A Path Forward For Retailers in China's Cooling Economy

A Path Forward For Retailers in China's Cooling Economy

As the world’s hottest market cools to a slow simmer, should retailers scratch aggressive expansion plans for China and look elsewhere?

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A Path Forward For Retailers in China's Cooling Economy

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As the world’s hottest market cools to a slow simmer, should retailers scratch aggressive expansion plans for China and look elsewhere? Stick to their playbook and wait for the market to reheat? Or, is it time simply to acknowledge that growth in the world’s second-largest market for consumer goods has slowed to a pace that is more realistic—and far more sustainable—than in previous years?

In our last installment, we chronicled the significant shifts in shoppers’ behavior and offered advice for brands hoping to advance in a market characterized by decelerated growth, widely varying pricing opportunities among product categories and other important trends. Now we turn our attention to the changing retail landscape, analyzing—in partnership with Kantar Worldpanel—the vast accumulation of shopper data from our panel of 40,000 Chinese shoppers to better counsel retailers on winning strategies for both offline and online channels.

It’s no secret that today’s China is different. The fast-moving consumer goods (FMCG) retail market grew 5.4% annually in 2014 compared with 11.8% three years earlier. During this deceleration, some stores experienced negative same-store sales growth. Retailers became more cautious about expansion and, in certain situations, did something virtually unimaginable five years earlier: they closed stores. Yonghui closed about 15 stores in the past two years, Carrefour closed about 25 stores and Walmart closed about 30 stores. Among major retailers, only Vanguard and Wumart opened a greater number of stores in 2014 than in 2013.

Modern trade (including the hypermarket, supermarket/mini store and convenience store formats) overall registered minor gains. However, growth varied widely depending on format and city tier. Convenience stores and other smaller formats are growing faster than larger formats such as hypermarkets. Smaller retailers grew faster than the top 20 retailers, a result of their local and regional focus.

Among the top 20 retailers, foreign and Chinese retailers have similar share nationwide but in the past two years, they each attacked the other’s historic strongholds. Foreign retailers gained share against Chinese retailers in Tier 3 to Tier 5 cities while Chinese retailers grew in Tier 1 and Tier 2 cities. Additionally, multinationals built up their capabilities to offer fresh food, which is critical for winning against smaller local retailers.

How can retailers use these findings to help them grow? With big-box stores no longer experiencing rapid growth, winners will develop and introduce smaller formats similar to the Carrefour Easy stores that the French retailer opened in Shanghai. Small-box stores require less investment, are more efficient to operate, and serve Chinese shoppers’ growing need for convenience. They can also be used to help retailers implement O2O (Online to Offline) strategies—serving as a site for picking up or returning items purchased online, for example.

Also, as both local and multinational retailers attempt to position themselves for future growth, they need to focus on a proven ingredient for success in China: achieving regional scale. With sales growth decelerating, winning means establishing leadership in one city or region at a time—and only then expanding beyond. For example, about 80% of Yonghui’s outlets are located in Fujian, Chongqing, Beijing and Anhui. After gaining scale in key cities within a region, Yonghui and other leading players build scale in surrounding areas to create multi-city clusters.

While physical stores selling FMCG exhibited lackluster performance, the opposite was true for China’s dynamic e-commerce landscape. If there’s a bright spot in China, it’s in the digital realm, where shoppers are willing to spend more in specific product categories and purchase larger quantities. Online sales rose 34% in 2014 as e-commerce retailers expanded penetration and as online shoppers dramatically increased their purchasing frequency. Online “pure play” retailers such as Taobao and Tmall continued to dominate in 2014, while omnichannel players are just emerging.

Clear distinctions between online and offline shopping behaviors are coming into focus. For example, shoppers tend to go online to purchase premium products, a trend that results in a higher average selling price for products bought online. Also, motivated by free or low-cost delivery, online shoppers opt for bigger orders and larger quantities. In addition, online shoppers are particularly eager to take advantage of special promotions. In fact, approximately 40% of online purchases are made during popular promotions like the Double 11 (November 11th) and Double 12 (December 12th) sales events. Retailers find it easier to promote online than offline, and shoppers are willing to take advantage.

In addition to promotions, imported goods also gained prominence online, with about 40% value share compared with about 10% offline. Health-related products such as skin care and infant formula are among the most popular online categories. When making purchases in such categories, shoppers will choose from different offline retailers but tend to be more loyal to particular online retailers.

We estimate that shoppers who were merely buying products online that they would have otherwise purchased in stores generated approximately 40% of e‑commerce sales growth. This means that about 60% of sales growth was the result of new purchases that shoppers would not have made without the digital option. This shows that e-commerce actually has increased the total retail pie. There’s opportunity for physical retailers to grow total sales by devising omnichannel strategies that make the most of both worlds.

To win in China’s e-commerce marketplace, retailers need to tailor their offerings based on these evolving online shopping behaviors, taking lessons from the category strengths that are fueling pure online players’ fast success. The best companies will optimize their offline and online product mix to address online shoppers’ demonstrated preference to purchase premium products online. They will make the most of low-cost or free delivery services to spur increases in pack size or bundled product purchases and will thoughtfully take advantage of online shoppers’ enthusiastic embrace of e-commerce promotions.

Another ingredient for success–for offline and online players, for multinational and foreign retailers alike–will be preparing thoughtfully for the O2O era. Forward-thinking companies already are making their moves. For example, in August, agreed to invest RMB 4.3 billion (US$700 million) for a 10% stake in Chinese supermarket chain Yonghui Superstores. The retailers will benefit from synergies in sourcing, warehousing, Internet finance, and IT. More important, though, the action represents a giant step toward implementing an O2O strategy, something that will be vital for success in China’s slower-growing but swiftly changing retail battleground.

Written by Bain & Company Partners Bruno Lannes, Weiwen Han and Jason Ding. Lannes and Han are Bain & Company partners based in Shanghai. Ding is a partner based in Beijing. All are members of the firm’s Consumer Products and Retail practices.


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