Investment Promotion Report of China Retail Industry

The report

Investment Promotion Report of China's Retail Industry was jointly developed by Deloitte China and Investment Promotion Agency of Ministry of Commerce, P. R. China. This report identifies the development status and challenges of China's retail industry in current market environment based on the analysis of China's retail industry's major business formats and development trends. It also provides a deep look at various opportunities for Chinese retailers in M&A activities and investments, offering a referential and practical guideline for enterprises to carry out their investment and cooperation.

Viewpoints / key findings

Through our research on the current status and trends of China's retail industry, the major findings are included as follows:

• Consumers are becoming the leading force impacting the retail industry. The consumers' behavior and preference are changing and become the core strength in shaping and pushing forward the growth of retailing market. Moreover, the pursuit of quality, experience, individualization, group social communication and others will also promote the industry segmentation and business models' evolvement.
• Physical retailing is badly impacted with big differentiation in performance. The economic slowdown, rising costs and emergence of Internet and mobile shopping have brought tremendous impact on physical retailers and top 100 retailing enterprises in China suffered a first drop in retail sales in 2015. Our research found out that retail formats, business operation regions, supply chain, channels and others become the major factors impacting enterprises' operation performance. with the decline of the whole retail industry, physical enterprises intend to reboot their growth by building Omni-channel, integrating stores, restructuring and merging, etc., which will lead to a more distinct differentiation in growth.
• Information technology, to a large extent, determines the development process of retail industry. The Internet- enabled is becoming a major trend and the popularization of smart phones and Internet also gives robust prop for the rapid development of mobile retailing. The big data, Internet of things and other technologies have given retailers strong support and enabled them to interact with clients and achieve effective internal management.
• The integration of online and offline activities and cross-border business has become a mainstream. As to constantly improve customers' experience and offer seamless shopping experience online and offline, online and physical retailers all dive into the building of Omni-channels. On the one hand, physical retailers actively expand their e-commerce channels, especially mobile and cross-border e-commerce with intention of providing better services to customers and access to a new growth stage via emerging modes and business formats. On the other hand, e-commerce enterprises are accelerating their paces to layout offline channels by updating logistics, joining hands with physical enterprises, opening brick and mortar stores, etc. so as to achieve the goal of Omni-channel. Retail giants also focus on the crossover integration of the value chain and positively explore the complementation with reputed retailers both at home and abroad in order to improve consumers' experience.
• Cross-border e-commerce has experienced an explosive development, while the development trend of policy is still uncertain. Over the past years, cross-border e-commerce has undergone a booming growth with its overall scale of RMB5 trillion by the end of 2015. Cross-border exports have taken a leading part for a long time, but the proportion of the import business is also increasing year by year with the expansion of imports. Under current circumstances, the rapid growth of cross-border e-commerce has spurred numerous retailers to get involved in this sector and take it as a new engine for business growth. It is worth noting that the new policy on cross-border retailing imports has exerted great impact on the cross-border import industry. Therefore, enterprises under their development should attach great importance to the suddenly tightened policy and high uncertainty in the future.
• Changes have taken place in consumer products market due to the combined influence of emerging purchase power, digitalization, urbanization and aging population. As consumers now take a closer look at quality and show more interest in personalized products that meet their specified needs, brand owners are trying to have more interaction with customers in order to better understand their preferences and demands. Moreover, they incorporate C2B and start piloting the model to provide better services for their consumers. Given that the status of foreign brands in Chinese consumer market has increasingly diminished by urbanization and shifting brand awareness, local brands will have rare growth opportunities driven by the purchase power of the third- and fourth-tier cities, plus the shifting brand recognition of emerging purchase force despite the fact that foreign players, among most brands, have long dominated the first- and second-tier cities.
• Retailing is active in the capital market with growing M&As and focused equity investment on emerging retailing models. The year 2014 and 2015 witnessed rapid growth in retailing M&As mainly for the purpose of expansion. The retail industry has initiated various attempts ranging from cross-border mergers and acquisitions, integration of supply chains to industrial crossovers which account for a certain market share. Private equity or venture capital (PE/VC) investment in retail industry peaked in 2015. The big winners in gaining investment are internet enterprises with large inflow of capitals powering the fast development of cross-border e-commerce companies and emerging models such as O2O, which also have created large amounts of bubbles.
• Over the past three years, the consumer market has seen relatively active M&As. Cross-border M&As accounted for nearly a half of the total consumer market in terms of transaction revenue, and internationalized integration has become normal for consumer goods companies. Ambitious enterprises at home aiming for bigger and stronger are vigorously obtaining resources like foreign brands, technologies and markets through mergers and acquisitions, largely contributing to the globalization process, while overseas companies are attempting to enter Chinese market by merging or acquiring local enterprises. The consumer market well reflected the flat trend of the global market.