Key View: Mainland China is slowly easing restrictions domestically with the progressive reopening of urban areas like Shanghai and Beijing. While this is expected to give the Chinese retail economy a much-needed recovery boost, we continue to believe that Chinese consumers will keep their spending focus on essential categories over discretionary non-essentials. Essential retail categories such as Mass Grocery Retail will continue to invest into retail technology to maintain synergy between e-commerce and brick and mortar stores. E-commerce companies like JD.Com have opened their first physical store in China and traditional essential retailers such as AS Watsons are looking into cashier-less stores in the future.
E-Commerce Giants Capitalise On Consumers Trading Down Price Points
While we do not expect consumers to completely eliminate discretionary spending due to the weaker economic environment forecast for the Chinese economy over 2022, we do expect to see some shifts in spending patterns. The economic realities of China's Covid-Zero policy has already forced many households to re-prioritise their spending, while also trading down price points. Essential spending will also outperform non-essential spending as Chinese consumers pivot spending focus on essentials rather than discretionary non-essentials. In 2022, essential spending will grow by 6.7% y-o-y whilst non-essential spending will grow by 2.4% y-o-y. The disparity between the two has expanded when compared to our Country Risk team's pre-June 2022 revision of their economic forecasts when the impact of the Covid lockdowns were considered. Prior to the revision, we expected essential spending to grow by 4.7% and non-essentials by 4.5%. We now believe that the refocus on essential spending and trading down price points would drive Chinese consumers towards local brands and discount retailers over expensive imported offerings.
Consumers Now Prioritise Essential Spending Over Non-Essentials
Mainland China - Essentials Versus Non-Essential Spending, CNY % y-o-y (2022)
As China continues to ease restrictions in key urban areas, e-commerce companies can take advantage of both consumers who are avid users of e-commerce platforms as well as those who are eager to return to physical stores. In July 2022, China-based e-commerce giant JD.Com opened The J Shop, a new flagship store, in the Chinese city of Chengdu. The store, which is a cooperation between JD and Chinese cosmetics retailer Perfect Diary, is the first of its kind in the country that incorporates both element of traditional brick and mortar as well as e-commerce trends in China. For example, the store features several immersive experience areas featuring different themes for social media postings and live streams but also have a wide spectrum from over 400 participating brands ranging from cosmetics, apparel, lifestyle and sports. Ultra-fast deliveries within an hour, an emerging key theme in Consumer and Retail in 2022, are also offered for consumers living within a five-kilometre radius of the J Shop, further enhancing the synergy between traditional e-commerce and traditional brick and mortar, in order to full capitalise on this shift in Chinese consumers' spending patterns.
China, The Next Big Market For Cashier-Less Stores
Another beneficiary of Chinese consumers prioritising essential spending will be traditional MGR and essential retailers, proving incentives to innovate and compete in an ever-evolving market. Machine-to-machine (M2M) refers to technology that allows networked devices to exchange information and perform tasks without the manual assistance of humans. This has enabled retailers to roll out cashier-less services at traditional brick and mortar stores. Using a combination of computer vision, sensor fusion and deep learning, the store detects when products are taken off or returned to the smart shelves. Once shoppers are ready to leave, the items stored in a virtual cart would be detected as shoppers leave the store and then paid for using an existing e-wallet technology. A prominent example of this are the Amazon Fresh stores from US-based e-commerce giant Amazon and their Just Walk Out technology. M2M connections in China have been rising rapidly. Since 2018, the number of M2M connections has grown from 737.9mn to 1.8trn in 2022. Over the medium term, the number of M2M connections will almost double from 1.8trn in 2022 to 3.5trn in 2026, with a CAGR of 20.6%. This rapid growth makes China an ideal market for the cashier-less technology to take hold and grow. Particularly, as Chinese consumers are retaining the focus on essential spending as they have re-prioritised spending away from discretionary categories or moved down price points, we believe it would be players within the essential retail category such as mass grocery retailers that would stand to benefit.
Strong Growth In M2M Connections
Mainland China - M2M Connections (2018-2026)
In July 2022, Hong Kong, China-based health and beauty retailer AS Watson announced that they will be investing an additional USD115mn to accelerate digital transformation and delivery of the company's O+O (Offline plus Online) platform strategy. AS Watsons already have an experience centre in the Netherlands as well as in the Chinese city of Shenzhen. The company hopes existing technology developed at the centres such as unmanned stores and smart shelves, similar to those found in Amazon Fresh stores, can be progressively introduced to Watsons stores in Hong Kong, China as well as the Chinese market.
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