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Alizila’s Adam Najberg:Daniel, thanks very much for joining us on Alicast. Let me kick this off by asking you if we go back to November, 2019 or so pre-Covid, how was consumption doing in China?

McKinsey’s Daniel Zipser:Well, I put myself back into my shoes back in November 2019. We actually were looking back to a very strong 2019, with consumer confidence being at a high level. We just look back to the 11.11 shopping festival, which has reached an all-time high. And there was quite a bit of excitement in the consumer industry about the level of consumption and the growth expectations for the future

AN:As we scroll slightly forward, heading into December or so and then into January and Chinese new year, just how bad did things really get, retail and consumption-wise, during the lockdown in China?

DZ:I would like to actually to put a bit of context when the crisis hit, because it was shortly before the Chinese new year holidays, which is the most important family holiday. I would like to put us back into January of 2020. And the context when the crisis hit. I think it’s important to remember that the crisis hit just a few days before Chinese New Year’s Eve, and Chinese New Year is by far the most important family holiday for China. It’s a time when people go to their home cities, when they spend a full week as a public holiday together with their family. It’s a very emotional and important time of the year. The crisis hit just a few days before and the whole country immediately knew that it was serious. That was not a gradual move, but one day to the other, everybody knows that the world will be different compared to what it was yesterday and people were reacting to it incredibly quick.

They were looking for their family. They were looking for themselves taking protective measures. They’re also looking for their employees and their colleagues and looking what can they do to actually protect their lives, be it through the wearing of masks and actually securing mask supplies, which obviously wasn’t easily available because back then, nobody was prepared. And in that moment, nobody had a playbook. I heard that so many executives were saying that we were not prepared. And I think that is very important as a context that in that time period, right before, and then during the Chinese New Year holidays, people were looking what actually to do and how to protect the country and the people. If you then go through the month of February, the month of February has been one of the really challenging and, at the same time, also actually quite inspiring times for me to watch. And I’ve been spending close to 15 years here in China. And if I think back to how China’s stood together as a country, how Chinese together face the crisis, it was very remarkable. And you can see that until today that there’s immense pride. We were seeing in the country how the Chinese actually has mastered the crisis and went through the crisis back in February.

AN:Could you talk a bit about those mitigation efforts and what happened? You know, because from one day to the next, we really did see things come to a screeching halt. And I’ve talked to a lot of brands and companies who saw foot traffic completely stop, to stores and showrooms. And I know that a lot of the tech companies in China were trying to find ways to mitigate this, to digitize, to move online. Could you talk a little bit about that? I want to understand what happened and did it work?

DZ:Yes. So let me answer your last question first. Yes, absolutely. It worked. And I think that’s also considering the pride the country now has, because the measures which were taken back in February actually did work. What would we need? What did we see? You’re absolutely right. I think there was a complete shutdown. Most of the retailers were closed. Most of the restaurants were closed. And people were staying at home. Everyone was talking to get protective gears for themselves. I think the offices also closed, schools shutdown shortly after, and people were really looking how to protect themselves. And it really came from the people who were trying not to infect themselves and also not to infect others. After some while, you’re absolutely right, people were at home, but they were working and they were also interested to buy goods and services.

They still wanted to eat. They still wanted to buy cosmetics products. And there’s a lot of things. Basically people were very keen to actually purchase and the way how they basically then purchased their goods, if they were ordering often online, get the products delivered the food, the food from restaurants, I think restaurants in that time. Great. You benefited from being able, despite being either closed or having very little traffic, being able to deliver to people in their homes and the same holds true for many of the department stores, who actually opened new channels and says, well, we don’t have any foot traffic or foot traffic may not be down as much as 80 or 90%. At the same time, we can still actually maintain our business by leveraging the people we have to communicate directly to end consumers and then deliver the goods to their homes.

So we’ve seen quite a substantial amount of retail innovation about how offline retailers connected online to provide goods and services to consumers who were at home. Livestream came up. I think so much has been talked about livestream and it’s existed before, right? It’s not an absolute new phenomenon, but it has seen so much growth throughout this year, 2020, because people are home. And when people are at home, they still basically enjoy shopping and they still like to engage with people. And if that’s not an in-person engagement, it’s on their mobile phones. And I think it’s something to stay. And I think of course it has been a challenging time, but it also has been a rewarding time for many people

AN:About the things that will stay now. Extreme times call for extreme measures. And we did see that when we saw things recover. And the question that I have is, what is actually sticking? What’s new that didn’t exist before that is probably a forever thing, that’s going to last in the world of retail in China?

DZ:First of all, I don’t see anything where I would say it’s completely new and it has not existed before. What I have seen is I’ve seen an amplification, an acceleration of existing trends to a very strong degree. I mentioned livestreaming. I mentioned food delivery and grocery deliveries. All of them were not new, but they reached a completely new scale throughout the crisis. Also, if you talk about remote working‚Ķof that was new, right. It existed before, but it got a major boost throughout the crisis. And I do believe that this acceleration fast-forwarded China by at least 18 months,

AN:Demographically, how would you break it down? I mean, I’ve heard anecdotally that old people who used to spend their mornings in the wet markets, for example, as a social thing, but also to go shopping, they started to go online. I heard that other age groups started to behave differently, but I’m sure you’ve drilled down a lot more into this than I have. What’s your observation about the demographics of what changed during lockdown?

DZ:I liked your examples and I completely agree with your examples because it’s really throughout the whole society, because on the one hand, as you said, invited the older generation who has been less familiar with digital engagement and purchases to actually try it out. And they did. And if you see the basically older generation making the first order back in February and March, they’re still doing it now. So we see also this being something that sticks at the same time. Not to surprise a lot, the basically more innovative ways of engaging consumers largely comes from the younger generation. So the whole topic of social commerce and social engagement is largely driven by the young generation. But it is an interesting phenomenon that we’ve seen the digital acceleration happening both with the older, as well as the younger generation, both with females and males, both with higher tier and lower tiers. So it’s really across the board.

AN:At what point did you start to see, when you were observing things, that we switched from kind of crisis mode and extreme measures and great changes online to actual recovery of retail in China? When did you first start to feel and see those first green shoots of recovery?

DZ:First of all, I think, let me just talk about two early phases back from January, February, and probably the first half of March. At the very beginning, it was harder on people. It was all around protective gears, securing lives. Once that seemed to be managed and under control and people feel confident and safe, it also shifted very quickly. How can we actually secure supply of goods and again, drive consumption. Obviously the monsters of February and March has still been challenging because people stayed home and consumption levels has seen very substantial declines. I think the turning point has been the May holidays. And this is, by the way, similar to what we’ve also been seen during the SARS days. The May holidays has seen a hundred million Chinese traveling domestically. It’s quite a number of tourists. Actually, if you think about it, a hundred million. It’s still much less than 2019, but it was a hundred million people and they’re out. And they came back from their holidays and they were in the mode again that the crisis has been mastered, schools are opening and we’re getting back out and have confidence to also buy, buy, buy goods. And that’s what I’ve seen incredibly strong months in May and June in terms of consumption. Also the digital platforms with the 618 shopping festival, which has seen an unseen level compared to previous years, I think helped to bring back the excitement to buy goods and really drove consumption very strongly

AN:In terms of actual goods, I mean, you talked about the phase where people were looking for protective gear and of course they were buying food, but when we really started to see retail recovering, has it been lumpy thus far? You know, what started to pick up first? What areas or sectors, and how steeply were they recovering and, just to finish this thought, were there any sectors, or are there any sectors that are still lagging?

DZ:It’s a very good question. And as you already pointed out in your question, the answer will depend on the different categories because we’ve seen very different shapes and forms of recovery. Obviously the early stages indeed has been grocery. People basically not going out and eating, but ordering in and also actually cooking home more. And that is true of consumption strongly in those categories. At the same time, it took quite a bit longer for a food service outside, like restaurants, to recover. So we’re still there, I think, slowly reaching last year’s level only, only by now and may not actually be there yet. Also, I think as a whole, hospitality industries like hotels and tourism, I think it’s gradually recovering, but it’s not there yet.

At the same time, there are other areas – like the beauty industry has been an area which has recovered very, very quickly. And people are very excited again to buy cosmetics and skincare products quite early on. Also a bit surprising for some people: luxury actually has been very, very strong in mainland China, and many people actually who cannot travel outside of China right now, they decide, first of all, they have more money by not being able to do the holiday trip. And some of them say, why, why don’t I buy a handbag instead, because they do have some money which they’re saving from the trip. And then they’re investing often into luxury goods. So luxury goods is an industry which we’ve seen very, very strongly driven by additional affordability. And also by shifting spending from overseas to China.

AN:Are you seeing a broad-based recovery? Are you seeing a steady recovery? Where are we right now? You mentioned some sectors are kind of where they were a year ago, but if you just step back and kind of look at the horizon, how broad is this recovery and how steady?

DZ:So I think now if you talk about August 2020, I think if you take the broad approach, the recovery is there. So, we are largely – in terms of consumption – at last year’s level. As I said, it very much differs by industry. But I say we are back on track and to anticipate the next month actually to see a steady, steady growth vis-√†-vis last year

AN:I keep hearing about revenge consumption. And it kind of grabbed my attention because it sounded pretty interesting. Is it hype? Is it actually happening? What is it? And how long is it supposed to go on?

DZ:Yeah, I heard the term and I’ve seen the trends many times. I’m not a huge fan of the term because revenge somehow sounds to me like something negative. I think the phenomenon being described, I think, is actually a very true phenomenon because you’ve seen people coming back, regaining their confidence and saying, yes, we made it. And you know, if you have a confident consumer and that consumer is also passionate and excited and goes out to buy goods and goes out for restaurants and goes out for nightlife. So we do see that the crisis when it was coming to an end has led to an incredibly strong confidence and that incredibly strong confidence that has led to what is often described as revenge purchase

AN:In terms of the economy right now, the state of the economy and the retail sector. What is still lagging? What needs to regain health?

DZ:I don’t think it’s possible to look at China in isolation. And we still face travel restriction domestically. We also do face international travel restrictions with China still being largely locked down for international travel. Obviously, also, we can’t look at China in isolation in terms of the virus, because while we speak here about confidence that China is at a more positive state, there are still no vaccination. And we’re still not at the end when it comes to the virus when you look at the global level. So I think that the key attention of everyone in China is how can this humanitarian crisis be solved globally, because eventually that will impact every single country.

AN:Now we’re well into the second half of the calendar year and that’s typically a big shopping period in China and for China. What are you thinking for the rest of this year?

DZ:I think we have the big shopping festivals coming up and Chinese in general, basically have a large part of their spending focused toward the second half. And I do believe this will be the same this year. Assuming that the confidence will remain at the levels that we’re seeing right now. And this is driven by two things: I think one thing is we speak about the consumer and the consumer is confident. The consumer is employed. The consumer is seeing salary increases and this confident spend. There’s another side of it, which will be driving what I anticipate to be a strong next months to come, which is global companies are looking for growth. And many countries in the world still actually are in the middle of the crisis, which will prevent global companies to actually drive consumption in those markets. So many, many global companies will look to China for health, which would also create more exciting and compelling promotional activities, new, innovative products being launched in China early. We’ve seen fashion shows from luxury brands now for the first time, also happening here, locally in Shanghai. So I do see that both happening, from the demand perspective as well as the supplies perspective, that we will look for a strong 11.11 and 12.12.

AN:I feel like you’re reading my mind here because I wanted to talk to you a bit about incentives and stimulus. I know the governments have been doing their part inside China. I know companies and brands and platforms have been doing things with rebates and coupons. Do you think that that is going to be necessary to continue to stimulate consumption?

DZ:I’m not an expert on government policies. So let me comment on the promotional activities that the brands are doing. I think it’s hard to answer whether it’s necessary, but it’s definitely happening. So I think there is no choice. Everybody’s turning to for China for growth. You have a consumer who’s willing to spend. And pretty much every brand I can think of is doubling down to drive demand from China. Whether it’s necessary – maybe yes, maybe no – but it’s definitely for sure happening. And it creates an environment which also from a consumer perspective makes it actually very attractive to buy in China right now.

AN:So if we were having this conversation over a glass of eggnog or something on New Year’s Eve, heading into 2021, and we look back at 2020 and retail in China, what would you be saying about China’s economic and retail recovery? And what would you say about its consumption patterns?

DZ:It’s a very good question. I don’t have the crystal ball, to be honest. And I don’t think anyone can answer that question. Would there be a second wave or third wave as we’ve seen basically parts of that in Dalian and in Beijing recently, and what will fall bring when it gets colder. Again, I think there’s a lot of open questions. Also the world economy. As of now, I’m actually very confident about China’s consumption and the China retail environment. I also see a lot of positive energy around the brand owners – the promotions they’re driving and the returns they’re seeing. So as of now, I have a positive outlook – cautiously positive outlook – but I think there’s so many factors to consider. I’m very much looking forward to actually speaking with you back at the end of the year. And hopefully, we’ll have a glass of champagne for the ending of what has been one of the most challenging years ever.

AN:Granted, if I could just ask you one last thing, every country, every region is unique. I’m wondering though, if you look at what is happening in China, what’s been happening in China on the retail scene. Are there any patterns that you might expect to see in the EU or U.S. or any other countries or any lessons that were learned in China that might be applicable elsewhere for retail recovery and consumption recovery?

DZ:China has brought forward a lot of innovation, particularly digital innovation. As I spoke about social commerce earlier, livestreaming related to that. So I think there’s a number of things which were basically pioneered from China and which could have applicability in other parts of the world. I haven’t seen it that much at that point of time. I think there’s some reasons for that, given also different age structures ‚Ķ but I do believe that not just in this year, but going forward, that China will play a larger role when it comes to bringing innovations from China to the rest of the world.

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