China’s retail industry speeds up transformation

Published: 18 September 2015

Deloitte China and China Chain Store & Franchise Association (CCFA) jointly released the annual report – “China Power of Retailing 2015” (also named as “The Report on Operation of Chain Retailers in China 2014-2015” by CCFA). Along with the slower growth in macro economy and the income of urban residents was the continuous drop in sales volume of the retail industry in China. In 2014, total volume of social consumer goods reached RMB26 trillion, up 12 percent year-on-year but at a slower pace for the fifth consecutive year. In addition, rents and salaries costs of sample enterprises maintained at a high rate of increase at 7.0% and 7.7% respectively, prompting enterprises to improve their operation efficiency. For example, China's top 100 chain retailers continued to slow down expansion, with a 50 percent contraction in the increase of the number of outlet stores over the past five years. The latest research showed that over 20% of the enterprises interviewed recorded no increase in the number of stores. Meanwhile, companies achieved cost control by downsizing their workforce, which led to reduction in the average number of staff per store by 0.8 percent and 1.2 percent in 2013 and 2014 respectively.

Based on a questionnaire survey covering 200 companies and in-depth interviews with senior executives in these companies, the report analyzed the latest trend and main challenges of China's retail industry and provided unique insights and recommendation for the transformation of China’s retail industry.

The Report underscored the operation challenges faced by brick-and-mortar retailers, including economic slow-down, upgrade in consumption, new industry norm and the rise of on-line and mobile shopping. Retail companies also suffer from profit margin squeeze brought by the continuous increase in operating costs. On the other hand, internet and network terminals have become increasingly popular and e-commerce is developing rapidly helped by incessant innovation in payment technology and elevated efficiency in logistics and distribution.

"Brick-and-mortar retailing is significantly affected by e-commerce and it is a painful journey of transformation for traditional industry, which is also faced with intense competition from e-commerce, changing behaviors of consumers and rising demand for personalized consumption experience. All these factors together with technology advancement have prompted retailers to develop online business and evolve into an operation with full distribution channels,” said David Lung, the Leader of Consumer Products and Retail Industry of Deloitte China.

According to the report, the development of O2O business topped the agenda of many brick-and mortar retailers in 2014. Inspired by the launch of RT-MART's network platform Feiniu and BBK's Yunhou, many well-known retailers have strived to develop their on-line businesses. In addition, online companies are actively working with brick-and-mortar retailers in the on-line space, and one of the great examples is Alibaba’s strategic investment in Intime Retail. Online and offline integration and the development of full channel distribution have become a collective transformation of the industry. Along with Alibaba’s RMB 28.3 billion investment in Sunning and JD.com’s RMB 4.3 billion investment in Yonghui Superstores, the retail industry will enter a new era in 2015, where companies will move ahead with double engines – online and offline businesses. Customers will not only enjoy multiple channels for purchase, but also the convenience from a greater diversity of services, which integrates the various aspects of their daily lives.

Pei Liang, Secretary General of CCFA, said, "Now retailers all compete with each other and devise their own plan for O2O business model. As O2O industry chain improves and mobile payment becomes more mature, retail companies will have to transform into an operation with full distribution channels, which will enable them to tackle the issues of resource barriers, online and offline profit sharing, and market promotion. As more and more traditional enterprises operate their business online, the penetration rate will also increase. It is believed that the online economy will become an important pillar of the broader economy of China in the future."

However, Lung expressed concerns on logistics development, which appears to have lagged behind the pace for retail companies to transform into an operation with full distribution channels. Incomplete logistics facilities and inconsistent quality of logistic services have imposed difficulties for e-commerce with regard to logistics distribution and this has hindered the development of O2O business model. In considering adopting O2O model, Mr. Lung suggested that companies should have long term plan to mitigate logistic-related losses so that a better industry cycle can be established to address the supply and demand problems of companies and customers.