The opportunities for private label in China

Matthew Crabbe

In the course of these last few years, China has been representing a market with good growth potentiality; given the current situation of rapid economic growth, it is interesting to evaluate the potential for private label (PL) goods, the size of the current market and the possible opportunities for private label manufacturing.

The total retail market in China grew by 52% between 1996 and 2002 in current terms, at an annual average growth rate of 8.68%;

The market is now worth a total value of US$463 billion;

The total number of stores grew by 44% between 1996 and 2002;

The total number of S-markets, H-markets & C-stores grew by 182% over the same 6-year period;

Per capita household incomes rose 34% since 1996.

The key point for consideration here is how such dramatic economic growth has changed the society in which the average Chinese citizen lives.

Such rapid change has manifested itself in several ways:

Greater variety – of shops, products, brands, aspirations and lifestyles.

Massive change – in living standards, spending power, foreign influence.

More uncertainty – in education, housing, employment, relationships, future goals.

ALL OF THIS COMBINES TO MAKE THE SOCIETY VERY DYNAMIC, CHANGEABLE AND COMPETITIVE.

Despite the huge opportunities it offers, China is not an easy place to be successful, and understanding the market from the ground up is the key to making it there. Futhermore, knowing the consumers you are trying to reach is imperative.

It is also imperative to understand where the growth comes from. It is worth noting that much consumer spending power comes from built-up savings and new borrowing; that substantial foreign direct investment (FDI) continues to pay for great infrastructure development (not local tax revenue); and local banks support many Chinese companies, which are still trading and paying wages, which may be in debt. So, to enter such a rapidly changing market, due caution is necessary.

DESPITE THE HIGH RISE IN AVERAGE INCOMES, THE MAJORITY OF CHINESE PEOPLE STILL LIVES ON RELATIVELY LOW INCOMES. The mass market represents the majority: low-income, high-aspiration. You only have to visit a major Chinese city to see the aspiration to wealth. But wealth is only part of the equation.

Most Chinese citizens simply want to have the opportunity to afford a lifestyle that lifts them from the low income mass (of 1.3 billion) to a more comfortable lifestyle; they aim at taking away some of the uncertainties that come with living in a country of such noticeable, rapid economic and social changes. However, aspirations are high: the Chinese media always dictates high aspiration, whether it be in government propaganda, or product advertising. It all hinges on aspiration to a better lifestyle.

The key lifestyle aspirations at the moment are for more and better living space, and mobility. Individual independence is key in this. Young Chinese long to be able to live on their own. They want careers, lifestyle, travel, education, gadgets, etc…

As more young-generation Chinese are living by themselves, so shopping patterns are changing. There is a shift from the tradition of shopping for fresh food for the day, each day, to shopping more for weekly groceries. More convenience for busy career lifestyles. A weekly shop is bigger than a daily one, and heavier to carry, so a car becomes necessary to transport it. Also, the supermarket has everything in one place, which is more convenient than shopping at several stores for different items; underground car parks and taxi ranks represent further advantages.

In a rapidly changing world, where life is becoming increasingly more frenetic, the last thing you need to be thinking too much about is the grocery shopping. The keyword is convenience. The result of more people focusing on career, marrying later and having children later, is that average household sizes are shrinking. However, Chinese families are tight-knit, and continue to purchase large-ticket items as a unit rather than as several individual households.

Newer, younger households tend to be more interested in new design, be it in products, or for their household interiors. Time-saving appliances help with busy lives, ergonomic design looks good and works well. So the interior landscape is changing just as rapidly as the exterior one.

THE GOVERNMENT IS ENCOURAGING CAR OWNERSHIP and, despite the lack in parking, car sales are rocketing. Owning a car means more people can shop for convenience, which leads to more use of supermarkets and hypermarkets, more of which are being built in the suburbs. Home and car buying also means more mortgages and loans. This entails that Chinese consumers, who were used to paying for what they bought, are increasingly learning to live under the rule of credit: anathema to the previous generation.

Home delivery is also useful, bringing the dawn of phenomena like catalogue shopping and e-commerce. Yet more convenience, yet more opportunity to use credit. In this way, Chinese society is undergoing the kind of changes that occurred in Europe and North America in over 50 years, from the end of the Second World War. But, Chinese society has made these changes in under a decade!

People are also having fewer children and per capita spending on children by the adults in the family is increasing.

THE WIDE DEVELOPMENT IN CONSUMER ECONOMY IN CHINA SHOULD HAVE MEANT THAT RETAILING WITHIN THE COUNTRY IS NOW EASIER. However, there is one major stumbling block. All the retail chains in China remain highly localised.

This is due mainly to the fact that they are restricted by the country’s distribution infrastructure, which has lagged behind the retail boom.

Distribution used to be run by the military, then by government monopolies and is only now opening up to private Chinese companies, and foreign companies’ involvement and investment. The chill chain is missing several rather crucial links. If you are Wall’s selling ice cream in China, you do not use local distributors: you set up your own distribution network, at great expense.

For most, sourcing goods therefore has to be local, and distributing goods is restricted by lack of good transport and its high cost. This is why Carrefour has been so successful in China, having concentrated on getting the goods sourced locally to its stores.

IF YOU ARE A CHAIN STORE RETAILER, AND WANT A WAREHOUSE, YOU HAVE TO BUILD IT YOURSELF. If you want chiller trucks to transport your goods from warehouse to stores, you have to buy your own fleet. Such investment is only possible for the main retail chains, and even these are relatively small and localised. Truly national chain stores are therefore some way off. But, as with all things in China, this is changing fast. The distribution market is opening up, and new investment is flooding into this sector. All of these chains are very localised.

Even Lianhua, by far the leading chain in China, is merely restricted to the Shanghai region, and has only expanded elsewhere through franchising – another key growth area. The likes of Carrefour and Wal-Mart have huge resources to invest into developing their own infrastructure, but their success rate is still slow.

THE HOME IMPROVEMENT MARKET IS BECOMING BIG IN CHINA, for the reasons already outlined, but even chains like IKEA and B&Q are still struggling to make any money. The cause of this is distribution difficulties.

Car ownership is still low, so few people can transport their IKEA sofa by themselves. This means that IKEA and B&Q have to provide for home deliveries, and the level of this type of service is still rather low. This is due to a lack of strong management, failure to explain to delivery drivers that furniture should arrive to the customer without any damage, be delivered to their home, and be assembled for the customer.

THE C-STORES HAVE BROUGHT ONE MAJOR RETAIL DEVELOPMENT, I.E. STORE BRANDING. Although most of the goods sold are branded, most C-stores sell hot snacks, prepared on the premises, in competition with the traditional street vendors who have been selling snacks to morning commuters for years. C-store snacks are served in their branded wrappers, and so could also be considered “own brand” goods.

Most foreign retailers entered the Chinese market during the decade of the 1990s, when the retail market was gradually opening up to foreign involvement, initially only in a few major cities. As the Chinese government has relaxed market entry rules, in line with World Trade Organization entry agreements, so the number of locations for foreign retail involvement has also increased. This has resulted in the fact that the incumbent foreign retailers in China are now planning substantial development in the size of their store chains.

7-ELEVEN IS THE MOST AGGRESSIVE OF THE FOREIGN RETAILERS AND IS PLANNING SOME 800 NEW STORES IN THE NEXT FEW YEARS, mostly into new territory in and around Beijing, while also continuing to expand its presence in Guangdong province in the south of the country. There is also talk of it entering Shanghai, but the longer it waits, the harder it will be to carve a niche in that crowded market.

Buoyed by its success thus far, Carrefour is planning to build about 350 more new hypermarkets around China in the next 5 to 10 years, expanding in a wider area of China. Carrefour is already set up in the main eastern cities, but has yet to establish itself in the many secondary cities in the East, as well as in the large cities of the inland provinces.

Following close on Carrefour’s heels, Wal-Mart is seeking to build another 100 to 200 stores in the next five years in China.

Smarting from the initial success of Carrefour, Wal-Mart will be keen to catch up with its French rival, and certainly has the cash for a campaign of rapid expansion in China. So, what are the key potential private label sectors in the Chinese market? Well, everything that we use on a daily basis, and it is no real surprise in an economy that is still very much a developing one. This includes toiletries, convenience foods, beverages, drugs, disposable paper products and even home appliances.

SO, DOES PRIVATE LABEL ACTUALLY EXIST IN CHINA YET? Yes, in that there are private label goods, but they are few and far between, and are mostly imported brands. In a still-developing retail market, PL is still only on the cusp of making an appearance, certainly among the local retail chains.

A very common though mistaken idea is that Chinese consumers only want brands, and that they are highly brand conscious.

Some are, indeed, but the majority just want value-for-money, especially for the basic daily products, as listed previously.

Bottled water is a commodity, not a lifestyle statement, in China. However, Watson’s Water is a successful own-brand product, thanks to its trendy and ergonomic bottle.

THERE ARE SUCCESSFUL PL PRODUCTS IN CHINA. Watson’s (again) also manufactures its own branded soft drinks and juices, which it sells through its Watson’s branded stores, and through its parent company’s (Hutchison Whampoa) Park’N’Shop hypermarkets in southern China. So the potential for no-nonsense, no frills, no pretensions store’s-own-brand FMCG is certainly there, but the problem is the price point. Is there any money to be made in PL?

Perhaps a premium PL brand could be created to compete against non-PL brands, and make some money. This would be difficult to achieve successfully at the moment, but the future in China is always closer than you think.

Premium PL would be the only way to make a profit, given the tight margins of the retail market. The problem is that even in the branded goods sectors many products are cheap to buy, so the margins have to be tight. Manufacturing in China is cheap, but the most expensive aspect is getting the goods to stores, which eats into profit.

HOWEVER, SUPERMARKET AND C-STORE CHAINS CONTINUE TO SPREAD, and this will mean more organised retailing, with better self-run distribution, supplying branded, well-maintained stores.

The competition between these retail chains, especially as they crowd-out markets like Shanghai and begin to confront each other in other regions, will mean that gaining a lead through brand image will become the new mantra for such retailers. So there is going to be opportunity for PL. The problem is working out when that time will be and making money from PL in China will become possible.

It is also worth considering the growing numbers of department store chains, many of which have the potential to sell “own brand” food, toiletries, clothing, even (though this would be a long way off yet) electrical goods. The potential is there, but such chains are still largely restricted in geographical range, and therefore market penetration, so the volumes would be small.

However, this situation is also evolving.

CHOOSING WHICH PRODUCTS WOULD WORK AS PL PRODUCTS WILL ALSO BE A MATTER OF UNDERSTANDING THE INDIVIDUAL PRODUCT MARKETS, and being able to judge when the time is right to introduce PL goods into any given sector. Just because the Chinese market is growing fast, does not mean that the market is ready for PL in many sectors. China is a tough market. For anyone wishing to enter its market, whether as retailer or manufacturer, this is something that has to be borne in mind. Chinese consumption is still at a relatively low level, for now. Prices are low, margins are tight, competition is high.

There are opportunities, and PL will no doubt have a place in China, but it is only just emerging, and will be tough-going for several years to come. •