Chinese consumers embracing online sales while modern retailing displaces traditional

Hewitt Lv was trained as an engineer but early in his career he started doing some marketing work and therefore decided to get an MBA at the Shanghai Jiao Tong University. After that he became focused on market research, the topic he has been working with for 10 years.

Hugh O’Brian 

“Up until about two years ago we were always talking about double-digit growth in the emerging market of China. For fast-moving consumer goods, FMCG, we had been experiencing around 15% annual growth. Starting from mid-2013 we have seen a slowing trend, with only single-digit growth. Of course, this is still stronger economic growth than most parts of the world but it is slower than what we had seen for the past decade (fig. 1).


ONLINE AND ALIBABA GROWING EXPONENTIALLY IN CHINA. Online shopping and retailing is a big trend in China with Chinese consumers very willing to try new technologies and methods. Relatively speaking, and especially for the big tier 1 cities like Beijing and Shanghai, consumers are very early adopters of technology. Basically everyone in tier 1 cities has a smart phone, for example.
Regarding overall online retailing, FMCG is lower than other categories like apparel and telecom, but online FMCG sales are growing at 50 to 100% annually.
Even milk, for example, is being sold online from a very low base of course but at a very high growth rate of over 125% annually.


QUALITY AND CREDIBILITY FAVORS BRANDS. The biggest hurdle to buying online is product quality, or perhaps the credibility of the online seller. Chinese consumers spend a lot of time working, so they are looking for convenient shopping channels, online offers and very good prices. So the only major hinderance is convincing shoppers that they will get the quality they are expecting. Of course, logistics are also challenging but workable.
Brands play a key role in this issue since brand quality tends to be high and consistent. Therefore some of the famous brand houses like Procter & Gamble and Unilever have opened shops on Tmall.
Consumers feel this is exactly the same quality as off-line, and manufacturers are offering a better promotional price, so they buy and get delivery to their homes. It’s very easy, convenient and credible, and is increasing very rapidly.


There is a phenomenon in China called the “Singles Day”, which is November 11, abbreviated as 11.11. This plays on the connection between these four 1s and unmarried or single people. In 2009 Alibaba started promoting it as an incredible online discount shopping day, offering savings of around 50% for all branded products bought over the Internet in China that day, excluding telecom equipment. It’s like Cyber Day in the US but much, much bigger (Figs. 2, 3).
In 2014, a few months ago, Singles Day sales over the Internet in China were an amazing US$10 billion. That’s nearly double the previous year and has put an enormous strain on logistics and delivery capacity throughout the country. Immediately following 11 November, millions and millions of packages have to be delivered in the following three or four days. There just isn’t capacity to do that.
Taobao and Alibaba created this concept, although now many other e-tailers are involved and the sales volumes are clearly enormous. I’m sure e-commerce will keep growing very rapidly in China for the next few years, at least.


On the bricks-and-mortar side, there are rapid developments as well. Modern trade, which is defined as modern stores with scanners and the ability to take credit cards, is taking over from the traditional groceries. Today there are about 200,000 ‘modern’ outlets in China, out of 3.3 million total outlets, modern and traditional in China. That is only 6%. But those 200,000 modern outlets account for nearly 50% of all sales, and they are growing quickly, with smaller format convenience stores and mini-markets (think 7-Eleven) accounting for the lion’s share of that growth (Figs. 4, 5).
The top three retailers presently have only 15% share by value of the modern trade, meaning it’s a very fragmented market. 15% is a very low number. In Western Europe figures are generally 70-80% for the top three retailers. In Australia, it’s 100% as there are only two big retailers (fig. 6).
The retail business in the big modern cities, the so-called tier 1 and 2 cities, is very competitive. Modern store count grew by 26% in 2013, but 13% of the stores closed, so the actual net growth was only 13% new modern trade outlets. So the big-banner stores like Wal-Mart and Carrefour are increasingly opening up in tier 3 and 4 cities because the bigger cities have become far too crowded with modern retail outlets.


TISSUE MARKET DEVELOPMENTS. Tissue is an RMB 30 billion ($4.8B) business in China, off-line, and online is maybe 5 to 10% of the off-line figure, as a very rough guess (fig. 7). With a very large buildup in tissue manufacturing occurring in recent years in China, the market is getting crowded and price competition is getting tougher.
We send our people to the hypermarkets to observe promotional activity and find that the tissue category is almost always on promotion. Brand A one week, the next week brand B. We also do some modeling work to analyze the price elasticity of all categories. We see the tissue category is very high, meaning consumers are very sensitive to price. Overall tissue is a heavily promoted category in China.


BUT DOES PROMOTION PAY OFF? Well, sometimes you have to do promotion because the competitor is doing it. We do some PNP studies (price and promotion) for our clients and we have the feeling that some players do clearly over-promote tissue sometimes, meaning that they are cutting the price more than will actually influence the consumer or drive any extra sales. For example, a manufacturer might be doing 15 or 20 weeks a year on promotion, when they only need to do 10. Some retailers that have better checks on their competitors’ pricing or have a more solid pricing strategy seem to be doing better at promoting in a profitable way.


PENETRATION DRIVING GROWTH, BUT GREEN AND INNOVATION EXCITES. If we look at the two main tissue products in China, bathroom tissue and facial tissue, we see the biggest growth driver is increasing market penetration in the lower tier, smaller cities. That is the key to growth; basic growth in volumes is driving total growth and value (fig. 8).
New product innovation is the second driver to gain attention and market share, as the Chinese consumer is quite willing to try new products. Specifically ‘green’ products, that can be seen to be reducing pollution or helping the environment, are very popular with consumers.
Our research shows that instead of just launching a new product, if you launch a new product with a story that leads back to high technology, environmentally-friendly, green, good for health etc., the more likely it will be successful.
As China’s pollution problems are rising, the emotional value that consumers put on something that they feel will help the situation increases.


ENVIRONMENT MAY BE PRIORITIZED OVER GROWTH. The new Chinese president Xi Jinping is pushing hard on the environment and pollution issues, which will not help grow the economy, but it is certainly raising the profile and will hopefully clean up the environment. Perhaps he has decided that environment is a higher priority than the economy; even 7% growth is still pretty good.



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