In order to manage, first measure. An accurate valuation of your business is critical to successful management.

In order to manage, first measure. An accurate valuation of your business is critical to successful management.

Real estate is often the most valuable asset on the balance sheet. When was the last time you had it reliably valued?

Real estate is often the most valuable asset on the balance sheet. When was the last time you had it reliably valued?

Often overlooked but always critical. Typically machinery & equipment is only considered for managing depreciation.

Often overlooked but always critical. Typically machinery & equipment is only considered for managing depreciation.

China Consumer Market – The Supermarket Sector

The Supermarket Sector Experienced Rapid Growth in the Past Decade

Since the early 1990s, when the supermarket sector started to open to private and foreign investors, the Chinese supermarket sector has been expanding massively. In 1992 there were around 2,500 supermarkets in China, and following economic growth and urbanization, the number of supermarket increased fourfold by 2002. The growth trend continued and the number reached 38,554 by 2011. The compound annual growth rate from 2002 to 2011 was 15.82%. As a matter of course, sales volume has also increased significantly from RMB131.8 billion in 2002 to RMB339.8 billion in 2011. Today, the Chinese supermarket sector is quite mature and competitive. 

Current Status of Chinese Supermarket Sector

What are the problems with the foreign players?

Foreign companies have been allowed to invest into the Chinese supermarket sector by joint venture since 1991 and permission for the first wholly foreign owned retail and wholesale companies was granted in 2004. According to the China Chain Store and Franchise Association, there were 14 supermarket chains in China’s 2012 top 100 chain stores list. Of these 14 supermarket chains, four are foreign invested including RT-Mart, Walmart, Carrefour and Tesco. The number of stores and sales volume of these supermarket chains has been increasing from 2005 to 2012. 

In spite of the expansion in scale and sales volume, foreign invested supermarket chains face various challenges. Three major factors hinder the further development of foreign invested supermarkets.

  1. Poor Adaptation to Local Culture: Carrefour and Walmart, two of the world’s largest supermarket chains, entered the Chinese market in 1995 and 1996 respectively. However, it seems that these companies are still not able to acclimatize to local circumstances. Foreign supermarket chains typically adopt a nationwide strategy and often ignore the huge differences between regions in China. The success of a particular business model in one region does not mean it will fit other regions. For example, these companies usually employ non-local people for the middle and top management positions and consequently, the decisions made often do not answer to local expectations.
  2. Losing Competitive Edge over Domestic Players: To begin with, in the 1990s, foreign invested supermarkets enjoyed certain advantages over local competitors, such as tax benefits and preferential right to choose a location. Today governmental policies are less beneficial to these companies, for example, new taxes have been imposed on these companies in recent years. In addition, foreign invested supermarkets used to be better than domestic players in terms of available capital, technical knowledge, and brand reputation, but over the last decade domestic players have managed to narrow these gaps. 
  3. Marginalization of General Merchandise Store: Foreign invested supermarkets usually operate in the mode of the general merchandise store (GMS) in high rental areas. These foreign invested supermarkets now have found it difficult to stay in core areas due to their low lease capability. Moreover, the high degree of product similarity in the market has also caused some consumers to switch to other competitors. The mode of general merchandise store is also gradually being marginalized as some domestic players have found success by adopting other strategies. For example, China Resources Vanguard developed high-end quality goods markets and Yong Hui Superstores emphasized fresh products.

Time for Market Transition

There is keen competition in the supermarket sector and many companies have seen a slowdown of profit growth or even recorded negative profit growth. The market players are now finding new ways to reclaim the market. Censere identifies three major trends during the transition in progress:

  1. Online Shopping: Following the wide adoption of the internet, online retail has become more and more popular in China. Some players in the supermarket sector have already established their online retail platform. Under conditions of increasing costs, for rent and human resources, online platforms have the potential to open up a new market with lower costs. Large retailers have several advantages in opening up online retail channels. They have higher consumer awareness, greater bargaining power with suppliers, and abundant experience in logistics. Currently, online retail is still in its infancy and market players regard it as a supplementary channel. 
  2. High-end Supermarkets: Following the continuous economic growth of China, a group of strong purchasing power consumers has emerged. These consumers are willing to pay more for high quality products as well as lifestyle. Currently, the development of high-end supermarkets is at an early stage. Many markets players, such as Bailian, China Resources Vanguard, and Walmart, have attempted to grow market share and become market leaders by setting up high-end supermarkets. Because product sourcing channels and operational models are still in the exploration stage, and due to high rental costs, high-end supermarkets are not yet profitable. However, the high-end supermarket sector shows considerable promise as the number of consumers with strong purchasing power is growing. 
  3. Development of Private Brands: As a result of decreased profit from retailing, many companies have launched private brands in an attempt to grow profits. Low procurement costs, and no advertising costs, make the overall cost of private brands much lower than other products. As a result private brands are more competitive than other brands. According to Century Lianhua (a subsidiary of Bailian Group), the retail prices of its private brands are lower than other brands by 20% to 30%. A survey conducted by China Chain Store and Franchise Association in 2011 showed that 39 out of 65 large supermarkets have launched their private brands. It is believed that large market players, with well-established networks, brand awareness, and good access to market information, will gradually strengthen their private brand businesses.