Retail Market in China September 2013

Transcription

1 Retail Market in China September 2013!"#$%&"'(#)''%*#+),,($)#-)%.)#+/)

2 Table of Contents Executive summary 4 Overview 6 Competitive landscape 13 Key highlights 37 Government initiatives 44 Challenges 48 Conclusions and implications 52 Appendix 55!

3 Retail Market in China, 2013 China is in the course of economic rebalancing, moving towards a consumption-driven economy. This presents huge opportunities for retailers, with foreign and local firms alike continuing to expand into the market. As China s retail sector evolves, market players are searching for ways to better adapt to a changing landscape. However, competition is increasingly fierce and some unresolved problems remain. This report provides an overview of China s retail market and assesses competitive prospects, offering key highlights on developments under different retail formats. We also review the industry s latest developments and major challenges. "

4 Executive summary China is now the world s second largest retail market. Total retail sales of consumer goods doubled to 20.7 trillion yuan in 2012 from 10.8 trillion yuan in Furthermore, China is expected to surpass the United States to become the world s largest consumer market within five years 1. The country s retail market is evolving as quickly as it grows. With higher incomes and increasing affluence, consumers are demanding better quality and unique products and services. Also, new technologies are revolutionising the way retailers are running their businesses. Key aspects of this transformative phase include: Aggressive store expansion is replaced by improving store productivity. Some domestic retailers used to adopt aggressive expansion strategies to boost brand visibility, only to find that such disorganised business expansion created many problems. Hence, a number of brand owners have started to close unprofitable stores and focus on improving core competencies. Retailers launch their own private labels or proprietary brands. Amid increasing competition, retailers are looking for ways to stand out from their competitors. Launching private labels or proprietary brands is a profitable way for retailers to underline uniqueness, pushing up margins while improving customer loyalty. Yet, private label penetration is still at a low level in China. A lack of experience, skills and strategies on how to launch private labels remain significant challenges. Mobile-commerce is increasingly popular, as is mobile payment. The mobile sales channel has become extremely important. Transaction values have seen a tremendous leap, up 181.0% yoy to reach billion yuan in 2Q13. Increasing numbers of e-payment providers have launched mobile services, making such payments increasingly easier, safer and more popular. Digital marketing is ever more prevalent. Social media is having an explosive impact on consumer purchasing decisions. Influential social media websites are believed to be increasing the sales conversion rate and encouraging more customers to purchase goods. Many retailers have been leveraging huge SNS website user databases to promote products and enhance profitability. 1 #

5 Retail Market in China, 2013 Improving customer relationship management. An effective customer loyalty programme is seen as instrumental in attracting and retaining customers. But while retailers have been running their membership programmes for a significant period, many simply collect data from customers without fully utilising the information. Also, many retailers have no centralised customer database for effective management. This is an area that is receiving increased attention. The concept of the omni-channel emerges. The concept of the omni-channel is still very new in China. Offline and online operations of many retailers are often separated, with limited interaction. However, some retailers are starting to take a closer look at numerous aspects of omni-channel strategising and their impact on business. Online and offline integration is expected to become an inevitable industry trend. Tier 3 and tier 4 cities become the development focus. With ongoing urbanisation and rising incomes, consumption is growing fast in lower tier cities. Tier 3 and tier 4 cities are expected to be the key focus for China s retail business development over the next few years as competition gets tougher in tier 1 and tier 2 cities. M&A continues to be an attractive avenue fuelling growth. Mergers and acquisitions (M&A) provide a fast route to greater market presence and penetration within different consumer segments. Indeed, several retailers are using this approach to extend their market presence. As a result, M&A activities are expected to continue pushing China s retail market growth. Such developments paint a rosy picture for the future of China s retail sector, but challenges still remain. For one, increased operating costs have squeezed profit margins for many retailers. At the same time, duplicated investment in some cities, lack of centralised city planning and mismanagement are all giving rise to such problems as traffic congestion, tougher competition, poor customer footfall, uneven trade mix, high vacancies and commercial disputes. Soaring logistics costs and relatively weak transport infrastructure add further hurdles for retailers and distributors. Faced with the headwinds of increasing competition and more demanding consumers, the retail winners are those which constantly innovate and improve their business practices. Indeed, to succeed, enterprises need to anticipate or at least keep abreast of the latest market developments. $

6 % Overview

7 Retail Market in China, 2013 China becomes the world s second largest retail market The total retail sales of consumer goods in China doubled to 20.7 trillion yuan in 2012, from 10.8 trillion yuan in 2008 (see Exhibit 1). According to the Ministry of Commerce (MOFCOM), China is the world s second largest retail market after the United States. Exhibit 1: Total retail sales of consumer goods, Source: National Bureau of Statistics Having said that, retail sales growth has seen some signs of deceleration over recent years. In 2012, the growth of total retail sales of consumer goods was 14.3% year-onyear (yoy), the lowest since As to the retail market in 1H13, total retail sales of consumer goods rose nominally by 12.7% yoy to 11.1 trillion yuan, while the growth rate was 1.7 percentage points (ppt) lower than in 1H12. However, in real terms, retail sales increased 11.4% yoy in 1H13, 0.2 ppt higher than in 1H12. By month, nominal retail sales growth reached 15.2% yoy in December 2012, and then decelerated significantly to 12.3% yoy in January - February The growth rate slowly picked up from March to June 2013 (see Exhibit 2). &

8 Exhibit 2: Nominal growth of total retail sales of consumer goods by month, January 2012 June 2013 Source: National Bureau of Statistics Retail sales of consumer goods: mode of sales Retail sales of commodities reached 9.9 trillion yuan in 1H13, up by 13.2% yoy. Retail sales for enterprises above a designated size in the catering industry saw a significant decline by 2.2% yoy in 1H13 to 8.7% yoy (see Exhibit 3). This is mainly attributable to the new Chinese leadership s increasing efforts to curb government spending on lavish banquets. Exhibit 3: China s total retail sales by mode, FY12 1H13 yoy growth (%) FY12 1H13 Total retail sales of consumer goods* Commodities of which: enterprises above a designated size** Catering of which: enterprises above a designated size Source: National Bureau of Statistics * Total retail sales of consumer goods refers to the sum of retail sales of commodities sold by wholesale retailing, catering, publishing, post and telecommunications and other service industries to urban and rural households for private consumption, and to social institutions for public consumption. ** Enterprises above a designated size refer to enterprises with annual sales of five million yuan or more and with an employee strength of 60 or more. '

9 Retail Market in China, 2013 Retail sales of consumer goods: commodities The retail sales of commodities of enterprises above a designed size rose 11.7% yoy to reach 5.2 trillion yuan in 1H13. Among various types of goods, sales of gold, silver, and jewellery saw a 29.7% yoy jump in 1H13, driven by a drop in gold prices. Sales of home appliances and video equipment also achieved growth of 15.3% yoy in 1H13, due partly to the positive outcome of the government s energy-saving product promotion project. By contrast, growth rates for sales of clothing, shoes, hats and textiles, and cosmetics slowed to 12.5% yoy and 12.7% yoy respectively (see Exhibit 4). Exhibit 4: China s nominal retail sales growth of enterprises above a designated size, by commodity, FY12 1H13 yoy growth (%) FY12 1H13 Change Grain, oil, food, beverages, tobacco, and liquor Clothing, shoes, hats and textiles Cosmetics Gold, silver, and jewellery Daily use products Sports and entertainment products Home appliances and video equipment Chinese and western medicine Stationery and office accessories Furniture Telecommunications equipment Petroleum and related products Automobiles Building and decoration materials Source: National Bureau of Statistics Retail sales of consumer goods: urban vs. rural Retail sales are primarily driven by the urban population, which accounted for 86.5% of total retail sales in 1H13; however, rural retail sales grew at a faster pace. Urban retail sales increased nominally by 12.5% yoy to 9.6 trillion yuan in 1H13, 1.8 ppt lower than in 1H12; while rural retail sales rose 14.3% yoy to 1.5 trillion yuan in 1H13, 0.2 ppt lower than in 1H12. (

10 The sharp increase in rural incomes has been a positive driver for rural spending. The per capita net income of rural households has grown steadily since 2010, reaching 7,917 yuan in The per capita disposable income of urban households increased 9.6% yoy in 2012 to 24,565 yuan in real terms. However, the per capita disposable income for urban households was still three times more than for rural households; urbanites still remain the major contributors to national total retail sales (see Exhibit 5). Exhibit 5: Urban and rural incomes, Source: National Bureau of Statistics Consumers and entrepreneurs turn pessimistic due to weaker economic sentiment The consumer confidence index has declined since February 2013 and stayed below the neutral reading of 100 for two consecutive months from May, indicating weaker economic sentiment over the period to June (see Exhibit 6). )*

11 Retail Market in China, 2013 Exhibit 6: China s consumer confidence index, January June 2013 Source: National Bureau of Statistics Over the same period, the national entrepreneur confidence index also dropped from in 1Q13 to in 2Q13 (see Exhibit 7), indicating that entrepreneurs in wholesale and retail trades were less confident about the economy. Industry players became less optimistic about their businesses, due to weaker market demand. Exhibit 7: China s entrepreneur confidence index, 1Q13-2Q13 1Q13 2Q13 National Manufacturing Construction Wholesale and retail trades Transport, storage and postal services Accommodation and catering trades Information transmission, software and information technology services Real estate trade Social services Source: National Bureau of Statistics 73.8% of the enterprises said that profitability in 2Q13 was normal or better than normal. The confidence index for large enterprises was higher than for mid-sized and small enterprises ))

12 Luxury market slows as anti-gift regulations take root Luxury goods sales in China were projected to reach Euros 15 billion in Taking the Greater China area as a whole, including Hong Kong, Macau and Taiwan, the total size of the luxury market was expected to reach Euros 27.3 billion, surpassing Japan and becoming the world s second largest luxury goods market in The rapid increase of household disposable incomes, fast-growing individual wealth, a more affluent middle class, ongoing urbanisation, and rising demand for luxury goods in smaller cities along with a surge in the number of credit card users all contributed to driving China s luxury market. However, the growth of luxury sales has started to decelerate since 4Q11. Bain & Company expected 2012 to show 7% yoy luxury consumption growth in China, down from 30% yoy in 2011 and 27% yoy in The slowdown was partly attributable to weak economic growth, as well as the increasing preference of Chinese consumers to shop for luxury goods abroad. Moreover, the move by China s new leaders to curb government spending on luxury items as gifts might also have had a negative impact on luxury sales. As shown in Exhibit 8, many global luxury brands have slowed their expansion in China over recent years. Recently, some luxury retailers have shifted their focus from aggressive store openings to improving store productivity; others have started to make inroads into lower-tier cities. In fact, luxury brands no longer see tier 1 cities as a springboard to raise their profile, but have started to push their sales nationwide. Exhibit 8: Number of selected luxury brand stores in China, Change in Change in 2011* 2012** store numbers 2013*** store numbers Burberry Ermenegildo Zegna Gucci Louis Vuitton Prada Source: Company websites; compiled by Fung Business Intelligence Centre *As of January 2011 **AS of February 2012 ***As of February Bain & Company, 2012 Luxury Goods Worldwide Market Study, October 2012 )!

13 Retail Market in China, 2013 Competitive landscape )"

14 Analysis of the Top 100 retail chain operators The Top 100s see steady development Early this year, the China Chain Store and Franchise Association (CCFA) released its annual list of the Top 100 Retail Chain Operators in China (the Top 100s) 4. Total sales of the Top 100s in 2012 were 1,870.0 billion yuan, up 10.8% yoy. It is noteworthy that total sales of the Top 100s increased at the slowest pace since 2007 and the growth rate was slower than that of the national total retail sales of consumer goods over two consecutive years. The significant slowing of Top 100 sales was due to the combined impact of a gradually diminishing demographic dividend, changing consumer behaviour and intensified competition from online retailers (see Exhibit 9). Exhibit 9: Performance of the Top 100 retail chain operators, Year Retail sales (billion yuan) yoy growth (%) , , , , * , Source: China Chain Store and Franchise Association, Fung Business Intelligence Centre *Adjusted growth rate As shown in Exhibit 10, total sales of the Top 100s accounted for 9.0% of total retail sales of consumer goods. China s retail market remains highly fragmented. Exhibit 10: The Top 100s share in national retail sales, Source: China Chain Store and Franchise Association 4 shcid=402881e91c59dbcb011c59df8a2b0002 )#

15 Retail Market in China, 2013 According to the CCFA, the Tops 100s in tier 3 and tier 4 cities have developed and expanded faster than those in tier 1 and tier 2 cities, mainly due to relatively saturated retail markets in tier 1 and tier 2 cities. The average sales growth among leading Top 10 enterprises in tier 3 and tier 4 cities was 18% yoy, while the growth rate for store numbers was 17% yoy. Both figures were higher than for tier 1 and tier 2 cities, at 6% yoy and 2% yoy respectively. Exhibit 11 shows the Top 10 retail chain operators ranked by total retail sales in Suning Commerce Group (Suning), with total sales of 124 billion yuan, has overtaken Bailian Group to become China s number one chain retailer by total sales. Exhibit 11: The top 10 chain retailers, 2012 (Rank by retail sales) Sales in 2012 (million yuan, yoy Rank Name of company pre-tax) growth (%) 1 Suning Commerce Group Co., Ltd. 124, Bailian Group 122, Gome Electrical Appliances Holding Ltd. 117, China Resource Vanguard Co. Ltd. 94, RT-Mart Shanghai Ltd. 72, Wal-Mart (China) Investment Co., Ltd. 58, Chongqing General Trading (Group) Co., Ltd. 54, Yum! Brands Inc., China Division 52, Lushang Group 49, Carrefour China Inc. 45, Source: China Chain Store and Franchise Association Amid intensifying competition from online retailers, many traditional retailers have set up their own online platforms. 62 of the Top 100s have their own online stores in 2012, up from 31 in 2009 (see Appendix 1). Foreign retailers in the Top 100s outperform domestic players Among the Top 100s, foreign players generally perform better than domestic players in terms of operating efficiency and gross profit margins. In 2012, there were 20 foreign enterprises in the Top 100 list, of which RT-Mart continued to hold the top spot, followed by Wal-Mart and Yum!Brands (see Exhibit 12). )$

16 Exhibit 12: Foreign retail chains among the Top 100s in China, sales Rank Rank (million yoy No. of yoy in 2012 in 2011 Enterprise yuan) change (%) stores change (%) 1 1 RT-Mart Shanghai 72, Wal-Mart (China) Investment 58,000 * Co., Ltd. 3 3 Yum! Brands Inc., China 52, , Division 4 2 Carrefour China Inc. 45, Best Buy Co., Inc. 24, Tesco China 20,000 * Parkson Retail Group Ltd. 19, Metro Jinjiang Cash & Carry 17, Co., Ltd. 9 9 Lotte Mart 16, Auchan (China) investment 16, Co., Ltd New World Department 16,000 * Store China Limited C.P. Lotus Corporation 12,493 * Zhengzhou Dennis 12, Department Store Co., Ltd A.S. Watson & Co., Ltd. 12,000 * , (Guangzhou) McDonald s Corporation 9,000 * , (China) AEON Co., Ltd. 8, IKEA China 7, Ito-Yokado Co., Ltd 7, Park n Shop (China) 4, Emart China 2,400 * Total 433, , Source: China Chain Store and Franchise Association *Note: Estimated value Also, the gross profit margins for foreign players are usually higher than for domestic players and the differences are becoming more significant each year. Exhibit 13 compares the gross profit margins of domestic and foreign retailers. )%

17 Retail Market in China, 2013 Exhibit 13: A comparison of gross profit margins for domestic and foreign retailers, Gross profit margin Domestic players 14.3% 15.9% 15.9% Foreign players 14.7% 16.7% 16.8% Source: Deloitte, China Chain Store and Franchise Association A comparison of domestic and foreign retailers Domestic retailers: eager to extend their national footprint Most domestic retailers are regionally focused, except for some consumer electronics appliance specialty retailers such as Suning and Gome. In fact, most domestic retailers, including Dalian Dashang Group, Wuhan Wushang Group and Shandong Yinzuo Group, focus their operations on respective regional markets due to huge regional differences in consumer tastes across the country, supply chain complexities and strong local networks. This is especially true for convenience store and department store operators in China. Some domestic players have started to expand their footprint nationwide through mergers and acquisitions (M&A). For instant, Wangfujing Department Store acquired a majority stake in PCD Stores with a view to expanding its overall market share and geographical coverage across China, while diversifying its business scope. Then again, domestic players are making efforts to differentiate themselves from aggressive competitors. Major initiatives include conducting market studies to understand consumer needs; specialising in certain merchandise categories; improving supply chain management and better engaging consumers through various social network channels. Foreign retailers: shifting from scale expansion to improving core competitiveness Over recent years, foreign retailers in China have encountered numerous challenges (see Box 1). Many are reportedly losing money in the market and have slowed expansion (see Exhibit 14). As seen in Exhibit 15, a number of renowned foreign players have even closed some stores. )&

18 Exhibit 14: New store openings for selected major foreign retailers, Source: China National Commercial Information Centre Exhibit 15: Selected examples of foreign retail store closures Closing Opening Store location City date date Supermarket Tesco Zhenning branch Shanghai May-13 Jun-05 Hugeo City branch Taizhou, Jiangsu Aug-12 Jan-11 Guangyu branch Tieling, Liaoning Sep-12 Feb-09 Tushan branch Bengbu, Anhui Aug-12 Jan-10 Huaihe branch Changzhou, Jiangsu Aug-12 Jan-10 Lotte Mart Binzhou branch Binzhou, Shandong Aug-12 Dec-07 Wal-Mart Huangshan branch Hefei, Anhui Jul-13 Jun-11 Yuanling branch Shenzhen, Guangdong Apr-13 Apr-03 Times Square branch Xiamen, Fujian May-12 Sep-05 Park n Shop Westgate Mall branch Shanghai May Department stores Isetan Taiyuan Street branch Shenyang Jun Ito-Yokado Wangfujing branch Beijing Jan-13 Nov-05 New World Taizhou branch Taizhou, Jiangsu Nov-12 Jan-09 Ningbo branch Ningbo, Jiangsu Feb-12 Nov-04 AEON Chaoyang branch Beijing Mar-12 Jun-10 Parkson Shijiazhuang branch Shijiazhuang, Hebei Aug Dashizi branch Guiyang Jun Jinfenghuang branch Guiyang Dec Hongqiao branch Shanghai Aug-12 Dec-02 Source: China National Commercial Information Centre; compiled by Fung Business Intelligence Centre )'

19 Retail Market in China, 2013 Box 1: Major challenges encountered by foreign retailers in China Some major hurdles facing foreign retailers: at favourable prices to establish new stores. retailers. regional retailers have usually increased synergies when negotiating with regional distributors. Also, operating in multi-format mode provides greater flexibility. So if hypermarket growth slows a retailer can shift focus to opening more convenience stores. differ significantly from their original operations, a strategy which may not suit the needs of the China market. Facing unfavourable market conditions, foreign enterprises have adapted their China strategies by shifting from large-scale expansion to improving core competencies. For instance, Wal-Mart announced in April 2013 that it would invest 5 billion yuan on revamping and upgrading 50 of its existing stores. Other foreign retailers are actively seeking partnerships with local players. In August 2013, Tesco confirmed that it will team up with China Resources Enterprise Ltd (CRE) to set up a joint venture in China. Analysis of major retail formats Overview Among all major retail formats, Internet retailing recorded the highest sales growth for As to traditional channels, specialty stores in general saw higher growth than grocery retailers such as hypermarkets and supermarkets (see Exhibit 16). )(

20 Exhibit 16: Yoy sales growth in retailing, by retail format, 2012 yoy growth (%) Total 12.8 Store-based retailing 10.8 Grocery retailers Non-grocery retailers 12.7 Apparel specialist retailers Electronics and appliance specialist retailers 6.8 Health and beauty specialist retailers 12.3 Home and garden specialist retailers 13.6 Leisure and personal goods specialist retailers 14.8 Mixed retailers Other non-grocery retailers 12.1 Non-store retailing 65.2 Direct selling 20.0 Home shopping 24.0 Internet retailing 84.4 Vending 11.5 Source: Euromonitor In terms of gross profit, all retail formats except convenience stores witnessed negative yoy growth in Convenience stores gross profits increased slightly by 0.8 ppt compared with 2011 (see Exhibit 17). Exhibit 17: Gross profit margin, by retail format, (%) 2011 (%) yoy change in ppt Convenience stores Supermarkets Hypermarkets Professional stores Specialty stores Department stores Average Source: China Chain Store and Franchise Association 5 Grocery retailers: convenience stores, discounters, forecourt retailers, hypermarkets, supermarkets, independent small grocers 6 Specialist retailers: specialty stores, professional stores 7 Mixed retailers: department stores, variety stores, mass merchandisers, warehouse clubs!*

21 Retail Market in China, 2013 As shown in Exhibit 18, specialty stores recorded the highest net profit margin of 4.15% in 2012, and professional stores the lowest net profit margin of 1.30%. The net profit margin for supermarkets dropped by as much as 1.05 ppt to 2.45% last year. Exhibit 18: Net profit margin, by retail format, (%) 2011 (%) yoy change in ppt Convenience stores Supermarkets Hypermarkets Professional stores Specialty stores Department stores Average Source: China Chain Store and Franchise Association Exhibit 19 and 20 show the selected retail performance indicators of sample stores by retail format 8. Department stores led in terms of operating area, number of employees, retail sales, average sales per sqm and average customer spending. Convenience stores had an edge in gross margin. Exhibit 19: Performance of selected sample store by retail format, 2012 Department Convenience store Hypermarket Supermarket store Operating area (m²) 42,038 11,863 2, Number of employees 1, Retail sales (million yuan) 1, Average sales per m² (yuan/ m²) 28,000 26,000 20,000 42,000 Average customer spending (yuan/ visit) Gross margin (%) Source: China Chain Store and Franchise Association 8 Sample stores are the stores with operational areas within 25% of the industry average; excluding outliners!)

22 Exhibit 20: Performance of selected sample store by retail format, a yoy comparison with 2011 yoy change Department Convenience in 2012 stores Hypermarkets Supermarkets stores Operating segment 7.6% 17.8% -5.4% 33.3% Number of employees 5.7% -1.5% -10.8% -14.0% Retail sales -7.0% -3.8% -9.5% 5.9% Average sales per m² -10.5% -11.6% 8.1% -1.6% Average customer spending -12.5% 3.8% -6.5% 28.0% Gross margin 0.3 ppt 0.8 ppt 0.4 ppt -1.9 ppt Source: China Chain Store and Franchise Association It is worth noting that the performance of sampled department stores showed a marked deterioration in 2012, with retail sales, average sales per sqm and average customer spending falling by 7%, 10.5%, and 12.5% respectively. Department stores China s department store sector is heavily dominated by regional players, and the market is highly fragmented. Many players have struggled over recent years. As well as facing fierce competition from shopping malls, specialty stores, and online retailers, they have also been undermined by their commission-based, concessionary model. As shown in Exhibit 17, department stores gross profits from sales last year dropped by 1.1 ppt to 17.5%; the net profit margin from sales decelerated to 2.15% and was below the industry average of 2.46%. Exhibit 21 shows the top 10 department store operators by sales.!!

23 Retail Market in China, 2013 Exhibit 21: Top 10 department store operators by sales, 2012 Country Sales yoy No. of yoy Rank Enterprise of origin (million yuan) growth (%) stores growth (%) 1 Shanghai Friendship China 570, Group Incorporated (Shanghai) Company 2 Dalian Dashang China 372, Group Co., Ltd. (Dalian) 3 Chongqing Department China 333, Store Co., Ltd. (Chongqing) 4 Yinzuo Group Co., Ltd. China 320, (Shandong) 5 Changchun Eurasia China (Jilin) 241, Group Co., Ltd. 6 Beijing Wangfujing China 215, Department Store (Beijing) (Group) Co., Ltd. 7 Rainbow Department China 203, Store Co., Ltd. (Shenzhen) 8 Parkson Retail Group Malaysia 197, Ltd. 9 Wenfeng Great World China 194, Chain Development (Jiangsu) Corporation 10 Golden Eagle Retail China 186, Group Ltd. (Nanjing) Source: China Chain Store and Franchise Association; modified by Fung Business Intelligence Centre *Note: Estimated value Major trends i. Integration of online and offline channels To extend customer reach and further penetrate the market, many department stores have launched online platforms. Currently, most department store operators outsource their online operations to third parties. They are running at a loss. Some operators are actively working on integrating their online and offline channels.!"

24 Case: Intime Retail Group Intime was one of the first China department store operators to set up an online virtual store. Its online store, Yintai.com, started in late Yintai.com is operated by Zhejiang Intime Electronic Commerce Co., Ltd. (while Intime owns 40% of the company). Yintai. com showed a 100 million yuan loss in 2012 despite reporting a stunning yoy sales growth of 380%. Intime s online and offline channels target different customer groups. The online platform targets the mass market, while the offline stores target mid- and highend consumers. Products offered by the online and offline platforms are not the same, with overlapping rate lower than 50%. Going forward, Intime is set to fully integrate its online and offline channels. It intends to create a unified client database and offer the same merchandise and shopping experience to its customers across all sales channels. ii. Department store operators refine market strategies and strengthen merchandise categories Competition is fierce in the department store segment. To distinguish themselves against competitors, some department store operators have started to revamp stores to target the premium segment. Wangfujing Department Store has introduced its sub-brand hq to target the high-end market; Dalian Dashang has opened its Mykal Department Store to cater to higher-end consumers, while Kingson Department Store targets trendy youngsters. Some department store operators have started to focus on certain merchandise categories. Realising that consumers pay more attention to home products, Wuhan Zhongbai Commercial Group has teamed up with home product designers from Japan, Taiwan and Hong Kong to offer unique collections. iii. Players strive to enhance customer experience To survive the highly competitive marketplace, some department store operators differentiate themselves by incorporating more entertainment elements and catering services. The department store plus shopping mall business model is becoming more popular. This allows operators to offer a better shopping experience and diversify income streams. Shopping malls Shopping malls continue to gain in popularity. Consumers can enjoy one-stop shopping conveniently under one roof. According to a report by Deloitte and CCFA, as at the end of 2011 China had a total of 2,812 shopping centres open for business, with an aggregate total commercial building floor space of 177 million sqm. It is estimated that new commercial building floor space for China s shopping centres will surpass 35 million!#

25 Retail Market in China, 2013 and 44 million sqm in 2012 and 2013 respectively; by the end of 2013, China s shopping inventory will occupy 250 million sqm. Exhibit 22 shows the number of newly-opened shopping centres in China over recent years. Exhibit 22: Number of newly opened shopping centres in China, (estimates) Source: Mall China Information Centre, Deloitte, China Chain Store and Franchise Association Major trends i. Shopping malls spring up in key city suburb areas Suburb areas of tier 1 cities are becoming new development targets due to highdensity shopping malls and rising rents in city centres. Also, the growth of inter-city transportation and the popularity of automobiles make it possible to travel conveniently. As a consequence, shopping centres in suburban areas have larger floor areas than those in city centres. ii. Oversupply of shopping malls is common Due to stringent measures imposed by the government to cool the residential property market, many property developers have diverted their attention to the commercial property market. Local governments have offered incentives to support shopping centre development. These policies have led to an oversupply of shopping malls. According to Knight Frank 9, the average vacancy level for tier 1 cities in China was 8.1% in 2H12, while the average vacancy rate for tier 2 cities over the same period was 9.5%. Exhibit 23 shows the vacancy rates of prime shopping centres in selected cities. 9

26 Exhibit 23: Vacancy rates of prime shopping centres, 2H12 Source: Knight Frank iii. Shopping malls scale up in size Shopping malls are becoming larger in scale and have more extensive floor spaces to incorporate differentiated merchandise and services. Jones Lang LaSalle expected that the average mall size would increase from 710,418 square feet in 2005 to over 947,224 square feet in iv. Catering and entertainment elements prevail To enhance the consumer experience and prolong the time customers spend in the shopping malls, many malls have expanded their catering and entertainment services. For instance, Popark in Guangzhou has undertaken extensive renovation and the mall now features a large food court hosting some well-known restaurants. Other shopping malls such as Saiho Plaza and CapitaMall Jinniu Phase II in Chengdu have invited cinema operators to open theatres. 10

27 Retail Market in China, 2013 Hypermarkets and supermarkets Intensified competition, surging rentals and labour costs and increasingly saturated markets have all seen hypermarkets and supermarkets margins narrowed. Planet Retail forecasts hypermarket and supermarket sales growth to fall from 16% yoy in 2012 to 12% yoy in 2013 and store number growth to drop from 11% yoy in 2012 to 10% yoy in 2013 (see Exhibit 24). Exhibit 24: Sales growth and store number growth for hypermarkets and supermarkets, (estimates) Source: Planet Retail, Deloitte Exhibit 25 shows the top 10 hypermarket and supermarket operators by sales in China Resource Vanguard topped the list with total sales of 941 billion yuan in 2012, followed by RT-Mart and Lianhua Supermarket.!&

28 Exhibit 25: Top 10 hypermarkets and supermarkets operators by sales, 2012 Sales yoy No. of yoy Rank Enterprise (million yuan) growth(%) stores growth (%) 1 China Resource Vanguard Co., Ltd. 941, , RT-Mart Shanghai Ltd. 724, Lianhua Supermarket Holdings Co., Ltd. 657, , Wal-Mart (China) Investment Co., Ltd. 580, Carrefour China Inc. 452, Nonggongshang Supermarket (Group) Co., Ltd. 303, , Yonghui Superstores Co., Ltd. 279, TESCO China 200, Shandong Jiajiayue Group 181,880* A-Best Supermarket Co., Ltd 180,000* Source: China Chain Store and Franchise Association *Note: Estimated value Major trends i. Direct farm sourcing continues An increasing number of hypermarket and supermarket operators source directly from farmers to lower distribution costs. They can also provide cheaper, fresher and better quality agricultural produce to consumers. A typical example is Carrefour. In the vanguard of direct farm sourcing, the retailer has partnered with over 460 farm cooperatives since Other hypermarket operators such as Wal-Mart, RT-Mart, Tesco, Metro AG, Wumart and China Resources Vanguard have undertaken similar initiatives and achieved remarkable successes in direct farm sourcing. This has in turn also helped farmers increase their annual incomes and improve the rural retailing landscape. Exhibit 26 depicts some specific ways that hypermarket operators engage in direct-farm sourcing.!'

29 Retail Market in China, 2013 Exhibit 26: How hypermarket operators engage in direct-farm sourcing Invest directly in planting and production bases Work with farmers cooperatives to handle transportation and logistics needs Work with agricultural production and processing firms Line up with other retailers to source food products together Source: Fung Business Intelligence Centre ii. Players keen to introduce high-quality imported foods With higher household incomes and increasing food safety concerns, many middle class consumers are willing to pay a premium for high-quality, authentic, imported foods. Eyeing such large opportunities, some supermarket and hypermarket operators have opened high-end stores which specialise in selling imported foods. For example, China Resources Vanguard launched Ole, a high-end supermarket chain to cater to the growing demand for fresh, organic and natural products. It plans to expand the brand to cities such as Chengdu, Nanning, Xi an, Shenyang and Zhongshan. The accumulated store number is expected to reach 50 by iii. Private brands become increasingly common in hypermarkets and supermarkets For many Chinese consumers, private brands are usually associated with low pricing and value for money. Many hypermarket and supermarket operators have launched their own private labels in categories such as household products and packaged foods. However, there are already a huge number of low priced brands available at hypermarkets and supermarkets. So, many Chinese consumers prefer to purchase branded products that are sold at similar or slightly higher prices. To sustain their competitive advantage, it is essential for private labels to improve on perceived quality and safety standards. 11

30 Convenience stores The development of convenience stores in China is somewhat unbalanced. In some cities such as Shanghai and Guangzhou, competition is extremely fierce. But in other cities, especially the lower-tier ones, development is lagging to a greater extent. Exhibit 27 maps out the competitive landscape of China s convenience stores. The leading players by number of stores are shown in Exhibit 28. For most convenience store players, ever-increasing rental and labour costs remain major challenges. Exhibit 27: Competitive landscape of convenience stores in China, 2012 Source: Kantar Retail!"

31 Retail Market in China, 2013 Exhibit 28: Top 10 convenience store operators by number of stores, 2012 Convenience Country of No. of stores Ranking Enterprise store brand origin in Sinopec Group Easy Joy China (Beijing) 20,891 2 PetroChina Co., Ltd. usmile China (Beijing) 13,000 3 Dongguan Sugar & Liquor Group Meiyijia Meiyijia China (Dongguan) 4,650 Convenience Store Co., Ltd. 4 Zhejiang Gongxiao Gongxiao; China (Zhejiang) 2,115 Supermarket Ltd. Jialian 5 Shanghai Liuhua Quik Quik China (Shanghai) 2,031 Convenience Stores Co, Ltd. 6 Nonggongshang Group Kedi; Alldays China (Shanghai) 1,780* 7 7-Eleven 7-Eleven United States 1,732* 8 China Resource Suguo Suguo China (Nanjing) 1,694 9 Guangdong Sun-high Sun-high China (Guangdong) 1,559 Convenience Store Co., Ltd. 10 Chengdu Hongqi Chain Hongqi China (Chengdu) 1,336 Co., Ltd. Source: China Chain Store and Franchise Association, modified by Fung Business Intelligence Centre *Note: Estimated value Major trends i. Convenience store players extend valueadded services To differentiate from competitors, convenience store operators increasingly focus on offering value added services. These include selling admission tickets for specific shows or tourist sites, top-up services for mobile phone users and bill payment schemes. Although the profit margins are slim, many convenience store players view these as effective in increase consumer traffic and driving impulse buying, particularly at the checkout counter. ")

32 ii. More on-the-go meal services available Convenience stores have been offering fresh, prepared foods for years, but the trend has become more pronounced as increasing numbers of time-conscious consumers look for on-the-go meals. Some retailers have revamped their conveniences stores and added on-site catering to provide hot and cold food and drink. For example, some Circle K outlets provide in-store catering to offer meals and drinks under its own Hot & In brand. Circle K believes its Hot & In service is the main revenue driver in the Guangzhou market, contributing approximately 40% of the sales mix in FY Eleven has also launched foods under its 7-Fresh brand 13, while Family Mart has established its own store brand Fami 14. In general, profit margins for catering services are higher than for many other categories of merchandise. iii. Partnerships with online retailers for pick-up services Given the vast network of convenience stores, more online retailers are considering adapting their stores as pick-up points, so consumers can collect products they order online. For example, Amazon China has teamed up with Family Mart since last March to offer pick-up services at the latter s outlets in Shanghai. Consumers can pick up their online orders in designated convenience stores within a specific period of time. They can choose to pay by cash, credit card or debit card at the store. Specialty stores Specialty stores are expanding aggressively, driven by both the rapid expansion of local specialty retailers and the increasing number of international players that have entered the China market. Some examples include Topshop, Forever 21, and Hollister. As illustration, Exhibit 29 shows the pace of expansion for apparel specialist retailers. The compound annual growth rate for total sales, numbers of outlets and size of sales space have increased by 17.8% yoy, 10.6% yoy and 12.5% yoy respectively between 2007 and "!

33 Retail Market in China, 2013 Exhibit 29: Apparel specialist retailers: value sales, outlets and sales space, Value sales (billion yuan) Outlets (thousands) Sales space (million sqm) Source: Euromonitor Exhibit 30 depicts the number of stores established by selected major fast fashion specialty retailers over recent years. All such retailers have accelerated their expansion in China. Exhibit 30: Store count of fast fashion specialty retailers in China, Source: China National Commercial Information Centre, Company websites Having said that, specialty store profitability has suffered a significant slowdown over recent years. According to CCFA, gross profits were down by 1.3 ppt to 17.0% in 2012 and net profits for specialty stores were down by 0.2 ppt to 1.3%. Specialty store operators, similar to their counterparts in other retail format segments, are facing increasing competition from online retailers. Also, after years of rapid expansion, many specialty store operators, particularly in the apparel and sports specialty segment, are now facing the challenge of holding large inventories along with higher operational, rental and labour costs. ""

34 In order to cut costs and jettison excessive inventory, some apparel retailers are closing existing stores and opening factory outlets. For instance, Puma has announced that it will close 90 stores in China as part of its global cost-cutting measures. Meanwhile, Nike is to open between 40 and 50 factory outlets in China this year, with discounts of up to 70% to clear inventory. Similarly, despite their national presence, many 3C specialty stores remain unprofitable. Some players are looking for ways to transform. Suning and Gome, for instance, are gradually shifting from solely consumer electronics sales to offering a larger range of other products such as apparel, cosmetics, books and household products. Suning s offline stores are set to carry more categories; the firm is introducing virtual displays of online categories through ipad and other mobile devices. The idea is to introduce a shop anywhere, buy anywhere experience. Discount outlets The discount outlet format continues to gain popularity among both retailers and consumers. It is estimated that China has more than 400 discount outlets 15, far exceeding the total number in the United States. Eyeing the booming market, more domestic and foreigner retailers are opening stores in discount outlets. For example, Shanghai Bailian Group opened its third discount outlet, Wuxi Mall, at the end of June this year after successfully opening two other discount outlets since Value Retail, the European discount luxury outlet chain, is reportedly to open its first store in a discount outlet in Suzhou in early Shopin, China s discount outlet chain with the majority of its stores in Beijing, has branched out to Hangzhou, and the retailer plans to roll out its outlet stores in Eastern and Southern China. Hunan Friendship & Apollo Commercial Co., Ltd. expects to open its second discount outlet in Exhibit 31 lists out some major discount outlets that have opened in Exhibit 31: Major discount outlets open in 2013 Name of discount outlet City Megamills Shanghai Beijing Capital Outlets (Fangshan branch) Beijing Changsha Globe Outlets Changsha Tianjin Yansha Outlets Tianjin Florentia Village Tianjin Source: China Commerce Association for General Merchandise, Commerce Magazine, May "#

35 Retail Market in China, 2013 For retailers, discount outlets are possibly the best channel to offload stale inventory without slashing prices in retail stores. Consumers can buy their desired brands at a discount. The government s anti-corruption campaign, which may lead to an increase in inventory for luxury brands, could further boost the outlet business, as many luxury retailers sell off-season products through them. On the other hand, discount outlets in China are not as mature channels as those in many other countries where consumers can easily find first-tier brands at big bargains. Many outlets in China can only attract lesser-known brands. Also, the problem of counterfeit products undermines the image that discount outlets would prefer to project. Online Retailing Online shopping s popularity continues to power ahead in China. According to iresearch 16, the transaction value of the online retail market increased by 66.2% yoy to reach 1,304.0 billion yuan in 2012, accounting for 6.2% of the country s total retail sales. China has become the world s second largest online market. Exhibit 32 shows total transactions in the country s online retailing sector by quarter. Exhibit 32: Total transactions for online retailing, 1Q11-2Q13 (estimates) Source: National Bureau of Statistics, iresearch With Chinese consumers increasingly used to shopping online, the retail market s growth momentum is set to be sustainable for a number of years. iresearch expects total online sales to reach 3,600 billion yuan in 2016 and account for 10.8% of total retail sales. China is expected to overtake the United States for online sales in "$

36 Major trends i. More B2C players operate as open platforms The B2C segment is highly competitive, so many B2C retailers are transforming themselves into open platforms in order to expand the scope of their business and become more profitable. Third parties can sell goods on their platforms and online tenants are usually charged various types of fees, such as credit deposits, entry fees, annual fees, commissions, advertising and transaction fees. The platform owners provide logistics, warehousing and after-sales services for these tenants. Hence, B2C players can expand their product categories without needing to make a significant investment. ii. Online retailers enrich product offerings Many online retailers have been actively increasing their product offerings by either adding new categories or forming partnerships with other brands on their open platforms. Reasons for expanding product offerings are threefold: (1) to enhance consumers stickiness and cross-selling opportunities; (2) to improve overall margins and turnover; and (3) to expand market share. iii. Price competition is common Competing on price to build market share remains the number one marketing strategy in China s online retail market, as most Chinese consumers remain largely price focused. Many retailers have tried to squeeze out competition and increase market share by adopting a low price strategy. The price wars have made it difficult for smaller online retailers to compete with giant operators. Many lack the scale and resources to provide a wide range of products through efficient logistics, and they are also less competitive in terms of pricing and reputation. So, for these smaller players, focusing on a specific category can help them to secure a foothold in the market. It seems they should actively seek better ways to differentiate themselves from competitors. For detailed information on online retailing in China, please refer to our Online retailing in China report published in June ( "%