In a country that measures time in centuries, retail is changing overnight
Time flies when you are having fun! I couldn't believe that it had been 4 years since I had last visited China. I was intrigued with what I would find in 2013 as I returned to teach a Retail University course. It turned out to be a case of where the professor learned as much as the students. I was simply astounded at the changes in China's retailing that had taken place in just a few years. As in most of the world, it is the consumers and their behaviors that are literally changing the face and fabric of retail in China.
Unique aspects of the Chinese Retail Market – Perfect storm for change
When I explored Chinese tech retailing in 2009, as much as 70% of consumer electronics were sold through IT Malls. IT Malls are large central complexes with as many as 500 small shops in one place. Not only could consumers go see a wide selection of products, the small shops competed primarily on price. So, consumers went to do both - see products and haggle for the best deals in IT Malls. Best Buy branded stores and other western retail stores closed because they had set prices, and simply couldn't compete based on differentiated selection.
But China's market differs from the US and Western Europe in several unique aspects:
- In western countries, a few large national chains of bricks and mortar retailers (like Walmart and Carrefour) control a dominant share of sales, but in China, large, national retail chains only account for relatively small % of national sales
- China already has over 160 cities with over 1 million people, not to mentioned hundreds of 3rd and 4th class cities, which are under served by organized retail stores
- China's middle class wages have risen, enabling a consumption economy, including a high % of mobile devices, which are sold at a modest markup
- While western retail stores now struggle to open websites and integrating them with their many stores, China's e-tailing literally exploded overnight, skipping the step of large investments in retail real estate
- According to a McKinsey report, China's e-tailers are realizing 8 to 10 points operating profit, beating most bricks and mortar stores
- China is literally skipping the expensive phase of "Big Box" phase of retail
China’s Great Wall was built to keep competition out. But, today’s Chinese retail stores are facing the biggest threat from within. Online e-tailers are disrupting the status quo with better assortments, lower prices and convenience of home delivery.
Showrooming is an overnight reality and competitive retail threat
Classic view of smaller Chinese shops and kiosks … complete with the new “Showroomer” armed with her smartphone checking online prices and selection.
The initial battleground between stores and online is typically price. As in many markets, China's e-tailing has the potential to be more a more efficient channel of distribution. A McKinsey study estimates that online has the potential to be 6 to 16% cheaper than bricks and mortar stores. In fact, the biggest threat of online prices might be for the classic IT Mall shops, who have survived thrived historically on being "lowest price".
Make no mistake about it. Smartphones are everywhere in China! When I walked the streets and malls shopping stores, I did not see one "regular" cell phone in Beijing. If the Chinese consumer wasn't talking on their phone, they were surfing. The result is that larger national chains are under siege. China's local equivalent to "Best Buy" is Gome. Gome shares have fallen 30% since 2010.
Gome is one of China’s largest electronic retail chains. It has a wide selection and clean displays like Best Buy in the US. Gome also faces Best Buy’s challenge of creating services and value to get consumers to purchase in store rather than shop for cheaper prices online.
What does the future hold for retail in the year of the Snake?
According to HanBan.com, 2013 is the Year of the Snake:
This 2013 year of the Snake is meant for steady progress and attention to detail. Focus and discipline will be necessary for you to achieve what you set out to create.
This description of success characteristics seems perfectly suited for ecommerce. And, I'm quite sure that many of Chinese traditional stores view ecommerce as the "snake". It's not that traditional retailers can't succeed online, but they must start from scratch in many cases. And then, they must figure out how to integrate online without destroying store prices, profits and services.
No one is predicting the fail of retail stores in China. The growth of the middle class has caused all boats to rise. But, it is ecommerce that is poised for explosive growth! We have posted previously how the growth of Alibaba (which owns a number of online market places such as Taobao and 360buy) will quickly exceed that of Amazon. The Alibaba companies alone accounted for $150 billion in 2012 sales. With compounded annual growth rates in double digits, McKinsey's forecast is simply astounding:
By 2020, as 15 to 20 percent annual growth rates (before inflation) continue, e-tailing could generate $420 billion to $650 billion in sales, and China's market will equal that of the United States, Japan, the United Kingdom, Germany, and France combined today.
While stats are impressive, it's each consumer vote every day that counts
The most fascinating thing about retail is that the only real numbers that count are individual consumers voting each day with their money where they will purchase. In the case of China like much of the rest of the world, consumers are voting on more than just price.
A classic photo of the Chinese retail market: Huge cities like Beijing, explosive construction and growth, complete with congestion and smog … and consumers stacked everywhere as far as the eye can see 30 stories high.
The reality is that shopping in big cities everywhere is a hassle. While consumers do want to see and touch their final choices for considered purchases, there is nothing like the convenience of shopping online. In the hundreds of cities beyond Beijing and Shanghai, online shopping brings consumers value they have not had in local shops: unprecedented choice, great value, and convenience of shopping anytime, anywhere without the headache of traffic.
At the end of the day, Chinese consumers are not that different from the rest of the world's shoppers voting for choice and value. To survive, bricks and mortar retailers in China must do what Best Buy in the US must do – create services and value that compel consumers to come to the store and purchase there what they can't find online.
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Sources:
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McKinsey China: What's in store for China in 2013?; Gordon Orr
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McKinsey: China's e-tail revolution; Elsie Chang, Yougang Chen, and Richard Dobbs
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Wall Street Journal: Change Afoot for Investors in China's Retail Sector; Chao Deng
- Wall Street Journal: China Retail Is for Choosy Shoppers; Duncan Mavin
- Photos: Courtesy of Chris Petersen
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Posted by: Gerard | November 03, 2013 at 01:09 AM