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Turning China into a nation of shoppers really a tall order
March 12, 2012, Monday
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THE country is better known for its factory workers and exports.
But to put China's economic growth on a steadier glide path, the Chinese government wants to shift the drivers of the economy towards consumer demand at home.
By the looks of the glitzy shopping malls in Beijing and Shanghai, selling everything from Louis Vuitton luggage to Lenovo laptops, China is well on its way.
"In the next five to 10 years, the retail sector will go through dramatic growth," says Wharton marketing professor John Zhang.
A quarter of a billion people have migrated from the countryside to the cities in the last 25 years, and rising incomes are spurring an expanding middle class.
Middle class
By 2025, that middle class is expected to number 612 million, or 76 percent of the population, up from 43 percent in 2006, according to the McKinsey Global Institute.
In a 2007 McKinsey & Co. survey of 6,000 Chinese, two-thirds of the respondents already count shopping as a favorite activity.
Yet, for all the potential, home-grown Chinese retailers are still in the early days of building a sector that matches the efficiencies of counterparts in developed economies.
Today, Chinese retail chains account for only 10 percent of the entire retailing sector in China, with traditional mom-and-pops comprising most of the stores patronized by Chinese across the country, says Jeff Walters, principal at the Boston Consulting Group office in Beijing.
Many of today's large retailers started with a bang, growing rapidly, but now face new challenges at their next stage of growth.
"In China, everything happens in a compressed time frame," says Edwin Keh, a Wharton School lecturer and former chief operating officer of Wal-Mart Global Procurement.
"China went from informal, unorganized marketplaces into shopping mall booms without much in between. There's a degree of challenge in that."
Retailers' challenges include transforming themselves from real estate operators to retail professionals, expanding to smaller cities, and managing the onslaught of e-commerce.
Landlord-retailer
Many of China's largest home-grown retailers started essentially as landlords.
Electronics purveyors Nanjing-based Suning Appliance Co and Beijing-based Gome Electrical Appliances Holdings, for example, buy prime locations in major cities and rent floor space to sellers to set up their own mini-shops. The mini-shops are run by the suppliers' employees, who make merchandising and pricing decisions on their products.
The landlord-retailer, which has few in-store employees, takes a percentage of the suppliers' sales, ranging from 5 percent for a strong international brand, to as high as 30 percent for an unknown domestic brand, says Jeongwen Chiang, chairman of the marketing department at the China Europe International Business School (CEIBS) in Shanghai.
"It's reminiscent of the concession model of 19th century retailers in the US, where all the margins went to concession (the retailer), not concessionaire (the seller)," says Wharton professor of management Marshall W. Meyer.
The model facilitates go-go expansion. Because retail penetration is so low in China, "the easiest way to grow is to continue opening stores," says Walters. "If I have five stores and I want 1,000 stores in five years, the landlord model is my first choice. Because the retailer shares the burden of running stores with the supplier, it can grow faster via new store openings."
As major Chinese retailers saturate China's Tier I cities, including Beijing, Shanghai and provincial capitals, growth will come from smaller markets.
But that step is fraught with difficulties. Specifically, the variation between consumer tastes and preferences across China, coupled with an underdeveloped infrastructure, means economies of scale are not easy to achieve.
Consumers in smaller cities, for example, make less money than their Tier I cousins. They are more value conscious and less interested in brand names.
Moreover, their tastes are specific to each locale. For instance, those in Hunan may crave hot peppers, and those in Northeast China prefer steamed buns over rice.
Underdeveloped infrastructure and distribution networks in China are a significant hindrance.
"There aren't enough roads and trains and warehouses and organized infrastructure ready to help people expand into the West and North," says Wharton's Keh.
China's fragmented mom-and-pop distribution industry also requires retailers laboriously to create new networks in every market they enter.
In China, no national logistics company, such as Federal Express or UPS, serves all parts of the country. At best, domestic logistics companies may exist in individual big cities, but to transport goods between cities, "they might have to form an alliance," says Chiang of CEIBS. In smaller cities, retailers may even have to find "a guy on a bike" to deliver packages, adds Keh.
Adapted from China Knowledge@Wharton, http://www.knowledgeatwharton.com.cn. To read the original version, please visit: http://bit.ly/ykGmX7.
But to put China's economic growth on a steadier glide path, the Chinese government wants to shift the drivers of the economy towards consumer demand at home.
By the looks of the glitzy shopping malls in Beijing and Shanghai, selling everything from Louis Vuitton luggage to Lenovo laptops, China is well on its way.
"In the next five to 10 years, the retail sector will go through dramatic growth," says Wharton marketing professor John Zhang.
A quarter of a billion people have migrated from the countryside to the cities in the last 25 years, and rising incomes are spurring an expanding middle class.
Middle class
By 2025, that middle class is expected to number 612 million, or 76 percent of the population, up from 43 percent in 2006, according to the McKinsey Global Institute.
In a 2007 McKinsey & Co. survey of 6,000 Chinese, two-thirds of the respondents already count shopping as a favorite activity.
Yet, for all the potential, home-grown Chinese retailers are still in the early days of building a sector that matches the efficiencies of counterparts in developed economies.
Today, Chinese retail chains account for only 10 percent of the entire retailing sector in China, with traditional mom-and-pops comprising most of the stores patronized by Chinese across the country, says Jeff Walters, principal at the Boston Consulting Group office in Beijing.
Many of today's large retailers started with a bang, growing rapidly, but now face new challenges at their next stage of growth.
"In China, everything happens in a compressed time frame," says Edwin Keh, a Wharton School lecturer and former chief operating officer of Wal-Mart Global Procurement.
"China went from informal, unorganized marketplaces into shopping mall booms without much in between. There's a degree of challenge in that."
Retailers' challenges include transforming themselves from real estate operators to retail professionals, expanding to smaller cities, and managing the onslaught of e-commerce.
Landlord-retailer
Many of China's largest home-grown retailers started essentially as landlords.
Electronics purveyors Nanjing-based Suning Appliance Co and Beijing-based Gome Electrical Appliances Holdings, for example, buy prime locations in major cities and rent floor space to sellers to set up their own mini-shops. The mini-shops are run by the suppliers' employees, who make merchandising and pricing decisions on their products.
The landlord-retailer, which has few in-store employees, takes a percentage of the suppliers' sales, ranging from 5 percent for a strong international brand, to as high as 30 percent for an unknown domestic brand, says Jeongwen Chiang, chairman of the marketing department at the China Europe International Business School (CEIBS) in Shanghai.
"It's reminiscent of the concession model of 19th century retailers in the US, where all the margins went to concession (the retailer), not concessionaire (the seller)," says Wharton professor of management Marshall W. Meyer.
The model facilitates go-go expansion. Because retail penetration is so low in China, "the easiest way to grow is to continue opening stores," says Walters. "If I have five stores and I want 1,000 stores in five years, the landlord model is my first choice. Because the retailer shares the burden of running stores with the supplier, it can grow faster via new store openings."
As major Chinese retailers saturate China's Tier I cities, including Beijing, Shanghai and provincial capitals, growth will come from smaller markets.
But that step is fraught with difficulties. Specifically, the variation between consumer tastes and preferences across China, coupled with an underdeveloped infrastructure, means economies of scale are not easy to achieve.
Consumers in smaller cities, for example, make less money than their Tier I cousins. They are more value conscious and less interested in brand names.
Moreover, their tastes are specific to each locale. For instance, those in Hunan may crave hot peppers, and those in Northeast China prefer steamed buns over rice.
Underdeveloped infrastructure and distribution networks in China are a significant hindrance.
"There aren't enough roads and trains and warehouses and organized infrastructure ready to help people expand into the West and North," says Wharton's Keh.
China's fragmented mom-and-pop distribution industry also requires retailers laboriously to create new networks in every market they enter.
In China, no national logistics company, such as Federal Express or UPS, serves all parts of the country. At best, domestic logistics companies may exist in individual big cities, but to transport goods between cities, "they might have to form an alliance," says Chiang of CEIBS. In smaller cities, retailers may even have to find "a guy on a bike" to deliver packages, adds Keh.
Adapted from China Knowledge@Wharton, http://www.knowledgeatwharton.com.cn. To read the original version, please visit: http://bit.ly/ykGmX7.
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