Barriers to China's US$240bn retail market are falling, but brands rushing to take advantage of growing liberalization must be prepared to face cut-throat competition. That is the message of a survey compiled by global market researchers AC Nielsen during a recent symposium of more than 100 overseas and domestic retailers doing business in China.
The company said that with new store openings across China growing at a faster rate than total sales – producing effectively a steady decline in sales per store – retailers looking to secure consumer loyalty and market share must place focus more on identifying their target consumer and communicating their brand's core values to that consumer.
The challenges are further compounded by the highly fragmented nature of China's retail scene. The top five brands, for example, account for just 2% of overall market share, Nielsen said – a long way off the levels of more developed markets such as Western Europe, where as few as three chains control as much as 70% of the market.
With the lifting of restrictions on foreign retailers in early December, that competition is expected to increase significantly. At present, of the world's top 25 global retailers, only nine have so far set up operations in China, leaving the prospect of more overseas competition entering the market, a further squeeze on profits (at least in the short term) and the need for brands to place greater emphasis on differentiation.
Britain's Tesco and France's Casino, for example, recently announced they were eyeing setting up their first stores in China, and many others are expected to follow.
Price low and you end up lower
For retailers already operating in China, price was inevitably the key point of brand differentiation in terms of attracting and retaining shoppers, observed AC Nielsen China's Director of Retailer Services, Kosta Conomos. The result? "Low prices have become the accepted norm across retail banners and, as competition increases and the market fragments further still, price can no longer offer a sustainable competitive advantage in isolation." With that caution in the background, Conomos said retailers had to refine their view of their target market and focus on matching their brand's values to consumer segments.
In China's second-tier cities (access to which eases considerably following December's WTO-mandated liberalization), he said research had shown retailers' emphasis on low prices to be misleading. "What consumers are really looking for and what retains their loyalty is value for money."
Spotty supply chains
From the retailers' perspective, expansion programs are already challenged by spotty supply chains in China, partly driven by a shortage of logistics expertise – and an overextended pool of human resources talent that leads to high staff turnover and a drain of know-how. All of these issues are, in the short term at least, likely to intensify as a result of market liberalization and more competitors entering the market, Conomos said.
The key, he said, would be for retailers to focus on their "core value proposition" – who they are, what they want to be, the values they want to deliver and how they want their consumers to perceive them.
By understanding their target demographics and the core values that they hope to sell, they should be better positioned to align their strategic direction, HR policies, not to mention supply chain and brand development strategies.
"At the moment," Conomos said, "retailers are fighting it out to secure prime locations and looking to mergers to create economies of scale." The winners will be those who, over the next three to five years, refine their overall business strategy to meet their core values, he said.
For those that get it right, there is the promise of great riches. Worth just over US$240bn last year, China's retail arena is already the second largest in Asia and is the fastest growing. That makes the prospects for retailers in China very exciting, Conomos said.
The big expectation, he said, is that one day China will begin to approach the levels of Japan, which has a retail market worth US$1.2tn. "Retailers with clearly defined value propositions that identify with a specific demographic and can communicate this to their target shopper will be the ones who survive and thrive," he said.