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Try Virtual Vouchers Instead of Deep Discounting

Global giants like Zara, H&M and Nike are experimenting with virtual vouchers to get people spending again in China. Should other brands follow suit to avoid the potentially harmful practice of deep discounting?
Sale sign | Source: Unsplash
By
  • Casey Hall
BoF PROFESSIONAL

SHANGHAI, China — In Wuhan, the epicentre of China's coronavirus outbreak, the city's government last weekend gave away 30 million yuan ($4.23 million) in vouchers to its citizens in an effort to encourage them to go out and start spending again.

The vouchers offer discounts that can be used in malls, shops, supermarkets, restaurants, tourist attractions and cultural sites and are redeemed using China’s major mobile payment platforms, Alipay and WeChat.

Some categories of the vouchers were gone within 45 seconds of their launch at noon on Sunday, and this initial roll-out marks only the beginning of Wuhan’s voucher programme, with plans for the government to give away a total of 500 million yuan ($70.6 million) in an attempt to try to stimulate a local economy decimated by the virus and a lockdown that lasted 76 days.

Major international retailers with a presence in the city, including Nike, are joining domestic players such as sportswear leader, Anta, and C-beauty unicorn, Perfect Diary, to participate in Wuhan’s voucher programme, as well as others that are proliferating around the country from Nanjing to Hangzhou.

I think this is potentially very powerful for brands.

A spokesperson from WeChat, which is servicing Wuhan’s government voucher programme through a mini-programme on its platform, told BoF that there was no restriction on product categories for participating brands. Fashion, beauty, luxury and jewellery brands are all eligible.

"I think this is potentially very powerful for brands," Ben Cavender, China Research Group managing director said, either for those who are using vouchers as part of participating in government-led voucher programmes, or those that decide to issue their own consumption boosting vouchers in an effort to kickstart sales for themselves in China's post-pandemic environment.

This boost may be especially helpful given the potential dent to consumer confidence precipitated by the revelation last week that China's economy contracted by 6.8 percent in the first quarter of the year — a first in the post-Mao era.

"It's dangerous for brands to offer big, broad spectrum discounts [or] price dropping on stock to move it because that trains the consumer and they don't ever want to pay full price [again]," he added.

Following the global financial crisis a decade ago, US retailers found themselves in a discounting spiral that proved difficult to break. Today, with a glut of Spring/Summer inventory across global markets, discounts will once again be the default method for brands to generate cash to get through the worst of the crisis in the West.

In China, Cavender says, going down that road would be disastrous. “In China, international brands have to be more upmarket or premium than they need to be in other markets,” he explained.

Vouchers [are] more focused... and can alleviate the long-term impact of discounting on the brand reputation.

Proponents claim that the beauty of vouchers in the China market is that consumers here tend to view them as a one-off special event, rather than a regular seasonal offer, and they are flexible enough to mean that brands could design their own version of vouchers in a way that suits their own priorities and positioning.

“Compared with direct discount activities, the use of consumer vouchers is more focused, more oriented, and can alleviate the long-term impact of discounting on the brand reputation,” said Chen Ke, partner and vice president of Roland Berger Greater China.

Stimulating Spending

In other countries — for example the US and Singapore — a stimulus has come in the form of direct cash payments, but not in China.

"Chinese people have the habit of saving, so they may save the money without spending it. Then it won't help to achieve the goal of stimulating consumption," explained Huang Manyu, professor of the economy and trade department at Zhongnan University of Economics and Law.

The authorities share this concern, which is why the consumer booster of choice has been vouchers.

Since March 13, 40 cities across China have offered vouchers encouraging people to spend more, according to Alipay data. Some of the largest voucher rollouts have been in Nanjing, which issued 318 million yuan ($44.9 million) of consumer coupons to residents, and Hangzhou, the hometown of Alibaba, which provided 1.68 billion yuan ($237 million) of vouchers to residents through Alipay.

International fast fashion chains H&M and Zara were among those participating in the initiative in Hangzhou, with in-store signs and point-of-sale advertising allowing customers to access the initiative through their phones while they shopped. BoF reached out to Nike, Zara and H&M about their participation in various government-led voucher programmes around the country, but all declined to comment or did not reply to a request for comment prior to publication.

Typically, these discounts take the form of spending a certain amount, in order to redeem an “added value amount” in store. So for example, a customer who bought a 299 yuan ($42) voucher, might be eligible to buy 399 yuan ($56) worth of product in store, when paying with their mobile wallet app (which most consumers in China would do anyway).

Imagine trying to implement a similar system in a country where people use cash or credit cards. It would be weird and convoluted.

For government programmes, many of the vouchers are underwritten by the municipality, but according to WeChat, in Wuhan, for example, partner brands provide their own vouchers to be a part of the programme, and are featured on its mini-programme as supporters of the initiative in return, although stipulations differ from city to city.

“Of course the enabling factor in China is the digitalisation to it all. Imagine trying to implement a similar system in a country where people use cash or credit cards. It would be weird and convoluted,” said Michael Norris, research and strategy manager at AgencyChina, a marketing and e-commerce consultancy.

“The integration between brands, [their] official accounts in WeChat, the coupons that can be redeemed and the brand subscription or service account that can ping people and remind them about their voucher expiring,” he added. “People abroad might struggle to comprehend [having this] loop so tight.”

Fashion-Friendly Strategy

So far, the voucher strategy seems to be working. As of March 30, a tally of the economic boost to individual cities linked to vouchers, according to Shanghai-based news outlet Guancha, saw the "cumulative stimulus policies for consumer coupons issued by various regions reaching nearly 11.5 billion yuan [$1.62 billion]. In some areas, consumer vouchers have successfully triggered a 'craze' of consumption," its report read in part.

Retailers need to consider trialling creative solutions like these — and fast. According to China's National Bureau of Statistics, retail sales in March were down 15.8 percent year-on-year, a slight improvement on the 20.5 percent on the year drop experienced in the first two months of 2020. The apparel retail sector is struggling even more, down 34.8 percent year-over-year for the month of March.

Norris believes that vouchers, whether as part of official government programmes, or dispensed by individual fashion brands, could be an interesting way to loosen the purse strings of Chinese consumers, some of whom are being uncharacteristically frugal in the face of economic uncertainty.

“One of the things we’ve noticed is how many folks have been delaying or dispensing with the idea of a seasonal wardrobe upgrade,” Norris said. “The trendy consumers we work with would [previously] always bring in new clothes for the new season, but this year people are thinking: ‘I can make do with what I have.’”

Norris suggests brands partner up with offline, experiential touchpoints to make offering vouchers more meaningful and feel less like a straight-up discount. A global sportswear brand could, for example, partner with a large gym chain and reward regular gym goers with vouchers.

“That’s a really powerful way to not only to encourage consumption but also for brands to play a part in people’s personal journey back to something that feels normal,” Norris explained.

Giving away vouchers could be a good opportunity to stimulate... consumers' shopping desire.

Retailers in Shanghai, where consumption vouchers have not been issued by the local government, are keen on the idea of participating in a programme, even those selling mainly high-end designer brands.

Eric Young, founder of multibrand retailer, Le Monde de SHC, which stocks local designers such as Pronounce and Samuel Gui Yang alongside niche international designer brands, said he would welcome such a programme in Shanghai.

“If there is any suitable opportunity, we are very much willing [to participate],” he said. “I think at this time, giving away vouchers could be a good opportunity to stimulate consumers to experience and buy things, [I would think of] it as rekindling consumers' shopping desire.”

Some malls in Shanghai have also issued their own coupons. TX Huaihai, a new experiential retail concept that opened late last year in the downtown shopping strip of Huaihai Road, is running what it’s calling “Boom Festival,” an initiative allowing consumers to buy vouchers and redeem them with participating brands and restaurants. The tenant mix at TX Huaihai is aimed at younger Chinese customer base and skews towards domestic designer brands popular with Post-90s consumers, such as sunglasses brand Percy Lau, Lucency, Jarel Zhang and This Nor That.

“Brands are very positive about it. At any time, cash flow is a very important indicator for retail. By offering a more creative way for consumers to get the products and services they are curious about in shopping malls, it will lead to a ripple effect,” TX Huaihai Chief Operating Officer, Pan Wei, told BoF.

However, not everyone feels that vouchers are the right way forward. Of the more than half dozen accessible luxury and pure luxury fashion brands BoF approached for comment, asking whether they might consider vouchers as an option, all said they would not.

Overall, the perception from high-end foreign brands seemed to be that, no matter how a voucher scheme is handled, the very idea of vouchers is too closely tied to the idea of clipping coupons to save money at the supermarket to be worth the risk of compromising their brand equity.

Similarly, in many parts of China, promoting in-store activities is still limited by local restrictions dictating the limited number of people who can be in one store at a time, for example. Limiting voucher strategies to online-only.

More is More

Experts agree that the most important thing for brands to do when considering vouchers as a way of stimulating consumption in China is to frame the practice as “value adding” rather than “money saving” — even if the latter is closer to reality.

If there are any luxury brands brave enough to trial vouchers, they could for example distribute vouchers to fans on social media, some of which might give recipients access to limited edition products, or allow them to buy rare archival pieces, or receive a gift when they spend over a certain monetary threshold in store.

“You can give people a deal in terms of access, so access to products that other people don’t have access to, that can still maintain a lot of interest and still maintain brand positioning,” Cavender said.

Michael Norris posits that there is a significant market of sneakerheads in China who would be happy to invest 20 to 30 yuan ($2.80 to $4.50) in a voucher that gave them early entry into a sale of rare models like a pair of Air Jordans.

In the face of an uneven and unpredictable recovery, brands should be looking for any advantage they can get in the China market, without diluting their brand image. For some, vouchers might be one piece in the puzzle.

“I think they should be considering it and I think they should be leery of going too far down the road of discounting,” Cavender said. “It really does make it difficult for brands to maintain pricing in future quarters. Consumers have long memories.”

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China Decoded wants to hear from you. Send tips, suggestions, complaints and compliments to our Shanghai-based Asia Correspondent casey.hall@businessoffashion.com.

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