The Role of Offline in Digital-First China

6 minute read

By the Hot Pot China Client Team

Hot Pot’s CEO and Founder, Jonathan Smith, recently spoke at the event Building Brand Value with China, alongside Kerry Lee, partner at Squire Patton Boggs and Richard Lim, CEO of Retail Economics. 

A Challenging Retail Environment

Richard Lim began the conversation by contextualising the current strains on the retail environment in the UK. He discussed a variety of factors that are increasingly putting pressure on profitability, including higher competition, idle yet expensive real estate, lower margins, and more consumer choice.

Jonathan Smith then contrasted the UK with the current retail environment in China. In China retailers are ahead of the curve and the retail landscape offers a view of how UK retail might look a few years ahead.

Key points are summarised below.

In China, online is booming. The market accounts for more than 60% of online sales globally and will eclipse $2 trillion in ecommerce sales by 2023. Compared with the previous year, online retail sales in China surged 17.8% in the first half of 2019.

Yet the route to success is less clear. It’s for this reason that ‘cookie cutter’ approaches, where strategies and tactics are transplanted from Western markets to China, lead to failures that negatively impact brand perception as well as the bottom line.

Chinese consumers also shop differently. More than 1 billion consumers regularly access combined social media and ecommerce apps like WeChat or Xiaohongshu, and 80% of all ecommerce transactions now take place on mobile.

 

If digital in China is so great, why do offline at all?

Ecommerce in China accounts for 35% of total retail sales, signifying that more than half of the retail purchases in China are still made offline. For comparison, ecommerce in the UK accounts for 20% of total retail sales.

A digital-first approach allows global brands faster speed to market, more agility when scaling, more data to test and learn, and more predictability in client acquisition costs. Yet brands that focus exclusively on online often start strong, but then face stagnant or declining sales, rising costs, and slowing innovation.

There are opportunities for brands to develop offline retail, but traditional strategies and metrics frequently lead to costs that don’t justify the return. Brand leaders must think differently about offline in China, in terms of how they account for the cost, how they plan and execute offline, and how offline activities integrate with their digital-first strategy.

There is commercial value in offline experiences. Integrating a well-planned and well-executed physical component with the digital user journey can further accelerate brand awareness and sales growth. It is precisely for this reason that Hot Pot advocates a digital-first, rather than a digital-only, approach.

The primary goals of any offline component should include:

  • An experiential element that brings the brand and its ethos to life;
  • A shareable element that creates cut-through in a crowded marketplace; and
  • A conversion element, either on site or in capturing data and inspiring action at a later point in time

 

How do brands make offline cost-effective, yet still impactful?

The retail paradox is that for many brands, high-traffic areas carry long-term burdensome levels of rent that eat into bottom lines, whereas more affordable real estate is plagued by reduced footfall. Yet offline has become less about a transactional purchase and is instead focused on experience, which encourages digital conversion at a later point.

With legacy real estate issues, UK retailers may struggle to re-purpose space to an experience-led model. However China represents blank canvas with willing and forward thinking landlords/developers, hence many businesses in China have been able to build experience into their retail presence from the outset.

Physically interacting with a brand drives affinity and loyalty, promotes conversation through social media and word of mouth, and encourages more frequent and higher-value purchases. As such, offline touchpoints are increasingly being viewed as media channels that form part of the client acquisition cost. They should also therefore be included in attribution calculations as a vital part of the purchase journey.

 

Experience is King

Zara is a household name in China, with more than 120 stores. To take on China’s homegrown competitors and outpace its global rivals, Zara has become a forerunner in O2O innovation. Their Shanghai store could easily be mistaken for a luxury-urban boutique. More art installation than traditional retail, the store features sparse, carefully curated items, rather than endless uninspiring racks.

The power of the experience is in the detail. Each product is equipped with a QR code tag that enables the customer to order their size to be delivered directly to a waiting changing room. Customers can then purchase items directly with WeChat Pay and either leave the store with their purchases in hand or have them shipped to their home within 24 hours.

Consumers no longer face long queues and can enjoy a hands-free shopping experience.  Zara has built a new age shopping experience that simultaneously captures data into their CRM, such as sizing and product preferences, to facilitate digital retargeting.

 

Collaboration

Shiseido recently partnered with WeWork Labs in Shanghai to open its first Innovation Hub in China. The Hub connects the company with local customers, and as such, is open to consumers as a community space.

Sheiseido invites customers to join them on a ‘个性化旅程’ (Personalization Journey). This multi-purpose space offers makeup tutorials, new product trials, and skin tests using Augmented Reality technology. Consumers can then make purchases directly from their WeChat official account.

Offline collaborations such as these offer brands the opportunity to generate direct engagement with a relevant and meaningful audience without a long-term commitment to ongoing offline costs.

 

Small Footprint, Big Impact

Brands must also view physical experiences not as permanent installations. Pop-ups, kiosks, events, and collaborations can make the same impact without the cost of always-open stores.

Kiehl’s recent launch of its avocado eye cream is an excellent demonstration of a brand getting this right. In the corner of Parkson Mall in Shanghai, Kiehl’s installed an automated product sample kiosk, making a big noise with a small retail footprint.

In exchange for following the Kiehl’s WeChat account and sharing their data with the company, customers receive a free product sample dispensed directly from the kiosk. With the sample in hand, they are immediately served information on their phone about product ingredients, benefits, how to use, where to buy, and how to share with friends.

 

In conclusion…

Brands’ strategies in China must be digital-first, but should also consider how to integrate meaningful offline experiences into their marketing mix.

  • There is concrete commercial value in investing in offline activity, so long as experiences are integrated into broader digital and CRM efforts
  • Offline can take many “lighter-touch” forms, such as pop-ups, kiosks, events, and collaborations.
  • Brands’ offline strategies must include experiential, shareable, and conversion-driven elements
  • Offline touchpoints should be treated like an additional media channel with related attribution metrics, laddering up into overall  ROI calculations

At Hot Pot China we partner with forward-thinking brands on their China activity. We guide our clients in maximising ROI from their short, medium and long-term marketing activity in China, as well as executing the same in-market.

Contact Hot Pot China to discuss how our team of China specialists can help realise greater value in your brand, digital and eCommerce initiatives.