The idea that a generation shares certain characteristics, and therefore qualifies for a moniker, ought to be credited to two American novelists. One of them is Gertrude Stein, the modernist who coined the term the “Lost Generation” to refer to those coming of age during the First World War. The other is Douglas Coupland, whose 1991 debut novel Generation X: Tales for an Accelerated Culture, set a precedent of naming demographic cohorts, spanning roughly 15 years each, with a letter of the alphabet.
Today the most-talked about grouping is Generation Z. Born between the mid-1990s and early 2000s, the oldest of them have already entered the workforce. Perhap more significantly, they are shaping up to be a paramount driver of consumption and retail sales, especially in China.
According to a February report by L Catterton, a private equity firm backed by French luxury giant LVMH, Gen Z accounts for 25% of the total expenditure on new brands in China, despite representing just 17% of the population. Moreover, half of that cohort is still in school, implying that they have limited income and that the other half are much bigger spenders.
A survey published by McKinsey last November found that Gen Z’ers in China are the world’s most spontaneous shoppers compared not only to all other age groups in the country but also to their overseas peers. In part this is thanks to their optimism about the future: 78% of China’s Gen Z demographic believe that their income will keep going up, and more than a fifth feel comfortable taking out loans to spend. “China’s Gen Z spent their childhoods during the fastest sustained expansion of a major economy in history, and are consequently used to rapid improvements in their standard of living,” McKinsey said.
So it’s unsurprising that Gen Z is a sought-after target for a lot of companies. One of them is KK Group, which operates ‘variety store’ chains under four franchises, namely KK Guan, KKV, The Colorist and X11. Since its foundation in 2015, the Dongguang-based firm has already opened over 600 outlets across China.
For many analysts, KK Group eludes easy comparisons. Unlike Muji, or its Chinese knock-off Miniso (see WiC326), both of which peddle a wide variety of lifestyle merchandise, KK Group focuses on product categories that appeal to Gen Z. These include cosmetics (see WiC476), snacks (see WiC485), low-calorie beverages (see WiC511), mystery-box toys (see WiC468), pet food (see WiC377), stationary and accessories.
Aside from foreign brands, KK Group also sells a lot of third-party domestic labels – such as Zeesea and Focallure cosmetics – that initially built their customer followings online. “Having experienced China’s economic boom in the late 1990s to the early 2000s, Gen Z’ers have a strong sense of national identity and are proud to support domestic brands,” said Ronald Liu, Beijing-based managing director of investment at Temasek, in a recent report.
Another marker of KK Group’s stores is their focus on design, which serves to draw in Gen Z’ers who put a premium on experiences and avidly post ‘hip’ photos on social media. Occupying up to 2,000 square metres in mostly upscale shopping malls, KK stores typically feature bright tones, spacious layouts and an ‘instagrammable’ wall decorated with merchandise.
“With the rise of e-commerce, young people today do not shop offline as much. However, if they find a store that is good-looking and sells decent products, which is worth taking pictures of and being a subject of social media posts, they will be happy to visit it,” KK Group’s co-founder and CEO Wu Yuening told NetEase Finance.
About 80% of KK Group’s customers are digital natives aged between 14 and 35, the company says.
The challenge for KK Group is keeping its customers interested. Its Colorist stores, which focus on cosmetics, have a churn rate of almost 30%, reported Xueqiu, a financial news outlet, meaning that for every 10 stores it adds, three will be shutting down. One reason is that the company doesn’t sell its own products, so consumers see its stores more as design destinations and less as essential shopping venues. Profitability is minimal too: for the first 10 months of last year, KK Group recorded a net profit of Rmb7.32 million despite generating Rmb1.7 billion in revenue, Xueqiu says.
Its limited profits do not seem to have deterred investors though. Early this month it completed its seventh round of financing, raising a total of $300 million on a unicorn valuation of $3 billion. The consortium was led by JD.com, which is hoping that the deal will expand its reach in bricks-and-mortar stores.
“So far, we have linked up with over 2.5 million stores, including our own stores. In three years, our projection is to have a network linking up to five million stores,” Xu Lei, chief executive of JD Retail, told CNBC last November.
Many of the Gen Z’ers are accustomed to omnichannel shopping experiences, with almost 40% saying that they usually browse in-store but shop online for apparel items, the McKinsey survey also showed.
For its financial backers and potential IPO investors KK Group will offer a play on Gen Z spending, but a risky one, given the fickle nature of the demographic and its stores constant search for new ‘instagrammable’ experiences…
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