China's O2O retail leads in technology, but is letting us down in content

The COVID-19 pandemic has driven the usage of e-commerce in China to an all-time high level. While at the same time offline retail is struggling to get footfall back. In the week of April 13, 77% of China’s stores were open again but only gained 50% of their traffic back, according to the China Commerce Association for General Merchandise. In Beijing during the May holiday period, offline retail traffic only recovered to 60%.

Bridging the two is the concept of O2O (online to offline). Unlike any other market, O2O or 'new retail' has become synonymous with China’s retail environment and developed exponentially. So what role can new retail play to recoup lost COVID-19 business, and create a relevant role for offline stores?

Havas Group’s latest Prosumer report ('prosumers' are the forward-thinking, first-to-market, 15% to 20% leading edge of consumers) “Retail Forward in China” revealed the opportunities in this segment in the context of what Chinese consumers are looking for and how O2O can deliver these with differentiation.

The fast developing O2O offering in China

Online retailers are already more popular than traditional retailers. 41% of Chinese consumers would not care if traditional retailer Walmart or Carrefour (44%) would disappear. Against much lower figures for online retailers such as Taobao and JD (26% and 31%). The popularity of online retailers is leading to a clear slowdown and even closure of traditional retail stores. Within department stores and hypermarkets, the closures are double the number of new openings. In 2018 supermarket chains closed 587 stores, while in total retail 42% of retail venues experienced negative sales growth. A similar development will be prevalent in specialty stores in the next 5 years—80% of the bookstores and 30% of the clothing and shoe stores are expected to close down in China. However, it is interesting to note that despite its popularity “just online” does not cut it with Chinese consumers as 51% of prosumers are against the survival of online retailers only. So, where lies the future of retail?

As Jack Ma stated five years ago, “In the next 10 to 20 years there will be no online stores but new retail”. New retail formulas offer new benefits through combining offline stores with online stores and technology—offering new benefits through product, services and content. However, instead of offering multiple new consumer benefits, most retailers are primarily focusing on delivery convenience—Alibaba’s Hema, being one of most prominent ones. Through an intelligent operating system, Hema is able to guarantee 30-minutes delivery for online or offline selected items, a real benefit for fresh products, resulting in a high delivery share of nearly 60% of the total market.

But delivery service seems clearly not enough. According to the original idea of new retail (based on the three factors of product, services and content), 79% of prosumers think delivery service is not going to be a key differentiating benefit in the future. This urges the need to use the O2O ecosystem to develop innovative services and content benefits by leveraging online and offline data to personalize and make the offering more relevant.

Services: More than a convenience battle

It is no secret that Chinese consumers have become used to an all-delivery society. 42% of prosumers are “used to have everything immediately delivered” and the sentiment has only intensified in the wake of the pandemic with consumers viewing it as an essential commodity. However, they want retailers to go further—they expect retailers to manage all pain-points across the physical purchase journey. Some of these are:

• See now and buy now: 96% would like to be able to make immediate purchases with their smartphone for everything they see, or like, nearby.
• Abundant suppliers and products with unlimited access: Prosumers have become used to an unlimited access in online stores when entering an offline store environment.
• Anticipated shopping needs: 77% would like retailers to predict needs and proactively send goods.
• Personalised products and services based on personal data: 60% of consumers would like hyper customized offering.
• Personalised promotions: 59% would like to get more personalized offers.

Content, an O2O opportunity but underperforming 

Our research show that appreciated content shows a correlation of 72% with a higher perceived level of benefits by a retail brand. O2O offers the opportunity to seamlessly connect the two content manifestations in retail: store experiences and (digital) content marketing. This is clearly an opportunity to be meaningful as there is a hunger for “inspiring” and “helping” content.

Inspiring store experiences is regarded highly by consumers as 85% would like to be surprised by what a store offers while 79% hope that stores in the future will offer more experiences like cooking classes and fashion shows. AI will help to do most of the shopping, is the opinion of 90% of prosumers as they look for more added value. Post 95s especially show very high expectation on the quality of the store experiences. Experiences that can be shared, together on ground or through social posts. 

Mobile and social play a key role in enhancing the O2O experience. While, social content has proven to be effective along the entire path to purchase, it has also proven to be beneficial in building repeat and loyalty-driven consumers. This is important as cost of customers acquisition in China continue to rise due to high inflation of media costs. Furthermore, the fast pace of 5G adoption will drive the creation and availability of AR, VR content.

However, the quality of content delivered by retailers in currently China is unsatisfactory, with 50% of the content valued as not meaningful. Chinese prosumers feel that local brands don’t inspire or inform like international brands do. The inclination is for retail or DTC (direct to consumer) brands to become content platforms, like Ikea (content in functional and pleasurable living inspiration), Nike (content in sports training), Lululemon (content in yoga and mental healthy living). Chinese equivalents are not really claiming a content position or beefing up their content offering. This is clearly a missed opportunity as consumers have a clear and rising need for meaningful content among a variety of topics:

• Learning new skills: 64% of Prosumers expect retailers to facilitate learning of new skills (on variety of topics from upbringing babies and children, personal care, home care, personal finance to passion points like photography and sports).
• Improving health: 93% would like retailers to stop selling products that are bad and help improve healthy living.
• Benefitting local economy: 73% would like retailers to guarantee fair prices for suppliers and support local producers.
• Inspiring with local culture: 92% find it important that retailers promote local culture.
• Delivering fun and entertainment: 70% think entertainment is a vital need and want brands to be entertainment platforms when relevant for their category.
• Protecting the planet: 87% would approve if retailers only select and sell products that are good for the planet.

While infrastructure, technology, full operating 5G and ever growing online shopping behaviour will grow O2O even further, it is evident that Chinese consumer will demand better formats that offer more than just delivery, innovative services, better content that informs and inspires. Most importantly, in the wake of the pandemic, O2O as a concept will gain further momentum and even leapfrog traditional players in both offline and online space.

Numbers quoted in the article are sourced from the China edition of Havas Group’s global study – Prosumer Report “Retail Forward in China” and Meaningful Brands China Research 2019.

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Dennis Potgraven is chief strategy officer for Greater China at Havas Group.