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Zero-COVID Impact on Chinese Consumption Report by daxue consulting

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Zero-COVID Impact on Chinese Consumption Report by daxue consulting

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The outbreak of the COVID-19 pandemic in 2019 and the consequent containment measures have forced consumers to stay at home, as a result, shopping habits significantly shifted. From group-buying to online counseling, and less demand for inconspicuous luxury products to growing demand for pet ownership. What should brands be aware of once China returns to normality? Did any industries benefit from the lockdown? Which industries are likely to continue prospering and who is at risk once the pandemic is over? Daxue Consulting investigated seven hypotheses on the impacts of Chinese consumption caused by recent lockdowns, from short to medium to long-term effects.

The outbreak of the COVID-19 pandemic in 2019 and the consequent containment measures have forced consumers to stay at home, as a result, shopping habits significantly shifted. From group-buying to online counseling, and less demand for inconspicuous luxury products to growing demand for pet ownership. What should brands be aware of once China returns to normality? Did any industries benefit from the lockdown? Which industries are likely to continue prospering and who is at risk once the pandemic is over? Daxue Consulting investigated seven hypotheses on the impacts of Chinese consumption caused by recent lockdowns, from short to medium to long-term effects.

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Zero-COVID Impact on Chinese Consumption Report by daxue consulting

  1. 1. TO ACCESS MORE INFORMATION ON THE BEAUTY MARKET IN CHINA, PLEASE CONTACT DX@DAXUECONSULTING.COM The Zero-COVID lockdown’s long-term impact on Chinese consumption June 2022 Image source: yitiao WeChat, 汤俊,, 2022
  2. 2. © 2022 DAXUE CONSULTING ALL RIGHTS RESERVED 2 Zero-COVID’s economic impact 1. 03 CONTENT OUTLINE Our 7 hypotheses on on Zero-COVID’s impact on Chinese consumption 2. 14 Takeaways on Zero-COVID’s short to long-term consumption impact 3. 52 Overheard in Shanghai 4. 53 About us 5. 54
  3. 3. © 2022 DAXUE CONSULTING ALL RIGHTS RESERVED Zero-COVID’s economic impact 3 Image source: yitiao WeChat, 田方方, 2022
  4. 4. 4 © 2022 DAXUE CONSULTING ALL RIGHTS RESERVED Takeaways from the 2019-2020 lockdowns 4 The average DAU of Arena Of Valor reached 50 million during CNY 2020. Mobile games saw explosive growth Short videos become popular, especially Douyin and Kuaishou, while live-streaming, movies and TV dramas also gained momentum. Rise of short-videos and livestreaming Major platforms were in short supply in March 2020, and the DAU of JD one-hour delivery reached 1 million, while Hema reached 400 thousand. More demand for grocery delivery The demand on remote medical inquiry and O2O medical ecommerce increased remarkably. Telemedicine was boosted After the government announcing to postpone the starting day of school, online learning APPs achieved dramatic growth. Education moved online Growing health awareness An Ipsos survey revealed that 84% of 3,000 respondents claimed paying more attention to their health after the first wave of COVID. Revenge spending Mainland China personal luxury sales increased by 48% compared to 2019. The DAU of Dingtalk is exceeded 100 million in 2020, with absolute advantage in the market. Remote work became mainstream
  5. 5. 5 © 2022 DAXUE CONSULTING ALL RIGHTS RESERVED Differences in the 2020 and 2022 China COVID outbreaks 5 VS The virus was mysterious, scary and often compared with the deadlier SARS, lending support for government intervention The first strain was more harmful and people were not vaccinated It was critical to prevent the spread of the virus to the rest of the world Non-Tier-1 cities were more affected by the virus 2020 More is known about the virus and there is more criticism for heavy government intervention. Though more contagious, the Omicron variant is less deadly and people are vaccinated The rest of the world has accepted that COVID-19 is now a part of life and is loosening their policies Tier-1cities such as Shanghai and Beijing were affected the most 2022 Source: Hill & Associates, 2022 Image source: 永康路KFC爷爷, Eric Chen, 2022
  6. 6. © 2022 DAXUE CONSULTING ALL RIGHTS RESERVED 6 Censorship of WHO recommendation Posts featuring WHO chief Dr. Tedros Adhanom Ghebreyesus have been censored on the Chinese Internet after he referred China’s flagship zero-COVID policy as “not sustainable”, this includes all Chinese social media platforms like Weibo and WeChat. New elements to patriotism “Zero-COVID” has become a new focus of nationalism. Xi’s attack against ‘doubters’ On May 5th, 2022 – President Xi sent a message saying, “We will resolutely struggle against all words and deeds that distort, doubt, and deny our epidemic prevention policies.” Source: Reuters – Tingshu Wang, 2022 Image source: NicoDerouge, 2022 #动态清零# dynamic zero #抗疫守护计划# anti-epidemic protection plan #上海疫情# Shanghai epidemic #封闭# lockdown #到底為什麼要全網刪除那則視頻?# Why was that video removed from the internet? Chinese social media prohibition of Shanghai lockdown videos A six-minute film titled “The Voices of April” documenting realistic scenes of what was happening during the Shanghai lockdown, originally published by Forever strawberry garden ( 永 远 的 草 莓 园 ) on WeChat, was instantly censored. This sparked outrage and opposition from netizens on Chinese social media. An article titled “What exactly is causing the nationwide censorship of that video?” written by Lei Silin (雷斯林) addressed question like, “Why and who gave them the right to scrub such a mild and objective video from the internet?” was also censored. Source: SupChina, 2022
  7. 7. © 2022 DAXUE CONSULTING ALL RIGHTS RESERVED Chinese netizens debating zero-COVID versus coexisting with the virus 7 The zero-COVID strategy has sparked online debates, with netizens expressing their opinions about the zero-COVID strategy versus coexistence: ”We cannot trade million of lives for coexistence” as opposed to “I dare you to stay in lockdown for the rest of your life!” If the virus continues to exist for decades, will China be like this for decades? As long as COVID exists abroad, it will not disappear in China. China is a country that has the ability to stay zero- COVID. Under the circumstance that the long-term impact of COVID infections are still poorly understood, those who propose to coexist with COVID are either stupid or evil! China's healthcare system simply can't afford it. Have you considered the elderly and children? Who can guarantee that there will be no long-COVID effects lasting decades? When will people understand that we need to coexist with COVID. I often wonder if China is coming to an end.
  8. 8. 8 © 2022 DAXUE CONSULTING ALL RIGHTS RESERVED Zero-COVID’s impact on GDP The larger-than-expected Omicron outbreak has disrupted China’s 5.5% GDP target growth rate. Private consumption and real estate investment delayed, manufacturing, infrastructure, and production have all slowed down. 8 Before the Ukraine War and Omicron outbreaks in China Source: Allianz Research, 2022 2022 China GDP growth forecast + Q1 actual growth (%) The lockdown in Shanghai officially began on March 27th, 2022, which lasted for almost two months, with restrictions loosening from the week of 16th May, 2022. In Q1 of 2022, the Chinese economy has expanded 4.8% y-o-y, which was above the market consensus of 4.4% and faster than the 4.0% growth from the previous period. However, rising uncertainty amid COVID- 19 lockdowns and slowdowns in the economy could result in a slower growth in the following months. In addition, the economy will mostly be affected in Q2 of 2022, which has yet to be seen. Source: Trading Economics, 2022 5.2 -0.2 -0.2 -0.4 -0.3 0.4 4.5 3.8 1.3 4.8 aa Previous forecast Oil price Global policy uncertainty Omicron outbreaks Supply chain disruptions Policy support Forecast made in April Downside scenario Worst case scenario Q1 actual growth rate Mobility returns to normal in May (1-month lockdown in Shanghai) 2-month lockdown in Shanghai and additional large cities Repeat of Q1 2020 shock
  9. 9. 9 © 2022 DAXUE CONSULTING ALL RIGHTS RESERVED 17.7% 12.4% 12.1% 8.5% 2.5% 4.4% 4.9% 3.9% 1.7% 6.7% -3.5% -11.1% pr-21 ay-21 un-21 ul-21 ug-21 ep-21 ct-21 ov-21 ec-21 eb-22 ar-22 pr-22 Source: National Statistics Bureau, 2022 Omicron outbreaks in China May-21 Jun-21 Jul-21 Aug-21 Sept-21 Oct-21 Nov-21 Dec-21 Mar-22 Jan, Feb-22 Apr-22 Delta outbreaks China’s retail sales monthly growth rate (%) Apr-21 19.2 25.4 28.0 26.9 21.7 20.9 24.2 6.3 14.7 3.9 28.2 32.7 17.2 20.4 31.4 19.5 19.9 10.5 -0.1 0 Jul-21 Oct-21 Jan-22 Apr-22 China’s monthly trade statistics (year-on-year change, %) Export Import Source: China’s General Administration of Customs The zero-COVID lockdowns impact China’s Dual Circulation Strategy China’s new economic model - the Dual Circulation Strategy (DCS), aims to shield the nation from global volatility and pivot the Chinese economy toward greater self-reliance. 9 Although the country's export growth in April 2022 was the slowest in nearly 2 years, imports are declining faster than exports, demonstrating that the decline in Chinese domestic consumption will push companies to sell their products abroad. Omicron outbreaks in China China's retail sales declined by 11.1% year-on-year in April 2022. This was the sharpest slump recorded since the 15.8% drop in March 2020 due to the first wave of the COVID-19 pandemic. Decline in domestic consumption drives domestic companies to potentially look overseas for revenue.
  10. 10. © 2022 DAXUE CONSULTING ALL RIGHTS RESERVED Weakened demand in retail, offline entertainment is suffering The prolonged pandemic and the recent waves of lockdowns are discouraging consumers from purchasing certain categories of goods. The closure of theatres and staying at home more have also led to people watching more shows and movies online. 10 -31.6 -26.7 -24 -22.8 -22.3 -21.8 -14 -11.7 -10.2 -8.1 -7 -4.8 4.7 6 7.9 10 Office appliances Tobacco and liquor Home appliances Daily necessities Building & decoration items Furniture Communication appliances Cosmetics Clothing Catering services Gold and jewellery Cars Food Medicine Beverages Oil and derivatives Y-o-y retail sales by sector (%) Chinese box-office in 2022 Q1 amounted to just RMB 16.1 billion, thus recording a 28% drop y-o-y. During the same period, less than half (47.4%) of all the cinemas in China were opened due to the outbreaks in Shanghai, Tianjin and Jilin. Meanwhile, less than 20% of cinemas were doing business in other provinces like Shenyang, Qingdao, Suzhou and Xiamen. Retail sales decreased during 2022 Q1 The lockdown gave a blow to cinemas and theatres Source: National Bureau of Statistics; FT, 2022 Source: Artisanal Gateway, 2022 Between mid-February and mid-March 2022, over 4,000 live performances were cancelled or postponed nationwide. As a result, Chinese theatres are projected to further decrease in revenues by 35% compared to Q1 in 2022, thus pushing major theatres to move their shows online. Source: China Performance Industry Association, 2022
  11. 11. © 2022 DAXUE CONSULTING ALL RIGHTS RESERVED Hotels adapt to providing staycations and ‘studycations’ to stay afloat The continuous waves of lockdowns as well as the change in consumers’ travel habits and preferences are putting a strain on Chinese tourism and hospitality industry. In such hard times, some hotels find ways to cater to the local market rather than the tourism market. 11 o During Labour Day holidays in 2022, the number of domestic tourists equalled to just 160 million, a decrease of 30% y-on-y. o Despite domestic flights recovering during Q1 of 2022, the crash of the China Eastern flight in March is likely to further disturb the air travel market in the short run. o Tourism in Fujian and Sichuan (where the pandemic was mostly kept under control) during the first days of May generated more than RMB 10 billion, proving Chinese consumers’ willingness to travel again once things return to normal. o Camping is becoming increasingly popular. The number of hotel bookings close to camping areas increased by 1.5 times y-o-y – hotels can capitalize on such camping frenzy by providing camping experiences to their guests. A dark moment for tourism Source: Ministry of Culture and Tourism, Qunar Hotels adapt to survive As new Omicron cases mushroomed across the country, some famous hotel chains decided to broaden their offer to mitigate the impact of the pandemic. In March 2022, Mandarin Oriental Pudong launched a “studycation” package including in-room online schooling, 3 meals per day, and daily supervision from the hotel staff. Parents were meanwhile granted a 30% off on their spa treatments and F&B services. Source: SCMP
  12. 12. © 2022 DAXUE CONSULTING ALL RIGHTS RESERVED Netizens show clear intent on revenge shopping and travel once lockdowns lift People in locked down cities are looking forward to traveling and shopping again. However, the pandemic led to a change in travel preferences and the consumption recovery is unlikely to be as strong as in 2021 due to increasing economic uncertainty. 12 3% 4% 5% 8% 8% 8% 8% 11% 13% 15% Universal Studios Seaside Disneyland Vacation Café Cinema Bar Picnic Park Travel Most mentioned destinations after the lockdown lifts on Chinese social media 35% of people in lock downed cities expressed on social media their intention to spend on tourism after the lockdown is lifted. According to a McKinsey survey, since the outbreak, Chinese travellers tend to prefer short trips and boast stronger interest in visiting cultural and historical sites compared to the past. 48% of Chinese netizens revealed their desire for normality, giving hopes for a recovery in consumption. Moreover, conversations about the 618 festival have suddenly spiked, surpassing those in 2020, showing that shopping is back on consumers’ agenda. Source: Publicis BrandRadar (2022) “I really want to go to a concert. I want to go to the supermarket and buy a lot of food. I want to go to the botanical garden, to the zoo, to the aquarium. I want to go to Disneyland, I want to have a picnic, I want to go camping. What would you like to do after the lockdown is over?”
  13. 13. 13 © 2022 DAXUE CONSULTING ALL RIGHTS RESERVED 13 The COVID-19 pandemic made it clear that it is time to stimulate domestic consumption by improving income distribution and expanding the social safety net. However, the Chinese government is likely to prioritize measures for stabilizing the economy by boosting export and increasing public spending first. Government policies to boost economy after the first COVID outbreak Source: Government Work Report (2022) Chinese government’s stimulus package Public investment +8.8% public-works spending by the government in March 2022 +RMB 1.5 trillion Infrastructural investment in 2022 Proposed infrastructure spending on following sectors: • Water • Transportation • Energy • Pipeline networks • Flood control and drainage facilities • underground integrated pipeline corridors Foreign trade and investment According to officials more challenges are yet to come in following years. Proposed supportive measures for foreign trade companies include following sectors: • Export credit insurance • Foreign exchange services and export tax rebates • Cross-border e-commerce and overseas warehouses Domestic consumption Proposed supportive measures for stimulating consumption • Increase income, improve income distribution, and enhance social infrastructure at a community level (e.g. community pensions and childcare) • Expand domestic service industry and develop rural e-commerce and express logistics and distribution. • Imports of high-quality products and services • Service trade, digital trade, and cross-border service trade.
  14. 14. © 2022 DAXUE CONSULTING ALL RIGHTS RESERVED Our seven hypotheses on the future of Chinese consumption during and after Zero-COVID 14 The lockdowns are likely to continue in a city-by-city basis 1 The economic situation launches luxury spending into a new phase focused on value and inconspicuousness 2 The Zero-COVID policy is going to accelerate the China+1 strategy 3 Rising mental health issues due to prolonged lockdowns is pushing China’s mental health industry to mature 4 Group-buying will continue to rise in the long run even when the pandemic is over 5 Digitalization will reach new heights as consumers seek experiences from the comfort of their homes 6 The single economy is reshaping China’s consumption landscape as lockdowns extend 7
  15. 15. 15 H1: Lockdowns are likely to continue on a city-by-city basis Short-term Source: ⽥⽅⽅ , 2022 Image source: 田方方, 2022
  16. 16. © 2022 DAXUE CONSULTING ALL RIGHTS RESERVED Due to how contagious Omicron is, lockdowns will unlikely beat it Before the Omicron outbreak in China, stay-at-home orders have proven to lower transmission rate, with a 90% decline in the number of new cases from the 2020 lockdowns. However, the Omicron variant is the most contagious strain so far, and is often asymptomatic, making it harder to control. 16 How is Omicron more contagious: • Multiplies 70 times faster than the Delta variant • 3-4 times more transmissible than Delta The CDC suggests that getting vaccinated and staying up to date with booster shots are the best protection against Omicron. Although almost 90% of the Chinese population is vaccinated against COVID-19, China’s existing vaccines, however, do not employ mRNA technology, which is suggested to be more effective against Omicron. However, on May 9, China has launched the world's first clinical research on a trial for an Omicron-specific vaccine in Hunan Province, which is expected to be completed in 3-4 months. Source: Our World in Data, 2022 87% 66% 2% 11% China US Fully vaccinated Partly vaccinated 89% 78% Percentage of people from China and US who are vaccinated against COVID-19 (as of May 9, 2022) Transmission rate of various COVID-19 strains Source: The Economist, 2021
  17. 17. © 2022 DAXUE CONSULTING ALL RIGHTS RESERVED Not all city’s lockdowns will be even Lockdowns play a central role in China’s zero-COVID strategy. However, there will be differences in the lockdowns between high-tier cities and low-tier cities such as Shanghai and Beijing versus rural areas. Municipal-level government has defined three zones: lockdown, control, and precaution - depending on the risk of spread, living environment, ability to identify close contact, and type of risk. 17 “High-risk” zone > ≥ 2 cluster cases OR > 5 new COVID cases in the past 14 days “Medium-risk” zone ≥ 1 cluster cases OR 2-5 new COVID cases in the past 14 days “Low-risk” zone = 0 COVID case in the past 14 days Beijing: VS High-tier cities Low-tier cities “Lockdown” zone > 0 COVID case in the past 7 days “Controlled” zone = 0 COVID case in the past 7 days “Precaution” zone = 0 COVID case in the past 14 days Shanghai: • “Lockdown” zone - cases exist in residential areas or living surroundings • “Controlled” zone - cases exist at workplace or activity areas • “Precaution” zone - any area except “lockdown” and “control” zone “High-risk” zone ≥ 10 COVID cases in the past 14 days “Medium-risk” zone ≥ 0 COVID case in the past 14 days “Low-risk” zone = 0 COVID case in the past 14 days Low-tier cities in Hunan: Source: People’s Daily, 2022; Beijing Government Website, 2020; Hubei Government Website, 2020; Erlianhaote Government Website, 2021; Hubei Government Website, 2021 “High-risk” zone ≥ 50 COVID cases in the past 14 days “Medium-risk” zone ≥ 0 COVID case in the past 14 days “Low-risk” zone = 0 COVID case in the past 14 days Erlianhaote in Inner Mongolia: Low-tier cities in Hubei: “High-risk” zone ≥ 50 COVID cases in the past 14 days “Medium-risk” zone ≥ 0 COVID case in the past 14 days “Low-risk” zone = 0 COVID case in the past 14 days
  18. 18. 18 H2: The economic situation launches luxury spending into a new phase focused on value and inconspicuousness Short-term
  19. 19. 19 © 2022 DAXUE CONSULTING ALL RIGHTS RESERVED Inflation and lockdowns drive down consumer confidence Rising inflation and the spread of the Omicron variant are inducing Chinese consumers to prioritize quantity over quality, thus favoring less expensive FMCG products and higher volumes of items per trip. 19 2.9% -0.9% 4.1% FMCG growth rates Fiscal year 2021 vs 2020 Average Pack Size Average Price in KG/L Volume -0.4% -7.1% 0.1% -1.1% 5.8% 1.9% Change in Chinese Mainland FMCG household spending as of Dec 2021 According to Ipsos, although China’s National and Expectations Consumer Confidence indexes remain positive and China outperforms the US and the global average, such two indicators have both been experiencing a drop since November 2021, illustrating that the fear for further city-by-city lockdowns is reducing Chinese consumers’ willingness to spend. 72.8 67.8 61.9 53.6 48.3 48.2 45.0 50.0 55.0 60.0 65.0 70.0 75.0 80.0 j u l - 2 1 a u g - 2 1 s e p - 2 1 o c t - 2 1 n o v - 2 1 d e c - 2 1 j a n - 2 2 f e b - 2 2 m a r - 2 2 a p r - 2 2 China and US National Consumer Confidence Index (Oct 2021-Apr 2022) China US Global avg Source: IPSOS, 2022 Source: Kantar, 2022 Source: Kantar, 2022 Delta outbreak Omicron outbreak Inflation Volume Change Promotion Choice Store Choice Product Choice FMCG Spending Soon after the Delta outbreak, consumers started opting for larger pack sizes and higher purchasing volumes per trip at the expense of quality in the FMCG. This trend is likely to continue as long as lockdowns hit other cities.
  20. 20. 20 © 2022 DAXUE CONSULTING ALL RIGHTS RESERVED Rough waters are ahead for luxury in China 20 The current wave of lockdowns, along with rising inflation, is fuelling fear of uncertainty which is in turn pushing Chinese consumers to reduce non-essential spending. The consequent decrease in first-time luxury consumers is going to curb the rise of China’s luxury sales this year. Source: People’s Bank of China, 2022 Q1 54.7% of respondents are planning to save more 23.7% of surveyed people are willing to consume more 21.6% of surveyees are keen to invest more • Entry-level consumers accounted for 50% of luxury shoppers in China in 2021. • Rising uncertainty triggered by both domestic and international factors is inducing consumers to save money, leading to fewer first-time luxury consumers in 2022. • In contrast, core luxury purchasers, whose demand tends to be less elastic, will probably favor more discreet luxury goods. The impact of lockdowns in China on luxury brands Source: LVMH, Kering, Reuters, 2022 Chanel Double-digit decrease in Chinese revenues as around a third of beauty & perfume stores and 16 fashion shops are closed. Kering Due to its exposure to China, Gucci recorded a slower growth than the other houses of the group. LVMH The Asia segment (excluding Japan) was the only region without a double-digit growth. Sales dropped from 41% to 37% during 2022 Q1. -1% y-o-y +2.9% y-o-y -1.9% y-o-y
  21. 21. 21 © 2022 DAXUE CONSULTING ALL RIGHTS RESERVED Core luxury consumers will favor quiet luxury brands The economic slowdown, along with rising inflation, increasing unemployment and the common prosperity campaign, is going to prompt Chinese wealthy to lay low and favor discreet inconspicuous luxury brands, such as Bottega Veneta and Hermès. 21 The desire for more privacy and discretion may keep sustaining the growth of online luxury sales in the future, contributing to convert e-commerce into China’s leading sales channel for luxury goods. #没有logo的包# bags without logo >45k posts #爱马仕低调 # Hermès low key >22k posts #低调奢华包包 # Low key luxury bags >17k posts # Celine无LOGO # Celine without logo >15k posts The absence of a big logo is regarded as a perk by many users on Xiaohongshu and a way to feel part of a community of luxury connoisseurs. “Gold-brown Hermes bag Halzan 25 with golden buckle. I love this bag! Pleasant to feel, the leather is soft and textured. It is very discreet without any big logo, impossible to recognize at first glance. (…) ~I don’t dare to post it on my WeChat Moments as my friends are almost all bosses, colleagues, working partners.” Considering China’s uneven income distribution, such period of economic downturn is going to discourage Chinese High Net Worth Individuals from flaunting their wealth. Therefore, brands with more sober designs and less evident logos are going to benefit from the growing appetite for inconspicuous luxury. Source: Bain (2022) Digital shopping accounted for about of total sales in 2021 (excluding duty-free shopping) 19%
  22. 22. 22 © 2022 DAXUE CONSULTING ALL RIGHTS RESERVED Luxury brands to expand into Tier-2/-3 cities where consumers are still optimistic Before the recent wave of lockdowns, luxury brands were already interested in investing into Tier-2 and Tier-3 cities due to their low penetration rate, faster economic growth, and expanding middle class. Considering recent lockdowns mainly disrupting Tier-1 cities, brands’ expansion into lower-tier cities is bound to accelerate in the years to come. 22 Luxury brands like Gucci and Prada already operate stores in Tier-2 and Tier-3 cities, such as Urumqi, Taiyuan, Sanya, Harbin, and Haikou. 11 out of 20 of the best performing cities in terms of economic growth in 2019 were Tier-2 and Tier-3 cities 40% 40% of China’s population living in Tier-2 and Tier-3 cities in 2019 Tier-1 30% New Tier-1 23% Tier-2 22% Tier-3 and below 25% Distribution of luxury consumers as of July 2020 by city tier Even though luxury consumers in Tier-1 and New Tier-1 cities account for 53% of the overall consumer base and contribute to 54% of luxury sales, those residing in Tier-2 and Tier-3 cities boast a stronger growth in spending and purchasing power. Source: Dianping, Gucci’s store in Taiyuan Source: Tencent, 2022 Source: National Bureau of Statistics, 2019 Source: PwC, 2021
  23. 23. © 2022 DAXUE CONSULTING ALL RIGHTS RESERVED 1 H3: Lockdowns are going to accelerate the China+1 strategy while giving China the opportunity to move up the value chain Medium-term
  24. 24. 24 © 2022 DAXUE CONSULTING ALL RIGHTS RESERVED Disruptions in the supply chains are going to boost the China+1 strategy The “China Plus One” strategy is employed by international companies to reduce reliance on China. Lockdowns are forcing factories to shut down and restricting mobility of goods. As a result, Southeast Asian countries are going to be the most popular destinations of Foreign Direct Investments (FDIs) diverted from China. 24 Over 180 global companies say they were affected by China’s lockdowns in their first- quarter earnings calls or financial statements in 2022 - as recent lockdowns paralyzed the major industrial hubs of the country and disrupts the global supply chain. LG Household & Health Care Ltd: ‘Sales of beauty products plunged 40% in the quarter as restrictions battered store traffic and travel retail channels.’ The Omicron outbreak in China was a reminder for foreign companies to outsource their supply chain in lower-cost countries to benefit from less strict containment measures, cheaper workforce, and weaker currency. Tesla Inc: ‘Shanghai plant closed down for three weeks in April. The factory, which typically ships around 60,000 cars a month, delivered only 1,512 vehicles last month.’ Sony Group Corporation: ‘Cut its PlayStation 5 sales forecast to about 18 million units this fiscal year from a previous estimate of 22.6 million, citing supply-chain complications.’ Source: The Edge, 2022
  25. 25. 25 © 2022 DAXUE CONSULTING ALL RIGHTS RESERVED With China+1 and the lockdowns, work opportunities will move up the value chain 25 Growth in China’s industrial production eased back to 5.0% year-over- year in March (from the surprisingly strong 7.5% year-over-year increase recorded across January and February). COVID-19 outbreaks in a number of industrial centers (most notably Shenzhen) have impacted productivity levels, however this was more evident in surveys than industrial production data. 5.4% 5.5% 5.3% 5.1% 5.0% 5.0% 5.1% 5.1% 4.9% 4.9% 5.0% 5.1% 5.3% 5.5% 5.8% J a n - 2 1 F e b - 2 1 M a r - 2 1 A p r - 2 1 M a y - 2 1 J u n - 2 1 J u l - 2 1 A u g - 2 1 S e p - 2 1 O c t - 2 1 N o v - 2 1 D e c - 2 1 J a n - 2 2 F e b - 2 2 M a r - 2 2 China’s unemployment rate (Jan ‘21-Mar ’22) Source: National Statistics Bureau, 2022 -0.2% +0.3% 28.7% 30.3% 29.9% 29.3% 28.2% 28.7% 34.6% 36.1% 40.6% 43.3% 46.1% 47.7% 2010 2012 2014 2016 2018 2020 Distribution of the workforce across economic sectors in China from 2010 to 2020 Manufacturing Tertiary Source: MOHRSS, 2021 As foreign companies leave the country, unemployment is bound to increase in the short run, but in the long run could also give China the opportunity to move up the value chain. As China attempts to move away from low value-added activities, manufacturing is no longer at the core of the national economy. Since 2011, majority of China’s labor force has been employed in the service sector and the proportion of people working in the tertiary sector in China has been steadily growing. The acceleration of the China+1 strategy could give a boost to such trend.
  26. 26. 26 H4: Rising mental health issues due to prolonged lockdowns is pushing China’s mental health industry to mature Medium-term Image source: ZZIPPY, 2022
  27. 27. © 2022 DAXUE CONSULTING ALL RIGHTS RESERVED 27 According to social listening, people appear to be less high-spirited due to prolonged home quarantine. Lockdowns will overall increase the demand for mental health services in China January 2022 February/March 2022 April 2022 New Year Wish Time with family Stay for CNY End earlier Safety Health Hope COVID go away! Hong Kong Meet friends University lockdown Online courses Harbin Back to Uni Food problem Shanghai Lockdown Delivery Policy Group buying Volunteer Medical treatment Overflow Overwhelmed Hopeful Critical • In preparation for Chinese New Year • People was feeling hopeful during the new start of a year • Beijing 2022 Winter Olympics in February • Hong Kong experienced an Omicron outbreak, exceeding 50,000 cases a day in early March • The Omicron outbreak began in Shanghai in late March resulted in a 2- month lockdown • Group buying took off in April to solve “food problems” Source: BrandRadar, 2022
  28. 28. © 2022 DAXUE CONSULTING ALL RIGHTS RESERVED 28 People are looking the most for anxiety and teen counseling There is a major shortage of mental health counselors. For every 100,000 people, there are 2.2 psychologists and psychiatrists in China according to the WHO (versus 42.4 in the US). Search frequency of terms related to mental health in March and April 2022 Numbers are an index for comparison, not actual search frequency Depression 抑郁 Teen counseling 青少年⼼理咨询 Emotional counseling 情感咨询 Anxiety 焦虑 Search Index Compared to previous period Keywords 37% 13% 24% 14%
  29. 29. © 2022 DAXUE CONSULTING ALL RIGHTS RESERVED 0 200 400 600 800 1000 1200 1400 1600 1800 2000 2 0 2 2 - 0 2 - 0 1 2 0 2 2 - 0 2 - 0 7 2 0 2 2 - 0 2 - 1 3 2 0 2 2 - 0 2 - 1 9 2 0 2 2 - 0 2 - 2 5 2 0 2 2 - 0 3 - 0 3 2 0 2 2 - 0 3 - 0 9 2 0 2 2 - 0 3 - 1 5 2 0 2 2 - 0 3 - 2 1 2 0 2 2 - 0 3 - 2 7 2 0 2 2 - 0 4 - 0 2 2 0 2 2 - 0 4 - 0 8 2 0 2 2 - 0 4 - 1 4 2 0 2 2 - 0 4 - 2 0 2 0 2 2 - 0 4 - 2 6 2 0 2 2 - 0 5 - 0 2 2 0 2 2 - 0 5 - 0 8 2 0 2 2 - 0 5 - 1 4 2 0 2 2 - 0 5 - 2 0 2 0 2 2 - 0 5 - 2 6 Xinli001 Yidianling Mental health apps are seeing a surge of downloads Source: Qimai Data, 2022 29 Psychological service platforms such as Xinli001 (壹⼼理) and Yidianling (壹点灵) are getting more users amid the zero-COVID lockdowns. Xinli001 is a psychological service platform that provides consultation, assessment, and online courses, with over 22 million users and 500 psychological counsellors. Yidiangling is an online psychological service platform, providing both online and offline counselling, instant talk, and online courses and tests, with 25 million registered users and 30,000 professional psychological counsellors. Shanghai lockdown commenced on March 27th First omicron outbreak in Shanghai on March 1st Number of downloads (on iPhone) between February and May 2022 Mar 24th 1,185 Yidianling downloads Feb 23rd 1,075 Xinli001 downloads May 26th 1,910 Yidianling downloads May 25th 1,228 Xinli001 downloads
  30. 30. © 2022 DAXUE CONSULTING ALL RIGHTS RESERVED Rise in the mindfulness economy The rise in downloads and usage in counseling and meditation apps indicate the potential growth in the “mindfulness economy”. This includes services and mobile apps for meditation, apparel brands and mobile apps for yoga, and any platforms providing mindfulness information. Meditation In 2021, 1% of Chinese regard meditation as a daily habit compared to 14% of Americans Yoga 21.6% of Chinese who exercised in the last year did Yoga/Pilates (2020 survey of 2,100) Tide Now Apps Companies incorporating meditation at work Apps Apparel brands Daily Yoga Wake Information Self-help books account for almost one- third of China’s printed book market (source: study by Eric Hendricks-Kim) #3 eBook in China Counselling for Toads: A Psychological Adventure By Robert de Board Didi Chuxing Lululemon #3 Most Popular Book on Douban (⾖瓣) in May 2022 Maybe You Should Talk to Someone By therapist Lori Gottlieb 30
  31. 31. © 2022 DAXUE CONSULTING ALL RIGHTS RESERVED Increased focus on wellbeing could cause backlash on hustle culture Though 996 (9AM-9PM 6 days/week), 700 (being responsible for work at all hours of all days) and 715 (15 hours a day every day) are technically illegal, they are still occurring in many companies around China. There’s some positions that require long hours, and that’s understandable. However, it is unfeasible for companies to put the physical and mental health of their employees at risk. - Dong Mingzhu, a delegate to the National People's Congress and chairwoman of Gree Electric regarding 996 work culture Source: Zhengyi Ku Weibo, 2022 Public litigation of “996” work culture Why do companies keep long work hours? • The employees need the money • Strong hierarchy • Management’s focus on ‘input’ (hours worked) rather than output (efficiency) • Cultural glamorization of grit (忍) How mental health awareness could unravel 996? • Employees decide their mental health is not worth sacrificing for a paycheck (内卷) • As more people have access to counseling, there’s strength in numbers • The law is already on the employees’ side What lies between “lying flat” (躺平) and the extreme “996” work culture? • A new trend called ”45 degree life” is trending in China, implying young people are looking for a more balanced life between burning out and lying flat • Companies may put more efforts into fostering a healthier work culture 31
  32. 32. 32 H5: Group-buying will continue to rise in the long run even when the pandemic is over Long-term Image source: 汤俊, 2022
  33. 33. © 2022 DAXUE CONSULTING ALL RIGHTS RESERVED Increased downloads of group buying apps due to lockdowns in high-tier cities Meituan Select and Pinduoduo, two major players of the group buying market, also led China’s community group buying craze two years ago, when the pandemic first hit the country. Although the number of Pinduoduo downloads on iOS appear to be declining, active users and revenue increased q-o-q by 4% and 7% respectively during Q1 of 2022. 33 Source: Qimai Data, 2022 0 5000 10000 15000 20000 2022-02-25 2022-02-27 2022-03-01 2022-03-03 2022-03-05 2022-03-07 2022-03-09 2022-03-11 2022-03-13 2022-03-15 2022-03-17 2022-03-19 2022-03-21 2022-03-23 2022-03-25 2022-03-27 2022-03-29 2022-03-31 2022-04-02 2022-04-04 2022-04-06 2022-04-08 2022-04-10 2022-04-12 2022-04-14 2022-04-16 2022-04-18 2022-04-20 2022-04-22 2022-04-24 Number of Meituan Select downloads (on iPhone) between February and April 2022 Mar 31st 15,351 Meituan downloads Shanghai lockdown enforced on March 27th Shanghai reported 3 local COVID cases March 8th Mar 11th 12,123 Meituan downloads Number of Pinduoduo downloads (on iPhone) between February and April 2022 0 50000 100000 150000 200000 250000 300000 2022-02-25 2022-02-27 2022-03-01 2022-03-03 2022-03-05 2022-03-07 2022-03-09 2022-03-11 2022-03-13 2022-03-15 2022-03-17 2022-03-19 2022-03-21 2022-03-23 2022-03-25 2022-03-27 2022-03-29 2022-03-31 2022-04-02 2022-04-04 2022-04-06 2022-04-08 2022-04-10 2022-04-12 2022-04-14 2022-04-16 2022-04-18 2022-04-20 2022-04-22 2022-04-24 Mar 28th 249,482 Duo Duo downloads Mar 8th 258,520 Duo Duo downloads Shanghai lockdown enforced on March 27th Shanghai reported 3 local COVID cases March 8th Source: Pinduoduo, 2022
  34. 34. © 2022 DAXUE CONSULTING ALL RIGHTS RESERVED In 2019, the number of group buying users surpassed online delivery users. At least 23 cities in China have experienced lockdown restrictions between 2020 and 2021, which brought neighbors closer, thus pushing community group buying to the spotlight. The group buying market already had momentum before the lockdowns While in 2020 we saw a rise of contact-free delivery, in 2022, the focus shifted to group buying. Individual online delivery services were prohibited during the lockdowns, as a result, consumers worked together to do group purchases as a community. 34 Community group buying allows a group of people to buy items in bulk at a lower price. Originally popular among rural and middle-aged women, it has now spread to Tier-1 cities due to the lockdown. Platforms Pick-up locations in community Community buyers 1. Order online 2. Deliver to pick-up location 3. Pick-up items at designated locations 212 335 420 470 646 343 406 398 419 544 2017 2018 2019 2020 2021 Total users of community group buying and online delivery in China (in million) Users in community group buying industry (in million) Users in online delivery industry in December each year (in million) Source: CNNIC, 2022
  35. 35. © 2022 DAXUE CONSULTING ALL RIGHTS RESERVED The 2022 lockdowns drive community group buying from rural to the mainstream The decrease in consumer confidence and rising uncertainty from the risk of further lockdowns will push people to form habits of stocking up and saving money. As a result, group buying, a more cost-effective way of buying necessities, may be brought from rural to the mainstream in the long run. 35 • Lockdowns in 2022 hit many higher-tier cities in China, thereby prompting not only rural consumers but also consumers from all over the country to save money and stock up on groceries. • Consumer confidence dropped to the lowest point in March 2022 and is likely to keep decreasing. 122.8 127 121.5 122.8 117.5 121.2 119.5 121.5 113.2 Jan '21 Feb '21 Mar '21 Apr '21 May '21 Jun '21 Jul '21 Aug '21 Sep '21 Oct '21 Nov '21 Dec '21 Jan '22 Feb '22 Mar '22 Consumer Confidence Index in China from January 2021 to March 2022 Source: National Bureau of Statistics in China 59.7% Consumers spent less than they did before the pandemic. Source: Data 100, 2022 Image source: 安特瓦信, 2022
  36. 36. © 2022 DAXUE CONSULTING ALL RIGHTS RESERVED Community WeChat groups have created a new digital group-buying infrastructure The 2022 lockdowns created communities in residential areas, whereas previously, urban neighbors interacted very little, now there are residential community groups established. Additionally, F&B brands like KFC and Ramen Talk have adapted their online ordering to cater to community group buying. 36 “Taking orders for Sofia ice-cream!” This WeChat group has 204 users from the same residential community. A link to WeChat mini program for ice-cream group buying. Click the link to participate in the purchase. The group organizer initiates new group buying orders “Residential group orders, delivered on-time with care” Number for community leaders placing orders over ¥3000 5 meals of tonkotsu ramen for ¥105 5 meals of beef ramen for ¥130 5 meals of tomato tonkotsu ramen for ¥105 Source: daxue consulting, 2022
  37. 37. © 2022 DAXUE CONSULTING ALL RIGHTS RESERVED Consumers are likely to continue group buying after lockdowns Consumers may still choose group-buying as one of the primary channels for grocery even when the pandemic is over due to of its lower purchasing price, better quality products, and the closer community brought by the 2022 outbreak. 37 Better Quality: • Increased information-sharing within community buyers • Products with inferior quality and unacceptable prices do not last long in a community-buying situation • In the long run, the items that survive in the group buying channels may boast a high quality at a reasonable price Closer Community: • The rapid pace of life weakens the sense of community • Group buying provides a chance to connect people who are living in the same neighborhood, creating a closer community Lower Purchasing Price: • Retail prices usually decrease when more purchases are involved • More consumers involved in purchasing increases bargaining power Drivers of group buying I used to watch Douyin (Chinese Tiktok) short videos during my spare time but now I check Meituan and my WeChat group whenever I’m free. Xiang Meiling – a local living in Hubei province Source: SCMP, 2022 Source: Eric Chen, 2022
  38. 38. 38 H6: Digitalization will reach new heights as consumers seek experiences from the comfort of their homes Long-term Image source: ZZIPPY, 2022
  39. 39. © 2022 DAXUE CONSULTING ALL RIGHTS RESERVED 39 Lockdowns led to a surge in interest towards video games The median age of video game players is 27, with 52.6% being male. However, female students in their 20s were the most likely to increase their time spent gaming after lockdowns were lifted. Finally, stress and anxiety were also strong indicators for increase in game time. 30 10 60 40 15 100 Overall Avg Lower Quartile Upper Quartile Before lockdown After lockdown Time spent on gaming per day, pre- and post-lockdowns (in minutes) Source: International Journal of Mental Health and Addiction, 2022 (N = 5,268) Leading game livestream platforms such as Huya Live and Douyu Live (left), are expanding into live commerce and paid subscription livestreaming. Demand for digital entertainment and livestreaming content has grown further under the lockdowns. In particular, video games saw significant increase in interest, with consumers both playing and watching more content. Source: Douyu, 2022 Video games are becoming increasingly popular Source: International Journal of Mental Health and Addiction, 2022 Potential growth in the Livestream gaming market 30 39.7 49.7 59.2 69.04 2020 2021 2022E 2023E 2024E Source: iResearch, 2021 Game livestreaming market size, 2020-2024 (RMB billions)
  40. 40. © 2022 DAXUE CONSULTING ALL RIGHTS RESERVED 1,240 2,200 3,500 4,900 2020 2021 2022E 2023E 40 Demand for ecommerce livestreaming is poised to explode Ecommerce livestreaming sees massive built-up demand due to lockdowns. Particularly in Shanghai, the shut-down of ecommerce consumption resulted in accumulated demand. When lockdowns are lifted, this will be a key driver of livestreaming ecommerce sales. Gross Merchandise Value of livestreaming ecommerce in 2020- 2023 (RMB billions) Source: Statista & iResearch, 2022 Demand for ecommerce drastically outweighed the supply during lockdowns due to handicapped supply chains. When lockdowns are lifted, there will be a a surge in ecommerce spending as people reclaim the consumption they missed out on. Top 3 livestreaming platforms in China: Douyin (Chinese Tiktok) Taobao Live Kuaishou Source: Tenba Group, 2022 While high profile KOLs are a major aspect of consumer’s spending decisions, people increasingly seek out the voices of their fellow consumers. Perhaps out of people’s need for social interaction, livestreams with KOCs became prevalent over the course of the lockdowns. KOCs can range from someone’s close friends to their local community, but the general theme remains: they are not paid to promote products and thus perceived as more trustworthy. Social commerce refers to ecommerce in which online interaction drives sales. People were deprived of social interaction during the lockdowns. As a result, they were eager to interact with streamers and brand ambassadors. Source: McKinsey, 2021 Source: QPS, 2022 Livestreaming as a form of ”social commerce” Key Opinion Consumers vaunt a great influence on spending habits
  41. 41. 41 © 2022 DAXUE CONSULTING ALL RIGHTS RESERVED Return of online grocery shopping and food delivery Online groceries have become the most reliable method of obtaining food in the face of COVID lockdowns. As lockdowns are lifted in Shanghai, the online food delivery industry sees recovery and digital transformation. Predicted online grocery sales in China 2021-2025 (RMB billions) People that struggled to fulfill basic needs under the lockdown will become more conscious of their access to food. Consumers are now likely to purchase more groceries online. In the short term, demand for takeaway services will be immense in cities that lock down. 1,334 1,674 1,982 2,266 2,548 2021 2022E 2023E 2024E 2025E Source: eMarketer, 2021 In face of the Zero-COVID policy, severe lockdowns have prevented consumers from shopping in-store. Existing consumers will likely continue using online grocery shopping, as there is always a chance of lockdowns under the Zero-COVID policy. The food delivery industry in Shanghai is receiving government support in its digitalization efforts. The Shanghai District Government worked with Tencent to develop an online system on the company’s WeCom platform, helping restaurants connect with professional delivery businesses, and arrange their own delivery riders. Source: Global Times, 2022 695 920 1,061 1,131 1,206 2020 2021 2022E 2023E 2024E Online food delivery market size in China 2020-2024 (RMB billions) Source: IMARC Group, 2021 41
  42. 42. 42 © 2022 DAXUE CONSULTING ALL RIGHTS RESERVED Digital lifestyle content boomed during lockdowns 42 Fitness livestreams In early 2022, Liu Genghong went viral during lockdown with his livestream workout sessions on Douyin (Chinese Tiktok). His livestreams have been viewed >100 million times in total, breaking Douyin’s viewership record of 2022 so far. Liu’s popularity during the lockdowns revealed the underlying demand for both fitness and livestreaming content. Consumers are becoming increasingly more conscious of their health and fitness. During the lockdowns, demand for lifestyle activities exploded. However, the lifting of restrictions acts as both a threat and opportunity for these sectors. Recipe apps were a major hit over the course of the pandemic, as cooking became a necessity for those who would normally eat out. It is also a way to learn a new skill, alleviate boredom, and give people an emotional outlet. When lockdowns are lifted, consumers will begin eating out and buying delivery. There will be a risk of losing consumer engagement. When supply chains recover and ingredients become easier to access, firms must utilize this opportunity in order to retain users. Online recipe apps Source: ECNS, 2022 Source: Dao Insights, 2022 Source: 下廚房 (xiachufang)
  43. 43. 43 © 2022 DAXUE CONSULTING ALL RIGHTS RESERVED The dramatic rise in digital health and wellbeing solutions 43 Digital health tools will become a major market in China, following 2 broad directions: online primary care to alleviate overloaded hospitals, and AI-powered digital healthcare solutions. AI-powered disease prevention, diagnosis, and monitoring software will be in high demand as China seeks to improve the quality and efficiency of its healthcare system. China’s largest and most advanced hospitals have experienced overcrowding for years as people tend to visit larger hospitals for basic medical issues better suited for primary care clinics. Online medical consultation, telemedicine, e-pharmacy, and OTC drug delivery services can provide unmatched convenience to consumers, solving the key pain point of hospital congestion. Revenue in China’s digital health sector, 2020-2026 (RMB billions) 82 101 122 140 157 174 192 2020 2021 2022E 2023E 2024E 2025E 2026E Source: Statista Global Consumer Survey, 2022 Source: McKinsey & Co., 2021 AI applications and automated systems were developed to support medical staff in the fight against COVID. This include temperature- screening systems, health chatbots, and AI-equipped diagnostic assistants, which have significantly improved efficiency in identifying the virus. Solutions to congestion and overcrowding in hospitals Alibaba recently developed “Medical Brain” (above), an AI software that helps physicians diagnose and propose treatment options. Source: Alibaba, 2021 Harness the Power of Alibaba Cloud’s Medical Brain Medical Data Integration Data Cleaning and Storage Smart Application Docking Data Platform Console Construction COVID accelerated the adoption of AI technology
  44. 44. 44 © 2022 DAXUE CONSULTING ALL RIGHTS RESERVED Some apps risk losing users after lockdowns are lifted 44 Although the number of active app users grew considerably under the lockdowns, app usage behavior will normalize when restrictions are eased. Certain apps may be able to keep their userbase, but many others are at risk of losing them. 5% 5% 12% 13% 16% News and Events Online Video Health and Fitness Mobile Games Food Recipes App sectors with highest MAU growth in Shanghai during 2022 lockdowns (%) Source: iResearch mUT, 2022 The top growth areas consists of apps that helped improve people’s lives under the lockdowns. They held a monopoly over their respective industries during the lockdowns as people had no alternatives. Some app sectors are at a higher risk of losing users as people return to normalcy and in-person consumption. Mobile Games: Mobile games are designed to be addicting and are a source of entertainment without many substitutes. Health and Fitness Apps: Gyms are a substitute to home-workout apps, but fitness trackers remain crucial to enthusiasts. Food Recipe Apps: People will be eating out or ordering takeout as there is currently substantial built-up demand. Low Risk Medium Risk High Risk Source: Publicis Brand Radar, 2022
  45. 45. 45 © 2022 DAXUE CONSULTING ALL RIGHTS RESERVED Companies exploring new ways to to engage with customers The “520” holiday in 2022 showcased a variety of highly digitalized and interactive marketing campaigns, such as IP collaborations and the use of NFTs. This showcases the digitalization trends in digital marketing and that Chinese consumers love engaging with their favorite brands. I Do X King of Glory Amiro X V&A museum Nestle X Mr Love Interactive Events Keep 520 Sports confessions NetEase Cloud Music Love MBTI test Pepsi Jay Chou concert replays BMW Event Bilibili coin Limited “520” NFTs IP Collaborations Balenciaga Lancôme Lyfen Brands collaborated with other IPs to make use of their brand equities. Digital IPs like King of Glory have dedicated fanbases who are willing to spend, whereas the V&A museum’s brand connotes sophistication and artistry. Publicis, 2022 Consumers are increasingly becoming interested in NFTs and related technologies. Brands can design and sell their own NFTs in order to capture this growing market.
  46. 46. 46 H7: The single economy is reshaping China’s consumption landscape as lockdowns extend Long-term
  47. 47. 47 © 2022 DAXUE CONSULTING ALL RIGHTS RESERVED The pandemic correlates with decreased marriage rate and divorce spikes 47 Marriage and birth rates disproportionally declined during the pandemic. Meanwhile, the average number of people living in one household in China dropped around 10% from 2019 to 2020, correlated with lower birth rates. Source: China’s Ministry of Civil Affairs & National Bureau of Statistics of China, 2020 • People have postponed their marriage and pregnancy plans due to COVID uncertainty. • China saw a spike in divorces after the 2020 lockdown, as couples were forced to spend more time together. Whether this trend repeats in the 2022 lockdowns remains to be seen. • China introduced a ‘cooling off’ law, involving a 30- day waiting period for divorces to reduce divorce rate. 8.3 7.7 7.3 6.6 5.8 3.0 3.2 3.2 3.4 3.1 13.6 12.6 10.9 10.4 8.5 2016 2017 2018 2019 2020 Marriage rate Divorce rate Birth rate Marriage, divorce and birth rate in China from 2016 to 2020 (%) Urban women age between 18 and 26 had no plans to get married in the near future, while 25% of men said the same Source: Communist Youth League Survey (N = 2,905) 44%
  48. 48. 48 © 2022 DAXUE CONSULTING ALL RIGHTS RESERVED Women are increasingly empowered economically 48 Although men still earn more than women on average, the gender pay gap is closing. Source: Zhaopin.com, 2018-2022 Although men on average still earn 12% more than women in China, the average monthly income for women is seeing a 30% increase over the past five years, whereas the average monthly income for men increased by 22%. 8,006 9,467 9,848 9,328 9,776 6,589 7,245 8,173 8,138 8,545 2018 2019 2020 2021 2022 Average monthly income among Chinese respondents by gender, 2018-2022 Male Female As marriage rate declines, and more women are in the workforce, they spend more money on themselves. Jewelry houses that have always targeted consumers in the bridal market are now attempting to widen their audience. Source: QuestMobile, 2022 Top 6 most searched product categories by women on e-commerce platforms during January 2022: 26.6% Skincare products 22.6% cosmetics 17.6% snacks 10.4% Kitchen appliance 7.1% Dairy products 5.8% ready-to-eat meals of surveyed high-income women in China intend to buy diamond jewellery for themselves. Source: De Beers, 2020 >80%
  49. 49. 49 © 2022 DAXUE CONSULTING ALL RIGHTS RESERVED The rising single population in China amid COVID-19 brings opportunities to pet brands 49 More than half of the single people in China own pets in 2021, compared to only a quarter of non-singles. The pet industry in China is also experiencing a steady growth in general, and is predicted to continue to expand in the following years. 58.4% 26.3% Single Non-single Single and non-single pet ownership in China, 2021 Source: iiMedia Research, 2021 Pets provide companionship, reduce boredom and stress, and are a cheaper (or alternative) investment than children, more and more single people in China are turning towards pet ownerships. As more people are choosing to stay single due to COVID and other factors, the pet industry is bound to continue to boom. In fact, cat food, among all industry, was the best-selling category on Tmall Global and Alibaba’s cross-boarder ecommerce marketplace during 2020 “Single’s Day” (11/11) shopping event. Sales for other pet-related goods and services are also growing steadily. Source: CGTN, 2020 72.5 107.2 154.5 199.1 252.1 298.8 348.8 396.0 445.6 2015 2016 2017 2018 2019 2020 2021E 2022E 2023E Market scale of China's pet industry, 2016-2023 (RMB billion) Source: iResearch, 2021
  50. 50. 50 © 2022 DAXUE CONSULTING ALL RIGHTS RESERVED Solo travel is becoming mainstream in China 50 The outbreak of the COVID-19 pandemic gave a significant boost to solo travels Source: Tongcheng, 2019 Solo travelers on average spend 60% more than those who travel with companions Over 50% of the people who take flights alone would purchase flight accident insurance and flight delay insurance. “Buy now, pay later” is common among solo travelers. Over 22.8% of solo travelers chose to pay by installment, especially Millennials. Solo travelers are more likely to be interested in exploring niche food and local cultural experience, instead of popular tourist attractions. Source: Tongcheng, 2019 60% Of 1,682 respondents in April 2020 claimed being unwilling to join any group tour in the near future, against 10% of surveyees planning tours including more than 10 people. Health concerns and a greater flexibility in choice of transportation were the main drivers behind the success of solo travelling in China. Source: McKinsey, 2020
  51. 51. 51 © 2022 DAXUE CONSULTING ALL RIGHTS RESERVED More industries are cashing in on the singles economy 51 Companies are targeting singles as a new consumption demographic, as the single population keeps increasing and more people are expected to live alone in China. Food Delivery Singles in China are reliant on food delivery services; 45.7% of the single people reported that they tend to order food delivery. Dating Apps As the pandemic made it difficult to meet in person, people are turning to online dating platforms. Momo is the most popular in China as of December 2021, with 53 million MAUs. Health & Wellness COVID-19 boosted health awareness in China. The single population is one of the key demographics for the health and wellness industry, as singles have more time to explore workouts and wellness activities. Ready-to-eat meals Pre-prepared meals are increasingly popular in China. 34.4% of the single people have a preference on ready-to-eat food. Source: iiMedia, 2022
  52. 52. © 2022 DAXUE CONSULTING ALL RIGHTS RESERVED The 2022 lockdown’s impact on Chinese consumption 52 Short-term impact Medium-term impact Long-term impact Lockdowns are likely to continue as far as Omicron is contained Demand for luxury goods will abate temporarily until consumer confidence is regained The China +1 strategy will be accelerated by the Zero-COVID policy Prolonged lockdowns will trigger China’s mental health industry to thrive Group-buying will become mainstream in high-tier cities even when the pandemic is over Digitization will continue to witness advancement and acceleration China’s growing single population is reshaping consumption habits
  53. 53. © 2022 DAXUE CONSULTING ALL RIGHTS RESERVED Overheard in Shanghai What we have overheard in Shanghai through in-person discussions, social media, and chat groups. 53 “ Hotels suffered much more in 2022 than 2020, with an expected -50% revenues for the year “ Second family houses in the countryside are becoming a thing “ Emigration services are getting a boost “ Communities living in compounds are getting more leverage towards the management company as they have now united “Group buying is here to stay “ Neighbor relationships will change for good “ A lot of really nice apartments are going down in rent by like RMB 5,000 to 10,000. “ Some people are interested in moving towards the suburbs where they can grow their own food “ Some of my friends (18-22 years old university students) are thinking of leaving China for the first time.
  54. 54. © 2022 DAXUE CONSULTING ALL RIGHTS RESERVED 54 ABOUT
  55. 55. © 2022 DAXUE CONSULTING ALL RIGHTS RESERVED Our mission is to guide businesses to holistic growth in China Through our market research and strategy consulting, we equip businesses with the knowledge and guidance to achieve growth in China and beyond 55
  56. 56. © 2022 DAXUE CONSULTING ALL RIGHTS RESERVED The values we embrace 56 Embrace change enthusiastically Similar to how markets are constantly changing, our mindset is also always evolving. We value routine only when it helps us improve and we value change because it helps to keep pace with our time. Freedom enriches creativity & responsibility Freedom to manage and envision her or his mission increases the sense of responsibility to that mission. Our clients’ goals are our goals We see ourselves as an extension of the client’s business in China or their target country, hence, we advise them as if we were in their shoes and investing along with them. Knowledge is meant to be shared While our projects team dives deep to provide catered research to clients, the media team shares insights publicly. At the same time, we foster a culture of sharing knowledge in our team, each individual works to increase their own knowledge and freely shares ideas each other. Intellectual humility gives clarity Only through the lenses of humility can knowledge be seen clearly. At daxue consulting, we are humble toward science and the truth. We interpret data in a way that lets it speak for itself, even if contradicts our hypothesis.
  57. 57. © 2022 DAXUE CONSULTING ALL RIGHTS RESERVED Who we are Covered Tier-1 cities Covered Tier-2 cities Covered Tier-3 (and below) cities We are daxue consulting: • A market research firm specializing on the Chinese market since 2010 • With 3 offices in China: in Shanghai, Beijing and Hong Kong • Employing 40+ full-time consultants • Full, complete, national coverage • Efficient and reliable fieldwork execution across China • Using our expertise to draw precise, reliable recommendations • With key accounts from around the world We help businesses prosper in China by uncovering deep insights and transforming them into action plans 北京 BEIJING, CHINA Room 726, Building 1, 40 Dongzhong Road, Dongcheng District 上海 SHANGHAI, CHINA (Head Office) Room 504, 768 Xietu Road, Huangpu District 57
  58. 58. © 2022 DAXUE CONSULTING ALL RIGHTS RESERVED Our approach to methodology-based consulting An agile and data-driven approach towards solving complex research questions RESEARCH CONSULTING as the base for IN-HOUSE ORGANIZED We do not outsource RESEARCH-DRIVEN Consulting backed up by massive research TRADITIONAL METHODOLOGIES Interviews, cold calls, focus groups, surveys, and etc. SOFTWARES AND TOOLS 3rd-party software and in-house built scrapping tools ACCESS COUNTRY-WIDE Able to run research across all layers of population MASSIVE Data-driven and cross-checking from many angles AGILE Market discovery -> market validation -> market entry COLLABORATIVE We encourage frequent meetings and workshops with our clients TRANSPARENT Full insights into our work with frequent intermediate updates CROSS-CULTURAL UNDERSTANDING Mix of foreign-educated Chinese and China-educated foreigners INDUSTRY PARTNER NETWORK Built-up over 350+ projects and 100+ podcasts 58
  59. 59. © 2022 DAXUE CONSULTING ALL RIGHTS RESERVED Our APAC network 59 A research and consulting firm headquartered in China, with an Asia-focus and a presence on three continents. China • Shanghai (HQ) • Beijing • Hong Kong France (Rep. offices, Paris, Bordeaux) Vietnam Beijing 2012 2013 2014 2015 2016 2017 2018 2 people 8 people 16 people 2019 2021 2020 Shanghai (new HQ) 30+ people Vietnam, Korea, Hong Kong representative offices (Rep. office, Ho Chi Minh City) South Korea (Rep. office, Seoul) Our history Partner offices: • Philippines • Malaysia • Japan • Thailand • Indonesia • Singapore
  60. 60. © 2022 DAXUE CONSULTING ALL RIGHTS RESERVED Our past and current clients 60 400+ clients with 600+ projects over the past 9 years
  61. 61. © 2022 DAXUE CONSULTING ALL RIGHTS RESERVED Our testimonials Comments from our clients Managing Director @ Palmer Hargreaves “The communication, structure, problem solving and support we received from the team throughout the project was fantastic, and it provided us with the ideal structure to keep the client engaged and confident of the deliverables. In terms of the outputs / deliverables, I was very pleased with the level of detail in the reporting, speed of response to questions and the flexibility to adjust and provide alternative output views. Should we be in the position of providing similar support to our clients in future, I would have absolutely no hesitation in contacting daxue consulting again, working in partnership to deliver a high-quality solution.” E-commerce Manager @ LIDL “Thank you so much for your and your team's support regarding our China eCommerce project. The feasibility study was very well delivered and useful to give us insights about China market. As business evolves, we definitely need to keep abreast of the latest developments to cope with the rapid change of the market. In this sense, we will continue to need your support to our business growth.” Director Ecommerce Marketing EMEA @ Ubisoft “Thank you for your answer. I’ve been through the presentation and I’m very impressed by all the useful detailed information I’ve found. Thank you so much!” JAPAC Revenue Strategy Manager @ Twitter “Thanks so much for your hard work over the last several months and the multitude of presentations that you have done to [our] stakeholders. I highly appreciate the quality of work and also the patience with which you have answered the questions. Overall the work has been very well received and has been very educational for our teams in Singapore, New York and San Francisco. We will be using a lot of this information as we make critical investment decisions into China over the next several months. Please do pass on our thanks to the entire Daxue team - hope you do take a moment with the entire team to celebrate the success and outcome of this project! Also, I would be happy for you to use my reference for any future clients.” 61
  62. 62. © 2022 DAXUE CONSULTING ALL RIGHTS RESERVED A recognized expertise on the Chinese market 62 Regularly featured and quoted in global publications Our latest quotations in recent publications Daxue on Thoughtful China Lecturing at Peking University MBA. Workshop on the China’s food imports TV interviews on prime time television in Singapore Frequent speakers on China- business topics
  63. 63. © 2022 DAXUE CONSULTING ALL RIGHTS RESERVED 63 To get weekly China market insights, follow our WeChat account https://www.linkedin.com/company/daxue-consulting https://daxueconsulting.com/newsletter/ WeChat LinkedIn Newsletter STAY UPDATED ON CHINA MARKET INSIGHTS

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