Since 2004, China has officially liberalized restrictions on the store opening of multinational retailers. Multinational retailers have experienced about 5 years of rapid expansion and development. In 2010, the multinational retailers collectively suffered a crisis of survival in the Chinese market. Carrefour, Home Depot, Best Buy and even retail giant Wal-Mart announced the closure of some stores or withdrew from the Chinese market. It was unexpected that the multinational retailers would encounter Winter in a market full of infinite potential. While McKinsey estimates: “From 2008 to 2025, just for Chinese cities, the consumption increment will be equivalent to that of creating a new market”. Undoubtedly, China’s retail market is full of potential.
To further emphasize my point, multinational retailers have the opportunity to succeed if they can implement the correct strategy in China. To this end, the following points require some attention:
#1: To better serve the middle-class customer segment. According to McKinsey, the ‘’middle class will account for the largest share of consumption, affluent and above households will lead consumption growth by 2025 in China”. Significant expansion of the Middle class brings new demands and multinational retailers should be prepared to serve this new, emerging customer segment: Relatively mid to high end categories; Customized products and services; Seamless omni-channel retailing; More comfortable shopping environment etc.
#2: To invest in retail service products. Retail services meaning product lines which can enhance the core retail experience by offering value-added products and services. Products including: Prepaid card and 3rd party card, Financial Services (Credit Card, Money Transfer, Installment Loan, Insurance etc.), Convenience Products (Welfare Lottery, Bill Payment, Extended Warranties etc.) and Lifestyle Products (Tourism, Fitness Center, Children’s Education Center etc.). Retail Services is still quite a new idea and field for retailers in China. It can help retailers gain market share in four ways: meet customers needs, drive traffic and sales, reduce cost of payments and provide standalone profits. At Tesco, the income of Retail Services products accounts for almost 7% of its total income. So, for multinational retailers, the earlier they invest in this field, the earlier they will get returns from both financials and customers’ satisfaction.
#3: To steer the front from 1st and 2nd tier cities to 3rd and even 4th tier ones. According to the China Statistics Bureau, in 1st and 2nd tire cities, retail employees annual income growth is 5-10% and a core gold district annual rent increase is over 10%.
Along with the soaring rate of manpower and real estate costs in 1st and 2nd tier cities, it has been declared the end of the dividend era, and the retail industry will now step into an era of meager profit or worse. Instead, Midwest, 3rd and 4th tier cities will be the driving factors of China’s urbanization. We can get a glimpse from the performance of China’s Top 100 retail enterprises; the average annual sales increase was 6% for those in 1st and 2nd tire cities, while this number was 18% in 3rd and 4th tire cities. Multinational retailers should actively build strategic alliances with local enterprises to seek entry into the market, or select the appropriate approach in anticipation of the future development of 3rd and 4th tire cities.
#4: To invest to improve food safety. In China, food retailing is definitely an important pillar of the retail industry, food products sales account for over 50% of retailers’ total sales. The frequent food safety incidents have made the customers lose confidence in retailers. With customer attention increasing on food safety, multinational retailers can bring their best practices and experiences in other countries to the Chinese market and to invest to make it their core competitive advantage.
Opportunities and risks coexist. Multinational retailers should face the reality that the local Chinese retailers have made significant progress in recent years, learning from local players and the multinational retailers should be prepared to evolve with them in the market.