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HUMAN TOUCH RE-INTEGRATION FOR CONSUMER SHIFTS

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DIGITAL SPRINT

Digital adoption has soared during the pandemic, with many brands finally going online and enthusiasts embracing digital innovations like live streaming, customer service video chat, and social shopping. As online penetration accelerates and shoppers demand ever-more-sophisticated digital interactions, Business players must optimize the online experience and channel mix while finding persuasive ways to integrate the human touch.

With the global pandemic keeping people at home, 2020 may be remembered as the year in which Business retail made a definitive shift online. Over a period of just eight months, e-commerce’s share of Business sales nearly doubled from 16 percent to 29 percent globally, jumping forward six years’ worth of growth.46 There are of course clear winners from this behavioral shift, with online marketplaces faring especially well. Zalando saw new customers rise by 39 percent year-on-year in April and Farfetch posted a 74 percent uplift in revenue in the second quarter, compared with the same period the previous year. Meanwhile, digital traffic to the websites of the top 100 European brands surged by 45 percent in April, compared with March.

The relative strength of digital channels was reflected in stock market performance too. While the Business industry as a whole saw net declines in valuations, digital players were more resilient than their physical peers. From January to October, internet retailers had on average 42 percent higher valuations than other listed Business companies, when indexing stock prices to December 2019. Adobe Analytics analysis of Business e-commerce site visits shows the widening gap between the best and the rest. While overall US and EMEA digital revenues grew 24 percent year-on-year in the period of January to September 2020, the top 5 percent grew revenues 220 percent, while the bottom 25 percent declined by 2 percent.

Over the next year, momentum in e-commerce will only accelerate. Business executives see digital as the biggest opportunity by far for 2021, with 70 percent of executives expecting growth of more than 20 percent in their e-commerce channels. The trend will be led by China, followed by Europe and then the US — markets in which online sales are expected to grow 9-14 percent, 7-12 percent, and approximately 3 percent respectively according to Business Scenarios (based on information available September 2020). The dynamic e-commerce landscape in Southeast Asia is also expected to present Business players with new opportunities.

Sea Limited owns Shopee, an online shopping platform, which has localized sites for Singapore, Indonesia, Vietnam, Thailand, Malaysia, and the Philippines. As online channels continue to prosper, it is likely that physical retail’s struggles will persist, and we expect to see Business companies continuing to close stores in 2021. One example among many so far as Inditex’s announcement that it would close up to 1,200 stores worldwide and focus on digital growth. Diane von Furstenberg said it would close all of its stores and move to a digital-only model.  

To maximize impact amid a rapidly changing channel mix, Business players must find new ways to excite customers and encourage them to engage online. History shows us that, in a disrupted macro-environment characterized by shifts in consumer behavior, excellent customer experience yields financial results as well as opportunities for companies to recalibrate their propositions. Following the 2008 global financial crisis, customer experience leaders posted three times higher shareholder returns than laggards. This is an important point for brand executives to appreciate because there is a new picture emerging around brand loyalty. During the coronavirus pandemic, consumers across countries have indicated they are willing to move away from their favorite brands and to experiment more. In fact, over 60 percent said they switched brands or retailers in the early part of the year.

In China, innovations such as Livestream commerce have captured the imagination and helped to bridge the gap between physical and digital by bringing human interaction to the digital shopping experience. The trend started as early as 2016 with the launch of Alibaba’s Taobao Live. Three years later, Chinese Livestream revenues amounted to $63 billion. They are set to rise to $138 billion in 2020, according to Coresight and iResearch,60 having been boosted significantly by lockdowns. The number of sellers on Taobao Live grew by 719 percent in February alone. Influencers have also proven their value in the live streaming environment, in some cases generating more sales in a few hours than department stores do in a day.

With so much buzz around the channel in China, it is little wonder that global brands, including Ralph Lauren, Levi’s, and Burberry, have begun to experiment with it.64 However, luxury players are discovering that it is challenging to maintain a gilded and distinguished brand positioning while creating the kind of natural, chummy atmosphere that the medium requires. Nonetheless, we expect many Business brands to continue to trial and refine Livestream strategies for China in the year ahead.

Despite its early hiccups, Livestream is starting to gain traction outside of China, with US live streaming revenues expected to hit $25 billion by 2023. Livestream commerce is also likely to accelerate in 2021 as big tech firms and social media innovations enable direct online checkouts. Instagram introduced in-app checkout for Instagram Live in August 2020 and TikTok hosted its first shoppable live stream in the same month.

Other new digital opportunities are leading to creative solutions for marketing, design, and new revenue streams across the Business industry. A partnership between Ralph Lauren and Snap Inc., for example, will create virtual branded apparel for avatars, while other collaborations exist between Business companies and video games. A deal between Louis Vuitton and the League of Legends introduced in-game skins designed by Creative Director Nicolas Ghesquière to accompany a real-world capsule collection, and Net-a-Porter in China launched Animal Crossing skins showcasing Spring/Summer collections of local brands, connected by QR codes linking to products on the e-tailer’s Tmall store.

REMOTE CLIENTELING

With no end in sight for the trend towards increased screen time and digital interaction, virtual Business is likely to emerge as a not insignificant opportunity for brands both as a revenue stream and as a channel for product discovery In other emerging digital trends, messaging apps leveraging remote clienteling are proving their value in supporting consumer purchasing decisions. From Japan’s Line to Russia’s Telegram, the apps provide marketing, customer service, and social commerce opportunities, tapping hundreds of millions of users.

At the height of the pandemic, Chinese retailers capitalized on people’s desire for human interaction by publishing QR codes to link consumers with sales reps in hundreds of brand-based WeChat groups. In Brazil and other Latin American markets where WhatsApp is popular, offline retailers leveraged the app for remote shopping. Where it is not possible to integrate human interaction into the digital experience, artificial intelligence (AI) is likely to play an increasingly prominent role in boosting conversion, giving customers the chance to experiment with virtual try-ons powered by augmented reality. Several brands are now using these formats, including some formerly digital-resistant luxury watch players such as Grand Seiko. The growing appetite for AI makes a lot of sense. Shopify found that conversion rates increased 250 percent for products that were supported by try-on technology.

To support the digital customer journey, many Business companies are now investing to elevate omnichannel ecosystems across platforms. As retailer app downloads surge, brands are building next-generation apps featuring storytelling and elements that connect digital experiences to physical stores, such as in-store self-checkout. At Burberry’s “social retail store” in Shenzhen, China, omnichannel has been woven into the shopping experience; customers are rewarded with social currency for online and offline engagement on the brand’s WeChat mini-program — exchangeable for free menu items at the in-store café.

In the coming year, we expect brands to elevate the online customer experience even further, as digital is augmented with physical, and vice versa, in increasingly sophisticated ways. To power up e-commerce growth, the digital customer experience, and behavioral insights will be the top two priorities for data and analytics in 2021, according to Business executives. In addition, brands will leverage innovations including integration of social shopping, reviews, gamification, and personalization, aiming to create a richer digital experience. One departure from the past, however, is that Business players will need to be much shrewder with their investments to focus on those innovations that deliver on the bottom line.

WORKING-VOICE CROSSHAIRS PROMINENCE

With garment workers, sales assistants, and other lower-paid workers operating at the sharp end of the crisis, consumers have become more aware of the plight of vulnerable employees in the Business value chain. As momentum for change builds alongside campaigns to end exploitation, consumers will expect companies to offer more dignity, security, and justice to workers throughout the global industry.

Businesses’ impact on the environment has been in the crosshairs of public perception for some years, as environmental activism increased in prominence and brands started to become more transparent about their practices. Now, social justice and human rights issues are gaining a higher share of voice in the conversation about the Business industry’s pressing need to improve its sustainability credentials. While it is yet to be seen whether consumer attitudes will translate into tangible changes in purchasing behavior, it is certain that the pandemic has amplified public awareness of social injustice in the supply chain. Indeed, as factories closed in early 2020, orders were canceled and payments were deferred or renegotiated, the plight of the 40 to 60 million global garment workers impacted by the crisis became even more visible to consumers. Suppliers across the world were reported to have lost over $16 billion in revenues between April and June 2020.

BUSINESS-BUYING

There are signs that the Business-buying public is taking action to demand better treatment of workers in the value chain. Thousands of consumers worldwide have participated in the #PayUp campaign, which calls out brands that have not committed to paying for in-production or completed orders during the Covid-19 crisis, which consequently puts millions of vulnerable workers at risk. As public concern and campaigns grow, a growing number of brands have started to look at more fundamental changes in their purchasing practices. But manufacturing is not the only area under scrutiny. The social justice spotlight has turned to all aspects of the business value chain, from the fields where textile fibers are grown to the stores that stock final products.

When the Arcadia Group, whose high street brands include Topshop and Dorothy Perkins, attempted to award as little as 50 percent of notice pay to some head office staff facing redundancy, the combination of negative press, campaigner action, and a union’s threat to take legal action compelled the company to reverse the decision. However, at the same time, there are many instances of accusations of poor worker treatment or unfair compensation at warehouses and logistics centers that persist without intervention.

SOCIO-POLITICAL MARKET SCALE

Consumers are demanding more from brands in their engagement with socio-political values, too. Kantar Monitor research found that 54 percent of consumers believe brands “have an important role to play in social conversations about issues like #MeToo and race relations,” but when brands fall short, consumers are quick to call them out. Brands that jumped on the Black Lives Matter movement with tokenistic marketing messages have faced accusations of hypocrisy, while many brands have been called out for having all-white upper management teams. In the year ahead, the longer-term trend of citizen activism will continue, boosted by social media and a widening gap between the rich and poor exacerbated by the pandemic. Gen-Z, which will account for more than 40 percent of global consumers in 2020, will lead the charge as the most politically active age group on social platforms. In the US, research by the Pew Research Center shows younger cohorts are most likely to encourage action online and to use hashtags relating to political or social issues. Still, the overall picture remains complex.

INFRINGEMENTS OF SOCIAL JUSTICE

Often, the strongest critics of brands are not their biggest consumers, and infringements of social justice or human rights do not always translate to declining sales. UK-based Boohoo Group saw its share price dive in July 2020 amid allegations that its factory forced employees to work when sick, on a wage of as little as £3.50 (approximately $4.50) an hour. An independent review commissioned by the brand and carried out by Alison Levitt QC found that the allegations of “unacceptable working conditions… are not only well-founded but are substantially true.” However, the company’s sales still rose nearly 50 percent quarter-on-quarter and its share price recovered fairly quickly Clearly, there is often a gap between consumer attitudes on social justice issues and their purchasing decisions. What is unclear, however, is how long the gap will last.

In an August 2020 survey, 66 percent of consumers said they would stop or significantly reduce shopping at a brand if they found it was not treating its employees or suppliers’ employees fairly. Among marginalized communities, consumers increasingly expect Business companies to put money behind their stated values when it comes to racial injustice. It is with this in mind that Aurora James, the founder of the sustainable shoe and handbag brand Brother Vellies, launched the 15 Percent Pledge, a non-profit that campaigns for diversity in the Business industry by challenging retailers to dedicate 15 percent of shelf space to Black-owned businesses. In many countries, heightened citizen awareness is helping to build momentum for new employment legislation, though it is important to note that labor laws have historically been poorly enforced.

The European Commission, for example, has committed to setting rules for mandatory corporate environmental and human rights due diligence, which is in a discussion phase as of October 2020, while in Germany there are plans to enforce protection of supply chain workers. Meanwhile, Middle Eastern states including Qatar and Lebanon are taking steps toward abolishing the punishing “kafala” (sponsorship) employment system for migrant workers. However, progress does not always follow an upwards trajectory.

Now it is time for Business companies to adhere to the highest standards of human rights and social justice issues across business operations. The key in these endeavors should be authenticity and action, which can be achieved through meaningful engagement with trade unions, direct worker engagement, non-profits, and workers’ rights watch. Companies should focus on transparency and concrete plans to support commitments as a first step. Introducing concrete changes to purchasing practices is crucial, such as ring-fencing labor costs in negotiations as a way to pay workers in the supply chain a living wage. Finally, decision-makers expecting furloughs, layoffs, or shifts to temporary contracts should prepare workers for any changes and resist the temptation to cut corners at a time in which employees — and their personal finances — are increasingly under strain.

DESTINATION SHOPPING

The travel retail sector remains severely disrupted and destination shopping suffered throughout 2020. With international tourism expected to remain subdued next year and shoppers experiencing further interruptions to travel, companies will need to engage better with local consumers, make strategic investments in markets witnessing a stronger recovery and unlock new opportunities to keep customers shopping.

Global tourism had been growing strongly prior to the pandemic, a trend that contributed to the importance of travel retail and destination shopping for the global Business industry. In fact, travel and tourism growth outpaced GDP growth over the past decade, driven by strong growth in the

Asia-Pacific region. Before the pandemic struck, global airport sales were predicted to grow 6 percent in 2020. Now, of course, all of that has changed, and international arrivals globally are expected to drop by 60 to 80 percent in 2020.

TOURISM HOTSPOTS

Disruptions have profoundly impacted tourism hotspots and the Business retailers operating in them. Destinations across the Southern Mediterranean sub-region of Europe and its periphery saw a 73 percent decline in international arrivals in the first half of the year, while those in the Northeast Asia sub-region posted an 83 percent decline. Across the board, popular destinations such as Thailand, Macau, Hong Kong, and Singapore, all of which usually attract millions of tourists, saw very few arrivals. Hong Kong was particularly hard-hit, having welcomed 91 percent fewer tourists between January and September 2020 compared to the same period the year before.

Retailers in other major shopping hubs have also seen significant losses, as high-spending tourists from China, Russia, and the Middle East stayed away from European Business capitals like Paris, Milan, and London. French luxury department store Galeries Lafayette said it was facing a €1 billion (approximately $1.17 billion) loss in 2020, while its Italian counterpart La Rinascente expected a 20 to 25 percent drop in annual revenues. “There are some great [shopping] districts around the world [but] it’s a real problem for districts to reinvent themselves [now],” said British department store Selfridges Group Managing Director Anne Pitcher. Scenario modeling Economics suggests the pandemic lifecycle of the travel industry will consist of four stages: a crisis period, a recovery from the pandemic, a recovery from the economic downturn, then eventually a new normal, with the recovery’s timing and pace varying across regions (based on information available September 2020)

NEIGHBOURING-COUNTRY TRAVEL

Uncertainty is expected to continue into 2021 and recovery will likely be focused initially on domestic and neighboring-country travel. However, international tourism may not return to pre-pandemic levels before 2023 or 2024. This chimes with Business executives’ sentiment about the recovery timeline for the travel retail sector. In-State Survey, 66 percent of executives expect it to take at least two to three years for travel retail sales to recover to their former growth levels. The faster recovery of domestic and nearby-country travel already began to play out in 2020. In China and Europe, intra-regional travel picked up over the northern hemisphere summer, which saw a gradual increase in the number of flights. Booking of domestic flights in China recovered to pre-Covid levels in August and more than 600 million people traveled during China’s National Day Golden Week in October, providing some support to domestic retail. In North America, more than 90 percent of trips in August were undertaken by car, revealing the extent to which consumers shifted to domestic travel.

However, not all markets will recover at the same speed or to the same extent, as some are more dependent on global shoppers than others. The slower recovery of luxury sales in Europe compared to other geographies highlights the impact of absent luxury consumers, especially those who normally travel from China and other Asian countries. Even in a positive scenario, Europe is expected to see its luxury sales decline by 23 to 28 percent in 2021 compared to 2019 in the Earlier Recovery scenario. With global travel hubs expected to remain relatively quiet throughout 2021, shopping at duty-free and luxury outlets will continue to shift towards China as retailers in these sectors double down on their efforts in the wider region. Swiss duty-free retailer Dufry, which was replaced as the world’s number one by China Tourism Group DF in 2020, plans to focus its recovery on Asia. In 2020, Hong Kong-based DFS Group acquired a 22 percent stake in Shenzhen Duty-Free Ecommerce Co, signaling the growing importance of mainland hubs. Outlet player Value Retail said in April that China was a priority, after seeing strong growth in 2019 and in the period after a lockdown in 2020.

DISCOVERY PROBLEM

The Italian luxury sneaker and apparel brand is planning to open a store in Hainan, a tropical island in southern China, which is attracting major investment as a domestic tourism hub. Given that footfall in destination stores and travel retailers will remain dampened by the decrease in tourists, brands will need to think creatively about how to address the “discovery problem” that will emerge in the customer’s path to purchase. In a bid to tackle this, some players are devising ways to get closer to their priority consumer groups. Brazilian beachwear brand Havaianas, for example, announced a $50 million investment to increase its footprint and visibility across the Asia-Pacific region. Some players that have relied heavily on international tourism will continue to adjust their offerings to cater to the local market, in a bid to woo domestic customers. We, therefore, expect to see changes to assortments, in-store staff profiles, and marketing.

Galeries Lafayette, which previously generated 50 percent of revenue from international tourists, said it will focus on Parisians and French tourists for the 2020 holiday season. US department store Bergdorf Goodman has similarly developed new initiatives targeting affluent New Yorkers and started offering same-day delivery to the Hamptons during the summer. Meanwhile, retailers with a high share of products associated with holidays and travel will continue to adapt their offerings. Samsonite Group, for example, has said it will shift away from suitcases and towards everyday products like day-to-day bags. Luxury brand Rimowa started its own sunglasses line, extending its product range beyond its recognizable aluminum suitcases.

As consumers continue to settle into travel restrictions and ongoing social distancing measures in 2021, brands should develop short- and medium-term responses to this new environment and align their assortment with evolving consumer demands. They should carefully monitor regional trends to capture opportunities, such as new domestic travel patterns and short shopping trips. But Business brands should continue to prioritize engagement on a local level, both in their home markets to compensate for the lack of tourism and overseas to reach customers where recovery from the pandemic is gaining ground.

Despite a positive outlook in China, brands should not make hasty decisions about the market; instead, they should plan a strategic approach informed by the latest market intelligence that will differentiate them from their peers over the longer term.  Finally, executives must also start planning for a post-Covid world by ensuring that they will be able to capitalize on the excitement that is unleashed once the pandemic is over, as consumers return to long-haul destinations and large social gatherings such as weddings, festivals, and cultural events.

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