China powers of retail 2009: Squeezed but promising

China powers of retail 2009: Squeezed but promising

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The report reviews the industry performance last year and summarizes the key findings, based on a survey conducted by CCFA on the top 100 retail chains in China, interviews with coportate executives and subject matter experts, and Deloitte points of view on China's retail sector.

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Squeezed, But Promising
China Powers of Retail 2009

Consumer Business & Transportation

Content

1 2 4 8 91 32 72 82

2

Preface

Executive summary

China powers of retailing Top 100 highlight

Top 100 Chinese Retail Chains, 2008

Leading companies by format

Top trends for retailers 2009

Postscript

Contact

Preface

Deloitte China and China Chain Store & Franchise Association (CCFA) are pleased to present the China
Powers of Retail 2009. The report reviews the industry performance last year and summarizes the key
findings, based on a survey conducted by CCFA of the top 100 retail chains in China, interviews with
corporate executives and subject matter experts, and Deloitte's points of view on China's retail sector.
Also discussed are the future direction of China's retail industry as well as eight major industry trends, in
light of the global financial crisis and China's economic downturn and recovery.

Squeezed, but Promising
China Powers of Retail 2009

1

Executive summary

China Retail in 2008
In 2008, influenced by the financial tsunami
triggered by US sub-mortgage crisis, the retail
industry around the world entered into a prolonged
"slack season". The downturn in consumption
abroad and exports had a strong impact on China's
economy, whose growth had relied on exports
for most of the reform era. China's GDP growth
decreased to 9 percent, and consumer confidence
index declined to the lowest level in recent years.
Data has not been released that would permit a full
analysis of the financial tsunami's negative impacts
on China's retail industry. But it is evident that if
the macroeconomic environment continues to
deteriorate, the short term performance of the retail
industry cannot be optimistic. This is true despite
the fact that domestic household consumption and
retail growth are being stimulated precisely because
of the export slowdown.
Data from CCFA show that sales of top 100 retail
chains in 2008 were high but peaked in first few
months of 2008, then declined. Performance varied
by different retail formats and geographical areas.
In terms of formats, home improvement stores and
electronics specialty stores were the most seriously
inflicted, and supermarkets the least. In terms of
geographic areas, first-tier cities in eastern coastal
areas were the most seriously inflicted with same-
store-sales growth rate declining significantly. In
contrast, the growth rate of sales in inland tier-2
and tier-3 cities continued to increase. To counter
the impact of the economic slowdown, many retail
chains took various measures to boost sales, cut
costs and improve operational efficiency.
In 2008, the combined market share of the top
100 retail chains' sales out of total retail sales
dropped, as did the percentage of the top 10. This
measure signals a reversal of a trend over the last
several years, which saw industry consolidation.
Domestically owned chains toped the listings, in
both total store number and revenue, are also
ranked the top among top 100. Next are the
US retail chains, having also the second most
diversified formats, including food & beverage,
supermarket, home electronics and home
improvement. US retail chains achieved the highest
average sales revenue per location. Asian retailers
(excluding China) are focused on two formats —
department stores and supermarkets. Asian chains
2

had the lowest ranking in the top 100, in enterprise
numbers and average sales revenue. There is a
"dumb-bell" shape distribution in geographic
footprint, with most retailers either nationwide
companies or single-province/city companies.

In 2008, the top 100 retail chains in
mainland China covered all retail
formats. Rankings of the top 100
included both annual revenue and total
number of store locations.
This indicates that enhancing the depth and width
of network coverage is the most effective tactic for
retailers to increase sales revenue.
Each of the retail formats in the top 100 has its
own characteristics. Multi-format retailers and
supermarkets are the two largest groups. Multi-
format retailers can satisfy the demands of various
segments of consumers, while supermarket format
is designed to meet consumer's daily essential
needs. These are "low discretion" categories and
therefore the impact of economic fluctuation on
these two retail formats is comparatively small.
On the other hand, the electronic specialty store
is the largest among all retail formats in terms of
sales revenue; however, the growth rate of its sales
revenue has declined due to the sluggish real estate
market.
In 2008, among top 100 retailers, sales growth
came mainly from regional retailers with multiple
formats, nationwide and multi-area supermarket
chains. Strongest growth driver was the trade up in
tier-2 and tier-3 markets.

Main Trends of Retail in China
Retailers develop private brands to realize
Retail chains will continue to grow rapidly in the differentiated competition, enhanced customer
future, especially in inland tier-2 and tier-3 markets, loyalty, and improve profitability. Management
where growth potential is strong. Growth rates of private brands also requires retailers to master
of all key indicators in these areas are higher than higher more advanced management capabilities,
those of the eastern coastal cities. By the year bearing on product category management, price
2012, China will become the second largest retail management, vendor management and marketing,
market in the world, second only to the US. Foreign etc. As retailers' business grows larger, their supply
and local retail enterprises will leverage their chain becomes more complex. To make the
respective advantages in management, resources, necessary advances at a time or intense operating
geographical positioning and relationships to costs pressure incurred by decreasing consumption
capture more market share. Since competition in is difficult. Succeeding in the necessary
tier-1 and tier-2 markets is getting more intensive, transformation will impose a new challenge to
growth space for retailers is limited there. Retail retailers and their supply chain management skills
chains will focus on tier-3 market and below. China and systems. As a response, many retailers have
has a vast territory and consumption capability, and started proactively to cultivate new competencies
consumer habits and preferences differ significantly of systematic supply chain management, including
across regions. Retail chains will need to fine-tune establishing their own supply bases for perishable
their business strategy to fit different attributes goods, logistics, and distribution. Some retailers
across regions, driving a process of tactical are also progressing in the implementation of ERP
localization.systems that will be necessary to achieve the supply
With China's surging growth of internet users, chain control they require, lower cost, and improve
on-line shopping and even multi-channel shopping responsiveness.
are developing rapidly. As this happens, most
retailers lack the capability to integrate processes
and resources to offer customers a cross-channel
seamless shopping experience. At present,
their offerings are simply an addition of a new
channel grafted on to the traditional ones. With
the emergence of new retail formats promoting
customer service and lifestyle as their value
proposition, retailers have begun to develop
business models that emphasize a customer
experience, and these require a higher level of
business strategy, management, organization,
processes, IT system and data mining capability.

qSeuzede ,ub trPmosini ghCni aoPewsro feRatli2 009 3
China powers of retailing
Top 100 highlight
The global retail market faces a bleak outlook

Exhibit2. U.S. GDP vs. Retail
1
sales growth
Since 2008, the financial tsunami has spread
over same period last year (%), 2006-2009
out all over the world. As a result of the credit
and liquidity freeze, an investment shortage and
10
consumption shortage drove the faltering U.S.
8
economy into a further recession. Of course, a
6
drop in American consumption, curtailing global
4
economic growth. There was a sign of slowdown
2
in the U.S. economy as early as the second half
0
of 2007, and that turned into a launchpad for a
-2
true crisis in early 2008. Within weeks the global
-4
financial sector was in turmoil. As a result, the
-6
growth rates of all major economies were in steep
-8
retreat in 2008 from previous years. China, India,
-10
and Brazil did well, comparatively speaking.
-12
Exhibit1. Growth rates of the world’s key
Retail Sales
economies (%), 2006-2008
GDP
14
Source: U.S. Bureau of Economic Analysis
21dropped precipitously, much faster than the GDP. This
10
shows how leveraged US consumers were, and how
8
quickly asset deflation reduced their buying power.
The impact on the retail market in other countries
6
was almost immediate. In Dec. 2008, UK's retail
4
sales dropped by 3.3 percent year-on-year, and the
sales volume declined by 1.4 percent. This is the
2
biggest single month plunge since British Retail
0
Consortium first published the report in 1994. 20
USUKEuroJapanBrazilRussiaIndiaChina
of the OECD's 28 member states posted negative
retail sales growth in the 4th quarter of 2008.
600270028002Source: World Bank, IMF
In U.S. the sub-prime crisis had an immediate impact
on consumer credit, and the US retail market was
the first to suffer dramatically from the recession.
Since Aug. 2008, the U.S. retail and catering service
sectors have posted negative monthly growth rates
year-on-year. The 4th quarter number is down 7.8
percent over same quarter last year. In December,
43 out of 63 major retailers in the United States
registered negative same-store- sales growth rate.
1. Including catering
The characteristics of this drop are important. Retail
4

Exhibit3. 4th Quarter retail sales growth of
that China's urban unemployment rate climbed
OECD states (%), 2008 vs.2007
to 9.4 percent, which is over the "7 percent"
international warning line. Since 2006 Q4, China
US-10.5
consumer confidence index dropped from a high
UK2.4
point of 97.0 all the way down to 90.0 in Q4 last
Sweden-1.1
year, a new low for recent years.
Spain-7.6
Slovakia3.5
Although China's consumer confidence index slid,
Portugal-1.2
it's still higher than world's average. As many other
Poland2.9
of the world's economies deteriorated, consumer
Norway-0.8
New Zealand-4.0
confidence indexes dropped drastically in most
Holand-0.9
countries and regions, including the other BRIC
Mexico-2.2
countries. Consumer confidence indexes of many
Luxemburg0.9
countries have also experienced a double-digit
Korea-3.6
decline. In comparison, the confidence of Chinese
Japan-2.2
consumers is still relatively optimistic and stable.
Italy-3.3
Ireland-8.3
Iceland-22.7
Hungary-2.0
Exhibit 4. Chinese consumer confidence
Greece-1.6
index, 2006-2008
Germany0.5
France-1.0
98
Finland-1.4
Denmark-6.3
96
Czech-2.0
Canada-1.2
94
Belgium0.9
Austria0.2
92
Australia0.6
-25-20-15-10-505
90
Source: OECD
88
68China is not "uncoupled" or invincible


Impacted by plunging consumption in its biggest
export markets, China's longtime export oriented
Source: Bloomberg, National Bureau of Statistics of China
economy slowed abruptly. After years of double-
digit growth, China's GDP growth rate dropped
to 9 percent in 2008, a 7 year low. Exports were According to the survey published by Data Driven
dropping over 20% a month.Marketing Asia, 60% of Chinese consumers expect
News of a drop in growth rate and increase to reduce their spending on luxury goods, branded
in unemployment created pessimistic income apparel and entertainment in the coming year.
expectations and a lack of secure feeling about In another survey by Nielsen, personal electronic
the economy in China. The consumer confidence products, clothing, household goods are on the list
index continued to drop. The Ministry of Human of household budget controls.
Resources and Social Security reported that the
urban unemployment rate reached 4.2 percent in
2008, an all-time high over the past three years.
And the "social blue book", published by Chinese
Academy of Social Sciences in Dec. 16, 2008, said
Squeezed, but Promising
China Powers of Retail 2009

5

2. Data source: CCFA
6

Exhibit 5. Chinese consumers choice of budget
priorities under economic crisis (%), 2008
Reduce vacations44
Reduce outside entertainment41
Delay updating person electronics40
Cut clothing purchase37
Save use of water and energy30
Delay changing home appliances28
Seek effective financial goods25
Change to cheap daily necessities25
Reduce fast food eating frequency 25
Cut communication fee23
Cut car use frequency20
Cancel annual leave19
Cut acoholic consumption18
Take no measures5
01020304050
relevant to the retailing industry
Source: Nielson
Data shows that financial tsunami's negative impact
on China's retail industry has not been fully manifest
yet. Although the total retail sales of consumer
goods over the same time last year started to decline
in Q4 2008, a growth rate over 15% has still been
maintained. However, given the fact that consumer
market reaction usually lags behind other economic
trends, there was little optimism about the next
period's retail sector performance. But in fact by
March 2009, consumer sentiment took a turn, and
some core retail categories have set monthly records.
Exhibit 6. Chinese GDP vs. Household retail
goods quarterly growth over same period
last year (%), 2006 - 2009
5202510150Sales of household retail goods
PDGSource: Bloomberg, National Bureau of Statistics of China

China's Top 100 chain enterprises

Data of Top 100 chain enterprises shows that, in 2008,
both the sales revenue and number of stores of Top
100 maintained 20 percent plus growth rate over 2007.
However, growth rate over same period last year of each
quarter varies significantly. The common pattern is: Q1
growth rate between 20-30 percent, Q2 around 20
percent, Q3 drop to 10 percent, and Q4 at 0-5 percent.
2
Among the 6 major retail formats, the growth rates of
visitor numbers are all negative except in hypermarkets and
supermarkets. For those formats with negative growth rate,
the average rate is -4.6 percent. In the mean time, the per
customer transaction value has increased, especially the
hypermarkets and convenience stores where per customer
transaction values have increased by more than 10 percent.
Performance varies significantly between retailers
in different regions.
Tier one cities in eastern coastal
areas suffered the most from the financial tsunami;
retailers' same-store-sales growth rate decreased
significantly. The same-store-sales growth rates of
supermarket store sales in Beijing, Shanghai, Shenzhen
and other coastal cities are minimal or even negative in
some cases. In the meantime, same-store-sales growth
rates in second or even third-tier cities of the inland
areas increased.
Home improvement stores and electronics
specialty stores are heavily impacted.
As China's
real estate remained weak, electronics markets began
to show signs of a slowdown in the second half of
2008, following years of high speed growth. Since
November, the sales of major electronics specialty
retailers slipped into negative growth year-on-year. The
2008 sales of home improvement retailers in Top 100
dropped as much as 18.98 percent compared to 2007.
Besides, in 2008,
the sales growth rate of
pharmacies, convenience stores and department
stores also dropped year-on-year.
Survey data from
sample stores shows that, compared with 2007,
2008 visitor numbers decreased in department stores,
convenience stores, electronics specialty stores and
drug store, with an average reduction by 4.6 percent.
The crisis impact on hyper/supermarkets is
relatively small,
as most SKUs in supermarket are daily
necessities of low demand elasticity. In the survey, the
number of visitors for hypermarkets and supermarkets
increased by 1.0 percent and 6.5 percent respectively.
Of all different formats in Top 100 retailers, we can see
that supermarkets ranked at the top, with a growth
rate of 18.8 percent.

Exhibit 7. Sales growth by format of
the Top100 (%), 2008
Drug store10.8
Home improvement-19.0
erotsspeEcliealcttyr ostnoicrse
30
8.9
ConveniSetnocree
25
4.3
DepartSmtoernet
25
11.4
Supermarket18.9
-20-1001020
Source: China Chain Store and Franchise Association
Retailers' countermeasures

Retailers undertook multiple management initiatives
to mitigate the impact of the economic slowdown,
handsome focused on attracting more visitors to increase
revenue, and others on improving operational efficiency
to reduce cost. Frequently employed measures included
direct cost controls, new strategic partnerships, channel
development, and category manage.
Direct cost control:
The top option of most
retailers is "cost-cutting". First step is to develop a
detailed budget, and then establish mechanisms for
rigorous review and allocation. A few years ago,
most domestic retailers only assessed sales revenue.
Later, they added gross margin into their dashboard
monitor profit. Today, many of them include cost
analysis into the dashboard as well, and break
down cost-related KPIs for functions, teams, and
individual employee.
Some retailers adopted flat management structures
to simplify the organization, optimize internal
processes and reduce IT costs. Others adjusted
operations by merging small groups of categories
into larger ones, and so on.
In terms of energy consumption, some companies
implemented energy-saving measures in stores,
which can shave utility costs by 20-25 percent.
Partnerships for competitiveness:
Small
and medium-sized retail chains are usually in
an unfavorable position to compete. Current
circumstances make competition with large
retail chains harder than ever. In response to

intensive competition, purchasing associations and
procurement unions have emerged in recent years
and developed rapidly in 2008. Members firms
have improved their competencies through building
shared logistics centers, making joint purchases and
negotiation and otherwise sharing mutual assistance.
Channel strengthening:
Channel control is a key
element of retail chains. Retailers have significantly
strengthened their channel management since 2008.
More SKUs are centrally purchased by department
store chains. Most hypermarkets and electronics
specialty stores manage channel through the
two-layer channel management system featuring the
integration of centralized and decentralized processes.
This system can effectively improve retailers'
channel control. Small and fragmented dealers and
distributors either grow stronger with the expansion
of associated retail chains, or get eliminated from the
race to become more competitive.
Category management:
During the financial
crisis, all retailers are strengthening their category
management. Some hypermarkets are actively
sourcing or developing more value-for-money
products, e.g., owning supply bases for perishable.
Some supermarkets believe the key to success is
to sell the most essential daily necessities. Some
department stores are optimizing their category
structure by reducing the proportion of luxury goods.
Electronics specialty stores adjusted the ratio of black
goods and white goods. Retailers have strengthened
category management through commodity structure
adjustments. Survey data shows that average sales
per SKU have somewhat imp roved in all retail
formats except electronics specialty stores. In the
same time, retailers' inventories and inventory
turnover rate have been reduced. Average inventory
turnover rate of department stores has dropped
from 34.6 days to 32.9 days. For hypermarkets, the
number has dropped from 28 to 27 days.
Active sales promotion:
Retailers are actively
engaging in expanding promotional activities,
employing more specific marketing skills, and
developing different market strategies that fit
their stages of store development. They deploy
promotions more frequently, extend the promotion
period, increase discounts, and expand more
categories for promotion. In addition, the Internet
has become a key marketing channel.
Squeezed, but Promising
China Powers of Retail 2009

7

TCohpa i1n0s,0 2C0h0i8nese Retail

RankCompanySales (‘0000 GrowthStoresGrowthNet Proit Format
RMB)(%)(%)Rate (%)
1
Gome Electrical Appliances Co., Ltd10,459,3782.21,36233.52.6Electronics speciality store
2
Suning Appliance Group10,234,24219.781228.56.1Electronics speciality store
3
Bailian Group9,432,9398.36,418-0.6N/A
Of which: Lianhua Supermarket Co., 5,004,7268.23,9324.2N/ASupermarket
.dtLHualian Supermarket Co., Ltd.1,501,219
GMS Co., Ltd.404,380
Homemart Decoration Materials Co., 253,000
dtL4
Vanguard Co., Ltd6,380,000

8

5

678

Of which: Suguo Supermarket Co., 3,035,800
.dtLDashang Group Co., Ltd.6,255,500

Carrefour (China) Management 3,381,912
Consulting Services Limited
RT Mart Shanghai3,356,700
Wumart Holding Group Co., Ltd3,020,002

Of which: Beijing MerryMart Chain 409,427
.dtLYinchuan Department Store Co., Ltd330,477
Zhejiang Gongxiao Supermarket 200,000
Co,Ltd
9
Wal-Mart (China) Investment Co.,Ltd2,782,197
10
NGS Supermarket Group2,667,544
11
Chongqing General Trading (Group) 2,625,481
Co., Ltd
Of which: Chongqing Department 823,600
Store Co., Ltd

-3.91,946
020.8-17.925

26.82,698

15.11,802

24.6150

14.1134
31.1101
8.12,010

32.832

12.158
25.01,920

30.6123
20.73,330
18.4294
18.3115

7.7-0.07.01-

1.01

5.2

4.3

6.918.816.6

2.3

4.77.6

6.022.38.112.61

1.6Supermarket
1.2Department store
-0.6Home improvement store

N/ASupermarket

Region
More than 200 cities in
all regions
More than 200 cities in
all regions
East China
East China

East China
East China
East China

Shenzhen, Guangzhou,
Beijing, Tianjin, Xi’an,
Zhengzhou, Lanzhou,
Shenyang, Hangzhou,
Suzhou, Nanjing,
Hongkong
1.6Supermarket, convenience storeJiangsu, Anhui

N/ASupermarket, department store, Dalian, Shenyang,
Electronics specialty store, Home Zhengzhou
improvement store
N/ASupermarketBeijing, Shanghai,
Guangzhou, Chongqing
N/ASupermarket13 provinces and 60 cities
in all regions
3.8Supermarket, department store, North China, East China
convenience store, Electronics
speciality store
6.1SupermarketBeijing

N/ADepartment storeYinchuan
N/ASupermarketZhejiang

N/ASupermarket89 cities in all regions
N/ASupermarket,East China
convenience store
N/ASupermarket, department store, Chongqing, Sichuan
Electronics specialty store
2.8Department storeChongqing, Sichuan