China’s changing consumers: Retail and Sourcing market outlook

As China’s retail market continues to look promising with a wide range of opportunities and market-entry strategies, the Michael Page Retail Outlook suggests hiring activity is becoming more tactical. Let us examine what is really happening within the retail market in China today and make some predictions for tomorrow, so retailers, both foreign and domestic, can prepare for new opportunities.

While China’s retail landscape diversifies and becomes more complex, pressures to reduce costs remain, as well as calls for productivity to be increased. Retailers will have to juggle driving flexibility and managing under shorter lead times whilst sustaining long-standing relationships with vendors and suppliers.

The sheer size of the China market and the differing consumer preferences throughout the nation, mean retail businesses will need to be more strategic and targeted in their approach. Foreign brands should consider expansion plans in first tier cities where the population has a wider appreciation of consumer trends and a greater knowledge of overseas companies. Penetrating the first tier cities will require some caution, as the demand in this area is mostly developed and consumption demand is lower than in second tier cities.

The Chinese government is making efforts to align development and expansion of its retail sector more towards domestic consumption rather than export dependence. In this vein, the Chinese government looks to introduce beneficial policies and bridge the gap between the price of retail goods in China and those abroad. Reduced retail prices will also encourage domestic consumers to buy goods in Chinese department stores rather than abroad.

Competition in China’s retail industry

Overall, the Chinese retail industry is highly competitive, with a variety of operating models and market entry strategies. Apart from generating revenue through product sales, speciality stores and department stores, technology is a crucial differentiator with the emergence of ecommerce. There also exist a number of globally recognised and less well known brands, among which few have achieved a national presence.

There are also incentives in place particularly the duty free tax benefits to encourage more retail sector opportunities for foreign companies. The trend now is to have more affordable luxury and lifestyle luxury stores where they target a broader range of consumers and prices stay moderate.

The outlook for luxury stores dips slightly. Some luxury brands have slowed down or stopped their expansion plans in China particularly in this year. Some top-tier brands are starting to closing down stores in China. For instance, Louis Vuitton recently announced the retail chain will close over 10 stores across China.

Most of the top-tier brands in China are changing appearances of their stores. Rather than malls, it is the individual brands that are doing refurbishments to give their existing stores a facelift. They are also investing more talents and efforts in field coaching professionals to upskill their sales force capacities.

New centres of growth

New reports and surveys by consulting firms indicate that Chinese workers are eager to flock to these fast-growing cities, giving companies access to a new level of talent and skills. Indeed, a survey conducted by the Wall Street Journal earlier this year argued that with the influx of new workers and industries, second-tier cities are also becoming thriving places of commerce, with large developing consumer and industrial markets.

A recent report from Business Monitor International predicts that from 2009 to 2014 retail sales in China grew by a brisk 74 percent in local currency terms. Part of the reason, the report notes, is the expansion of Chinese retailers into the booming secondary and tertiary cities.

Companies need to consider the wide-ranging needs of smaller cities that are seeing a surge in growth and brisk advancement. Retail companies will have to design city-specific solutions, including product portfolios, marketing approaches and operating models. These should complement the distinct culture and demographics of these cities and the needs of the increasingly sophisticated customers.

Building a changing market

Competition in the consumer markets will intensify as retail brands, both international and local, both continue to ramp up their presence in China. Companies will have to dedicate themselves to better understand the needs of customers, their expectations and habits. They will have to pay attention to enhancing their productivity and efficiency by merging technology and innovation. They will also have to be more strategic in their overview of the business through investing in suitable training, improving employee loyalty and refining e-commerce and mobile commerce programmes.

With influential social media websites such as Sina Weibo and Meilishuo, retail companies will have to diversify and expand opportunities for users to share feedback and write reviews, spurring customers to visit brand portals more. Increasingly, sophisticated and savvy Chinese consumers – an expanding middle class and a rising number of aspirational consumers – are fast changing the skills required to manage and lead in the retail sector.

A heightened need for more expertise and specialist personnel will call for a demand for retail trainers who understand the brand culture and can bridge the gaps in strategy or communication between the local store and its foreign counterparts. For China’s retail sector to continue to thrive and expand, it will have to shift gradually towards a more consumption and service-driven model, so as to attain volume in sales and meet quality standards in productivity and innovation.

Planning for continued, sustained growth

Retail companies in China will need to develop a broad-based business plan that allows them to stay ahead of the competition and gather their resources for maximum growth.

To ensure success and effectiveness, retail players need to look at creating a sustainable operating model that balances the pace of business with long-term strategic interests.

Talent scarcity and challenges with identifying the suitable fit locally will encourage retail companies to rethink the way they operate and enter new markets. They will need to identify the right go-to market for each location, weighing considerations such as financial, legal and operational barriers.

Choosing which resources to deploy or move around will require discretion on the part of retail companies. It is critical that the best talent is deployed to make the best impact and most distinct outcome. The most versatile and innovative talent are needed today to find solutions for lowering market-entry thresholds, encouraging certain business formats, and boosting domestic consumption in China’s competitive retail sector.

Fast Facts

• Over 25 of the world’s largest retailers are conducting business in China.
• Five of China’s domestic retailers are ranked among the 250 largest global retailers on the Global Powers of Retailing for 2014.
• China’s GDP growth of 7.4 percent in 2014 was its lowest in a quarter of a century. Yet, relative to other developing markets, its performance is unparalleled, and in 2014 its retail growth was an impressive 11.6 percent. China’s retail market is expected to surpass the United States as the world’s largest retail market by 2018.
• As Internet penetration expands and online offerings improve, China’s ecommerce retail sales could grow as much as 25 percent annually. The online channel will continue to be a major focus for retailers in the region in the coming years.
• China emerged triumphant and came out on top of AT Kearney’s Global Retail Development Index 2015, the first time since 2010.

Source: Global Retail Development Index from AT Kearney

The Chinese retail industry is highly competitive, with a variety of operating models and market entry strategies