What Will The Chinese Retailing Industry Look Like In Five Years?
摘要： Although the Chinese retailing industry in cities might look very differently in five years, some of the major operation models of that day have already emerged now.
The past three to five years witnessed tremendous change in the Chinese retailing industry. As various types of e-commerce platforms rise, traditional Chinese retailing industry is facing unprecedented challenge.
Something even more interesting happened in 2016. On the one hand, major Chinese e-commerce platforms are still grabbing market share from offline channels, but the growth rate has slowed down; on the other hand, major offline traditional retailers have all come up with their own mature reform plans (such as RT-MART’s feiniu.com, Better Life’s “supermarket & general merchandize & electronics”operation model, Carrefour’s convenience stores and multi-pattern business structure, etc.).
At this point, it is worth asking the question: what will Chinese retailing look like in the future? Retailing is the closest business pattern to people’s life. Therefore, it might be a good way to tell the future of retailing from consumers’ perspective.
1. Three trends in the Chinese retailing industry
1) Rising disposable income and consumerism
According to National Bureau of Statistics’ data released at the beginning of 2016, disposable income per capita reached ￥21,966 ($3,337), a nominal increase of 8.9% year-on-year. After adjusting for inflation, the actual growth rate hit 7.4%, while GDP increased only by 6.9% at the same time period.
With the rapid growth of disposable income, Chinese consumers’ confidence maintained high level during the past few years.
According to Nielson’s Q4 2015 Consumer Confidence Report, China’s score was 107 among the world’s largest economies, followed by the U.K. (101), the U.S. (100), Germany (98) and Japan (79). Although China’s economy slowed down in 2015 with the annual GDP growth rate dropping to 6.9%, people’s consumption desire isn’t affected at all, but instead continues to rise.
2) Consumption upgrading: from consumer products to high-end ones
As consumers’ confidence remains high, the trend towards premium products is already well underway. On the one hand, growth of the premium segments is outpacing that of the mass and value segment. As is shown in the below figure, Chinese consumers have begun to turn to premium products, particularly cosmetics, wine and milk:
On the other hand, sales increase of mass and value segment (such as food and household commodities) begins to result from price increase, instead of sales volume, as can be told from the below figure:
3) Rising contribution of service sector to GDP
In this year’s government work report, Premier Li Keqiang pointed out that 2015 witnessed lots of positive adjustments in the industrial structure of China, and that the contribution rate of service industry to GDP reached 50.5%, which indicates that Chinese consumers are increasingly allocating more of their income to lifestyle services and experiences instead of products and necessities. However, the contribution rate of service industry to GDP in the US has already reached 80%, so there’s still room for further improvement, and such trend will certainly persist for a long period of time.
The following figure clearly demonstrates such trend: Chinese consumers are increasingly focusing their spending on trading up for premium products over mass products.
But, how will these trends affect the Chinese retailing industry?
2. Another perspective to see the Chinese retailing industry
Nevertheless, a clear understanding of the above trends will not help us fully understand what the Chinese retailing industry will look like in the future.
The retailing industry can be closely affected by factors such as physical distance, personal income and lifestyle, while China is known as a vast country with huge income gap. In this case, average data might help us tell the basic trend, but won’t tell us the different development paths and future structures in different regions.
For example, the urbanization rate in Shanghai is 89%, yet less than 34% in Guizhou. That is to say, the huge difference in physical distance, personal income and lifestyle entails different forms of retailing.
So we will first have to divide 1.3 b Chinese into several categories in order to fully understand what the Chinese retailing industry will look like in the future.
The first way that might come to our mind is to divide Chinese population by the place they live in, whether towns and cites or countrysides. Based on the 6th national population census, the urbanization rate of China has already reached 55%. However, I don’t think it’s appropriate to roughly divide Chinese population into two groups: those who live in towns and those who live in countrysides, because we will miss out lots of important information this way.
To be more specific, although towns are similar to cities to some extent, there aren’t some basic city facilities and services such as movie theaters and buses in most towns. As a matter of fact, over 200 million Chinese live in around 20,000 towns (based on the sixth national population census).
In other words, over 400 million among 1.3 billion Chinese live in modern cities, over 200 million in towns, while around 600 million in countrysides.
From another perspective, over 400 million Chinese live in modern cities that cover less than 5% of the total land area of China, while over 800 million Chinese live in around 20,000 towns and countless villages around these towns that cover the rest over 95% of the total land area.
It is important that we continue our analysis after we make the above distinction, because people living in modern cities are after all more welcome to, and thus easier to enjoy the convenience of e-commerce.
3. Modern cities and modern retailing
E-commerce platforms are definitely the major players in the Chinese retailing industry for the past three years, especially in first, second and third-tier cities. Against the background of rapid development of e-commerce sector, traffic in traditional offline retailing channels suffered from a generally decline.
The following figure compares the average revenue growth in sampled stores of different types of operation for the two years of 2013 and 2014 .
As the slowdown of growth in overall retail industry has differentiated different types of operation in operating performances, shopping malls and convenience stores have demonstrated a better growth trend, while the growth of hypermarkets, supermarkets, department stores and specialty stores for the same period almost stalled. In this case, it’s worth noticing the following five trends:
1) Cross-channel integration
As I have mentioned above, many traditional retailing giants have already diversified their types of operation. For the past three years, we might often mention offline and online, e-commerce and traditional retailing. In the next five years, however, the distinction between online and offline will increasingly become blurred. While e-commerce platforms might open offline stores, traditional offline retailers might also turn to online channels. In this case, those who can provide the best service and meet the needs of consumers more efficiently will stand out, now that e-commerce platforms and traditional retailers have all started to utilize both online and offline channels.
Statistics suggest that total Chinese retail sales totaled 26.2 trillion yuan ($4.2 trillion) in 2014, among which 23.4 trillion still came from offline retailing channels. That is to say, offline retailing remains the dominant retailing channel in China. However, based on Deloitte’s research, 59% of offline retailing has already been influenced by online digital platforms, whose influence is so deep that they have already affected all the aspects of consumer buying-decision process and changed consumers’ habit.
Realizing the significant impact of digital platforms to consumers, we may safety predict that: Traditional offline retailers who still failed to add cross-channel integration to their schedules have already missed several vital channels to communicate with consumers.
Take fast retailing for an example, a report from Kantar Worldpanel and Bain & Company all-channel retailers are on the rise.
2) Extraordinary customer experience
If we regard the past three years as the ground-breaking period for all types of retailing, then the next five years will become more like the period to sum up all the achievements and focus on details more.
a. Extraordinary convenience: the rapidly-developing China’s convenience stores
Shanghai has always been the very place where convenience stores are most prevalent in China. Within the Outer Ring of Shanghai, there is at least one convenience store in a 1000-meter radius.
Why are convenience stores still so prevailing in China, especially in major cities?
Convenience stores aren’t challenged by e-commerce a great deal. Currently, bringing out product innovation, improving franchise model and opening stores in new regions remain the three major challenges for us.
By General manager of 7-Eleven
The following figure explains well some of the driving factors why the number of convenience stores is still rising.
b. Extraordinary price and operation efficiency
Traditional retailing giants, represented by Wall-Mart and RT-MART, used to be the symbol of low price and high efficiency. In this new era of retailing, traditional retailers have all tried to explore new operation models, expand in second, third and even fourth-tier cities, further improve service in regional markets, and enhance operation efficiency. In the next five years, opportunities and challenges will coexist in the Chinese retailing industry.
As is shown in the below figure, the number of outlets for Sun Art, Yonghui, Vanguard and Wumart continued to rise even in 2014, which should be a quite challenging year for traditional retailers.
In addition, such growth results from the effort of traditional retailers to enhance efficiency and improve service in one or two cities or provinces.
Based on a report from Bain & Company, Inc. and Kantar Worldpanel, Yonghui’s market share in its second largest market Chongqing is 2.5 times larger than that of its largest rival, Walmart. Wumart’s market share in its largest market Beijing is 1.6 times as large as of Garrefour, and Walmart’s market share is 2.1 times larger than that of its largest rival in its headquarter Shenzhen. After achieving the basic scale in major cities, these leading retailers all started to expand their business scale in regions around major cities in order to maintain their dominance in city clusters.
In the background of economy depression, some consumers attach high importance to price-quality ratio, while some retailers also need to clean up their storage. In this case, discount stores or department stores still have room for development and are still thriving in China.
As consumers’ purchase capability continues to rise, their demand for better life quality also becomes stronger. In China, it’s becoming increasingly popular to chase for fashion and individualism. In this case, buyer stores featuring differentiation, customization and less-known brands are rising rapidly.
Buyer store model, first developed by Europeans a century ago, can also be referred to as “Buy-centered stores”. In these stores, owners will choose clothes, decorations, jewellery, bags, shoes and cosmetics of various brands based on the different fashion concepts and preference of their target customers. In Hong Kong and Taiwan, these stores are always located inside shopping malls. That’s why they can also be referred to as “stores inside stores”. In Europe and the US, these stores are often located across streets.
Although buyer-centered store model is still in the primary stage in China, it will certainly one of the future trends. As a matter of fact, we can already see such trend in online stores on major e-commerce platforms.
In recent years, chain high-end food stores, drugstores, maternal stores opened one after another in many residential communities. Whether it’s offline and online retailing, we see the rise of stores featuring only one types of goods or from one industry.
Besides, the momentum towards “small and beautiful” is also gathering.
For example, MUJI started to open MUJI to GO stores in airports and railway stations. Different from ordinary MUJI stores, these stores only sell goods that appeal to people who travel a lot, such as travel cases, neck pillows, snack food, travel cosmetics, etc.
5) More than shopping: another lifestyle
If you can still remember a set of statistics mentioned at the beginning of this article, shopping malls develop the fastest in the Chinese offline retailing industry, because going shopping in shopping malls has become a necessary part of people’s life in China.
It is consumers’ need to relax, communicate and enjoy life that helps not only these shopping malls, but also content-centered e-commerce platforms such as Xiaohongshu.com, continue to thrive.
This also helps explain why there are always a large bookstores in many shopping malls for people to relax, though these stores won’t make much profit at all.
In addition, all kinds of art shows, salons and lectures are also held in these retailing outlets and shopping malls, which not only integrate beauty and art to shopping, but also help retailers build a closer relationship with consumers, which will gradually have consumers get into the habit of going shopping in shopping malls to relax themselves.
In conclusion, although Chinese retailers in cities will be quite different in five years, most operation models of that day have already emerged today.
If we divide the need for retailing into three aspects:
- Goods availability;
- Goods variety, convenience and discount;
- Segmentation, customization, and another lifestyle
then I believe the Chinese retailing industry in cities will further developed focusing mainly on the second and third aspect.
However, we should not forget that there are still over 800 million Chinese living in towns and countrysides. So it remains to answer what the Chinese retailing industry will look like in five years in these areas.
Nielson: “Chinese Consumer Confidence Enters ‘New Normal’”
McKinsey&Company: “2016 China Consumer Report: The Modernization of the Chinese Consumer”
Deloitte and China Chain Store&Chain Franchise: “China Power of Retailing 2015”
Bain & Company, Inc. and Kantar Worldpanel: “Winning Over Shoppers in China’s “New Normal”: China Shopper Report 2015, Vol. 1 &Vol. 2”
Roland Berger: “How Offline Retailers Can Win Customer Traffic?”
Deloitte: “Navigating the Digital Divide Addressing the evolving needs of Chinese Customers”
[The article is published and edited with authorization from the author @Liu Shijiu, please note source and hyperlink when reproduce.]
Translated by Levin Feng (Senior Translator at PAGE TO PAGE), working for TMTpost.