Grocery Retail in China, Bull or Bear?

Carrefour recently sold 80% of its operations in China. Meanwhile, Aldi just opened its first China store, and Costco is also set to open its first store in Shanghai this month. It looks as if China’s grocery retailing is a “fortress under siege” – some want in, some want out. So, is this market truly attractive?

The latest statistics from the 2018 CCFA (China Chain Store & Franchise Association) report may yield more questions than answers. Overall the grocery retailing market is growing at 2.5%, yet sales per sqm is down by a whopping 8%. Gross margin is up by 0.5% yet operating cost is climbing at double digits (labor and rental costs are up by 13% and 10.6% respectively). Grocer-operated e-commerce grew rapidly at 50%+, yet it only accounts for <2% of their total sales. How do we put these numbers into perspective?

The short answer: there’s still great potential for grocery retailers, but they need to be relentless in staying relevant to the rapidly evolving Chinese consumers.

This is because consumers are getting more sophisticated, more demanding, more value-conscious than ever. And they change fast.

Consumers want the latest and greatest from around the world. Increasingly they want to know how things are made and distributed to get a sense of trust. They want to explore and be inspired. Most importantly, they are increasingly “spoiled” with options.

In the past, consumers decide where to shop among 2-3 stores in the vicinity. Now, they can always resolve to buying from the comfort of their mobile, the malls nearby, the modern wet markets in the neighborhood, the convenience store downstairs, or even the unmanned kiosk in the office. Retailers now need to have a clear value proposition of why consumers should go shopping at their place in lieu of the endless options out there.

Consumers are willing to pay more, but only if it’s justified. More importantly, pricing is now transparent to everyone with a click of a button using apps such as Wochacha. To reverse margin erosion retailers need to either provide uniquely relevant products/ experiences or reengineer their cost structure altogether.

Finally, consumers’ needs are rapidly changing. Think about the cashless society, shared economy, everything O2O, and the proliferation of new entertainment formats. These did not exist just a few years ago. Consumers’ lives are rapidly changing, and they expect the same pace of changes from retailers.

How do retailers stay relentlessly relevant to Chinese consumers?

Think customer-in, omnichannel experience.

It is ironic that retailers, despite day-to-day customer interactions, often do not truly know their customers. Next-gen retailers are actively getting to know their customers, engaging them across online and offline touchpoints, in and out of store experience. They think hard about what drives customers to shop and what makes them indispensable to customers among the various shopping options. Is it fresh, ready-to-eat, price, exclusiveness, discovery, value-added services or the shopping environment?

The “how” is also critical. Take “fresh” as an example, how do retailers become known for fresh?  It takes a holistic approach from sourcing strategy (e.g. Yonghui’s local direct sourcing), supply chain capabilities (e.g. Walmart’s blockchain traceability pilots), to store design (e.g. Hema’s seafood tank credentialing), communication (e.g. Hema’s day-of-week vegetable packaging), and more.

This also means that retailers need to rethink the way they operate. Instead of the lens of format/ channel (e.g., store vs. e-commerce) and functions (e.g., merchandising vs. operations), retailers need to see from the lens of customer value proposition and journey.

Think multi-format, think small.

Retailers should develop store concepts designed against target personas and occasions to improve sales productivity. This means operating multiple, smaller store formats tailored to locale. For example, Yonghui has been expanding its formats such as YH Mini, YH Bravo, Super Species, and YH Lifestyle to cover different occasions and segments. Hema is also following suit with the recent announcement of 1+N store format strategy, adding 4 new store formats covering wet market, neighborhood market, and convenience store.

Coincidentally, smaller format e.g. convenience store is also seeing strong growth momentum (21% YoY) given low penetration. It is also noteworthy that smaller format is best fit for the omnichannel future as it is both complementary and supplementary to e-tailing: think last-mile warehouse for delivery; think replaceability of on-the-move consumption.

It is not easy to head into the multi-format world given the huge back-end implications (say, store operations, merchandising, supply chain), but this is something retailers need to double-down on.

Think data.

Increasingly, leading retailers are making strategic decisions backed by data: customer segmentation, site selection, pricing, promotion, assortment adjustment, store flow optimization, sourcing optimization and others.

As decisions are increasingly data-driven, as a first step, retailers need to think through their data acquisition strategy. How to get more information about customers via a clear value exchange? What are the potential sources of external data to leverage? How to capture meaningful data through the sea of unstructured data within reach? How to capture new data points via the use of IoT? Importantly, retailers should start data strategy with tangible business use cases, instead of technology.

Think agile.

Traditionally, successful retailers have a strong operation mindset – they are highly efficient yet somehow rigid. With rapidly changing customer expectations, retailers need to be more agile, working across silos to generate multi-disciplinary solutions. Embracing “test fast, fail fast” mindsets to accelerate time to market. Balancing top-down visions and bottoms-up ideas to enable change. Engaging with the broader ecosystem to get inspiration.

Transforming into an agile organization requires change in culture, operating model and performance management, and it needs to be led by examples with C-level endorsement.

Staying relentlessly relevant takes a transformation agenda. Some retailers have already embarked on this transformative journey and have built industry-leading growth momentum. Will you be next?

 Building Relevant Brands: 

 A New Way to Win with Customers 

 New Retail in China:

 Promise, Progress and Pitfalls