Growth will continue to accelerate for convenience formats: Convenience stores have become one of the fastest growing sectors in China’s retail market. Competition has already been extremely intense in the South while there is still pretty of room to strike double-digit growth in the North and West. Convenience stores are also trying to innovate to create a differentiated shopping experience and typically offer the last mile delivery for e-commerce. The recent ambitious franchise agreement between Lawson and Zhongbai clearly paves the way for even more rapid expansion in the inland provinces.
Cautious expansion and tailored adaptation in lower tier cities: As modern trade has exhibited lacklustre growth in higher tier cities, all retailers are seeking growth opportunities in the lower tier cities where there will be intense competition for share of wallet. New store openings are still the fastest way to grow. For example, RT-mart’s outstanding performance was largely contributed by penetration increase in lower cities where the retailer opened 31 new stores with more than 85% of them based in lower tier cities. With the absolute growth in lower tier cities also experiencing a slowdown, it is critical for retailers to be more shopper centric and develop their ‘right to win’ through optimizing merchandise and in-store execution based on local needs.
Size matters in China so more mergers and alliances are expected: As competition intensifies and the total market continues to decelerate, retailers have to build scale to optimize their cost base and strengthen their negotiation power. In 2015, Yonghui’s acquisition of a stake in Lianhua supermarket allowed it to expand into the affluent East China region, while Hongqi’s takeover of Huhui supermarket enabling the group to reach share of 1.5% of the West market. Further regional market consolidation is expected in 2016 as China’s retail landscape is still fragmented, with top 10 retail group only accounting for less than one third of the modern trade sales.
Real Omni-channel experience is yet to emerge: E-commerce continues to surge in China’s FMCG market, with annual growth of 37%, as the likes of JD.com and Tmall invested heavily in festive promotion and shopper conversion. More and more brick-and-mortar retailers have started to introduce their own e-commerce platform on the back of the boom of cross-border e-commerce and mobile commerce to win their shoppers back. However most of them are yet to create a differentiated shopping experience between the online and offline world, as the current Omni-channel shopping experience is not strong enough to standout against the competition.