The retail markets of China are changing lightning fast with digital continuing to surge. But it is not curtains for bricks and mortar
The luxury American lingerie brand Victoria’s Secret has just opened its first store in China, a huge and impossibly opulent monument to the continuing viability of non-mobile consumerism. It is also a reminder of the growing power of China’s Middle Class, the fast-changing tastes of Chinese consumers and the need to keep mistresses happy even during times of a slowing economy.
The VS store in central Shanghai faces onto several retail locations that have closed in recent months, including a massive and once-prosperous department store, killed by the consumer shift to digital purchasing. It is pink and enticing in its subliminal message that there are certain items which people prefer to see and touch in person before they buy.
But it also doesn’t change the fact that traditional retail in China, as in much of the world, is in the midst of cataclysmic changes. The shopping mall construction spree across the country over the past 20 years has suddenly ground to a halt, and owners and operators are frantically trying to find new uses in multi-level emporia for space that used to be used to sell clothes, household wares, and the full spectrum of products which Chinese people increasingly prefer to buy with a swift click on the screen of their ever-present mobile phone.
The big winner in the market has been Alibaba with its subsidiaries TaoBao and Tmall which dominate the mobile consumer space. The iResearch Consulting Group recently reported that Alibaba’s business-to-consumer (B2C) marketplace Tmall had a massive 56.6 percent share of retail ecommerce sales in 2016. Ranking second was JD.com with a 24.7 percent share, followed by a long, long margin by electronics retailer Suning with 4.3 percent.
JD.com has taken a slightly different approach from Alibaba’s Tmall by managing its own inventory and shipping to consumers, while Tmall is simply the connecting point for sellers and buyers. But even then, the model has done well, and while clearly in second place, JD in the third quarter of 2016 reported net revenue of more than $9 billion, a year-over-year increase of 38 percent.
And how about Amazon? The biggest player by far in the Western world has struggled mightily to repeat its success in the US and European markets in China, but with little or no success and Amazon’s China operation managed to do just 0.8 percent of China’s online retail business during last year. Is it protectionist barriers, or that Amazon doesn’t understand how the Chinese consumer markets operate? It’s an open question, but the result either way is already pretty clear.
China is now the world’s largest digital retail market and is poised this year to overtake the United States to become number one in total retail sales revenues. And the gap between the two markets from there on in, as China’s middle class grows, is expected to get even wider pretty fast.
China’s total online retail sales in 2016 is estimated to have topped $680 billion, accounting for about 20 percent of total retail sales in the country. The research firm Forrester said in a report recently that it expects China to become the first market to reach $1 trillion in online retail sales in 2020 with online’s portion of the total rising to 24 per cent by 2021.
Over the past few years China’s e-commerce market has been growing at an annual rate of more than 30 percent, a rate that is expected to slow somewhat to around 20 percent annual growth by 2020.
Despite the arrival of the Victoria’s Secret store, foreign retailers in China have had a tough time of it generally in recent years. The massive box retail outlets, led by France’s Carrefour, the US giant Walmart and Germany’s Metro set a standard starting in the 1990s, creating a massive market presence due to a lack of Chinese competition, superior expertise and the inbuilt preference for many Chinese consumers to buy foreign-branded goods where possible. But times have changed and these operators are under pressure. The trend now is one of store closures rather than store openings. The British retail brand, Marks & Spencer tried valiantly in the China market in the past decade, but has announced it will close all its China stores.
The rise of online retail is not the only problem these stores face. China is a fiercely competitive market with razor-thin margins and the Chinese approach to doing business time and again is to accept losses to gain market share and kill competition. Coming from a different environment with decision-makers far away, many of the large foreign firms simply cannot keep up. Then there are different requirements with regard to customer service and the fatal assumption that what works in London will work in Shanghai.
Boutique retail is doing well, and in one corner of the market, helping to mop up empty shop fronts are the coffee bars. with Starbucks and Costa and a bunch of other often local players are fighting for a share of the exploding interest in coffee and western snacks amongst the young, urban, educated middle class individuals who are China’s future. Sales of cheese, something western consultants and marketers 20 years ago said the Chinese consumer would never accept, are booming. And in electronics, the major Chinese brands including Huawei and Xiaomi are in the midst of a huge push to expand their retail outlet presence, to repeat the obvious success globally of the Apple Store concept.
Meanwhile, the champ of online retail sales is not signaling the end to offline either. Alibaba has recently announced that it has formed a strategic partnership with Bailian Group, the largest retailer in China by raw store numbers with 4,700 outlets including supermarkets and convenience stores in 200 cities around China. Alibaba can leverage its online positioning and the raw power of its big data resources to find a way to benefit from bricks-and-mortar retail as well. And Bailian is not Alibaba’s only move in the offline retail area – it has invested in other companies including Suning,
And beyond the major cities are tens of thousands of smaller villages and towns served by tiny general stores, but they are now behind roped into the new intermixed formula of online and offline in a way that will allow for a renaissance of many smaller stores, with new ways to connect to customers, inform them of specials, and generally create a sense of localized connectivity.
It’s a brave new world, but the shape of retail’s future in China gets clearer by the day, and the bottom line is that it’s going to do fine. Just with different channels and different players from the past.