RETAIL IN CHINA: DYNAMIC CHANGE A Monograph on Chinaâ€™s Ever-Changing Retail Industry
R. Tajzadeh, H. Yu, & Student Contributors from the 2016 RMG 917 Class at Ryerson University
TABLE OF CONTENTS Change in China’s Retail Industry – A Brief Introduction.........................................1 Acknowledgements........................................................................................................2 Contributors.....................................................................................................................2 Editor............................................................................................................................................2 Student Contributions (2016 RMG 917)...........................................................................2 Secondary Research...............................................................................................................2 How This Monograph was Created..............................................................................3 Ryerson’s RMG 917 Course...........................................................................................3 Challenges & Opportunities – Why Academia Plays a Pivotal Role in Understanding China’s Dynamic Future.....................................................................4 The CCIBD.........................................................................................................................4 China and the Ever-Changing Face of Retail..............................................................8 China & Canada................................................................................................................9 Retail in China: Five Important Sectors in China’s Retail Industry.........................12 Luxury Retail..............................................................................................................................12 Automotive Retail.....................................................................................................................14 Retail Grocery............................................................................................................................16 Online Retail...............................................................................................................................19 International Retailers............................................................................................................21 Challenges to Chinese Retail Growth: An Aging Population and a Dynamic Real Estate Market...................................................................................................................22 Population Age.........................................................................................................................22 Real Estate..................................................................................................................................23 Future Implications ........................................................................................................25 Bibliography......................................................................................................................26
CHANGE IN CHINA’S RETAIL INDUSTRY – A BRIEF INTRODUCTION In an age of constant change, one in which the dynamic has become the new normal, having a clear and thorough understanding of factors affecting change and the direction of change is critical if one is to take advantage of new opportunities that regularly occur. Experience, expertise, and extensive research are equally important in order to understand dynamic situations and identify opportunities to add value and create growth. China is in a state of constant change and its vibrant economy encompasses an ever-changing landscape of opportunities and associated
risks. Factors that contribute to China’s status as a hotbed of opportunity and risk in modern investment include: an emerging middle class and aging population, underpinned by a fluid and proud culture; expanding infrastructure; ghost cities and unutilized space; the government’s changing role in business; increased demand for consumer goods; and gaps in demand and supply across various services. In the retail sector, factors that contribute to change include (but are not limited to) improved living standards and disposable income, urbanization and growing tier 3 and tier 4 cities, a booming online retail marketplace (SunZhao, 2014), and an increased demand for electronics (Euromonitor International, 2011).
ACKNOWLEDGEMENTS The content of this monograph is derived from contributions of students in Ryerson University’s 2016 RMG 917 (Experiential Learning – Asia Pacific Study) course, along with secondary research by Dr. Hong Yu—Director and Associate Professor of the Ted Rogers School of Retail Management—and Rahi Tajzadeh, a Master of Science in Management student.
Dr. Hong Yu
CONTRIBUTORS Editor Rahi Tajzadeh, B.Comm., MScM Candidate, Ryerson University
Student Contributions (2016 RMG 917) Nicole Atkinson Pauline Iannello Lauren Jaques Aliana Kopec Adam Ladovsky Stefanie Lam
Chang Liu Nurul Mohd Hasbi Lauren Rainville Samantha Rondinelli Adam Sebesta Sierra Shearer
Tamour Sheikh Kirk Taylor Diandra Urech Aryan Vatanian Cherice Wilson
Secondary Research Dr. Hong Yu, Director Ted Rogers School of Retail Management, Ryerson University Rahi Tajzadeh B.Comm., MScM Candidate, Ryerson University
RYERSON’S RMG 917 COURSE
HOW THIS MONOGRAPH WAS CREATED This monograph was created using primary and secondary research. Primary research included first-hand accounts of students from the 2016 RMG 917 course at Ryerson University’s Ted Rogers School of Retail Management (TRSRM). Secondary research was conducted by Dr. Hong Yu, Associate Professor and Director of the TRSRM, and Rahi Tajzadeh, MScM Candidate at Ryerson University. This monograph is designed to highlight the current status of the Chinese retail industry, focusing on five sectors: luxury, automotive, grocery, online, and international. Challenges and opportunities are identified and correlated to each sector to provide more depth and value to the reader. Each sector, or market, in China’s retail industry shares a common opportunity for future growth, which will be elaborated upon in the sectors’ respective analyses. Common themes include: dynamic economic conditions, massive infrastructure development, changing population demographics and psychographics, monetary and international trade policy, and the burgeoning online retail platform.
RMG 917: Experiential Learning – Asia Pacific Study is a credit course at Ryerson University. It examines consumption patterns, retail formats and operations, as well as sourcing opportunities in the Asia Pacific Region. As part of the program of study, the course is offered every two years on a competitive basis to 3rd- and 4th-year Retail students as a professional elective course option. After regular in-class learning of theoretical models and case studies during the Winter semester, the students participate in a 2-week experiential learning program in China. Typically, the group visit three cities: Beijing, Shanghai, and a 2nd-tier city (Hangzhou or Nanjing). The biannual trip was launched in 2012, seeking to enhance students’ international exposure to retail opportunities in China, as well as to facilitate hands-on learning experience in China. The trip brought about an increase in international elements of the program curriculum, improved diversity of student experiences, and increased students’ depth of knowledge before and after the trip. The overall richness and depth of the course content was boosted by the trip each year it took place. The course and trip also introduce new opportunities in international exchange with universities in China. Students in the RMG 917 course have identified a number of key sectors of interest in China’s retail industry, as well as various challenges facing future growth. This monograph highlights RMG 917 students’ work and also incorporates secondary research to further illustrate findings.
CHALLENGES & OPPORTUNITIES – WHY ACADEMIA PLAYS A PIVOTAL ROLE IN UNDERSTANDING CHINA’S DYNAMIC FUTURE A number of challenges impede the Chinese retail sector’s ability to reach its potential peak growth, including China’s aging population (“Nursing Home Boom,” 2011), the rapid and massive growth in new real estate development (Rapoza, 2015), rising home prices (Holodny, 2016), and heavy import tariffs (Wilson, 2016). These challenges affect each major retail sector in a variety of ways. While there are opportunities to create and expand value in the Chinese retail sector, a clear picture of the future of retail in China is not possible without a comprehensive understanding of all the factors at play (including major challenges and risks), and the experience and expertise needed to disseminate the vast wealth of available data and knowledge. Academic bodies have the unique ability to gather, organize, disseminate, and identify said opportunities and risks more efficiently and with greater accuracy and insight than can most individuals and industry-related organizations. The Canada-China Institute for Business and Development (CCIBD) at Ryerson University’s Ted Rogers School of Management is one such academic body with a rich and diverse group of council members.
THE CCIBD The CCIBD “aims to build and advance understanding of China through research, innovative educational and training programs, and influential public events” (CCIBD, 2016a, para. 1), and is in a position to significantly improve the understanding of, and spot opportunities within, the Chinese retail industry. Founded in 2013 by a dedicated group of faculty at Ryerson University, the CCIBD advances knowledge through hands-on research and partnerships fostered with dozens of academics at a variety of universities.
Dr. Shuguang Wang, and Dr. Hong Yu, whose combined experience and expertise encompass retail management, entrepreneurship and strategy, business law, geography, economics, executive management and strategy, and international trade, amongst other disciplines (CCIBD, 2016a). With the CCIBD acting as a “centre of excellence for education and knowledge dissemination of China, past and present day” (CCIBD, 2016a, para. 1), the expertise and experience needed to gather, organize, and understand the many factors at play in the Chinese retail environment are now concentrated and available to help seek out opportunities, create new value, expand existing value, and improve the overall industry for stakeholders in Canada, China, and beyond.
Led by the honourable David C. Dingwall, Dr. Howard (Xiaohua) Lin, and a group of highly regarded council members, the CCIBD firmly established itself in the global management arena after co-hosting the annual conference of the Academy of Innovation and Entrepreneurship alongside Tsinghua University in China and Oxford University in the United Kingdom (CCIBD, 2016b). The CCIBD acts as “a hub for connecting Canadian businesses, academics, policy makers, governments, and other stakeholders to support transnational entrepreneurship” (CCIBD, 2016b, para. 3). CCIBD council members include Dr. Kenneth A. Grant, Dr. Mary Han, Dr. Ken Jones, Dr. Gil Lan,
The CCIBD at Ryerson University’s Ted Rogers School of Management works closely with the TRSRM to promote, foster, and facilitate further research and education about China. One of the endeavours has been the experiential learning course. RMG 917 (Experiential Learning: Asia Pacific Study) is an upper-level professional elective course in the Retail Management undergraduate program. It provides an experiential learning opportunity for students to learn more about the Chinese retail sector, contribute to the academic material on the subject, and write blogs (web log posts) on their experiences. Three such trips have taken place in 2012, 2014, and 2016, in which the students visited several
cities, various retail outlets, and companies, and actively learned valuable lessons from retail leaders that include companies such as Alibaba, and Landi (Liu, 2016). Key insights from the students’ pre-trip research were complemented by, or stood in contrast to, their experiences in China. New findings emerged as the students spent more time in China and had the opportunity to learn from their experiences and first-hand accounts. Some
The CCIBD, in conjunction with the TRSRM, plans to expand the experiential opportunities to more students and scholars beyond Ryerson University. A major goal of the CCIBD is to enhance the mobility of academic exchange between Canada and China, and that goal is coming closer to fruition thanks to the students’ hard work and valuable contributions. Choosing China as an area of focus for retail management education, academic exchange,
A major goal of the CCIBD is to enhance the mobility of academic exchange between Canada and China, and that goal is coming closer to fruition thanks to the students’ hard work and valuable contributions. areas of focus from the 2016 trip in which 15 students visited China included: the growing impact of online retailing (Wilson, 2016), the automotive industry in 1st- and 2nd-tier cities (Sebesta, 2016), the dynamic state of the luxury retail sector (Liu, 2016), the obstacles to improving the effects of social media on retail sales (Ladovsky, 2016), the opportunity for crossborder collaboration in the beauty and personal care sector (Lam, 2016), and the challenges and opportunities for innovation in supply chain management (Taylor, 2016).
and value creation and expansion was a natural choice for several reasons, most notably: China’s role as a major trading partner with Canada, the CCIBD’s expertise and experience, and the evergrowing list of opportunities in value creation in China’s highly dynamic and evolving retail sector. Finally, engaging students in actively researching, participating in, and contributing to the complementary goals of the CCIBD helped both the CCIBD and students alike to gain new knowledge, identify new opportunities, and further the academic reach between Canada and China.
CHINA AND THE EVER-CHANGING FACE OF RETAIL China is in a prolonged period of transition, one in which: city building and infrastructure investments are at an all-time high (Cao, 2015); the population is aging, especially in 3rd-tier and rural areas (Xiaohong, 2011); a minor slowdown in growth hinders potential Gross Domestic Product (GDP) gains (Government of Canada, 2016); the phenomenon of the growing middle-class is changing the landscape of future potential growth in retail (Jaques, 2016); and new monetary policies aimed at controlling the real estate industry and boosting the retail industry create new opportunities (Xu & Chen, 2012). The degree of complexity inherent in the Chinese retail sector presents significant barriers to entry for new retailers, especially non-Chinese retailers, and poses a dynamic obstacle to growth for established retailers (Wilson, 2016). Intellectual property statistics demonstrate the substantial levels of innovation, entrepreneurship, and intrapreneurship taking place in China. Indeed, 36.4% of all patent
applications worldwide were filed in China in 2014 (MacLean, 2016). Chinese applications for patents abroad added to 18.4% that of American and Japanese each in patent applications (a significant increase over the last decade), and by December 2014, China recorded 15.4 million trademark applications (MacLean, 2016). Clearly, China represents an environment that is conducive for real growth, and government and financial supports for new technologies, processes, and trademarks are clear indicators that this trend is not slowing down. Apart from such an increase in intellectual property, other significant factors affect change that can have positive or negative effects on the Chinese retail industry. Major factors contributing to change that have a positive effect on all retailing in China include: improved living standards, increased disposable income, increased purchasing power, ongoing urbanization, growth of 3rd- and 4th-tier cities, rapid economic growth in lower-tier cities (as opposed to the saturated 1st-tier cities/ markets), increasing units-per-transaction in the
Chinese applications for patents abroad added to 18.4% that of American and Japanese each in patent applications, and by December 2014, China recorded 15.4 million trademark applications.
grocery/food categories, a boom in the Internet retailing sector, and increased demand for nongrocery items such as electronics (Euromonitor International, 2011). Major factors contributing to change that have a negative effect on retailing in China include: an aging population (Xiao, 2014), heavy import taxes (Wang & Hu, 2015), a slowdown in economic growth (Yu, 2015), China’s real estate situation in which new development outweighs new demand significantly (Rapoza, 2015), and rising home prices in tier 1 (and a few tier 2) cities (Holodny, 2016). All such factors contribute to make China the site both of dynamic retail growth and gaps waiting to be filled. In order to better understand the gaps inherent in China’s retail sector and how Canadians can work alongside their Chinese counterparts to better address such gaps, it is important to look at the current relationship between the two nations.
CHINA & CANADA China is Canada’s second largest trading partner with more than $77 billion (all $ amounts used in the paper are CAD $) being traded between the two nations—a figure that has increased by 53% in 5 years’ time (MacLean, 2016). A strong human connection between Canada and China has brought about various new milestones, such as: $25 billion in Chinese foreign direct investments (FDI) in Canada; Canada becoming the fourth most popular destination for Chinese outward direct investment (ODI); more than 119,000 Chinese students studying in Canada; and China being among the top three sources of new immigrants and top two sources of tourists in Canada (MacLean, 2016). A strong economic and social relationship requires both nations to have a clear understanding of each other’s current position, which includes economic conditions. In 2016, the Chinese economy is expected to decrease
its growth rate, potentially creating higher levels of volatility in its stock markets, an increase in anti-corruption activity, and certain supply-side reforms (Government of Canada, 2016). Despite a rebound in GDP growth due to government stimulus funding in early 2016, the remainder of the year is expected to see a reduction in GDP growth in primary, secondary, and tertiary industries. Furthermore, the service sector’s share of GDP is increasingly lead by the less stable financial intermediation and real estate sectors, and the more stable hotels/catering and transport/storage sectors. An improving housing sector and Consumer Price Index (CPI), complemented by a slight uptick in foreign trade in 2016, also indicate that the economic conditions are significantly better than after the financial crash of 2008 (Council on Foreign Relations, 2009; Government of Canada, 2016).
Figure 1. Canada’s presence in Chinese cities. Source: MacLean (2016).
More recently, a Foreign Affairs Ministers Dialogue and an Economic and Financial Strategic Dialogue have been established to enhance bilateral communication and cooperation between Canada and China (MacLean, 2016). As Canadian exports to China have increased by 179% in the past decade, so too have imports of Canadian merchandise (up from $52 billion in 2013 to $65 billion in 2015). British Columbia exports about 30% of
total Canadian exports to China, while Ontario, Quebec, Saskatchewan, and Alberta each hover between 13% and 16%; these five provinces account for more than 79% of Canada’s total exports to China. However, Chinese investment in Canada is mostly concentrated in Alberta, British Columbia, Ontario, and Quebec, with Alberta accounting for nearly 400% more investment dollars than all other provinces combined (MacLean, 2016).
The Energy industry enjoys the majority of investment dollars from China, making up 75% of invested dollars at $46.9 billion, while Entertainment and Real Estate is a distant third with $1.5 billion (MacLean, 2016). Figure 1 illustrates Canada’s presence in Chinese cities, as well as each city’s population and economic output:
As rates of Chinese–Canadian tourism and business investments increase (MacLean, 2016), the importance of mutual understanding, cooperation, and competition becomes more obvious. Working together to increase total value in any sector in an entrepreneurial and intrapreneurial spirit can significantly improve said sectors’ overall value in both nations (Feenstra, 2015). One of the best resources for up-to-date, accurate, and insightful information, research, and international cooperative opportunities between China and Canada is at Ryerson University.
RMG 917 students at Ryerson University have in their 2016 trip reports identified several retail sectors that are in a state of change in China, including luxury, automotive, grocery, online, and international. The students also identified key challenges facing these sectors including (but not limited to) the dynamic state of China’s real estate, China’s aging population, and heavy import tariffs on foreign-made products.
RETAIL IN CHINA: FIVE IMPORTANT SECTORS IN CHINAâ€™S RETAIL INDUSTRY Luxury Retail More than half of the 161 respondents in a study examining Chinese consumersâ€™ attitude towards luxury fashion goods expressed their intention to purchase luxury items that they could not afford (Zhang & Kim, 2013). This powerful statement is indicative of a nation that is opening up both socially and economically to the idea of luxury retail. China will soon be the second largest market for luxury goods (Deloitte, 2014), despite recent slowdowns in the sector which are likely the result of international rather than domestic factors (Zhang & Kim, 2013).
Luxury retailing is slowly becoming a form of destination shopping, one in which the experience is an integral part of the buying process. As such, some luxury retailers are using the Chinese market as promotional platforms and testing grounds for various products and services (Jaques, 2016), which includes A/B and validity testing. Validity testing and A/B testing (an experiment to determine which of two options suits clientele best) both focus on customer feedback, which can be used to customize offerings and determine the potential value of existing products (Hannington, 2012).
Luxury goods are in such demand by the middle and upper classes that members of these socioeconomic groups are willing to purchase such items on overseas vacations. This is not due to a lack of supply in China; rather, the heavy import taxes in China drive the costs of luxury retail products so high that buying a flight to another nation to purchase luxury items is often more economical, especially when buying more than one item (Jaques, 2016). Large shopping malls are becoming more prevalent in tier 1 and tier 2 cities, indicating Chinaâ€™s anticipation of a growing middle class. Luxury retailers are riding the wave of increased large mall construction, and utilizing their space to increase their reach. At this point in time, most large malls are scarcely populated with clientele; this is to be expected given that Chinese building projects can be completed very quickly when the motivating factors are there (Macguire, 2015). Empty malls are indicative of the ongoing plans to urbanize and modernize Chinese rural peoples, which may take decades to complete.
to U.S. dollars after the devaluation of the Yuan by the Chinese government in 2015 (Bloomberg News, 2016a). This turn of events will most likely have a direct impact on the number of Chinese middle- and upper-class people who purchase their luxury items outside of China. Moreover, this trend will have a meaningful effect on the longterm strategy that luxury retailers have in further developing their reach in China, especially in tier 2 and tier 3 cities and the ghost cities that have yet to be populated. Two clear opportunities in luxury retailing in China are the increase in disposable income (SunZhao, 2014) and the urbanization of the rural areas (Government of Canada, 2016). As more rural Chinese migrate to large cities, an inherent increase in their disposable income, a natural increase in demand for luxury items, a decrease in lower-class and increase in middle-class people, and new opportunities in luxury retail in general are expected to happen.
Large shopping malls are becoming more prevalent in tier 1 and tier 2 cities, indicating Chinaâ€™s anticipation of a growing middle class. An important factor affecting change in this sector of retail is the increasing value of the United States dollar, which has a negative effect on luxury retail sales in Hong Kong and mainland
Luxury retailers must balance their strategy between penetration into the Chinese market to take advantage of said opportunities, and maintain sales levels for Chinese clientele who
China (Reuters, 2016). More Chinese middle- and upper-class citizens are converting their Yuan
wish to purchase their luxury items outside of China.
Automotive Retail The year 2015 was a turning point for Chinaâ€™s automotive industry, due in part to a slowdown in growth, emerging opportunities in new energy vehicles (such as hybrids), and an increase in price consciousness that has forced many manufacturers to decrease prices. Despite this turning point, Chinaâ€™s automotive industry is still growing, with passenger cars gaining 7.3% over last year, and 24.6 million cars (86% of total vehicles sold), trucks, and buses being sold (Perkowski, 2016). China has proven to be the largest market for vehicle sales since 2009, with growth in one year by 1.1 million vehicles nearly matching Australiaâ€™s entire annual sales of 1.15 million vehicles. China has more brands and models (952) than any other
nation, including foreign brands (e.g., Audi), local brands (e.g., Geely), and sub-brands managed by joint ventures between Chinese and foreign companies (e.g., Venucia) (De Feijter, 2016). Foreign automobiles are taxed to the point of being the most expensive vehicles in the world, with some prices doubling as a result. China also has some of the least expensive cars, with the Jiangnan TT costing only $3,177. Lastly, the growth in the sales of new energy vehicles (NEV) has grown by 223% in 2015, but accounted for only 0.9% of the total market (De Feijter, 2016). Many trends are emerging in the Chinese automotive industry as a growing percentage of the population can afford to own a vehicle. Ownership is preferred to leasing, as automobiles are often seen as a status symbol. Long wheel-
base versions of vehicles are more common than in other nations, and are viewed as boosting one’s status. German sedans are sought after for various reasons, including their luxury image and the fact that many Chinese government officials drive them as well (Sebesta, 2016).
Another predicament for automobile retailers in China corresponds to tier 1 cities: a deficiency of affordable real estate in high traffic areas has led to an increase in off-site maintenance bays, added logistical costs for each dealership, and added complexity (Sebesta, 2016).
Most vehicles in tier 1 cities are late-model (i.e., less than 6 years’ old), manufacturer-maintained, and non-local brands. Local automotive brands are not perceived as being luxurious (or luxurious enough), and are too new to have established credibility, and therefore demand. Moreover, 70% of tier 1 citizens own vehicles, which are almost all non-hybrids (Perkowski, 2016).
An emerging trend is the shift to smaller SUV or crossover vehicles, both on the demand side and on the supply side, with some Chinese manufacturers joining the crowd. Increased sales figures for small SUVs and crossovers are further fueling development of that segment of the market (Sebesta, 2016). Although we can only speculate whether local manufacturers can
Hybrid vehicles are underrepresented in China in general, with a high volume of electric bikes and scooters in tier 1 cities, and various forms of non-electric transportation in tier 2 and tier 3 cities. The underrepresentation of hybrid vehicles is due in part to the unfavourable view by potential customers and a lack of infrastructure and facilities for charging such vehicles (Sebesta, 2016). The dilemma for tier 1 Chinese vehicle owners is that they all want to drive the same black German-made sedans, but also want to stand out from the crowd—a feat achieved through “loud” fashion rather than explicit vehicular modification or customization (Sebesta, 2016).
overcome hurdles in credibility and image, and create small SUVs or crossovers that can take the Chinese market by storm and shift demand back to local-made vehicles, such considerations suggest a potentially large opportunity. Local brands are young enough to be able to pivot and use their agility to position themselves, adjust their brand to suit the market demands,
and slowly increase their share and the loyalty of the Chinese market. One potential avenue to speed this process up is to use online sales and product customization to increase reach and perceived value (Sebesta, 2016). Chinaâ€™s aging population is becoming a larger hurdle to maintaining sales growth in the automotive sector, especially as housing and health care costs overwhelm individuals and the economy, leaving less disposable income for larger purchases such as vehicles (Xiaohong, 2011). An older average age is not the only contributing factor to change in the future of automotive retail in China; as urbanization increases, currently
empty cities will be populated, more people will be upgraded to middle class, and an increase in disposable income and demand for automobiles are the expected outcomes. Major opportunities in automotive retail in China will result as urbanization efforts increase, further quickening the growth of the sector.
Retail Grocery Chinaâ€™s retail grocery stores have seen fragmentation due to geographical factors, below-average modernization of distribution channels, and competition from large international grocers such as Carrefour and Walmart. Unlike Walmart, Carrefour is providing more authentic Chinese purchasing experiences, while Walmart lags behind (Wang & Jha, 2011).
China has overtaken the U.S. to become the largest grocery market in the world. Expectations are that growth rates will soon double from 4% in 2014 to more than 8% in 2016. The increasing popularity of online retail has slowed that growth potential somewhat. Nonetheless, a 1% growth in the number of grocery outlets was observed in 2015. Supermarkets have about 73% of the total market share in terms of sales of modern groceries, and 45% of grocery sales overall. This highlights China’s continued appetite for more traditional grocery items (Urech, 2016).
still shop around to ensure their purchases are still the best value for their money (Urech, 2016).
China’s economic growth and the increase in average incomes have fostered significant growth in the middle class as people rise up the economic ladder. This has affected consumer behaviour and characteristics as new products are in demand and older, less expensive items see drops in sales. Chinese grocery consumers display more price sensitivity and a desire for higher-quality items, and take a long-term view of savings. With the average consumer spending nearly 40% of household income on food, China is among the countries with the highest cost of food (Urech, 2016).
The problem of loyalty is less apparent in tier 3 cities than it is in tier 1 and tier 3 cities. Tier 3 cities’ grocery stores are less competitive and more sparsely distributed, thus reducing customers’ ability to shop around; this leads to increased loyalty simply through default. An increased sense of community and loyalty becomes stronger over time as shoppers in these markets tend to be older and hold more traditional or conservative ideals (Urech, 2016).
China has overtaken the U.S. to become the largest grocery market in the world. Expectations are that growth rates will soon double from 4% in 2014 to more than 8% in 2016.
Chinese grocers face an uphill battle with foreign controlled grocery chains: state laws and political
High food prices, an increase in income, and a long-term view of savings translate into savvy grocery shoppers. People are willing to visit multiple stores to get the best deals, and that means that garnering customer loyalty is very difficult in this sector. In contrast to this trend, a rise in the demand for quality items means that certain customers are willing to pay more for their groceries, but may
influence have yielded a high degree of control over the supply chain and individual grocersâ€™ operations, while foreign controlled grocery chains have a greater competitive advantage as they feel far less pressure than their local counterparts (Hingley, Lindgreen, & Chen, 2009). However, older fresh-food markets can be, and often are, less sanitary, more cluttered, disorganized, contain more safety hazards for the customers and the food, and result in a poorer shopping experience (Maruyama, Wu, & Huang, 2016). Fresh-food markets that do not adapt to the dynamic demands of customers will face significant challenges to remain open in the long run. Supermarkets and large chain grocers also face changing demands, and have unique challenges of their own; their fruits and vegetables are often less fresh and costlier than their smaller counterparts. The supply chain has many intermediaries, resulting in slower delivery times and items that are not as fresh or over-ripened. Therefore, fresh foods represent a lower profit potential for large supermarkets and present an opportunity in improving supply chain and quality control elements to maximize the profit potential of fresh food (Urech, 2016).
they try not to compete with them directly, opting to differentiate rather than start price wars; their convenient locations, fresh fruit, and quick service still have a healthy market in any tier city in China. A major threat to the local, small grocery store is the rising cost of rent as cities grow and income levels rise (Urech, 2016). An opportunity for smaller grocery stores to start selling online has been observed: the added revenue stream has minimal risk for the individual grocer as the only added cost is a small overhead for a web presence, and a small variable cost of transport. For a smaller grocer to embrace online retail, many different important conditions need to be right: a tier 1 or tier 2 city is ideal (as tier 3 and lower tiers wonâ€™t see as large a demand), a reliable delivery system must be available at a nominal cost to the customer; a customer relations protocol needs to be set up for returns and dissatisfied clientele; a web-building and hosting company needs to provide a reliable online web presence with adequate marketing at a feasible price; and the grocer must have the means to take on the extra work.
Online retail has influenced the younger Chinese consumers, especially in tier 1 and tier 2 cities. More young people are willing and even prefer to purchase their grocery items online. This phenomenon significantly hurts the locally owned, older, smaller grocery stores, but not to
Regardless of the potential hurdles in change management, the opportunity to modernize smaller grocers into online competitors of large supermarkets is real, and it highlights the overall opportunity in online retailing as a whole. Furthermore, the urbanization of rural peoples in China will result in an increased demand for both
the degree that they are disappearing. Rather, small stores complement the larger chains as
online and traditional grocery retail in emerging cities.
Online Retail With more than 650 million online users in China as of 2015 (more than Japan and the U.S. combined), online sales in China have grown by 1,500% in the last 5 years. More than 300 million users shop online for clothing, books, electronics, appliances, and even furniture. A major section of the online population in China is young professionals, who have more disposable income, are more educated, and are more comfortable with the online retail experience than their older counterparts (Chen, 2014). More than 130 million Internet users in China use broadband connections. More than 6 million
retailers list products on retail sites such as Taobao. The Chinese online retail market grew by a compound annual rate of 120% from 2003 to 2013. Close to $200 billion was generated in online retail in 2012 alone. Clearly there is a major opportunity in the online market in Chinaâ€™s retail industry, and these figures demonstrate the stability in the growth of that market (Dobbs et al., 2013). Business to Business (B2B), Business to Consumer (B2C), and Consumer to Consumer (C2C) make up the majority of online retail platforms in China. Alibaba (B2B), Tmall (B2C), and Taobao (C2C) have the largest market share
Figure 2. Growth rate of Chinaâ€™s e-tailing market. Source: Dobbs et al. (2013).
on these platforms and have grown substantially in the last few years. This growth indicated the dominance that local (Chinese) companies have in the online retail market. The dominance advantage is a significant barrier to entry for foreign-owned/controlled retailers who wish to compete with these companies in the present and future (Hasbi, 2016). An important factor in the changing face of online retail in China is the prevalence and growth in social media use. As more users of social media communicate and connect with each other, there will be more demand for online retail products and services (Hasbi, 2016). Multichannel strategies such as onlineâ€“offline services act as a buffer for those who either have no preference between online or traditional brick-and-mortar stores, or are still wary of online purchases in general. Online fashion retailers are likely to open a brick-and-mortar store if the economics of doing so are favourable, and the demand for offline shopping increases. However, the critical takeaway is that these retailers started
in the online sector, and demand for offline grew, rather than the opposite (Hasbi, 2016). Chinaâ€™s online retail sector has massive growth potential: the rate of broadband Internet penetration is barely 30%; online sales are estimated to grow to $650 billion by 2020; labour productivity is predicted to grow by 14% as a result of online retail; and the urbanization of rural peoples will dramatically increase exposure to online retailâ€”even in tier 4 cities the average shopper spent 27% of disposable income in online retail stores (Dobbs et al., 2013). A significant opportunity for online retailers in China (domestic or foreign owned) is the urbanization of rural people, and the eventual population of currently empty, new cities dotted across the country. As more people migrate to these cities, there should be higher rates of income (including disposable income) and exposure to online retail through broadband Internet, providing online retailers an incentive to start preparing for this eventuality now.
A key strategy being employed by international retailers in China is the strengthening and development of infrastructure that will help facilitate growth in the future, with a focus on Internet retailing.
International Retailers International retailers have more recently seen a reduction in their respective market shares, partly due to a slowdown in the Chinese economic growth rate overall, and partly due to an increase in local retailersâ€™ reach across China (Yu, 2015). This presents both an opportunity and a barrier for new entrants into the Chinese retail sector: the opportunity is to help facilitate local retailersâ€™ reach through complementary products and services, and the barrier is a likely increase in demand for local retail. A key strategy being employed by international retailers in China is the strengthening and development of infrastructure that will help facilitate growth in the future, with a focus on Internet retailing. Domestic retailers are focusing more on adjusting or reworking existing brickand-mortar locations. For non-Internet retailers, a mounting barrier to growth is the competition
from local brick-and-mortar and Internet substitutes (Euromonitor International, 2011). Since 2011, international retailers have been eyeing grocery stores as potential expansion and penetration points in the Chinese market. Despite the push into the grocery sector, non-grocery sectors of the retail market have performed much better due to improved penetration into rural and urban areas, as well as increased Internet presence and offerings. International chains only account for 3% of the value share in 2011, due in part to the complex nature of the market, and expansive geography of China (Euromonitor International, 2011). As infrastructure expenditure from international retailers increases, and the urbanization of rural people progresses, an ancillary effect is expected, including increased demand for local and international retail.
CHALLENGES TO CHINESE RETAIL GROWTH: AN AGING POPULATION AND A DYNAMIC REAL ESTATE MARKET Population Age A growing factor affecting economic change is China’s aging population, which has a variety of negative impacts in areas such as monetary policy (Xiao, 2014), the housing market (Qiao, 2013), future automotive sales, public health and its associated costs and infrastructure (Li, 2016), the unemployment rate and pension situation (Wu, 2013), and the decline of trained/skilled labour (Banister, Bloom, & Rosenberg, 2012).
The Chinese government isn’t standing still on this matter; it is actively investing more funds into disease prevention, health education, child care, mental health, emergency services, blood collection and supply, specialized care, medical security systems, pharmaceutical supply systems, and in rural areas, a threetier service network consisting of the county hospital, township hospitals, and village clinics (Information Office of the State Council, People’s Republic of China, 2012). In 2011, it was estimated that only 1.8% of the elderly population
The 30-year-old one-child policy in China ended in 2015 and by some measures was a success as it reduced the average family size from 4.41 to 3.13 people from 1982 to 2005 (Yan, 2010) and kept the population to 1.3 billion instead of a potential 1.7 billion by the end of 2009 (Yang, 2010). An undesirable effect of the one-child policy Figure 3. China’s aging population. Source: Bird (2014). is that the average age of Chinese citizens rose over the last 30 years, could have been cared for in nursing homes including 221 million people over the age of (“Nursing Home Boom,” 2011). 60 (Xiaohong, 2011). This phenomenon raises concerns of chronic disease rates (along with The gap between available services and housing the associated costs of specialized care) and a for the elderly population, and what’s required, lack of means to care for most of the elderly— indicates that there are significant opportunities especially in the coming decades (Yu, 2016). in the Chinese economy for innovative, value-
added endeavours that not only seek to resolve or decrease said gap, but to also determine how the elderly can earn more, rather than just cost less (“Nursing Home Boom,” 2011). The number of seniors who can afford senior housing is estimated to reach 22 million by 2020, but that will account for only 10% of seniors in tier 1 cities. This means extra pressure on lowertier cities to care for seniors despite having lower tax revenues than their tier 1 counterparts.
Real Estate The real estate condition in China is highly dynamic, complex, and indicative of a nation that is still planning for its future modernization and urbanization. The Chinese real estate market has been growing at a rapid pace, as expansionary fiscal policies drive up the value of homes (Xu & Chen, 2012), and China tries to urbanize more than 100 million members of its rural population (Rapoza, 2015). Primary retail markets are most often found in tier 1 cities, while lower-tier cities with smaller markets house secondary and tertiary retailers, including those that are foreign owned. Depending on its economic development, population, and historical significance, a city in China is categorized into one of five tiers, with tier 1 being the highest. Large gaps in household income from tier to tier exist. Urbanites in a particular tier also enjoy higher income than their rural counterparts. A significant difference between tiers is that most tier 1 cities are fueled by domestic demand and consumption, while tier 2, 3, 4, and 5 cities see much lower economic
growth based on the same factors. As tier 1 cities reach their population ceilings, new real estate developments across China have demonstrated the government’s desire to urbanize the rural population, shift population growth away from tier 1 cities, invest in long-term population growth and economic development, and create new opportunities for innovation and investment in China overall (Wang & Jha, 2011). Primary, secondary, and tertiary retail markets each have unique characteristics, barriers to entry, competitive landscapes, and opportunities. Most primary markets are not readily accessible to Canadian and international retailers. This factor makes the crafting of retail strategy in China particularly unique for international retailers. An active discussion exists among experts regarding the health and future outcome of the real estate market in China, with some claiming that it is destined to flourish as anti-corruption activities increase in volume, scope, and effectiveness (Cao, 2015; Fan, Huszar, & Zhang, 2016) and monetary policies are crafted to boost the industry (Xu & Chen, 2012). The proponents of this positive outlook claim that a decrease in development could lead to a major Chinese and global economic slowdown (Murphy, 2012). Others see a greater risk, correlating lower disposable income with lower home values, and tying that to the aging population and their inevitable negative impact on disposable income overall leaves a much more perilous outlook in the long run (Zhang, Liu, Ding, & Su, 2015). Moreover, China’s real estate market is estimated
to be overdeveloped by as much as 53% (Murphy, 2012), leading one to believe that there is significant room for improving the transition from rural areas to these new cities, and recovering daily opportunity costs lost if said transition is delayed.
for a shift in focus for the government, away from just building new cities, towards a more consumption-based strategy, so as to balance its GDP composition (Knowledge@Wharton, 2012). A shift in policy to foster more growth in consumption industries such as retail will have a positive net effect on Chinese retail in general,
Chinaâ€™s overdevelopment of tier 1 cities has left many lower-tier cities Figure 4 identifies the top 20 emerging cities in China as of 2010 and 2015: stagnating (Chen, 2016), but has also driven demand for more real estate investments in light of volatility in the markets (Bloomberg News, 2016a). The increased demand for real estate investment has itself magnified the growth in that sector, driving up prices even further.
However, considering the heavy impact that Figure 4. Chinaâ€™s top 20 emerging cities. Source: MacLean (2016). political policy changes and macro-controls have in China, it is well and secondary positive effect on non-Chinese within the means of the government to rein in retailers operating in China. risk and mismatched real estate supply and demand using adjustments in policy (Lu, 2013)â€” Regardless of challenges that face China with something the government has been working on respect to real estate development, urbanization, for years now (Shepard, 2016). and home price moderation, certain retail sectors are growing and further establishing themselves Given the current real estate situation in China, within cities of varying tiers. Among these with ghost towns and malls dotting the landscape sectors are online retail, luxury retail, grocery, waiting to be occupied, many have called
automotive, and International.
FUTURE IMPLICATIONS Chinaâ€™s dynamic economy, changing face of real estate, aging population, and active government policy changes make predicting the probability of future retail success in any given sector difficult at best. Nonetheless, with first-hand accounts from students in the RMG 917 course at Ryerson University, the experience and expertise of members of CCIBD, and with active secondary research from faculty and mastersâ€™ students, spotting real opportunities in each sector can significantly help reduce future risk, and improve the overall prospect of success.
Whether it is an opportunity born from increased disposable income, improved and expanded infrastructure and development, or changing attitudes of customers, various sectors in retail can take advantage of the changing tides to yield better rewards and increased potential. With added support from stakeholders, CCIBD and Ryerson University can help to make these opportunities and challenges clearer. Further trips to China for first-hand experience and primary research, alongside increased and improved academic collaboration in primary research, will make the process of identifying opportunities and challenges easier, and more fruitful.
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Published on Jan 26, 2017
A Monograph on China’s Ever-Changing Retail Industry by R. Tajzadeh, H. Yu, & Student Contributors from the 2016 RMG 917 Class at Ryerson U...