Navigating a tech-savvy world

Hong Kong’s small and medium-sized enterprises, hard hit by the pandemic, have given themselves a lifeline by jumping on the e-commerce bandwagon. Oswald Chan reports from Hong Kong.

Cheung Leung Kee took to e-commerce early, selling pomade products on Instagram when it was founded in 2015. The company launched its first physical store a year later and started online sales of various hair products in 2017.

In 2018, the company opened more brick-and-mortar stores. It also has barbershops in Central and Causeway Bay that provide grooming services for men, including haircuts, eyebrow shaping and beard trimming. Before the fifth wave of the COVID-19 pandemic, Cheung Leung Kee's online store business accounted for 30 percent of the company's overall business, with its retail and barbershop operations contributing 70 percent.

The pandemic hit hard, resulting in the company's total revenue plummeting by 30 percent, with revenue from its physical stores down by about half. The worst day's performance saw just a few hundred dollars in business. Going online became the main source of the company's income when its barbershops had to close for more than a month.

Gary Cheung, who co-founded Cheung Leung Kee, realized the advantages of e-commerce during the pandemic. E-commerce makes it easier for a company to reach out to customers. And online business is less affected than physical retail stores amid a public health crisis and offers lower operational costs. The company is investing more in its online businesses and advertising.

With greater numbers of people working from home during the pandemic, consumers are more inclined to use personal care products. Cheung Leung Kee has diversified from selling hair care products to personal care items. The retailer offered consumption vouchers during this year's Easter holidays. The move paid off as the company's online stores saw 40-percent growth in sales from April 7 to 18. Cheung Leung Kee currently has average monthly revenue of about HK$1 million ($127,408).

The fifth wave of the pandemic has reminded small and medium-sized enterprises of the importance of digital transformation and helped many to realize that physical stores are not the only option.

Hong Kong's e-commerce industry is seeing rapid growth as more retailers go online due to social distancing restrictions and interruptions to business caused by the virus outbreak. More importantly, e-commerce is more cost-effective and profitable.

According to global payment service provider Statrys, the e-commerce penetration rate in Hong Kong stands at nearly 60 percent and is expected to climb to 72.6 percent this year. Data from business information provider GlobalData forecast that Hong Kong's e-commerce sales will grow at a compound annual growth rate of 8.3 percent from HK$178 billion last year to HK$226 billion by 2024.

"All SMEs need to embrace digitalization and should not be afraid of change. We also have to educate consumers on the ease of e-commerce. It will be a group effort involving corporates, SMEs and consumers to achieve full digital transformation in Hong Kong," says Shopline Hong Kong General Manager Nick Gao Zhongchao.

The special administrative region is lagging behind other Southeast Asian economies in e-commerce, but is catching up, he says. "Hong Kong enjoys a high internet and mobile penetration rate, and the dominance of social media platforms, including WhatsApp, Facebook and Instagram. This is definitely one of Hong Kong's strengths that enables the emergence of social commerce, and this grew even more rapidly during the pandemic."

Late adoption

Hong Kong's relatively small market size means that local businesses must embrace digitalization to reach overseas customers. "Companies have to understand how digitalization affects the business environment, helping them to lead the digital strategy. Digitalization must be driven by the board and its executives and not by specific functions. One of the barriers Hong Kong businesses may face is the late adoption of digitization by senior management," says Gao.

Statrys says that due to Hong Kong's small e-commerce market, there are extremely high levels of cross-border spending. Cross-border e-commerce is becoming increasingly accessible and convenient due to mobile banking, international e-commerce platforms, and app-based e-commerce sites. Therefore, Hong Kong SMEs have to step up their investments in digitalization to compete with international merchants with large e-commerce platforms.

The Standard Chartered Hong Kong SME Leading Business Index shows that some of the 812 Hong Kong SMEs polled in March did not cut down on long-term investments, such as in information technology, and research and development when the business confidence of local SMEs plunged during the fifth wave of the pandemic.

According to the survey, 18 percent of the SMEs interviewed expected a decrease in overall investment although only 23 percent and 25 percent of SMEs said they would reduce investment in IT (relating to e-commerce) and R&D, respectively.
Forty-three percent of the companies said they would scale down investment in inventory, and 38 percent said they would reduce investment in offline marketing promotions.

Hong Kong SMEs are also considering using technology as a way to cut costs to survive in a tough business environment. According to the survey, 70 percent of SMEs said they would reduce costs, mainly by downsizing their operations, changing suppliers and leveraging technology.

SMEs make up more than 98 percent of Hong Kong's business establishments, but most of them do not have a dedicated IT department and lack technical support for them to go online. Larger companies that have online stores or are doing cross-border business should utilize data analytics techniques in a simple dashboard format to help them adjust their marketing inventory and logistics strategies, as well as better manage customer relationship.

"Many business sectors are adopting digital technology, even some traditional small shops. Before COVID-19, when you talked about digital technology, they would just turn you away. Now, they are using it because they have no other choice," says Edmond Lai Shiao-bun, chief digital officer of the Hong Kong Productivity Council.

"Other SMEs and big companies are also using a lot more digital technologies in their business operations, selling their products and services, and helping to digitalize the businesses process. COVID-19 is to accelerate the digital transformation of Hong Kong enterprises by three to five years," says Lai.

In embracing technology, the application of logistics technology, especially in aggregating spare resources in the fragmented logistics supply-chain process, enables SMEs to maintain sustainable transactions and supply-chain costs. SMEs are transforming and adopting digitalization, and customers are demanding faster, yet cheaper delivery services from online merchants. SMEs perceive logistics as a key operational pain point.

As SMEs start online businesses or undertake cross-border business, on-demand delivery services are crucial to business development. Simply dropping off items at the door or at the reception desk is not enough to meet customers' expectations. SMEs must ensure that their goods can be delivered to customers quickly, safely and at a minimal cost.

Growing demand

According to Statrys, Hong Kong's niche in e-commerce lies in its infrastructural support that allows SMEs to meet the growing online demand due to continuous transport facility improvements.

"From the first mile to the last mile, logistics is essential in every business. Digitizing deliveries can reshape how SMEs operate, empowering the business to take back control and create an agile and scalable foundation for short- and long-term growth," says Gary Chow Ka-kin, managing director of Lalamove Hong Kong. "It hands the power back to small-business leaders so they can be agile and instantly scale deliveries according to their exact needs."

Lalamove has formed alliances with e-commerce platforms and setups, such as Shopify and Boutir, to create one-stop e-commerce services, offering small businesses peer-to-peer selling capabilities online and on mobile.

Lalamove aims to invest in Hong Kong SMEs to provide them with customized logistics solutions and expand the ecosystem with more business partners. About 85 percent of Lalamove's business orders come from Hong Kong SMEs.

"SMEs demand logistics services that are fast, flexible and cost-effective. Logistics technology is concerned with how to aggregate the spare resources in the fragmented logistics supply-chain process so that every big and small business can obtain cross-border logistics services with greater flexibility and transparency, as well as lower costs," says Crystal Pang, co-founder and CEO of Pickupp - a Hong Kong logistics technology startup focusing on data-driven technology.

In procuring logistics support, SMEs should focus on whether their logistics partners can offer decentralization technology that allows them to bolster transport capacity to cope with peak seasonal orders and obtain smart logistics services, such as batching and clustering, she says.

SMEs should also look at whether there is any information feedback by logistics service providers, and whether they can offer a quick and efficient shared logistics network for micro-fulfilment, cross docking and inventory prediction in the delivery process.

"Compared with big companies, SMEs do not have adequate information that enables them to obtain the best value deal in logistics service procurement. Also, without sufficient economies of scale, SMEs cannot maintain sustainable transaction and supply-chain costs, which are crucial to the cost-control refinement process," says Pang.

Pickupp plans to invest in R&D of the machine learning algorithm logistics technology and decentralized network with different optimization levels to provide cost-effective and customized solutions to clients.

"The pandemic is a major catalyst for transforming business models and consumer spending patterns. In Hong Kong, more consumers are purchasing online and using digital payments. With the relaxation of social distancing curbs and the rollout of stimulus measures, such as electronic consumption vouchers, small businesses should continue innovating, digitalizing and updating their business plans to ensure they are best placed to rebound in the second half of 2022," says Janssen Chan Ming-yim, chairperson of CPA Australia's SME Committee-Greater China.

A survey by CPA Australia showed that 40 percent of the SMEs polled said investing in technology had led to bigger profits last year. Up to 53 percent of them said more than 10 percent of their revenue came from online sales - the highest percentage recorded for Hong Kong since 2017.

CPA Australia's 13th Asia-Pacific small business survey, conducted in November and December, interviewed 4,252 small-business owners or managers across 11 Asia-Pacific markets, including 310 from Hong Kong, to assess their business conditions and confidence.

The professional accounting body urged Hong Kong businesses to focus more on online sales and new payment technologies, identify and adopt suitable technologies in their operations, innovate by introducing new products, services or processes, expand sales in overseas markets, and seek professional advice from financial consultants.