Survey of online operations by traditional retailers October 2013

Transcription

1 Survey of online operations by traditional retailers October 2013!"#$%&"'(#)''%*#+),,($)#-)%.)#+/)

2 Table of Contents Introduction 3 Background to the survey 3 Overview 4 Online operational mode by traditional retailers 7 Trends among retailers operating an online business 9 Challenges 13 Conclusion 14 Appendix 16!

3 Survey of online operations by traditional retailers Introduction The population of online shopping continues to power ahead in China. According to iresearch, the transaction value of China s online retail market increased 66.2% yearon-year (yoy) to reach 1,304.0 billion yuan in 2012, accounting for 6.2% of the country s total retail sales (see Exhibit 1). As Chinese consumers are progressively familiar with shopping online, the retail market s growth momentum is set to be sustainable over the coming years. iresearch expects total online sales to reach 3,600 billion yuan in 2016 and account for 10.8% of total retail sales. Exhibit 1: Transaction value of online retailing in China, (estimates) Source: iresearch According to the China Chain Store and Franchise Association (CCFA), 62 retailers among the top 100 retail chain operators embarked on an online retailing business in 2012, although only three achieved online sales revenues of over 100 million yuan. "

4 Background to the survey With the intention of shedding light on the latest developments in online operations by traditional retailers in China, the Fung Business Intelligence Centre, together with the CCFA, conducted a survey in early A total of 45 major, traditional retailers in different retail formats, including department stores, supermarkets, hypermarkets, convenience stores, and specialty store retailers, were included in the survey. Exhibit 2 shows the operational scale of the 45 samples. Exhibit 2: Sample by revenue Overview Business online is booming and many traditional retailers are flocking to this expanding marketplace. For many traditional retailers, the decision of whether or not to go online is no longer yes or no, but rather when and how. Among the surveyed enterprises, 73% of traditional retailers have already begun online operations, of which 85% have entered the online retail market between 2010 and 2012 (see Exhibit 3). For most retailers, online operations are still in their infancy. Many retailers are still in the process of testing the water, to see if their strategies are feasible..!

5 Survey of online operations by traditional retailers Exhibit 3: Years of entry Most traditional retailers surveyed have desisted from very significant investment in their online operations, hence may not have input sufficient capital on advanced technologies, information systems or online marketing initiatives. Typically, the scale of online operations is relatively small. Some 58% of operators invested less than an accumulated 5 million yuan in their online businesses (see Exhibit 4). When asked to describe the investment budget for online operations, they responded by saying that they would invest less than 5 million yuan in their online operations in 2013 (see Exhibit 5). Exhibit 4: Accumulated investment in online operation #

6 Exhibit 5: Investment in online operation in 2013 Moreover, there was little incentive for the surveyed retailers to invest in human capital. Over one-third of those responding said that they employed fewer than 10 staff; only 12% had more than 100 staff responsible for their online operations (see Exhibit 6). Exhibit 6: Number of staff responsible for online operation For a number of years, most traditional retailers did not regard the online platform as a significant channel to drive sales, as most revenues were derived from brick-and-mortar stores. The survey indicates that 58% of surveyed enterprises recorded online sales of less than 5 million yuan in 2012 (see Exhibit 7). Some 85% reported that online sales accounted for less than 5% of total sales revenues, while 79% of retailers received less than 500 daily online orders (see Exhibit 8, 9). $

7 Survey of online operations by traditional retailers Exhibit 7: Online sales revenues in 2012 Exhibit 8: Share of online sales to total sales Exhibit 9: Number of online orders per day %

8 Most survey respondents offered only limited merchandise on their online platform. Some 42% offered less than 1,000 stock keeping units (SKUs) online (see Exhibit 10). The number is far less than the merchandise they offer in their offline stores. Exhibit 10: SKU on online platform Online operational mode by traditional retailers 1. Self-operation and single platform are the norm The survey result shows that 88% of respondent retailers built and operated their own online platform. Self-operation can provide more authority to the retailer, apparently. Of those who use third-party platforms, Taobao and Tmall are the most popular choices (see Exhibit 11, 12). Exhibit 11: Self-operated or via third-party platforms &

9 Survey of online operations by traditional retailers Exhibit 12: Third-party platforms retailers used Some 55% of the surveyed retailers only use one platform, while 45% use more than two platforms. For those which only use one platform, these are all self-operated (see Exhibit 13). Exhibit 13: Single or multi-platforms 2. Most online business is operated by a team or department within the traditional company Most traditional retailers have no clear strategies for their online operations. Some 39% of the surveyed retailers had set up a team within the company to run the online business and there was no separate accounting system for online operations (see Exhibit 14). '

10 Exhibit 14: Business model 3. Lack of interaction and synergy between online and offline operations Although an increasing number of traditional retailers have launched online platforms, their online and offline operations are often separate. Some 42% of the surveyed retailers said that there was no interaction between online and offline operations. Another 42% stated that their online operation had a positive effect on offline sales, while 3% said that their online operation actually had a negative effect on their offline business (see Exhibit 15). Exhibit 15: Effect of online operation to offline buisness ()

11 Survey of online operations by traditional retailers Trends among retailers operating an online business 1. Shifting from price competition to improving services Competing on price to build market share remains the number one marketing strategy for many traditional retailers, as many Chinese consumers are still price focused. Many retailers have tried to squeeze out competitors and increase market share by adopting a low price strategy. Price wars have negatively affected many players with weak operating margins. Some companies even operate at a loss. As a result, some retailers have begun to shift from competing solely on price to competing on services, hoping to increase consumer satisfaction. Improving logistics, consumer experience, a return of goods and exchange policies are some of the ways they enhance services. 2. Traditional retailers embark on M&A to expand online For some traditional retailers, acquiring players that already exist in the market provides a quick way to enter the online retail market. China s online market is still very fragmented and there is plenty of opportunity inherent in market consolidation. More retailers are expected to use the mergers and acquisitions (M&A) route to expand their market presence. Exhibit 16 shows some recent M&A cases in China involving traditional retailers. ((

12 Exhibit 16: Selected M&A cases in China involving traditional retailers Date Companies Details May 2012 Gome, Coo8 1 Gome acquired an 80% stake in Coo8 for 48 million yuan in 2010, and further invested 12 million yuan to acquire the remaining 20% stake in September 2012 Suning, Redbaby 2 Suning acquired Redbaby for US$66 million. After the acquisition, Redbaby will retain its current brand to operate independently in the maternal and child supplies market, but join in the logistics system of Suning. October 2012 Wal-Mart, Yihaodian 3 Wal-Mart completed its further investment in Yihaodian, bringing the former s total ownership stake to approximately 51%. Source: China Chain Store and Franchise Association 3. Retailers market through digitalisation As Chinese consumers are more affluent and more digitally savvy, digital marketing has emerged as one of the most important ways to reach customers. Social media, in particular, is having an explosive impact on consumer purchasing decisions. This is especially the case in China as shoppers are generally more actively engaged in social media than their overseas counterparts. It is believed that influential social media websites can increase conversion sales rates and encourage more customers to purchase items online. Many retailers have tried to leverage the huge user base on SNS websites to promote their products and enhance profitability. Some 74.3% of surveyed samples have set up accounts on Sina Weibo, a microblogging website with more than 500 million registered users; 51.4% have accounts on WeChat, an instant messenger developed by Tencent, with more than 400 million registered users. However, the majority of retailers declared that they are not yet adequately prepared to convert growing online interactions into a sales advantage 4. Traditional retailers are also seen as not being as active as pure click players when interacting with consumers through online social media aspx?type=32&guid={edfdf671-e699-42e8-af46-7f99b6c51793} (!

13 Survey of online operations by traditional retailers 4. M-commerce reshapes the online retail landscape Mobile shopping has become a strong driving force for China s online retail market. Increasing numbers of Chinese consumers now shop and make purchases from their mobile devices. The total transaction value of mobile shopping in China has seen a massive leap, from 11.5 billion yuan in 2001 to 55 billion yuan in 2012 (see Exhibit 17). With easier and more secure online payment, more consumers are expected to buy online. Retailers are putting more effort into expanding their services through mobile devices. Exhibit 17: Transaction value of mobile shopping, 1Q2011-4Q2012 (estimates) Source: iresearch 5. Government commits support for the development of ecommerce The Chinese government has been very supportive towards the country s e-commerce development. Over the past few years, a number of key rules and guiding opinions have been promulgated to promote this. For instance, in April 2013, the State Administration for Taxation issued the Measure for the Management of Online Invoices. The measures stipulate that merchants on online retail platforms need to issue official invoices with each purchase, starting from April This allows the government to better tally an enterprise s tax bill and better regulate the online retail market. ("

14 The measures are not expected to have a large effect on purchases directly from major B2C e-commerce sites, as many have already provided their customers with official invoices. But it may lead to price rises on C2C sites like Taobao, where plenty of individual shop owners which previously did not trouble themselves to issue invoices are now required by law to do so. Exhibit 18 lists the major e-commerce policy initiatives launched by the government over recent years. Exhibit 18: Major recent e-commerce policies launched by the Chinese government Rules and Effective regulations date Launched by Highlights Measures for the April 2013 State Merchants on online retail platforms Management of Administration are required to issue official invoices Online Invoices of Taxation with each purchase. Circular on Further April 2013 National Further improve the trans- Promotion of Development departmental working coordination Sound and Fast and Reform mechanism, boost innovation E-commerce Commission in the e-commerce sector, promote Development with 12 other a safe and credible environment for government e-commerce transactions. departments Circular on Issues February National Establish an expert consulting Concerning the 2012 Development committee for building pilot cities Promotion of and Reform for e-commerce, regulating online Sound and Fast Commission payment, promoting application of E-Commerce with 7 other IC cards, promoting e-commerce Development government standardisation. departments Guiding Opinions January Ministry of Encourage and support large retail on Promoting the 2012 Commerce enterprises to set up online stores; Development of support the establishment of third- Retail Trade During party transaction platforms for the 12th Five-Year SMEs. Plan Period Guiding Opinions October Ministry of Establish regulations for online for the 2011 Commerce retailing. Online retail sales are Development of forecast to account for 9% of the E-commerce in total retail sales of consumer goods the 12th Five-Year by the end of Plan Period (*

15 Survey of online operations by traditional retailers Rules and Effective regulations date Launched by Highlights List of July 2011 Ministry of 83 enterprises were selected as the e-commerce Commerce e-commerce Demo Enterprises. Demo Enterprise Notice for April 2011 Ministry of Online shopping platform operators Combating Commerce should take responsibility to Intellectual Property with 8 other monitor whether goods sold online Infringement and government infringe intellectual property rights Counterfeits in departments and they should ensure that the Online Shopping goods are genuine products. Circular on January Ministry of Online retailers must offer sufficient Regulating Online 2011 Commerce information on promotional items. Shopping Promotional Activities Source: Chinese Government websites, Fung Business Intelligence Centre According to the State Administration for Industry and Commerce, China s first e-commerce law is being drafted and is on the agenda of the 12th National People's Congress. The law is expected to tackle malpractices such as unfair competition, lack of intellectual property right protection and tax evasion. To better protect consumer rights, the Chinese legislature has put forward a draft revision to the consumer rights law. It is proposed that consumers should have the right to return goods within seven days and receive a full refund. However, some industry experts believe that the unconditional right to return goods within seven days may damage smaller online businesses. (#

16 Challenges Traditional retailers online business operations have yet to reach maturity. Retailers are facing a host of challenges ahead. Exhibit 19 summarises these as related to retailers covered by the survey. Exhibit 19: Challenges of operating online 1. Lack of professionals for online operation The operating models for online and physical stores are very different. Currently, there is a lack of qualified staff in the online segment, and the turnover rate is also very high. Some 60% of surveyed retailers said that the lack of professionals constrain their development online. Many traditional retailers initially allocated staff from their internal IT departments to operate the online platform, but many IT staff do not have the know-how to run an online business. 2. Unhealthy profit model for online business Online retailers in China are mostly capital-driven, not profit-driven. They had largely attempted, until recently, to take market share by adopting a low price strategy despite low or even negative profit margins. This is certainly a sign of unhealthy competition. Although operators realise that it is difficult for them to succeed online without investing heavily in technologies and advanced systems, many traditional retailers still hesitate to make significant investment in online infrastructure. Instead, they have largely preferred to use their capital on continuing price wars. ($

17 Survey of online operations by traditional retailers 3. Low customer loyalty Many Chinese consumers still look for discounted items online, and they have a somewhat under developed sense of customer loyalty. Most hypermarket and department store online platforms have similar product offerings; they also provide similar after-sale services, delivery and returns policies or exchange policies. The lack of uniqueness is one of the major reasons for low consumer stickiness. Retailers should focus on providing more unique products and services. 4. No synergies between online and offline operations Traditional retailers usually have a strong physical store presence, but find it hard to leverage their offline resources in online operations. For instance, many domestic retailers are still regionally focused, so their logistics and supply chain networks work well regionally but not nationally. Also, inconsistent online and offline pricing strategies are a challenge for many. 5. Unclear positioning and online strategies Many retailers do not construct clear positioning for their online operations. Many go online to imitate other players. They hesitate to make sufficient investment in their online businesses, and continue to experiment in their online strategies. Conclusion Retailers generally have a positive view towards the online market in China. In this survey, retailers expressed their expectations that online retail sales would reach 12% of total sales by Some leading retailers are investing more resources online and restructuring their cyber businesses, introducing greater efficiencies and compatibility with offline channels in terms of merchandise, pricing and consumer experience. Moreover, some traditional retailers are seen to be moving gradually towards an omnichannel operating model. They are seeking to pull together multi- and cross-channel offerings, including physical stores, online platforms, mobile devices and social media, to create a seamless shopping journey. With the emergence of the omni-channel, retailers will need to equip themselves with the appropriate IT systems and enrich their product and service offerings to embrace an entirely new concept in China s retail medium. (%

18 Appendix Appendix 1: List of enterprises among the top 100s that have launched their own online purchasing platforms, as of April 2013 Enterprise Website 1 Suning Commerce Group Gome Electrical Appliance Group Wal-Mart (China) Investment Co., Ltd Intime Retail (Group) Co., Ltd. 5 Yum! Brands Inc., China Division McDonald's (China) Co., Ltd. 7 Bailian Group Co., Ltd. Lianhua Supermarket Holdings Co., Ltd. 8 ShenZhen Nepstar Chain Drugstore Ltd. 9 Guangzhou Watson s. Food & Beverage Co., Ltd Metro Group Co., Ltd. (China) 11 Beijing Wangfujing Department Store (Group) Co., Ltd. 12 Carrefour China Inc Rainbow Department Store Co., Ltd New World Department Store China Ltd Liqun Group Shareholding Co., Ltd PCD Stores (Group) Ltd Shandong Commercial Group Corporation (Yinzuo Group) 18 Wuhan Zhongbai Group Co., Ltd Guangzhou Grandbuy Co., Ltd Ito-Yokado Co., Ltd Hisap High Technology Corporation 22 Nonggongshang Supermarket (Group) Co., Ltd Dalian Dashang Group Co., Ltd Easy Joy Convenience Store of SINOPEC 25 Auchan (China) Investment Co., Ltd Liaoning Xinglong Happy Family Business Group 27 Beijing D-phone Commercial & Trade Co., Ltd Parkson Retail Group Ltd Chengdu Hongqi Chain Co.,Ltd Hefei Department Store Group Co., Ltd Shijiazhuang Beiguo Renbai Group Co., Ltd Guandong Jiarong Supermarket (SPAR Guangdong) (&

19 Survey of online operations by traditional retailers Enterprise Website 33 Renrenle Commercial Group Co., Ltd AEON Group 35 Qingdao Weekly Group Co Sanjiang Shopping Club Co., Ltd Shandong Weifang Department Store Group Co., Ltd Chongqing Peace Chain Drugstore Co., Ltd China Zhenhua Group Science & Technology Co., Ltd. 40 Guangzhou Friendship Group Co., Ltd Hunan Friendship & Apollo Holding Co., Ltd A-Best Supermarket Co., Ltd Changchun Eurasia Group Co., Ltd Chongqing New Century Department Store Co., Ltd Eading Group Co., Ltd Changsha Tongcheng Holdings Co., Ltd Jiangsu Wenfeng Great World Chain Development Corporation 48 Beijing Capital Retailing Group Co., Ltd Anhui Huishang Group Co., Ltd C & U Group Co., Ltd Wuhan Wushang Group Co., Ltd China Resources Vanguard Co., Ltd Shandong Newstar Group Co., Ltd Qingdao Likelai Co.,Ltd New Cooperation Joint-Stock Trade Chain Co., Ltd. 56 Wuhan Zhongnan Commercial Group Co., Ltd Handan Sunshine Department Store. (Group) Co. Ltd Shandong Quanfuyuan Commercial Group Co., Ltd. index/index.jsp 59 Beijing Funtalk Century Telecommunications Equipment Retail Chain Co., Ltd. 60 Xiongfeng Group 61 Nanjing Central Emporium Co., Ltd Guangdong Dashenlin Chain Drugstore Co., Ltd. Source: China Chain Store and Franchise Association ('

20 Appendix 2: Sales of selected B2C websites in 2012 Revenues in 2012 Rank Websites (million yuan) Main category 1 Tmall 200, All category 2 JD.com 60, All category 3 Suning 18, All category 4 Amazon china 10, All category 5 51Buy 6, All category Yihaodian 6, All category 7 Vancl 6, Apparel 8 Dangdang 5, All category 9 QQ Mall 4, All category 10 Gome (incl. Coo8) 4, All category 11 VIPshop 4, Discounted goods 12 Jumei 2, Cosmetics 13 Xiu 1, Fashion 14 Lefeng 1, Cosmetics 15 Moonbasa 1, Apparel 16 D.Phone 1, Mobile handsets 17 M Apparel 18 Yougou Footwear and accessories 19 Womai Food 20 Yintai.com Fashion 21 Xinxing All category 22 Huimai C consumer electronics 23 Rujigou All category 24 Yinzuo All category 25 Pinyi C consumer electronics 26 Baiyjk Healthcare products Source: China Chain Store and Franchise Association!)

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