores are located, the venue should generate enough foot traffic and buzz at the right time.

However, regulations need to be considered before picking any location. Unfortunately, due to strict rules in Shanghai and many other cities, pop-up stores are often only allowed to open in malls rather than on vacant street as no business will be granted to open in front of stores of or on side of the roads. Although street will give pop-up stores more space to occupy, shipping malls can offer a competitive edge for the brands. Shopping malls attract high foot traffic and right demographic, which makes it easy especially for smaller brands to target specific customers as they wish. Shopping malls are embracing pop-up stores as a form of new retail in China to save their lost traffic in the recent years, and more than welcome this win-win situation. Therefore, most malls offer convenience set-up process that will save many effort and time of pop-up stores owners.

Nars opened a pop-up store in Beijing in 2018 utilizing the open entrance area of Taikoohui Shopping Mall. The boutique was fairly eye-catching, easily grabbing people’s attention as they walk pass by.

Establish effective brand communication

Pop-up stores must align with and communicate core brand values. A consistent brand story should be narrated regardless of a press interview, a launch party or just a pure experiential store.

PUMA launched a pop-up experience museum in downtown Shanghai earlier this year, allowing visitors to go on a blockbuster journey of experiencing the blurring borders of reality and illusion. The theme goes with their featured new product, the “Future Rider” shoe, and allows consumers to fully experience what the brand has to offer. Added to the thrilling journey, consumers can enter PUMA’s flagship store at the iAPM mall nearby to win more products online. The purpose of the pop-up is not to drive sales, but to spread brand awareness. PUMA is inviting its customers to become a part of its brand and to be on their journey.

Be present on Social Media

In an ever increasing digitalized world, it is especially essential for brands to be present on social media, and of course will be the same for brand pop-up stores. Pop-up store in China relies heavily on short-term traffic and attention. In order for it to go viral and gain success, brands must encourage consumers to take photos in the store and share location on different social media platforms. Collaborating with KOLs and celebrity endorsers will be a powerful marketing tool to build anticipation and generate buzz before store opening. Stores can further enhance the engagement effort and accelerate social media impact by adopting hashtags that relates to the pop-up store theme.

Apart from traditional forms of Social Media like WeChat and Weibo, companies should also consider the growing importance of Xiaohongshu. Millennial and Gen Z spend their leisure time activity on this platform daily, searching up interesting places to visit.

When searching for pop-up stores in Shanghai on Xiaohongshu, a countless number of posts appear. This means that this platform has indeed became an important platform and marketing tool in China, which brands should utilize to generate buzz and increase traffic among its target customers.

Be creative and be exclusive

The most successful pop-up shops in China create unique and interactive experience for its customers. In order for a pop-up to offer a higher level of interaction and engagement, getting creative and think beyond simply selling products will be the key to differentiate from traditional retail.

YSL Beauté launched a pop-up ‘hotel’ in Shanghai early 2019 to promote its new product. The hotel was located in an Art Museum featuring three floors of themed rooms. YSL creatively incorporated its sales effort in this pop-up store. Customers are encouraged to engage with the brand through make-up station, digital interactive activities, and many photo-worthy spots. They are also invited to redeem YSL Beauté.

products using activity points earned along the way. In the hotel, they can become fully immersed in the situation and receive a unique and exclusive experience.

Pop-up stores are an effective marketing tool in China

Overall, successful pop-up retail in China will allow you to create awareness from potential customers, connect with your existing customers, learn more about their needs and hence better tailor your service accordingly. Plan your steps and utilise this marketing tool in China to make further developments on your brand.

Author: Chenyi Lyu

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Two drivers of China’s counterfeit production

The counterfeits industry in China: a consequence of economic growth

The counterfeit industry in China is seen as a problem but it should also be studied as a symptom of economic growth. In 1978, Deng Xiaoping started reforming China’s economy. For the first time, foreign investments where encouraged. Many companies wanted to relocate there because of low wages and domestic potential. The industrial power grew and the country became the factory of the world as the the international production process. Global brands like Nike or Adidas have a part of a part of their production there. In many sectors, the country started to adopt new technologies.

While China’s living standards improved greatly, the new industrial power lead to counterfeits, as factories could cheaply re-create brand products. The counterfeit industry in China seems like a minor symptom of industrialization. Hence, even if it is necessary to tackle counterfeits, it was just the result of a growing Chinese industry.

China counterfeiting is linked with brand culture

Since the early 1990’s, the counterfeit phenomenon increased quickly in China. During this decade brand culture emerged as the opening of western luxury stores in country. Fashion brands became hyped, and counterfeits were a mean to obtain luxury goods without spending years’ worth wages. Since, fakes continue to progress fulfilling the domestic market of China.

In 2015, China and Hong-Kong represented 86% of the global counterfeit industry, which is around 400 billion USD every year, according to Europol. Thanks to years of relocating for foreign companies, Chinese factories now have the skills needed to copy almost everything. In Chinese stores, 60% of luxury goods are imitations and you can also find some complete fake stores who just looks like a real one. For instance, A fake supreme store opened in Shanghai. The counterfeit phenomenon highly increased following the luxury market starting in China.

Size of the market for counterfeit products in China

The global counterfeit trade for all items, from purses to electronics to software, is worth USD 461 billion, about 2.5% of all trade worldwide. That is more than the global drug trade. Despite attempts regulation, international trade in counterfeit goods has almost doubled since 2008.

According to the 2018 Global Brand Counterfeiting Report, worldwide losses suffered due to counterfeiting amounted to USD 323 billion in 2017, with handbag companies alone accounting for $20 billion of that.

80% of the world’s counterfeit goods come from China, and many of the market’s consumers are in China as well.

The market for fake goods in China

There are several distinct market segments of consumers who purchase fake goodsin China. The primary segment is buyers unaware that they are purchasing fake products. This deceptive counterfeiting is rampant, but the market for fake goods in China is largely driven by consumers who actively search for and purchase counterfeit products. 

Middle-class shoppers who value brand prestige make up a large segment of the non-deceptive counterfeit market. They can afford the occasional $500-$1000 bag, but not the luxurious $15,000 Louis Vuitton or Birkin. These aspirational Chinese shoppers purchase fake goods for the same reason the wealthy buy real products: to emulate their high-class idols, impress peers, and enhance social status. Fake goods allow shoppers to “consume” prestigious brands without actually buying the high-quality goods.

Some consumers knowingly buy counterfeit goods even though they could afford a genuine product. They have ample funds but believe that the high prices of authentic products are unwarranted, especially when they can get a similar version at a much cheaper price.

Chinese Fashionistas chasing the trends

Some wealthy buyers of counterfeit goods in China are known as “fashionistas.” These fashionistas want to buy the hottest new products, but know that another trend will replace it next season and are thus unwilling to invest the money to stay on trend season after season. Furthermore, they see counterfeit purchases as low risk, because limited-edition or recently released products are less familiar to the general public, making it more difficult to call out a fake.  

Buyers of counterfeit goods impose a hidden cost on the brand and people who buy the real thing: they make the brand less exclusive. All non-deceptive counterfeit market shoppers share one attribute: they are willing to pay for visual attributes and functions, but not willing to shop the genuine products. 

Government regulation of the fake market in China

Affected parties have previously complained that punishments for selling counterfeit goods in China are too light to deter offenders. In February 2017 Alibaba reported that of the 1,910 cases of suspected counterfeiting they passed on to authorities, only 129 people were found guilty.

In August 2018 the State Administration for Market Regulation stepped-up efforts to crack-down on the illegal production and sale of counterfeit goods in China.

The regulator announced strict punishments for online trading platforms that fail to protect the rights of consumers and trademark owners, or that do not actively cooperate with market regulatory authorities.

They demanded that other regulators such as the Shanghai Administration for Industry and Commerce launch targeted investigations into sales of counterfeit goods in China, and specifically called out offending platforms such as Pinduoduo.

The new China’s e-commerce law, which took effect on January 1^st, aims to discourage counterfeiting in China through heavier fines and places more responsibility on digital platforms to remove sellers of fake goods. The law also addressed false-advertising, consumer protection, data protection, and cybersecurity.

The new law targets three groups: e-commerce platform operators like Taobao, merchants who sell goods on sites like Taobao, and vendors with their own websites or who sell on social media. Merchants who sell exclusively on social media platforms had been previously unregulated, but now these sellers will need to register their businesses and pay relevant taxes.

In an effort to spur major e-commerce platforms to crack down on counterfeits being sold on their sites, the law makes platform operators jointly liable with the merchants selling fake goods. Previously, only the individual merchants were liable. Platform operators can now be fined up to 2 million RMB (USD 290,000) for the property infringement that comes with selling counterfeit goods in China.

E-commerce platforms crackdown on the sale of the counterfeit good industry in China

Taobao and fake goods

In 2015, Alibaba was the subject of intense state scrutiny as the State Administration of Industry and Commerce unveiled that only 37% of the luxury goods authorities examined on its Taobao platform were genuine. In a strongly worded white paper, state authorities criticized Taobao for lax internal controls, declaring that many of the products sold on the site were substandard, violated trademarks, or were just plain illegal. Chinese consumers agreed and called on the government to tighten supervision over Taobao. Alibaba declared a zero-tolerance policy towards counterfeits, and created a new 300-person team to ramp up the fight against fake good in the Chinese market.

Luxury brands were unimpressed, and in May 2015 Gucci, Balenciaga, YSL and other brands filed a lawsuit alleging that Alibaba’s negligence encouraged the sale of fake goods on its sites. A US federal court dismissed the suit, but Alibaba’s reputation as a haven for counterfeiters persisted.

In 2017, Alibaba was again under consumer and government pressure when Taobao was found to have over 240,000 vendors selling fake goods, up from 180,000 vendors the previous year. To assay consumer anger and protect investor relations, Taobao in mid-2017 launched an initiative to crack down on the fake goods being funneled through their site. That initiative has led to 95% of takedown requests and red-flagged listings being processed within 24 hours, a significant improvement in processing times. 97% of listings for counterfeit items are now deleted before transactions even take place.

How does Pinduoduo handle counterfeit items?

Pinduoduo, the third-largest e-commerce platform in China, is another site criticized for selling low-priced knockoffs. In August 2018 the State Administration for Market Regulation investigated Pinduoduo and announced that Pinduoduo should strengthen platform management and better regulate activities of third-party vendors. Pinduoduo soon removed more than 10 million fake items from its site and blocked more than 40 million product links suspected of copyright violations. It is working with over 400 luxury brands to fight counterfeiters and has created a hefty 150 million RMB account to refund consumers who were unwittingly sold fake products.  

How counterfeiters in China get around AI controls online

There are many intricate ways in which sellers of fake goods in China have evaded regulation online. One common trick is for sellers to redirects clients to separate websites, where they can browse options and place an order. Another method is to label items as “haute couture,” which consumers are aware implies ‘high-quality copy.’ Aside from this label, Taobao sellers can change the name of the brand they are copying, or display just part of it. One seller of copycat Zara clothes lists his items as ZA or Z*ra, which allows him to sneak past the filters set by Taobao.

Taobao’s AI tools are constantly upgrading to become more difficult to trick, especially with the introduction of filters against luxury products priced below a certain point. Accordingly, some sellers of fake goods will display a price for their product that is consistent with the price for the real thing, or display a price that is outrageously high. Interested customers will talk to the shop in Taobao’s private chat function, and sellers will reveal the real, much lower price.

In-person sales of counterfeit goods in Shanghai and Beijing

Counterfeit goods sold online in China work hard to avoid detection, but physical brick-and-mortar ‘fake markets’ in cities like Shanghai and Beijing are out in the open, easy to find and even reviewable on sites like Trip Advisor. Officials routinely inspect physical stores, but they may not take the job too seriously because they know local vendors rely on the income. Regulators let the stalls peddling cheap and fake goods slide, instead choosing to target merchants who lead interested buyers to unmarked apartments, back rooms, or closets full of high-quality fake Gucci, Prada, Michael Kors, and Louis Vuitton handbags.

Aside from avoiding government regulation, counterfeiters in China work hard to stay under the real company’s radar. One fake good peddler in Beijing explains: “We careful. Louis Vuitton. They send spies and they sue. So we hide.”

The emerging authentication industry in China

The prevalence of fake goods in China and consumers’ subsequent fears of being scammed into accidentally purchasing knockoffs has created a new sector: product authentication.

There are dozens of apps on the Chinese Apple iOS app store that offer to verify luxury goods. Authentication company Zhiduoshao has hundreds of thousands of users who pay 49 RMB for a product to be checked virtually by an expert. Founder and CEO of Zhiduoshao maintains that 95% of authentication requests can be answered online via photos. Authenticators tell users what kind of photos to upload, and then carefully inspect the monogram, fabric, and technique. Often, the process only takes a few minutes.

Similar app Isheyipai boasts an “expert jury” of 12 authenticators. Users upload photographs of the item in question and choose who they want to check their product. Prices range from 49 RMB for a junior authenticator to 99 RMB for senior staff. Appraisers each have areas of expertise, such as bags, jewelry, or shoes.

Private companies offer training courses that teach appraisers-in-training how to inspect a wide range of luxury brands and products, with advice about texture, logos, stitching and everything else that a counterfeiter might get wrong. A 10-day program can cost up to 40,000 RMB.

Authentication companies in China have an uneasy relationship with the brands whose integrity they claim to protect. Cartier maintains that their products should be bought only from “authorized sellers,” while Audemars Piguet states that it does not endorse any authentication app and De Beers says it is unaware of them.

Brand wariness of authentication services is rational because Chinese counterfeiters are now imitating these authenticators too. Seemingly authentic sites copy the names, website layouts, and imagery of established authentication platforms like Zhiduoshao in order to scam consumers seeking product verification out of their money. In one case, consumers discovered that an authentication app was faking reviews and authentications to sell knockoff goods.

How brands can fight back against Chinese counterfeiting

Anti-counterfeiting strategies must be brand specific to take into account the company’s target market, the types of counterfeits produced, and how the counterfeits are being manufactured, distributed, and sold. An effective strategy combines IP protection, export and customs controls, and retail market controls.

But no matter how sophisticated the anti-counterfeit strategy is, where there is a demand there will be a supply. The only surefire way to shrink the market for counterfeit products in China is to deter consumers from purchasing fake goods in the first place. However, typical deterrence strategies that luxury brands have used in the West will not work in the Chinese market.

Many consumers are aware that their purchases are counterfeit

Most consumers who purchase counterfeit products in China are well aware that the quality is not on par with the real product. When consumers buy fake goods, they do so despite the possibility that the product will fail them. Additionally, the prevalence of sophisticated fakes means that consumers can easily buy counterfeit products with nearly genuine quality. Thus, highlighting the poor performance quality of counterfeit goods is not an effective deterrence strategy for brands to adopt in China.

Where in other countries purchase of knockoff goods is a punishable crime, in China consumers are not liable for their counterfeit purchases. Deterrence of counterfeit purchases in China cannot then be fear-based.

There are two main deterrence strategies that luxury brands can adopt to dampen Chinese consumer demand for fake goods: the ethics emphasis, and the psychosocial emphasis.

Anti-counterfeiting in China: The ethical approach

Counterfeiting is not a victimless crime, and luxury brands should tell consumers who gets hurt when they buy fake products in China.

Most counterfeit goods in China are made in sweatshops by children and slave laborers who are often the victims of human trafficking. These sweatshops are overwhelmingly in low-tier Chinese cities, and these child workers are often Chinese, making the issue hit particularly close to home for Chinese consumers of knock-offs.

The Chinese counterfeit industry’s use of child labor is much more damaging than the use of child labor by companies like Walmart and Target. Corporations can beare held accountable for exploiting cheap labor: when labor abuses are exposed, companies face plummeting share prices, lawsuits, and customer boycotts. Counterfeiters face no such risk, because consumers of knock-off goods do not know who manufacturers their handbags or sneakers.

Brands can educate against counterfeiting practices in China

Additionally, brands can educate Chinese consumers about the criminals who benefit when a shopper buys a counterfeit good. Production and distribution of counterfeit goods are heavily controlled by ultraviolent Chinese triads, who traffic in narcotics and sex slavery alongside fake products.

Consumer awareness of the hidden costs associated with their counterfeit purchase can create shame and guilt that might deter some Chinese consumers from buying knock-off goods.

Anti-counterfeiting in China: The psychosocial approach

In the West, there is a shame that comes when one admits to buying counterfeit products, and luxury brands should work hard to foster that stigma in China. For some people, the regular purchase of fake goods is a normal part of life: many Chinese consumers who own fake goods assume that the luxury brands sported by their peers are fake as well.

In 2018 the Japan Patent Office launched an anti-counterfeiting campaign that revolved around embarrassing consumers who buy knock-off products.

It is too early to see the results of Japan’s shame-based anti-counterfeit strategy, but the premise is solid. Luxury brands effected by Chinese counterfeiting could emulate the approach, and work to create a social stigma against knock-offs.

Across the board, the most effective strategies to deter Chinese consumers from buying counterfeit products are shame-based.

Who is benefiting from the counterfeits industry in China?

China is responsible for more than 70% of counterfeiting according to the World Customs Organization. Where all the money from this industry is going? Alain Rodier, in his book: The Triads: the hidden threat, indicates that the counterfeiting is linked with Chinese triads. They are using the money received from counterfeiting to invest in other illegal activities. However, the money can also be legally re-injected into the country. Alain Rodier argues that criminal money is largely reinvested in the country’s legal economy: “As far as the Chinese triads are concerned, they would have a worldwide turnover of 200 billion dollars. Much of this money is reinvested in the legal economy”. For instance, the Sun Yee On triad would have largely participated in the development of Shenzen. Even though triads and other organizations directly benefit of counterfeiting, it can be noted that this money is sometimes reinvested in the legal economy.

Rethinking the fashion industry

One way of tackle the fake industry is to completely change the opinion of people concerning clothing. Trends should focus more on quality than brands. Fast fashion might also be a big issue in consumption because of its impact on the environment. If the fashion industry evolves to its simplest form, people would not be sensitive to brand image. Without the importance of brand image, there is no demand for counterfeit luxury goods anymore. Naomie Klein with its book “no logo” lead this movement in the end of the 1990s. One way to wipe out counterfeits is to educate people to consume goods differently, without being obsessed with brands.

To conclude, the counterfeit industry is a direct consequence of the industrial growth in the country combined with the value placed on brand image. It is difficult to tackle this gigantic phenomenon generating billions each year. You have both to address the production and the consumption of counterfeit goods. The counterfeit goods industry is injuring companies because it negatively impacts their brand image, consumers who are genuinely interested in the luxury products may lose faith that what they are buying is authentic.

What brands can do to avoid intermixing with counterfeits in China

For luxury brands to avoid being sold alongside counterfeits, brands can try a brand independence, or direct to consumers strategy in China. Counterfeits are sold easily on e-commerce platforms, but selling from a brand’s own website, or brand.com, is a surefire way to avoid competing with counterfeits and keep a pure brand image.

Authors: Alison Bogy & Enzio Cacciotto

Daxue Consulting helps you get the best of the Chinese market. Do not hesitate to reach out to our project managers at dx@daxueconsulting.com to get all answers to your questions.

Luxury brands in China do not have to compete with counterfeits

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The incredible success of bubble tea in China since 1996

The story behind the success of bubble tea in China

Bubble tea is a drink made from tea (usually black tea), milk, syrup, and a special ingredient that captivates the hearts of Chinese people: tapioca pearls. Bubble tea is also known as 珍珠奶茶 (Zhen Zhu Nai Cha) directly translates to pearl milk tea, but is also known as boba tea in parts of the world. Far from healthy, the drink contains a lot of caffeine and sugar, especially due to syrup sweetener. 

What is captivating about this drink is that it is both drank and eaten at the same time. Tapioca pearls, which can be different sizes, offer a unique chewy texture and a sweet taste.

Where does such a successful drink in China’s beverage market come from?

Bubble tea originates from Taiwan, in the city of Taichung. It was reportedly created in the 1980s in a tea shop called Chen Shui Tang where the owner, Liu Han-Chieh, was selling oolong tea. With the innovative idea of changing the way Chinese people consumed tea, and a bit of influence from the Japanese way of drinking cold drinks, mixed tea, milk, and ice in a cocktail shaker. Following the popularity of his cold drinks, he experimented with pouring tapioca pearls into the milk tea. This marks the birth of the world-famous Bubble tea beverage in China.

The rest of the story is well known: bubble tea has been a great success, spreading throughout Asia and even gaining popularity throughout North America. Today, bubble tea is an integral part of Taiwanese and Chinese culture.

More and more brands on China’s beverage market

Source: iiMedia – Number of milk tea shops in China

China’s bubble tea market seems almost saturated: at the end of 2018 iiMedia counted 450,000 milk tea shops offering bubble teas in China. The number of milk tea shops in 2018 increased by 74% from 2017. Bubble tea is the best-seller in almost every milk tea shop. There are dozens and dozens of players in the milk tea market in China. Equal Ocean ranked the 19 most powerful brands in this sector earlier this year listed below:

Bubble tea brands in China can be divided into two types: traditional and new style, embodied by the famous Heytea brand. The differences are mainly in price and design. The new ones attract younger consumers who see them as a way to show a cool and international lifestyle.

Among these bubble tea brands in China, some will catch your attention, either by the pertinence of their marketing strategy or by their product innovation or even their financial power.

Top bubble tea brands in China

• Yi Dian Dian is one of the three most powerful bubble tea brands in China, coming directly from Taiwan. It is considered a classic brand, serving traditional bubble tea milk. Yi Dian Dian has more than 600 stores in China and is now conquering Europe and other Asian countries such as Japan. Yi Dian Dian keeps their prices lower than most bubble tea stores.

• Coco or Coco Fresh is also one of the 3 brands mentioned above, with more than 2,000 stores worldwide and 20 years of experience.Coco offers a wide variety of toppings and the adjustment of all recipes, and have entered the coffee market in China.

• Heytea, whose success has made a lot of headlines in Chinese media, the Starbucks of Bubble Tea, is one of these new styles brands and has easily competed with Coco and Yi Dian Dian. Attracting mainly Chinese millennials, they are an example of innovation in a standardized sector and successful brand launch. With their first boutique opened in Shanghai in 2017, they are now also present in Singapore and Hong Kong, and with higher prices, hey are positioned towards the premium end of the bubble tea market in China.

• The Alley is probably the brand that has focused the most on the aesthetic side of beverages. Known for its brown sugar tapioca pearls, and layered matcha and black tea drink, its drinks are also among the most caloric bubble teas in China. The brand has succeeded in its commitment to be present throughout the world, on all continents.

• With its first boutique opened in Shanghai in 2006, Happy Lemon is also an interesting bubble tea brand in China because its identity differs slightly from that of its main competitors with design and values more focused on freshness and fruits.

In search of innovation for tea beverages in China: format is constantly evolving

Although most tea shops offer two main options (milk teas and fruit-flavored teas), harsh competition boosted the number of innovations. Non-fruit flavors such as avocado, ginger, mango green tea, taro or mocha are very often available and toppings such as tropical fruits, lychee, coco cubes, aloe jelly, coffee jelly, coconut jelly, pudding or chia seeds can be chosen as well.

The segment of cheese teas, also known as milk cap, is also new: Heytea is very well known for adding salty, creamy cheese to its beverages. The idea is to add creamy cheese to the tea. This helps to compensate for the bitterness of tea, which is less popular with younger generations of Chinese people. This salty cheese balances the sweet taste of the tea and fruits that are added to the drink. Surprisingly, cheese tea seems to appeal to people who care about their health thanks to the low-fat options available.

Happy Lemon has also developed Oreo Milk Tea which consists of adding oreo pieces to a milk-cap tea. But innovations do not stop at taste, design, and format. Shops try to offer the best customer experience. This is the case of Happy Lemon. They went viral on social media thanks to their robotic arm present in some of their shops, which embodies their desire to embrace the trend of new retail.

A report from Mintel recently showed that Chinese people prefer to buy their tea in physical stores. That is why many bubble tea brands in China try to innovate offline. The owner of the boutique explained that it was a pure marketing initiative, to attract consumers in a very competitive landscape.

Instant milk tea in China: different marketing, different codes

China’s tea market is by far the biggest in the world with a retail value of US$9.6 billion. Where it becomes particularly interesting is that 38% of its value comes from the instant tea category. One of the top segments of the instant beverage market in China is milk tea and bubble tea.

China’s instant teas imitate the flavors of bubble teas that can be bought in shops and sometimes even add real tapioca pearls to drinks. How does it work? In a cup, often made of plastic, you can find a sealed pouch of instant tea, a straw and another small pocket with tapioca pearls. Then add hot water, mix and in two minutes, bubble tea to take away is ready. Consumers’ favorite instant bubble tea brands in China are U-loveit and Xiangpiaopiao.

Packaging plays an important role in this market: on-the-go packaging is perfectly adapted to the fast-paced lifestyle of urban and overbooked Chinese millennials. Although more limited than what can be found in the shops, the choice remains quite wide: Xiangpiaopiao offers milk tea with green tea, chocolate, caramel, strawberry, sweet potato, etc.

The brand U-loveit has even worked with celebrities and KOLs in China to promote its bubble teas, collaborating with the world-renowned actor, singer-songwriter, Jay Chou.

The conclusions that can be drawn from the success of bubble tea in China

Drinking bubble tea is something you need to show on social media, that you share with your followers to show your very cool lifestyle, especially with the increasingly aesthetic drinks

On Chinese social media, the bubble tea trend is definitely huge and several pictures of milk teas are posted every single minute. Indeed, bubble tea is fashionable, fun and the most beautiful drink in China’s beverage market. The tapioca pearls and the colors of the tea mixed with milk make very shareable pictures. On Xiao hong shu or Weibo, there are thousands of photos of all brands. The Alley has particularly succeeded in making drinks beautiful enough for social media.

Social media is a showcase opportunity for Chinese consumers

This success of bubble tea in China shows us once again how much social networks are an integral part of Chinese life and that sharing with friends is the daily activity of millennials.

However, social media are also used by brands to advertise. Thirst marketing is thus leveraged by a large amount of bubble tea brands in China, such as Heytea which success relies heavily on its smart use of social media. The brand used the ‘network effect’ of social media and is mainly famous for the extremely long waiting time to get its products.

It uses a controversial technic: scarcity marketing. Heytea posted several pictures of lines in front of their stores explaining that waiting time could reach 6 hours! This went viral online and encouraged customers to share a picture when they finally got the precious beverage. Heytea’s famously long waiting time actually became a selling point.

China’s tea market, an invincible market

One of the first conclusions that can be drawn from the success of bubble tea in China is that the Chinese are still tea drinkers. It should be recalled that tea was discovered in 2737 BC by the Chinese Emperor Shen Nong. An emperor that became mythical precisely because he taught agriculture, medicine and the art of using plants to the population. Since the Tang dynasty, tea has become the main drink in China’s beverage market. Despite the growing success of coffee and the arrival of new coffee brands, tea remains a staple among Chinese. Moreover, the consumption of milk tea in China has exceeded the consumption of coffee. According to Ibzuo, Chinese people consume five times more milk tea than coffee.

Starbucks trend going to an end?

The success of bubble tea in China also leads us to question Starbucks’ supremacy in China. With existing 3,300 stores in over 90 Chinese cities and around 2,700 new stores expected to open by the end of the 2022, Starbucks’ success in China is undeniable. The American and international way of life promoted by these coffee chains has pleased Chinese people for years. Costa Coffee used the same sales argument, with nearly 350 stores in mainland China.

However, the atmosphere of these coffee shops and the values they convey still appeal to the Chinese.

What a tea entrepreneur says about the threat of coffee consumption

In an expert interview with tea entrepreneur Martin Papp, he shared his experience conducting market research in Starbucks in China.

 “China is still a tea-drinking country. I did some market research in 2014 when I was planning on starting this company. So I went to multiple Starbuck stores in China and surveyed customers in the store on whether they prefer drinking tea of coffee. I found that about 50% of Starbucks’ customers prefer tea over coffee. ”

Papp’s research suggests that people who prefer tea still went to Starbucks because tea shops did not offer the desired atmosphere in 2014. However, now things are changing, and milk tea chains have begun to adopt the same codes. People no longer have to go to Starbucks to find a hip place to socialize over a drink. Whether in the names of the drinks, the aesthetics of the drinks, the decoration of the shops and the values conveyed in the advertisements, everything reflects the enviable codes of Starbucks. Recently, HeyTea and Nayuki have even created tea rooms which are comfortable spaces for their customers to relax. So going to Heytea has become just as cool, even cooler given the long queues in front of the shops in Shanghai.

Healthy or unhealthy: a still difficult choice?

Finally, bubble tea drinks with a lot of sugar, raise the issue of healthy drinks in China’s beverage market. According to the Daxue Consulting report on healthy snacks in China, Chinese people, and especially women, have been paying attention to what they buy, the composition of products and the origins of ingredients.  Baidu Index demonstrates searches on healthy products has been stable throughout the past year, showing a real interest in better products. Although, searches for healthy products takes a dive during the spring festival when Chinese people tend to eat more sweet things and other family dishes.

Source: Baidu Index, Daxue Consulting report – The search frequency of “healthy snacks” in 2018 and 2019

How does bubble tea adapt to this trend?

A mix of milk and tea seems not caloric but because of the added sugar and tapioca pearls, bubble tea is a very caloric drink, heavy in carbohydrates. The typical glass contains more than 200 calories and 33 grams of carbohydrates.

According to Meituan, who delivered more than 210 million orders of milk tea last year, Chinese women are the largest consumers of milk tea and bubble tea, far ahead of men. 95% of women under 26 who use the Meituan app typically order milk tea every week. This means that bubble tea brands in China have had to adapt to new health concerns by offering more healthy alternatives and being more flexible on the amount of sugar. It is anyway a trend that is going to reshape the whole F&B industry in China.

Thus, in a highly competitive market, there is no shortage of innovations. Bubble tea brands in China are working hard to keep their current customers and attract new ones. Despite the growing trend of a healthy lifestyle, bubble teas in China still have a bright future ahead of them. The craze for bubble tea is so huge that we are even starting to find bubble sushis, bubble sandwiches, bubble noodles, and bubble pizzas…

Author: Steffi Noël

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• 0:15 Guest introduction and Spa Solutions’ history
• 6:12 Why does 19% of revenue comes from Spa retail sales?
• 7:16 Personalization and protocol – the two factors for running a successful spa
• 9:53 Why is the quality of the spa service in Asia better than in the West?
• 13:06 How is the coronavirus outbreak impacting the spa industry short term and long term?
• 18:43 The spa market segmentation – a brief analysis
• 20:50 What equipment could raise the efficiency of spa businesses?
• 23:58 Other examples of the spa business segmentation
• 27:36 The hotel spa pricing system
• 30:06 The spa market in China – big chain spas vs stand-alone spas
• 32:43 How are the independent spa chains impact the spa Chinese market?
• 38:30 How does a spa service business structure look like?
• 40:48 Are there other streams of revenue for spas expect treatment and retail?
• 43:06 The top spa businesses in terms of capital
• 44:04 A few key features a spa needs to have to survive in China
• 49:43 Does it make more sense to view the spa business as a retail business rather than a treatment business?
• 51:35 About the geographical segmentation of the spa business
• 56:25 Getting spa sales improved by 70% – a Spa Solutions quick fix
• 58:49 Spa products retail prices – higher or similar to getting them from another specialized store
• 1:00:21 About problems that need to be addressed in the spa industry
• 1:02:07 Is formal training by cosmetic brands required for spas in order for them to sell their cosmetic products?
• 1:05:28 What training does Spa Solutions offer big brands in terms of integration with spa services?
• 1:07:14 How does technology help the spa industry?
• 1:09:31 How does a profile of a typical premium hotel spa or medical spa look like?
• 1:12:16 Are spas adapting their offers based on the different weather climates existing in different geographical areas in China?
• 1:15:35 Outro

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We also find that the smart and second-hand jewelry market has soared recently. China’s jewelry market can afford to approach a wider target market, men and children represent a flourishing consumer base. However, their demand have not been satisfied yet. In this fast-changing market, having insights on the latest trends would level up performance.

Jewelry sales are tied to GDP, so here is an overview of China’s GDP

The Chinese GDP has seen an upwards trend from 2010 to 2019, maintaining a stable growth rate at around 10% from 2017 to 2019. The number of the wealthy class and the upper middle class in China are expected to rise, which is a sign to promote the consumption of jewelry. From 2015 to 2020, the number of the wealthiest class (more than 24,000 RMB monthly disposable income) has the highest growth rate, with a CAGR of 16.9%.

Correspondingly, from 2009 to 2015, China’s jewelry market saw an upward trend. However, in 2015, the industry revenue dropped by 9.12%, ending the six-year continuous growth. The downward trend in 2016 has eased in 2017, following a stable growing trend onward.

China’s fundamentals, including the growth of the middle and upper classes, and urbanization, remain strong and the government’s new fiscal policies, such as 13th Five-Year Plan, are expected to improve jewelry market conditions in the next few years.

These 8 trends shape China’s jewelry market

1. The luxury jewelry market is dominated by foreign brands

Players in China’s jewelry market could be divided into mainland companies, Hongkong-invested companies and foreign companies. Generally, products of foreign brands, such as Cartier, Van Cleef & Arpels, and Swarovski are priced higher than domestic brands. These luxury brands often have a longer history, and customers are willing to know the story behind the brand and each product series.

Chinese domestic jewelry companies are younger. Most of them have no more than a hundred-year history, and the price is more affordable. In recent years, with the Chinese economy’s recovery from the global recession, more young players, such as KEER, I DO, and Zbird have joined the market and expanded quickly.

Big companies such as Chow Tai Fook Group implement a multi-brands strategy, building high-end jewelry brand image. Jewelria, for example, is a brand of Chow Tai Fook group, targets high-income people, and only has stores in a few tier I cities, products of which are not accessible on the online shops.

2. The geographic center of jewelry consumption is shifting downward

With demand in Tier 1 and Tier II cities reaching maturity, Tier III cities become a more important driver of growth and contributes the most value to China’s jewelry market.

The purchasing power of Tier II and III cities is increasing rapidly. Accordingly, the demand for jewelry is increasing, stimulating store expansion in lower-tier cities, especially for companies that implement both store franchising and self-operating models.

Source: China Industry Information

Lukfook and Chow Tai Fook are the two companies with the most stores in mainland China. In recent years, they focused more on expansion in Tier II, III and lower-tier cities in order to achieve a broader coverage, and accelerate authorizing franchise stores in these cities. These cities which experience higher economic growth are in general more resilient to global economic fluctuations and have seen rapid expansion in their jewelry markets. Cartier is also trying to expand carefully in Tier II cities, such as Chengdu and Nanjing.

However, the market in tier I cities is not shrinking, of course, so companies continued to upgrade the positioning and branding of Tier I and cities to cater to the sophisticated customers in these cities. Pandora, for example, retained all the operation of distributors in China to improve the purchase experience.

Demographically, population growth rate in tier III cities is higher than that in tier I and II and has doubled in recent 10 years. Population in tier III cities is 5 times more than that in Tier I. Because internet penetration rate of tier III and lower-tier cities is higher than before, people are more easily to be affected by KOLs when making a purchasing decision.

Source: Lukfook annual report, Chow Tai Fook annual report

3. Gold jewelry is the most popular, but tier I cities are reshaping the trend

China’s jewelry market can be segmented into three: gemstone jewelry, metal jewelry and other jewelry. Other jewelry could be made by Ceram, ivory, wood, etc. Although many jewelry companies have expanded their watch sectors, and watches are usually set diamond or other precious stones, watches are not considered a subcategory of jewelry.

In the whole jewelry industry, gold products are the most popular category and accounts for more than a half of industry revenue, followed by diamond, jade, and other precious metal such as platinum and silver.

Source: Gems & Jewelry Trade Association of China

The revenue contribution proportion is the same in some companies. Chow Tai Fook, for example, gold products contribute the highest revenue of 57.4%.

Chow Tai Fook divided bridal jewelry into Chinese bridal and western bridal. Chinese bridal jewelry is usually made of 24-K gold. In northern China, there is a tradition that the bridegroom has to buy “three gold (三金)” for the bride, which contains a gold ring, gold necklace, and gold earrings.
Image: Daxue Consulting

The Chinese market is dominated by plain, 24-carat products, which represent about 85% of the market by volume. This ‘pure gold’ jewelry (known as 足金 in Mandarin) is almost entirely sold by weight. Ships weigh the items chosen by their customers, multiply the fine weight in grams by the daily SGE spot price and then add a markup that incorporates the labor charge and a retail margin. The balance of the market is made up of 18 carat ( known as K金 in Mandarin) and gem-set products. A large share of the 18-carat market is for weddings bands, where ‘white gold’ provides strong competition for platinum.

Source: Precious Metals Insights

In recent years, gold jewelry has faced stiff competition from gem-set or other jewelry products in tier I cities. Only 18% of women in tier I cities would choose to buy gold jewelry when given 5,000 RMB, compared with 14% and 15% who would buy diamond or platinum jewelry respectively. However, this competition is not as fierce in lower-tier cities. Consumers in tier III and IV flock to buy high carat, heavy gold jewelry for wealth preservation purpose. Also, in tier I cities, there is a healthy market for 18-carat fashion jewelry, much of the upper end of which is imported Italian product.

Source: World Gold Council

Tier I cities are changing the shape of consumerism in China. Trends that start amongst these groups eventually filter through the consumer landscape.

4. Self-purchasing of non-bridal diamond jewelry pieces is growing

Bridal diamond jewelry may not be the foundation of the diamond jewelry industry

Wedding jewelry is traditionally the biggest part of jewelry consumption occasions, which contributes 32.1% and 39.2% total revenue of Chow Tai Fook in 2014 and 2015. Brands such as I DO and Darry Ring have always targeted in the bridal market.

However, in 2016, only 11.43 million Chinese couples registered for marriage, making it the third consecutive year the number has declined. Much of the marriage decline results from China’s one-child policy. Ended formally in January after 35 years, the policy accelerated a decline in the country’s birthrate. As a consequence, people between 20 and 29 – prime marrying age- make up a declining share of the population compared with two decades ago. Because families often preferred male babies, China has a surplus of men, further complicating marriage prospects.

Source: Ministry of Civil Affairs of PRC

With the decrease in demand for wedding jewelry, brands need to adjust the product line. Danish fashion jewelry manufacturer Pandora seems to quit this market. It has kept away from ‘love’ based promotion in China. Its advertisement has never shown the image of couples, which is thought to be old-fashioned and would discourage it from potential customers such as single women.

The Tmall store of Pandora presented many pictures with young ladies wearing its products. This differentiates this young jewelry brand from other traditional brands.
Image: Pandora Tmall flagship store

Products popular with Millennials and for female self-purchase are helping to spur growth.

While women’s desire to be given diamonds is still strong, women in China are more likely to buy diamonds for themselves. This is due to the growing number of working women. 25% of women in China are already earning more than their spouses, which is higher than that in the US.

They often choose gifted jewelry themselves or have input into its selection. 26% of women receive diamonds for birthdays, with the exception of 18^th and 20^th birthdays when an even higher percentage of women receive diamonds. 27% of women buy diamond jewelry for no specific reason. Emotional drivers are particularly powerful in China, with the celebration of relationship and personal milestones topping the list, while this number in the US is among the last.

Source: De Beers Diamond Insight Report 2017

Millennials increasingly value everyday wear jewelry. Unlike wedding jewelry, jewelry for every day is a repeat purchasing opportunity. They also value experience over things, that’s why Pandora is so popular in China. Its Moment series bracelets provide over 600 different options in China for Chinese customers, launching new products in various celebrating days. Pandora remains a two-digit percent of annual revenue growth in mainland China since it entered China market officially in 2015.

Conventional domestic jewelry companies are also seeking to attract millennials. After-acquired Boston jewelry brand Hearts on Fire, Chow Tai Fook provides more products for young customers. Luk Fook provides gold jewelry in low purity, making the price more affordable.

People are trying jewelries on in Monologue shop, and most of them are young ladies. Monologue is another young brand of Chow Tai Fook, targeting millennials in a simple design and low price.
Image: Daxue Consulting

5. The digital market can’t be isolated from offline stores

Online shopping has effectively become a national pastime in China with approximately 77% of respondents picking it as their favorite leisure activity.

80% of consumers aged between 20 and 40 learned about gold and jewelry products through the internet and 60% of them had spent money on the internet. The proportion of spending on gold jewelry under RMB1,600 was 64%, while that on gold jewelry over 3,000RMB was 15% only. Currently, the products priced at around 1,000RMB are prevalent in the internet spending on gold jewelry, while the products priced under RMB2,000 are the major market for the internet spending on gem-set jewelry. Chow Tai Fook sets price range in their physical stores is 3,000-6,000RMB, whereas online it is 1,000-1,500RMB.

Almost all the main players in China have its own Tmall and JD stores. Besides, Wechat shop and Vip shop are the 2 platforms where people could reach jewelry products.

E-commerce player keeps rolling out offline stores

In the online market, jewelry companies’ biggest challenge is to inspire confidence in customers. Because of Chinese people purchasing preference, the business model of Blue Nile that provides diamond selections for customer online has no physical inventory and only procured from the supplier once a customer has made an online purchase will not succeed. Almost all the online shops of jewelry companies could locate the nearest offline shop for online visitors, inviting them to walk in and touch and feel jewelry. Even early e-commerce success players are rolling out offline shops these years.

One difference between e-commerce player and conventional players is the function of offline stores. For the former one, it has fewer offline stores: Kela (柯兰钻石) has 210 stores, and Zbird(钻石小鸟) has only 41 stores. These stores only have sample products and a few inventories. People can either place a digital order through in-store tablets or their own mobile device, or through the store directly, and they have to wait for products producing and shipping from Shenzhen, China’s biggest jewelry manufacturing and trading hub, where most jewelry manufactories are located in, including Kela and Zbird, for 5 to 20 days.

Zbird(钻石小鸟) successfully implements a B2C model into jewelry industry. Zbird is founded in 2002, before Alibaba had even launched Taobao, selling diamond rings and pendant on Eachnet, the first e-commerce platform in China, and only opened its first offline store in 2014.

Customers could select key components of diamond (i.e. Price, Cut, Color, Clarity, Carats)
Image: Zbird official website

However, for Zbird and Kela, most of their revenues come from offline stores: 80% for Zbird and 70% for Kela. Customers looking for engagement and wedding rings are more likely to actually buy the ring in the offline Store. Online customers tend to buy more personalized diamond jewelry like pendants, earrings, and other pieces that are less likely to require opinions from family members.

E-commerce and O2O interactions will continue to reshape the retail industry

Unlike e-commerce companies, conventional jewelry companies are trying to access customers as broad as possible. They focus on in-store experience and have more than one store in a city. Chow Tai Fook’s revenue from e-commerce platform accounts for 9.3% of the total. 11% for Lukfook, increased 97.4% from 2016, 77.7% of which comes from gold and platinum products

Chow Tai Fook levered on its extensive retail network paired with inventory unification system to collaborate with online platform partners and launched the online order distribution program in 2017, enabling its customers to enjoy jewelry deliveries directly from nearby POS in shorter delivery time.

WeChat is an efficient channel to communicate with customers

WeChat’s monthly active users sit at 1 billion as of Feb. 2018. Cartier was the first luxury jewelry brand to use WeChat moments ads. Relying on Tencent’s enormous database, the accurate delivery of the ads helped Cartier’s WeChat account gain a huge following.

From February sixth until Valentine’s Day of 2017, 150 limited editions “rose gold love bracelets” were available exclusively on Cartier’s WeChat online store. Each bracelet cost over RMB 30,000 and was on the more affordable end of its jewelry collection. The total 150 bracelets were sold out within a week on WeChat.

The purpose of this campaign was not to focus on the selling figures, but rather on showcasing Cartier’s premium-purchase experiences. Essentially, using hunger marketing resulted in raised brand awareness and increased desire from consumers.

Besides WeChat, Weibo and Douyin are also witness a joining of jewelry brands. Domestic jewelry brand I DO has 38 thousand fans on Douyin and is one of the most popular jewelry brands on it, compared with Chow Tai Fook’s mere 12 fans and KEER’s14 fans. The most popular videos of I DO are the promotional cuts off a group of celebrities, Nine Percent, that has presented its crossover perfume. The group member of this nine-member Chinses boy group formed by the survival show Idol Producer has at least 4 million fans on Weibo, 73 percent of which are young people aged under 23. Finally, this perfume contributes 4-million revenue to I DO. Recently, Chanel cooperated with Douyin, posting videos about its watch, gaining up to 73 thousand views.

Posters of I DO perfume presented by celebrities NINE PERCENT have covered the whole exit of Shanghai Xujiahui subway station.
Image: I DO Weibo account

Brands need an innovated form of advertising. The parent company of I DO, Hiersun Industrial Co., Ltd., founded its own film company, and plan to shoot a movie based on the idea of its I Do bridal jewelry. The same as Kela, whose parent company Gangtai Holding (Group) Co., Ltd has acquired an advertising company in 2015.

Without long history, domestic jewelry brands emphasize design and quality of raw material

Some high-end jewelry brands attract customers by telling brand stories, such as Cartier and Van Cleef & Arpels, and some young brand without such a long history could choose to endorse itself by strengthen its design, persist in social responsibility and others. Pandora strengthened its concern to Thailand workers, Shinning house (钻石世家) emphasizes donating to schools in rural areas.

Since Shanghai Diamond Exchange is the only transaction platform for import and export of diamonds in mainland China, most jewelry companies in China purchase processed diamond from it. However, some companies, such as Zbird, choose to sign purchase agreements with Antwerp Diamond Exchange and purchase processed diamonds from there.

Rather than purchasing processed and polished diamond, a few big players have ability to process diamond by themselves, vertically integrating their business model. Chow Tai Fook now purchases rough diamond from Alsora and Rio Tinto, and has 5 Jewelry Manufacturing Companies in mainland China, covering upstream raw material procurement, and rough diamond cutting and polishing, and midstream product development, manufacturing and quality assurance.

Cutting and polishing rough diamond allows Chow Tai Fook to secure the quality of diamond to be sold.
Image: GIA, Visit to Chow Tai Fook Diamond Cutting Factory in Foshan, China

6. There is still much room for jewelry for men and children

Limited male jewelry despite the strong demand, especially in tier I cities

China’s jewelry market consumption is dominated by females. 63% of jewelry products are purchased by females, and this number would go up with an increase in unit price.

While the traditional women’s market is fiercely competitive, the male jewelry market is still in the early stage of its development. As well as traditional jewelry items, such as rings, the men’s market also includes such solely masculine items as tie clips, cufflinks, and belt buckles. The interest of mainland male consumers in jewelry products stems mainly from their taste for diamonds. Among Chinese males in the 30-44 age group, 67% wish to own diamonds. Compared with the relentless growth in overall demand, though, the development of the mainland male jewelry market is relatively slow.

Although jewelry brands more or less have some male jewelry products, the design is lack of innovation, and most of them are gold rings or bracelets. Diamond jewelry brands have only a couple of diamond rings for men.

Source: Data from brands’ Tmall flagship stores

Most male consumers bought jade and K-gold products, but the diversity of jewelry purchased would increase with the income of male. For high-income male consumers, they prefer amber, diamond, color stone and crystal, and are less interest in conventional jewelry such as jade and K-gold. Males in tier I and II cities contribute most of the revenues of jewelry for men.

Jewelry for children

In accordance with Chinese traditions, people give longevity locks, bracelets, and necklaces to children as goodwill tokes and as a way of wishing them a healthy and happy life. In particular, the kinds of gold jewelry items can be worn, but which also has an inflation-proof value, are the top choices among those parents who are skilled at managing finances.

In December 2015, the two-child policy allowing Chinese couples to have two children was passed, and effective from January 2016.

Source: National Health and Family Planning Commission of the People’s Republic of China

In response to the implementation of this policy, many companies have introduced a variety of kids’ products. Lukfook, for example, launched an array of jewelry accessories featuring the Rilakkuma, a popular fictional character produced by a Japanese company, and the baby gift sets that came with the accessories invoking blessings for peace, safety and health as well as the exquisitely designed gift boxes. Chow Tai Fook also cooperated with Disney, Line, and Marvel, attracting parents to buy for their children.

Chow Tai Fook launched Minions series products, most of which are priced relatively low, compared with others, from 756 RMB to 948 RMB
Image: Chow Tai Fook e-shop

Besides images of cartoons, the twelve Chinese zodiac animals is also a theme of children jewelry. Parents believe that give children a gold or silver bracelet of their zodiac animal would keep bad luck away from their children.

7. Smart jewelry may be an opportunity

Totwoo, the first domestic smart jewelry company, has got 20-million series A round investment in 2016, used for developing new products and launching offline stores. It launched smart jewelry “We Bloom”, “We Bold”, and “Time Memory” in 2015. It has necklaces and bracelets, priced from 1,098 to 2,389RMB, and made of crystal set on silver or gold. The featured function is that two connected users can share their “virtual emotions” in real-time through the Totwoo APP to vibrate and light up, according to the reporter-turned Internet entrepreneur. Users can store their secret memories and receive alerts: “Take a break,” “Fitness Tracker” and “Incoming call.”

Conventional jewelry company Chow Tai Fook also invested in smart jewelry “Linklove”. It has vibrating, selfie shooting, and step tracking recording functions.

8. The second-hand jewelry market is at a beginning stage

Although the second-hand market is growing fast in China, especially for second-hand car, having over 10 e-platforms exclusively for the second-hand car business, second-hand jewelry seems to just at a beginning stage. Second-hand jewelry products could be traded in second-hand platforms that allows users sell things in various categories, such Xianyu, developed by Alibaba group, and Zhuanzhuan; or in platforms exclusively for luxury products, such as Zhier (只二) and Secoo (寺库).

Daxue Consulting can strategize your entry into China’s jewelry market

As a business intelligence authority in China, Daxue Consulting has a thorough understanding of China’s jewelry market and millennial spending habits and can help your company strategize a China market entry.

If you want to know more about China market strategy, do not hesitate to contact us at dx@daxueconsulting.com

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The O2O food delivery market in China is estimated to be worth over 37 billion USD, and it is growing rapidly. Among the products sold online, food is one of the most promising categories: online food sales rose by 36.8% year-over-year in the first two months of 2018. Food delivery apps have an estimated 355 million users, meaning that a quarter of all Chinese people are ordering food from their phones. There are more than 1.8 million food delivery orders placed every day in Beijing alone.

Transformation of eating habits in China

Getting takeout food is a relatively recent phenomenon in the country. The trend started with foreign fast food franchises such as McDonald’s in the 1990s. Homegrown local restaurants, such as noodle houses and those offering regional specialties, followed suit. But it was not until the rise of online food delivery platforms that the O2O delivery market in China took off.

Since 2009, when the first food delivery app Ele.me appeared, the number of customers using these platforms has gone up from zero to 406 million at the end of 2018. Nearly half of China’s internet user base has ordered takeout food through apps at some point in their life.

The development of online delivery has improved the food processing and supply capabilities of offline restaurants. At the same time, it has also stimulated new demands due to convenient and fast services. As of 2020, the growth rate of O2O food delivery market in China is more than 10%. It exceeds the growth rate of the traditional catering industry. Due to the development of diversified consumption habits of Chinese people, the food delivery market in China will exceed 300 billion yuan in 2020.

Fast food category dominates in terms of O2O food consumption

In the first half of 2019, fast food accounted for 69% of O2O food consumption. Western food and local dishes had second and third place. Such categories as seafood barbecue, milk tea, desserts also were popular among Chinese consumers when ordering food.

The number of seafood O2O orders increased in 2019

The proportion of seafood in China‘s O2O delivery market increased. It is an important category for night delivery consumption. In the first half of 2019, users consumed more than 150 million seafood barbecues on the Meituan takeaway platform. It had a year-on-year increase of 55.3%. In the first half of 2019, the order volume of crayfish has exceeded 20 million orders. It is about 300 million crayfish.

Semi-prepared food and vegetables as a new trend in the O2O food delivery market in China

Online shopping for semi-prepared dishes has become a new choice for young consumers. This new trend has led to a rapid increase in sales of semi-prepared food. In 2019, 800,000 semi-finished dishes have been sold. At the same time many elderly people have changed their habit of hoarding vegetables for Spring Festival. They started to order home delivered fresh vegetables. Sales on the platform Taoxianda increased 172 percent compared to 2018. “The semi-prepared dishes satisfy young people’s enjoyment of cooking at home,” said Yongcheng, a sales clerk at Tmall.

Penetration rate of the O2O food delivery market in China continues to increase

As the market scale continues to grow rapidly, the penetration rate of the food delivery industry continues to increase. In 2018, the penetration rate was 10.8%.  By the third quarter of 2019, this figure had increased to 15.9%.

Breakdown of the O2O food delivery market in China

The food delivery services in China work through apps, which show lists of food providers nearby or allow the user to search for specific restaurants. Clicking on the restaurant brings up the menu and the ordering system, which uses online payments or bank cards. The apps also allow users to rate the food and service, as well as show the location of the delivery driver so an order can be tracked. The apps take about 20% of the order revenues.

The Chinese food delivery industry is high growth and highly profitable, but it is hard for outsiders to enter the space because two platforms control 90% of the food delivery app marketplace.

Who are China’s food delivery industry’s consumers?

The food delivery industry in China is so large and profitable because of how often consumers make purchases. 256 million people in China used online food ordering services in 2016, and in 2017 that number rose to 346 million. Now it is 355 million.  35% of food-delivery app users order food one to three times a week, and a separate 35% of users order food four to six times a week, according to a report by iiMedia Research.

Online food delivery service users are primarily white collar workers. In 2015, about 63% of online food delivery app users were white-collar workers and 30.5% were students. Now, 83% are white-collar workers, and only 10% are students.

Consumers are clustered in top tier cities, with Shanghai boasting the highest number of users per capita.

Consumer demographics are split nearly evenly by gender, with women making up 51% of food delivery app users. Users are overwhelmingly young, with 75% between ages 18 and 39.

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Food delivery in China is popular among all income demographics. Consumers are split nearly evenly by income level, with high-income consumers boasting only a small edge.

Why is food delivery so popular in China?

Because of the intense competition between delivery apps in Great China, consumers often receive steep discounts and coupons when they place an order. This can often make ordering food cheaper than eating it in a house. The intensive couponing practice is a result of price wars between the industry’s two major players, Ele.me and Meituan. The rivalry has hit both companies hard, with Meituan’s operating losses crippling year-over-year to USD 510 million in the third quarter of 2018. Ele.me will also face pressure soon as their parent company Alibaba copes with slowing revenue growth. Coupons are no longer as high as they once were, but consumers still receive them often.

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Meal delivery in the Chinese market is significantly more popular in China than in the West, owing in some part to the fact that food delivery costs in China are about 10% to 20% of what they are in the US.

Which apps dominate the food-delivery industry in China?

The food delivery market is a duopoly dominated by Chinese tech giants Alibaba and Tencent, who own Ele.me and Meituan respectively. Combined, these two delivery apps control a 90% share of China’s food delivery market.

Longtime rivals Alibaba and Tencent have been competing across industries for years, and China’s meal delivery is just yet another sector for them to battle in. The two giants are not just competing for the O2O food delivery market in China, but they are racing to gain new users who can be guided to other Alibaba or Tencent services. Owning Ele.me gives Alibaba a treasure trove of consumer data, and the same goes for Tencent’s ownership of Meituan. Data derived from Chinese meal delivery apps provides insights about consumer spending power, eating preferences, and payment profiles.

Chinese meal delivery app: Ele.me

Ele.me is China’s largest food delivery giant with 53.4% market share. They have 260 million users, 3 million couriers, and are estimated to have delivered nearly 300 million orders. Alibaba in 2018 valued Ele.me at USD 9.5 billion.

Chinese meal delivery app: Meituan Waimai

Meituan Waimai, commonly known as Meituan, controls 40% of China’s food delivery market. Similar to Ele.me, Meituan is an online-to-offline (O2O) food delivery app that provides users with online ordering, food delivery, and some other related services in China. Significantly, Meituan offers more non-food delivery services than Ele.me, such as flowers, office supplies, and more.

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What are the benefits/drawbacks for restaurants of being on food delivery apps in China?

Listings on food delivery apps give restaurants in the Chinese market new profit sources, widened service awareness, and new consumers. App operations can be so profitable that some “virtual restaurants” operate out of the kitchen only. However, profit margins for restaurants are declining swiftly. To gain Chinese market share, Ele.me and Didi provided restaurants with subsidies to entice them into selling food on their apps. But as the apps struggle to become profitable, they are raising commission rates on the food providers. Commission rates vary by restaurant location, size, and type, but most restaurants give the apps 20% of order revenues. For restaurants operating on low margins, this can hit hard. To keep profits stable, restaurants must shift the burden to consumers and raise menu prices. Otherwise, they are forced to absorb the new costs – keeping consumers happy but hitting their profit margin hard.

The Chinese food-delivery industry: Looking ahead

Ride-hailing app Didi recently threw its hat into the food-delivery ring, starting in March 2018. Didi provided subsidies and incentives to restaurants and consumers, forcing Meituan to follow suit before local authorities stepped in to demand an end to the “extreme” marketing practices. As Didi expands to other cities, the subsidy battles will likely continue.

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[Data Source: Statista, size of the facemask market in China]

2021 estimations after COVID-19 show a slowdown of the trend, but the memory of the pandemic will still account for a significant part of the demand.

Before the outbreak, the face mask market in China was much more driven by pollution concerns than disease. Pollution alerts often led to a surge in demand on the Chinese e-commerce marketplaces. Resulting from COVID-19, an unprecedented surge in national demand for face masks pushed thousands of new manufacturers to start producing face masks, with the support of local authorities. However, the rush for N95 masks with higher filtering capabilities has largely benefited the American brand 3M, which dominates the N95 face mask market in China.

China met global face mask demand with a production boom

Since the re-qualification of the outbreak as a global pandemic, China experienced a mask-making boom. In 2020, More than 38,000 new companies registered to make or trade face masks. China was already the main market for protective masks production in the world, making half of the global output in 2019. In February 2019, the country had already risen its capacity from 20 million to 110 million. Concerns about overcapacity in the offer on the Chinese market have quickly disappeared, with China’s face masks being in urgent demand from other countries.

In April 2020, foreign governments’ ‘wild feeding frenzy’ for Chinese protective face masks brought chaos to the landscape of manufacturers. A medical supplier during the pandemic told the South China Morning Post: “mask machines are like cash printers.” To meet global demand, many factories that were making completely different products like car parts, electronic parts, or plastic toys, therefore turned to mask production. With governments fighting for ramping up their stocks, quality controls at purchase were often completely avoided in favor of shipping speed.

New regulations to prevent face mask scams

The influx of new actors to the market has led to a dilution of the quality and a surge in scams, forcing the Chinese government to change the rules. Mid-April’s new regulations from China’s customs agency require companies manufacturing PPE (Protective Personal Equipment) for export to go through a government-led process. Mask exporters also need to prove that their products meet the relevant regulatory standards of the destination country.

This move comes after a global backlash in which foreign countries were supplied shoddy products, undermining China’s position as ‘the global savior.’

As long as the pandemic doesn’t end, the Chinese face mask market will stay warmly flooded with transactions. However, foreign countries are now ramping up their own productions to be less dependent on Chinese exportations.

Thus, if the pandemic is an instant boon for the Chinese face mask market, the gold rush will soon end, and many actors may be left aside.

National issues supporting the Face Mask Market in China

The face mask market in China is largely driven by external events like epidemics and pollution. Most recently, the Coronavirus outbreak has caused face masks to sell out all over China. Originating in Wuhan late December, the 2019 new Corona Virus (2019-nCoV), has infected over 28,000 people and killed about 570  in Chinese mainland as of February 7^th 2020. – The rapid spiral in the number of identified n-CoV cases forced the Chinese government to seal cities and public transport. The Spring Festival holidays had been extended by a week, hoping to curb the spread of the epidemic. Two months before the destructive outbreak, China’s National Health Commission had already called to effectively enhance prevention measures in anticipation of the upcoming flu season, looking for a more standardized process for diagnosis and treatment.

But the 2019-nCoV is by far neither the first nor the last to appear on Chinese soil. China has always been considered by the World Health Organization (WHO) a hot spot for new influenza viruses; there is indeed no other country on earth where so many people have close contact with wild animals. Thus, the n-CoV reminds of the lethal 2002-3 severe acute respiratory syndrome (SARS), but also less widely known avian influenza A(H7N9) virus, which killed 212 people in China according to a 2015 WHO report.

In the meantime, according to the Global Health Observatory, total health expenditure per capita in 2014 in the country reached 731 USD, which is much lower than the 2014 world average of 1041 USD. This report from the OECD shows that China counted 1.8 physicians per 1000 people in 2015, which is slightly more than the World average of 1.5, but almost twice less than the OECD countries.

Pollution drives the functional mask market in China

Flu prevention is not the only health problem that China is facing. Air pollution is another one, which has become one of the most intensely discussed livelihood issues that the Chinese government focused on the 12th National People’s Congress (NPC), held in Beijing on March 5, 2016. Chinese Premier Li Keqiang declared a “war on pollution” at the Communist-controlled NPC parliament in 2014.  Three years later, average particulate levels in Chinese cities still do not meet the World Health Organisation (WHO)’s standards, which considers anything over 10 PM2.5 as health hazard (maximum annual average PM 2.5 exposure). According to this infographic, in 2016, Beijing had  a yearly average of 7.3 times above the WHO’s recommended safe levels.

N95 masks in China: A shield in a war against the Coronavirus

In January 2020, Chinese President Xi Jinping declared “a people’s war against the [n-CoV] epidemic” over a governmental meeting, stressing that prevention and public awareness remain the most effective measures to fight a pandemic. Since the 2002-3 SARS, people rely on wearing surgical masks. Especially high-filtering specialized N95 masks, during illness as one of the main preventive barriers against propagation. Claimed as an effective way to protect oneself from the virus, face masks have been urgently brought to the fore as a daily necessity and a fast-moving consumer good in China, resulting in a massive gap between market demand and supply.  On January 3, 2020, just over a week after the new coronavirus outbreak, China “urgently needs” protective medical equipment while medical masks shortages were reported across the country.

 Face masks, also called ‘kouzhao’ (In Chinese口罩) usually cover the nose and mouth and include cotton masks with cute designs, surgical masks, and imported high-end filters. In 2014, officials in Shanghai considered distributing free protective masks to residents after the financial hub of China “suffered one of the worst spells of air pollution on record,” reported The Telegraph. At this time, PM2.5, fine ambient particles less than 2.5 micrometers in diameter causing cardiovascular diseases and lung cancers, rocketed to levels that were more than 20 times those deemed safe by the WHO.

Red alert in Northern China

In December 2016, northern China (including Beijing, Tianjin, and around 70 other northern Chinese cities) had been covered for weeks in thick toxic smog, composed of high concentrations of PM2.5. It is one of the worst episodes of air pollution the country has seen, affecting 460 million people.

The “red alert” was declared in 24 cities, prompting the closing of schools and airports, restricting traffic and asking citizens to stay indoors. In response, online shoppers splurged on filtration masks, and anti-pollution equipment , with e-commerce firms and brands reporting record demand, as explained by Reuters. In December 2016, Internet retailer JD.com Inc sold to domestic consumers about 15 million US-branded filtration masks through its online marketplaces. 

Face mask price inflation

The 2016 measures to counter air pollution strangely resemble the drastic measures of early 2020 to stem the spread of the new coronavirus, forcing dozens of Chinese cities to quarantine. As a result, 80 million masks were sold on Taobao over the two days of January 20 and 21. The BBC also reports that the price of a 20-mask box jumped to 1,100 yuan ($158) on Jan. 21, up from 178 yuan in November. Between December 30 and January 24, 3M, the most popular face mask brand in China, added $1.4 billion in market value. Honeywell, the American conglomerate that also sells face masks in China, added $500 million in market value, in the same frame time.

Overall, due to significant health crises, the protective face mask market in China, still dominated by Western brands that control more than half of the Chinese market, is heating up. Many budget manufacturers and low-cost producers from Japan and China are now trying to get a slice of it.

Rising demand for face masks in China

The demand volume of protective masks in China has grown continuously since 2012. State media estimate the protective face mask market in China was worth nearly 4 billion yuan ($600 million) in 2015. Along with the improvement of the living standard of people in urban areas and the rise of the middle-class, people’s awareness of pollution, germs and contaminants protection is increasing all the time, especially for young children, and will maintain rapid growth.

Protective face mask production in China

China’s protective face mask market enterprises are mainly distributed in the eastern region, and Bohai Rim, Yangtze River Delta Region, and Pearl River Delta Region are the major production areas. Shandong province serves as the center of the masks industry in China with another production hub, Dadian, dubbed the “mask village” for producing the cheapest pieces.

There are more than 300 mask processing and supporting enterprises in Dadian village, Jiaozhou City of Shandong with an annual production capacity of nearly 1 billion pieces. Realizing about CNY 1.1 billion ($160 million) of output value, it accounts for more than 80% of market shares nationwide (data based in 2017).

Currently, common protective masks widely available in every convenient store are priced at CNY less than 1 or 2 ($0.15 to 0.40) to CNY 30 or 40 ($4.5 to 5.8), and they are made from cotton yarn, activated carbon, and other materials. Along with the continuous increase of Chinese residents’ incomes and the improvement of people’s living standard, people have a stronger awareness about the environment and health. As a result, consumers are willing to pay more to protect themselves from health crises’ effects. They look for more comfortable and effective masks, such as Vogmask or Cambridge masks, which generally range in price from CNY 120 to 245 CNY ($19 to 37, based on 2019 Tmall/Taobao prices and currency exchange rates).  To meet growing demand in China, new market entrants like Airinum focus on the high-end market, with stylish design and high-quality replaceable filters.

Collectivism and Chinese consumer psychology 

“In China, people just pretend or assume that it is useful. It’s a mass behavior,” indicates Wong Chit Ming, a researcher at Hong Kong University’s school of public health. “You may feel a little better…but there’s no real evidence this might help.” This is collective consumer psychology among the Chinese who are entirely concerned about the threat of air pollution and germs during flu season. For him, Chinese people have the impression that this could resolve the problem of air quality and they should, therefore, do something to protect themselves from the harmful air, which will comfort them emotionally regardless the practical effect.

Different style and functions for the Face Mask Market in China

China Textile Commercial Association officially released ‘the community standards of PM2.5 protective masks’. The standards were implemented on March 1, 2016. Before this date, China had no quality standards for face masks for personal use, and the majority masks available claiming to reduce particulate matter by 99% on the market were not protecting against PM2.5.

According to the FDA, “Face masks and N95 respirators protect the wearer from liquid and airborne particles contaminating the face. They are one part of an infection-control strategy.” While face masks like medical and surgical masks are meant to block large-particle droplets, splashes, sprays or splatter that may contain germs from reaching your mouth, they are more loose fitting than N95 masks which are meant to achieve very close facial fit. The ‘N95’ designation means that the mask blocks at least 95 percent of very small (0.3 micron) test particles. Properly fitted, N95 respirators’ filtering capabilities exceed those of face masks, making N95 masks the most popular choice in times of pollution and influenza season. Currently, the N95 mask market in China is dominated by the giant 3M, as it is the only brand to be N95 approved by the Center for Disease Control and Prevention (CDC).

[Source: South China Morning Post ‘3M N95 Masks in China’]

Choosing the most effective mask

At present, the variety of types of anti-dust and anti-contamination masks sold in online shops and outlets have contributed to the disorder of this market. Those most popular kinds of masks are always those masks which have a relatively simple wearing process. Still, the vast majority of Chinese residents use cheap cotton masks that offer little protection. Also, expensive specialized N95 masks aren’t made to fit Chinese faces well, according to a study from Wuhan researchers. Even those benefiting from China’s Kou Zhao boom admit that their masks can only do that much.

Except for the most common cotton masks, active carbon mask which can be recycled and praised for  its adsorption force becomes another hot choice in China market. As some researchers analyze, China’s functional mask market has not been arousing general consumption groups’ attention due to its late start. But now it has garnered significant attention.

Division of the Chinese Mask market

Simple market research shows that on Taobao/Tmall, the top-selling mask brands are replicas of each other. Top brands sold in Dec 2018 to Jan 2019 are listed in the graphic below:

Lack of diverse options in China’s mask market

These brands and their products are the same in almost all aspects including materials, designs, promotional strategies, pictures used online and textual description. It is very likely that these masks are produced by the same producer. However, there is no trace showing the actual manufacturer of the products, and thus unable to identify whether the domestic mask product is highly concentrated or not.

Based on Xinhua.net, the overall face mask market in China is mostly controlled by the international giants 3M, which occupies almost 90% of all the market share, followed by Honeywell and Ludun 绿盾 with less than 5% respectively. Other brands such as Uvex and Hakugen have a non-significant market segment of less than 1% respectively.

To be noted that, among all these brands, only Ludun 绿盾 is produced by Chinese domestic company Sinotextiles Corporation Limited, other brands are all international based.

Another market analysis renders different views on the masks industry in China. According to a market report, four major domestic mask producers own 7 major brands. The largest domestic mask manufacturer is Shanghai Dragon Corporation 上海龙头股份 (market share 6.52% with 2 brands) followed by Shanghai MNP Inc 上海美科 (market share 7.14% with 3 brands), Teda Tianjin 天津泰达 (market share 5.90% with 1 brand) and Dongguan Rongxin 东莞容鑫防静电技术 (market share 1.00% with 1 brand) in a descending order.

The future of the Face Mask Market in China

There is an increasing demand for both functional and comfortable masks, so much improvement has been achieved in protective measures, what’s more, these functional masks are equipped with high technological contents. Thus, the additional value increases correspondingly. For example, masks for controlling bacteria and protecting virus should carefully suit with people’s facial form. Obviously, such a malignant environment we are living in is difficult to be improved thoroughly in a short time. Therefore, self-protection measure appears to surge high unprecedentedly, bringing vigor to the protective face mask industry in China.

New market studies in late 2018 found that ‘smart’ masks are now more welcomed than traditional protective face masks. Now major mask buyers in China not only consider the function of filtering but want to buy smarter equipped masks. With some AI microchips implanted into masks, those new products can both monitor the filtering function and other rates affecting human body performances including heart rates, air pressure, humidity and other air-related live data. Some other products even developed a replaceable filter with AI function, and these products are more like sports equipment than simply anti-pollution masks. Their filters can be replaced to imitate different air pressure levels and add on training difficulties when people try to exercise under a thin-air condition and to improve cardio abilities. Most buyers of this new type of AI-based masks are female, and 53% of the buyers are less than 30.

Many investors have seen this opportunity; it is estimated that the production value of China’s functional mask market will grow up to CNY 10 billion in the next five years.

Author: Maxime Bennehard

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This article The Face Mask Market in China: An Enforced Growing Trend | Daxue Consulting is the first one to appear on Daxue Consulting - Market Research China.