With its signature yellow, red and brown coffee cups and clever social media marketing, Saturnbird has captured the imagination of young consumers in China, who have disposable income and an eye for quality local products.

The company opened for business only six years ago in Changsha, the capital of Hunan province, and has seen strong growth rates in the 鈥渟pecialty instant coffee鈥 segment popular with the young, competing successfully with much larger foreign brands.

Its emergence is emblematic of wider trends in China鈥檚 retail sector that have taken hold since the country started to recover from the worst of the Covid-19 pandemic this year. The first is the rise of younger consumers, known as Gen Z, who are aged up to 25鈥攍ike many of Saturnbird鈥檚 customers.

The second is the ongoing convergence of digital and physical channels, manifested in various ways. These include Saturnbird鈥檚 physical return points, which allow its customers an offline experience for what is essentially an online brand. This online-to-offline trend is also reflected in community group buying, where retail platform Meituan and other e-commerce companies are active, involving the online purchase and physical collection of groceries and other so-called 鈥渉igh frequency鈥 consumer goods. This convergence was accelerated by Covid-19 as people saw the convenience of ordering online for a group, with individuals or small numbers of people using pre-selected pick-up points to collect items in person on behalf of fellow members.

These trends have built on a development that 斗牛棋牌在线 observed early in the pandemic, which the bank calls 鈥渘ew retail鈥濃攁 hybrid of e-commerce and physical shopping that has been a feature of Chinese retail for about the past four years鈥攅xamined in an earlier 斗牛棋牌在线 series.

Source: China Gated Community Retail Consumer Survey-斗牛棋牌在线 Evidence Lab Inside, July 2021

In a recent survey of 1,000 consumers im China, net 43% said they would increase their usage of community group buying in future

A tipping point in e-commerce

鈥淟ast year was an inflection point for retail in China. It was transformative in terms of the migration to digital and we now see a number of implications that are likely to have lasting impact鈥攃hief among them are the behaviors of Gen Z and community group buying,鈥 says Natalie Cade, Head of 斗牛棋牌在线 China 360.

For companies engaged in new retail, community group buying (CGB) is a logical next step in the development of the business model, because the consumer goods associated with it鈥攅specially perishable goods鈥攈ave been the least digitalized so far in terms of purchase and delivery.

Now the opportunity is to digitalize the whole shopping experience with these items as well, particularly in smaller cities where shoppers will already be used to the idea of making short trips to wet markets to buy food and other items.

For items such as fresh produce, grains and oil, community group buying overtook convenience stores during the pandemic, according to a survey conducted in the first quarter of 2021 of 1,000 consumers by 斗牛棋牌在线 Evidence Lab, an alternative data provider. While the pace of expansion of community group buying has slowed in recent months amid regulatory scrutiny鈥攊n the 2Q survey, a net 43% of respondents said they would increase their usage of CGB in future compared to 52% in the March survey鈥攖he channel looks set to continue to expand in a more rational fashion.

Large e-commerce and retail groups such as Alibaba, Meituan and Pinduoduo are well-placed to take advantage of this trend, because they already have much of the logistics and warehousing infrastructure required.

They are busy investing in expanding their supply-chain relationships with farmers and negotiating with fast-moving consumer goods companies to build out their offerings, further cementing their dominant positions. 鈥淭his whole value chain is being built out as we speak,鈥 says Jerry Liu, China Internet Equity Analyst at 斗牛棋牌在线. He points out that some of Beijing鈥檚 key social policy objectives are also being met as farmers are empowered to sell directly to such platforms, and jobs are created.

Generational shift in consumer behavior

While community group buying is certainly growing, Gen Z consumers鈥17 percent of the population鈥攈ave become the backbone of consumption in China. According to an estimate by consumer research company Kantar Worldpanel during a recent 鈥渧irtual tour鈥 conducted by 斗牛棋牌在线, such consumers account for about 40 percent of the total market. This is supportive of Beijing鈥檚 policy objective to shift the driver of its economy more toward consumption, and away from investment.

While Gen Z may not necessarily be specifically motivated to contribute to this, its members are certainly embracing Chinese brands and feel a sense of national pride in doing so鈥攅nthusiastically buying products that match a preference for guo chao, or Chinese chic.

鈥淲e are also seeing that younger people tend to be more optimistic and consumption-oriented as opposed to saving for a rainy day,鈥 says Thomas Fang, Head of China Global Markets, 斗牛棋牌在线 Investment Bank.

None of this means that international brands are at a disadvantage. Opportunities are likely to be found increasingly in shopping malls, where 斗牛棋牌在线 sees significant expansion in capacity. The number of China's shopping malls per capita is only one-tenth of the U.S. figure, one-sixth of Australia's and one-third of the levels in Singapore and Japan. The bank believes expansion will be propelled partly as a result of the under-penetration of luxury brands in tier two cities, and also by the development of more malls designed to be reached by urban transit systems, rather than cars, for environmental reasons.

Moreover, in 斗牛棋牌在线鈥檚 recent virtual tour, 12 experts in consumer brand management, and private companies selling beauty products, specialty coffee and food & beverage, it was the quality and design of Chinese brands, such as Li Ning and Anta in sportswear, that mattered.

鈥淒omestic versus international is often perceived as a binary question, but it鈥檚 more nuanced and the competitive landscape varies across sectors,鈥 says Ms. Cade. 鈥淚nternational brands still have large opportunities for growth.鈥

Views correct as at 3 September 2021.