151016_cb_china power of retailing 2015_cn.docx

China Power of Retailing 2015 1

China Power of Retailing 2015


Foreword 2015 has witnessed the recovery of a global economy and the gradual stabilization of a real economy in China. While the Eurozone economy continues to improve, the differentiation among its economies remains noticeable. Abeconomics throws Japan into deep recession. The United States of America, as the only exception, enters the trajectory of a strong recovery and the US dollar has appreciated sharply against other major world currencies. Its well-anticipated rise in interest rate in the fourth quarter forebodes an accelerated devaluation of currencies in most emerging economies. As a result, the pressure on devaluating RMB is mounting.

With a slowed growth rate, the Chinese economy has arrived at the stage of new normal. The YoY growth for the first half of the year lingers around 7%, hindered by the deceleration of the three engines that used to propel GDP growth a sluggish export, a slow growth in investment and a domestic consumption that continues to fall behind expectation. Although the growth rate of the total retail of consumer goods has dropped, it has far outpaced the domestic industrial growth. With the consumer confidence seeing constant improvement that will further free up consumption potential, consumption is expected to continue pulling the economy in the future. A continued fall in oil prices has offset the inflationary pressure, curbing the inflation at a lower level to make room for executing a lax monetary policy. To further boost investment and consumption, and reduce enterprise financing costs, the government has gradually redirected its macro economy from stabilize growth and adjust structure to ensure growth, making the lowering of interest rate and reserve ratio possible in the second half of the year.

A rising cost and narrowed profit still threaten the retail industry. Constantly climbing house rents and labor expenses have pushed up enterprise operational costs and further eaten in their profits. Meanwhile, physical retailers face the challenges from e-commerce, forcing the traditional retail industry to go through the pain of transformation, while the competition among retailers is becoming more brutal. On the other hand, technological innovations, change in consumer behaviors and individualized needs in consumption have combined to drive enterprises to beef up efforts in online business, switch to O2O all-channel operation and speed up mobile e-commerce and cross-border e-commerce deployment.

Our major findings about the situation in the present and trend in the future in Chinas retail industry include:

A slowing economic growth, consumption upgrade, emerging industries and the emergence of online and mobile shopping have grabbed a significant share of offline retailers and resulted in the slowdown in the growth rate of the latter. At the same time, constantly rising house rents and labor expenses have put tremendous pressure on the costs of running businesses. In 2014, growth in sales slipped to 5.1% among top 100 chain retailers and net profit dropped to 2.08%, a 0.03 percentage points below last years figure.


The slump environment has further differentiated the operating results across retail enterprises. It has come to our attention that enterprises with a national operation have outperformed their regional counterparts thanks to the economy of scale and their mature operational and managerial mechanism. In terms of the type of operation, shopping malls and convenience stores have maintained in a growth trajectory due to their stronger capability of defending themselves from e-commerce and the upgrade and transformation they have done to adapt to changing consumer needs. Although businesses have made the attempt to fend against risks by diversifying their types of operation, the operational data collected this time prove otherwise: Businesses with only one type of operation have delivered better results than those with multi-types of operation, suggesting that businesses should take a cautious approach toward transformation.

Integration in the retail industry has picked up in speed where businesses seek to break through by mergers and acquisitions. Foreign companies begin to feel increasingly fierce competition from local rivals. More M&A deals are concluded among Chinese enterprises that are more inclined in M&A across different types of operation.

The rapid development in internet technology and logistics has fueled the continuous growth in the size and share of e-commerce market.

Physical retail industry is undergoing an accelerated transformation and restructuring. More stores will be closed to further optimize commercial structure and more emerging technologies will be adopted to differentiate operations.

The entire retail industry is switching to O2O all-channel operations where the last-kilometer distribution remains a critical factor in consumer experience.

Cross-border e-commerce emerges to be a new growth engine, steadily bringing up shares in import. B2C and B2B will grow hand in hand. While internet giants have intensified their efforts in making cross-border deployment, physical retailers are wasting no time in testing the water of cross-border e-commerce.

Mobile shopping has grown to account for nearly half of the market of online shopping and is showing the tendency of dominance. The increasing infiltration of mobile payment technology has further boosted the transactions on the mobile platforms.

China Power of Retailing 2015 is published jointly by Deloitte China and China Chain Store and Franchise Association (CCFA). Produced on the basis of analyses of sample data collected from 206 enterprises that responded to the questionnaire we sent out to a total of 208 enterprises, and in-depth interviews we conducted with top retailers, the report offers insights into the trend of the retail industry in China and provides preliminary advice on the transformation of retail businesses.


Contents

I Macro environment .................................................................................................................................. 5

II Retail industry overview and trend .......................................................................................................14

III Operating conditions of hypermarkets and supermarkets .......................................................................37

IV Operating conditions of convenience stores ............................................. Error! Bookmark not defined.

V Operating conditions of department stores and shopping malls ................. Error! Bookmark not defined.

VI Operating conditions of specialty stores ................................................... Error! Bookmark not defined.

Appendix: 2014 Top 100 Chain Store Enterprises in China .......................................................................75


I Macro environment

1.1 International macro environment Global trend

Declining oil prices

Global oil price has declined more than 50% from its level in the first half of 2014, mainly triggered by the increase in the value of the US dollar, expected increase of oil supply in the global market and a decrease of intensity of oil consumption by global economy. The decline in oil prices has a widespread impact on the global economy. It has alleviated the inflationary pressure off all the countries, especially the developed markets such as US, Europe and Japan, and has lifted the purchasing power of oil consumption states such as Japan, India, US and Europe. In the meantime, the decline of oil prices is more likely to add fuel to the economic growth than does an increasing oil price. For oil exporting countries like Russia, Iran, Venezuela and Nigeria, however, a slump oil market has clearly deteriorated their international balance of payment and frustrated their economic growth.

Oil prices may continue to fall in the short term. Considerable new oil production capacity is in the pipeline in the US and is expected to go into operation in 2015, causing crude oil inventory to pile up continuously. In the long term, a depressing oil price may suppress the investment on fracking. As a matter of fact, we have noticed a cut in the number of drilling licenses issued and the amount of capital expenditure in oil companies. As a result, the reduction in oil production by the US may come at the time when global demands start to pick up, which, if materialized, will certainly cause oil prices to rebound. Such a speculation may become reality in as short as a couple of years. A rising oil price will translate into inflation and add pressure on debt repayment in oil consumption nations, leaving them with no choice but to adopt a tightening monetary policy. This is at least true in the US. An oil price hike will, on the other hand, benefit oil exporting countries such as Russia, Iran, Venezuela, and Mexico, in particular.

A stronger US dollar

A remarkable trend for the period from 2014 to early 2015 is the sharp rise in the value of US dollars against most of other major currencies. Many factors have contributed to the trend: a weak oil price, a stronger economic growth and expected rise of interest rate in the US as well as the more active monetary policies introduced by Europe, China and Japan while experiencing sluggish growth. The impacts of a stronger US dollar are multifold. Domestically, a stronger US dollar will make imported goods cheaper and thus have the effect of keeping inflation in check, allowing more time before the Fed has to raise the short-term interest rate. Internationally, a rising US dollar will trigger inflation in all other countries, which although benefits countries with unreasonably lower inflation


rates such as Europe and Japan, may not sound pleasing to many emerging economies. In fact, some emerging markets have adjusted the short-term interest rate up as a way of stabilizing home currency and battling inflation, only to see their economic growth to slow down. Moreover, to the US dollar debt-ridden companies from emerging economies, a stronger dollar means a heightened burden in debt repayment and thus a higher debt risk. Such a debt has quadrupled in the past seven years. Looking forward, although it is impossible to accurately forecast foreign exchange rate, it is highly likely that the US dollar will continue the trend of appreciation.

Important markets overview

US

The US economy is picking up speed and will witness the fastest growth in 2015 since 2005. Despite a robust economy in general, the first quarter of 2015 slumped, partly due to the unsatisfactory economic conditions in many places in the US, or simply reflecting the impacts by the sluggish economy in other countries and by a stronger US dollar. However, the most encouraging data came from a surprisingly robust job market. Encouraging signs are also visible in the area of business investment that suggests a possible come-back. The real estate industry has been underperforming in the US economy. Although data from real estate have been fluctuating in the past year as a result of high mortgage rate and housing price, coupled with student loans that often hinder first-time buyers, the industry has a promising medium-term prospect as housing prices stabilize, mortgage rates go down and more jobs are added to the market, creating vast potential needs.

In addition, factors such as drastically falling crude oil price have kept the US domestic inflation rate far below the Fed target of 2.0%, making it possible for the Fed to raise interest rate before the end of this year. Furthermore, lower inflation rate and energy price have played a role in boosting consumers purchasing power. Unlike the situation in the past few years, fiscal and budgetary control has not been tightened in the US. A sharp decline in budget deficit, thanks to a strong economy, has almost lifted the political pressure to deal with budget deficit off the US government.

In the long run, the United States will have to face the conflict in its population structure. The gap between the increase in retired population and a lagging working population will drag down economic growth, begin worsening budget deficit around 2025 and make it more difficult to fund the pension accounts. Demographically, possible solutions include increasing the number of immigrants, pushing forward the average age of retirement, collecting more taxes that are used to fund the governments pension programs, and encouraging people to save more for the retirement.


Europe

The economy in Eurozone has shown some signs of improvement. Despite a weaker-than-expected economic growth, some positive indicators seem to suggest that the situation is getting better. These include a strong job market, rising retail sales, improvement in manufacturing industry performance, and a partially improved credit market condition. Needless to say, they are far from enough. The major issue comes from a sluggish credit market that has curtailed the number of jobs available on the market to a lower level and kept the unemployment rate high. A sluggish credit market is due to many reasons. For example, shaky banks try to restructure their assets by selling off risky assets and restraining from adding new risks. Worries about sovereign risks and panics over a possible deflation have worsened the risk situation and are haunting the peripheral countries in Europe. Although a moderately easy monetary policy has increased the broad money supply, banking credit available to private sectors continues to fall.

To deal with the problems in the credit market, European Central Bank has introduced a more radical monetary policy recently, including setting an extremely low interest rate, granting low-interest-rate loans directly to banks (on the condition that these loans be extended to private sectors), and most importantly, purchasing government bonds, namely the measure more well-known as QE. While preliminary signs are positive, QE alone is unlikely to bring back a strong economic growth. Other measures needed by Europe include a more slack fiscal policy, a deeper economic restructuring and financial integration among major countries in Eurozone.

Japan

The large tax hike has failed its purpose and has thrown Japan into recession since 2014, causing both the consumer expenditure and business investment to shrink. Right after he was sworn in about two years ago, Shinzo Abe immediately grabbed peoples attention by putting forth a radical economic policy represented by three arrows, the so-called Abeconomics fiscal stimulation, loose monetary policy and structural reform (in essence, to lift control and free trade), among which only the arrow of monetary policy was shot out. According to this policy, Japanese banks implemented unrestrained QE measures aimed at an eventual 2.0% inflation rate, which would suppress the Japanese Yen, uplift securities prices, increase the level of inflation and keep real interest rates at a lower level. Initially this policy went well as planned but soon derailed. The salary level has not shown the promised change but the real consumer purchasing power has diminished that has negatively impacted the consumer expenditure. Sluggish demands from other countries that have not shown the willingness to cooperate have sunk the Japanese export. The most severe problem, however, is caused by the massive tax hike implemented in April 2014. The policy was ready for execution as early as the time when Abe took office. Its impact has been catastrophic and has led to the current economic recession.


In November 2014, Shinzo Abe announced to postpone the second round of tax hike that had been scheduled to kick off in October 2015 for 18 months. How he shoots his third arrow remains a problem. Will he deliver on his initial promise to push forward the reforms that will without any doubt meet with all kinds of political resistance, such as labor market liberalization, removal of controls on product market, free trade, change of corporate governance and encouraging females to enter the labor market? Abe has taken some actions on the last two reforms, but supporters of Abeconomics are now hoping that Abe can solve all these problems, which, if realized, may have a positive impact on enterprise productivity and may boost enterprise confidence and thus rejuvenate investment.

Compared to the US, Japanese banks are adopting an extremely easy monetary policy. It is estimated that, if walking down the current path, the relative weight of the assets of the Central Bank over GDP will increase significantly, but whether it will bring the inflation rate to the level that the government needs remains unclear. Japan has a very strong deflation mentality and is hard to let go. For the time being, the policy has produced a greater impact on the price of assets than it has on inflation, and may remain this way in the future.

1.2. Domestic macro environment The Chinese governments efforts to turn the slowed economy around have not stopped it from deteriorating. The 7.4% economic growth rate in 2014 has been the slowest since 1990. The government expects to see a growth rate of 7.0% this year. What has caused the slowdown? First of all, major export markets like Europe have been weak. Even the US market is not what it used to be. The constantly rising salary level and exchange rate in China have weakened Chinas export competitiveness, and have caused the capacity to migrate from China to lower-cost regions such as Vietnam and Indonesia.

Secondly, the Chinese government has been trying to restrain the shadow banking from growing out of control. The previously rapid inflation of shadow banking has been blamed as causing over-investment in real estate, infrastructure and heavy industry, therefore creating more NPA and threatening the stability of the financial system. However, restriction on this type of investment has the side effect of slowing down the economy. The government is stuck in a dilemma: control the financial risk but not to halt the growth. It has taken measures to keep the size of shadow banking loans from growing out of control and, in the meantime, try to vitalize more kinds of traditional credit through a loose monetary policy. Indeed, both the interest rate and bank deposit reserve ratio have been lowered. However, given the sizable over-capacity in real estate and manufacturing industry, whether the loose monetary policy will lead to more lending on the market or the increased lending will bring desired benefits remain to be seen. The worst case scenario is that it may end up in more losses in economy as more loans aggravate the problems of over-capacity and rising wholesale prices.


Domestic consumption has grown to be a new driving force

Figure 1-1: Nominal growth in industry value-added and total retail sales of consumer goods (%)

Data source: Wind

The above chart shows that while VAI continues to dip, growth in total retail sales of consumer goods, although decelerating, has been much faster than that of domestic industry value-added. Data from the second quarter of this year indicate that overall consumer market is stabilized and is showing signs of growing. Under the new normal economic circumstances in the future, the consumer market is expected to bring hope to the Chinese economy. In the meantime, a weakening oil price that has alleviated domestic inflationary pressure and a stabilizing CPI will give more leeway to the government in the selection of monetary policies and will play a positive role in encouraging business investment and individual consumption. Another force that is significantly driving consumption comes from the emerging consumer market including education, tourism, cultural and entertainment activities, which has been booming due to the accelerated urbanization process and a growing per capita income.

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Figure 1-2: Urban and rural resident consumption expenditure (%)

To further develop Chinas consumer market, the monopoly by the state-owned enterprises in the market must be reduced or lifted. Currently, state-owned enterprises are holding 50% shares in industries such as education, sports, culture and art, preventing these markets from growing at an unprecedented speed. Changes are taking place, to our delight, to bring down the shares of state-owned enterprises. More national policies are introduced to encourage unrestrained competition, which will make the market more dynamic.

Figure 1-3

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Internet + reshapes the real economy and drives consumer industry through innovation

Internet+ has become a nationwide hot topic. The Chinese internet industry, although a late starter, has demonstrated evident late-mover advantages. Compared to developed countries in Europe and US, Chinas internet industry has been growing explosively at a much faster rate than the other countries. It also has a much higher penetration rate. Online shopping accounts for more than 10% of total consumption in China, while in the US it is a mere 5%. In 2014, the total retail sales of physical goods in China were about 80% of those in the US but its online sales were 150% of those in the US. In the future, e-commerce will be a backbone industry in Chinas national economy.

1.3 Recent policies Concerted measures introduced by multiple government departments send cross-border e-commerce into the fast lane

Opinions on the Implementation of Policies in Support of Cross-border E-commerce Retail Export

Ministry of Commerce announced on its official website on August 29, 2013 that General Office of the State Council relayed the Opinions on the Implementation of Policies in Support of Cross-border E-commerce Retail Export jointly issued by Ministry of Commerce and other government departments, which introduced six specific measures about cross-border e-commerce in the areas of customs, inspection and quarantine, tax and collection and payment of foreign exchanges. These measures will be taken as a coordinated effort among nine ministries and commissions including general administration of customs, ministry of finance, and ministry of commerce. This is the first time for the Ministry of Commerce to officially announce a policy in favor of cross-border e-commerce.

Since its announcement, the new policy has gone into trial implementation in the five cities of Shanghai, Chongqing, Hangzhou, Ningbo and Zhengzhou that had been pilots in the customs clearance service for cross-border e-commerce trade. Since October 1, 2013, it has become effective in all the other eligible places across the country.

Circular of General Administration of Customs #12, 2014

In February 2014, in order to promote retail import and export business in cross-border e-commerce, facilitate customs clearance by commercial entities, standardize customs administration and allow for the compilation of customs statistics, the General Administration of Customs (GAC) has introduced a new customs supervision code: 1, The new code "9610" relates to " Cross-border Trade by E-commerce", or " E-commerce" for short. This new code is applicable to cross-border trade initiated by individuals or e-


commerce enterprises via those e-commerce platforms recognized by China Customs. It applies to all inbound and outbound retail goods subject to cross-border e-commerce that have been processed through the mode of clear by commodity lists and declare in total (with the exception of any import or export retail goods traded via e-commerce platforms among special customs supervision zones or bonded customs supervision premises). 2, E-commerce enterprises carrying out cross-border e-commerce import-export trade under customs supervision code "9610" or e-commerce enterprises, payment enterprises and logistics enterprises that are involved in cross-border e-commerce should file a record with China Customs in line with the relevant regulations. They should also submit their real-time data relating to transactions, payments, warehousing and logistics through the e-commerce platform.

The State Council Printed and Distributed on March 12 the Official Reply to Approve the Establishment of China (Hangzhou) Cross-border E-commerce Comprehensive Pilot Zone

In March 2015, the State Council gave permission to Hangzhou to set up China Cross-border E-commerce Comprehensive Pilot Zone, symbolizing the beginning of cross-border e-commerce pilots in China. The progress made in the pilot zone will offer copiable and expandable mature experiences to boost the growth of e-commerce in China and provide fuels to the entire industry. In April 17, the State Council issued Some Opinions on Improving Operations in Ports of Entry to Support Foreign Trade Development, which put forth 22 measures in six areas including optimize services in ports of entry, drive a steady growth in foreign trade, intensify the construction of ports of entry, promote foreign trade transformation and upgrade, improve the environment for foreign trade development, further open up ports of entry and enhance the level of openness, reinforce the foundation in ports of entry, increase the ability to facilitate the economic and social development, and step up the organization and leadership function over the operation of ports of entry.

The State Council issued the Guiding Opinions on Driving a Healthy and Rapid Development in Cross-border E-commerce

On June 20, 2015, General Office of the State Council issued the Guiding Opinions on Driving a Healthy and Rapid Development in Cross-border E-commerce (Guobanfa [2015]46), the first of its kind that completely reflects the opinions of the State Council regarding cross-border e-commerce. It gives opinions in 12 areas including support domestic enterprises to conduct foreign trade business by e-commerce, encourage capable enterprises to grow bigger and stronger, optimize supporting measures in customs supervision, improve quarantine and supervision policies, plan on policies about import and export taxations, improve e-commerce payment and settlement management, provide favorable fiscal and financial support, build a comprehensive service system, standardize operational behaviors and intensify bi-lateral and multi-lateral international cooperation. As a keynote in the development of internet + foreign trade, it reassures


the policy supports by the government to cross-border e-commerce. If 2014 symbolizes the beginning in cross-border e-commerce in China, it soon turns bullish in 2015 when quite a few trade policies are introduced that voice support to cross-border e-commerce. From foreign trade to e-commerce, from one road one belt to free trade pilot zone, cross-border e-commerce has emerged to be an important area in international trade and cooperation.

The State Council issues guiding opinions on commercial development and encourages internet enterprises to go public in domestic stock market.

On May 7, 2015, the State Council issued the Opinions on Driving the Rapid

Development of E-commerce to Create New Economic Engines, encouraging qualified internet enterprises to list in domestic stock markets. It requires that all relevant government departments intensify support in financial services within respective functions,

establish and improve diversified and multi-channel investment and financing mechanisms that adapt to the development of e-commerce, support commercial banks, guarantee inventory management organizations and e-commerce enterprises in providing

various form of intangible assets or movable assets-pledged financing services. It encourages commercial banks, commercial factoring organizations, and e-commerce businesses to carry out supply chain financing, commercial factoring business to further

extend e-commerce businesses financing channels, guides and drives venture investment funds to intensify support to e-commerce start-ups. In addition, it clarifies three principles: Firstly, proactively drive the development and solve various conflicts and

problems in the development of e-commerce. Secondly, gradual standardization. Streamline administration and institute decentralization, loose control but in the meantime tighten supervision. Businesses may do what laws do not explicitly prohibit and the

governmental should not step in the territory they are not authorized to do by the laws, keeping the administrative interference in the e-commerce market to the minimum. Thirdly, offer more guidance to help businesses understand can capitalize on the trends.


II Retail industry overview and trends 2.1 Overview Growth in brick-and-mortar retail continues to slow down with mounting cost pressure

The slowdown in macro economy and income of urban residents continue dragging the retail sales down. The total retail sales of consumer goods in 2014 reached RMB26,239.4

billion, representing a yoy nominal growth of 12% and a drop in growth for five years in a row. Conditions in top 100 retail chains were no exception: The growth in sales continued to fall from 21% in 2010 to 5.1% in 2014 and the market share over the total retail sales

of consumer goods continued to dwindle from 11% in 2010 to 8% in 2014. The expansion by the top 100 retail chains slowed as well: the growth in the number of stores dropped from 9.8% in 2010 to 4.2% in 2014. 23% of these enterprises had a negative growth in

the net number of stores while 7% of them remained at the same level as a year before.

Figure 2-1 Total retail sales of consumer goods and growth in China

Data source: Wind, Deloitte Analytics

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Operations in physical retail enterprises are under tremendous pressure. A sluggish economic growth, consumption upgrade, rapid emergence of new types of operations,

online and mobile shopping combine to slow the revenue growth in these enterprises. Constantly rising operating costs further narrow the profit margin and therefore separate these enterprises apart by operating performance. Figure 2.3 reveals that the overall

rents and labor expenses in the sample enterprises, growing by 7.0% and 7.7% respectively, remained at a higher level, while utility expenses dropped slightly by 2.7%1, showing how rising rents and salaries impacted the costs in these enterprises. The above

difficulties forced the enterprises to focus more on improving operational efficiency. It is evident from the collected data that businesses tried to control costs by downsizing their workforce, resulting in a drop in the number of employees per store by 0.8% in 2013 and

1.2% in 2014 in average.

Figure 2-2 Ratio of retail revenue by top 100 retail chains over total retail revenue of consumer goods

1 2013 samples growth of the rent, employee salary and utilities are respectively 1.9%, 10.2% and 0.9%.

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Figure 2-3 Three expenses and growth rate in sample enterprises

Figure 2-4 Average growth rates in the number of employees in the stores of top 100 retail chains

Data source: wind, CCFA, Deloitte Analytics

Falling net rate of profit separates businesses in operating results

A sluggish revenue growth, slowed expansion and constantly rising costs continue eating in enterprise profits. According to data from questionnaires for retail chains in 2014 administered by CCFA, although the average gross margin % of top 100 retail chains was 16.4% and slightly higher than a year before, the net profit margin % dropped by 0.03 percentage points to 2.08%. The falling revenue and profit in the entire industry further separated businesses in operating results. Among the 206 sample enterprises, 52, or

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27%, reported a drop in revenue, while 31, or 16%, reported a revenue growth of over 20%. Out of the 144 responding enterprises that disclosed gross margin, 39 showed a drop compared to 31 that reported a growth of more than 20%. It indicates that even under the circumstances of a gloomy market, climbing costs and brutal competition from e-commerce, enterprises may have a better chance of staying in the lead through a well-planned strategy, articulated operation and outstanding marketing and promotional activities.

Figure 2-5 Distribution of revenue growth in sample enterprises

Figure 2-6 Distribution of gross margin growth in sample enterprises

Data source: CCFA, Deloitte Analytics

Enterprises with national operations outperform their regional counterparts

Among the sample enterprises in 2014, 104 (51%) restricted their operations within a province, 54 (26%) operated across (2-5) provinces and 48 (23%) had a nation-wide operation (in 6 or more provinces). The enterprises with national operations were more sizable and had an average annual operating income of RMB26.5 billion that almost doubled those with cross-provincial operations and was 8 times of those operating within a single province. Economy of scale and mature operating and managerial mechanism both contributed to the better operating results of businesses with national operations. Below figures tell that businesses that operated nationally outperformed those of a regional nature (including cross and intra-province) in both revenue growth and gross margin. To the contrary, businesses that operated across provinces had barely satisfactory operating results. Their revenue growth and gross margin, at 16.6% and 4.8% respectively, were lower than those that operated within a single province despite their larger size than the latter. It seems to suggest that businesses operating across a few provinces faced more challenges. They had to compete head-on with those that focused on and were more familiar with the environment in a single province, while at the same time kept alert not to be outflanked by the national giants. Whether the high-investment

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and low-profit business expansion strategy will succeed is subject to the test by the market.

Figure 2-7 Comparison of key financial indicators among retail enterprises with national, cross-provincial and single-provincial operations


Build multi-dimensional retail channels through multi-type operations

Facing challenges by structural upgrade in consumption, differentiation in levels of consumption and emergence of mobile and online shopping, retail enterprises are trying to build multi-dimensional retail channels by diversifying the types of operation so that their operational advantages can be maximized. Better Life Commercial Chain Share Co. adopts a mode of multi-type operation that comprises supermarket + department store + electrical appliance to optimize and integrate its primary business; Tianhong (Rainbow) Department Store adds shopping malls and convenience stores to the traditional department stores and expands the previously single type of operation that solely relies on offline physical department stores to an all-channel multi-type mode that integrates offline and online channels. Metro and Carrefour both introduce convenience stores in China. In fact, 60% of the enterprises sampled in this 2014 survey carry out business operations in multi-types including supermarkets, department stores, shopping malls, convenience stores, and e-commerce etc.

The multi-type operation is both a forced choice in a harsh business environment and a natural result in the development of the businesses, and is adaptive to the change in consumer needs. Thanks to the elevation of income, consumers today are putting more emphasis on individualism, customer experience, efficiency and effectiveness, and thus,

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are more diversified in needs. Both the dull one-stop shops and undistinguishable standardized commodities and services have gone out of fashion and are hard to appeal to consumers. Changes in consumer needs inevitably lead to the transformation of retail businesses that choose to devise new operating standards, commodity structures and marketing and promotional strategies accordingly, giving rise to the mode of a multi-type operation. The new mode becomes popular also because it increases the likelihood of achieving a synergy. Businesses may share customers among different types of operation under the same brand name and a larger scale gives them more bargaining power against upstream suppliers. Furthermore, multi-type operations help diversify risks and increase profits. Better Life Commercial Chain Share Co, as an example, has maintained a rapid growth mainly as a result of its multi-type operational strategy.

Despite all the benefits a multi-type operation may offer, over-optimism should be guarded against. After we classify the sampled enterprises into two groups by the standard of single-type operation (such as Gome and Suning ) or multi-type operation (such as China Resources Vanguard, Lianhua Supermarket) and compare the operating performances between the two groups, weve found out that enterprises with single-type operations outperform those with multi-type operations in both profitability and growth, reflecting, to a certain degree, the difficulty that businesses may encounter when expanding into multi-type operations. We think that although multi-type operations may benefit the businesses in optimizing resource allocation to meet the needs of different consumers by integrating strengths of each operational type, it is imperative for businesses undergoing a transformation to thoroughly understand their competitive strengths and weaknesses, continue building profound core competency in the primary business, and intensify concerted development and dynamic integration among different types of operation.

Figure 2-8 Comparison of key financial indicators between retail businesses with multi-type and single-type operations


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Shopping malls and convenience stores demonstrate a trend of better growth

As the slowdown of growth in overall retail industry has differentiated different types of operation in operating performances, shopping malls and convenience stores have demonstrated a better growth trend. Data from enterprises responding to the CCFAs questionnaire indicate that sampled shopping malls and convenience stores recorded an average revenue growth for the two years of 2013 and 2014 by 6.7% and 3.6% respectively, while the growth of hypermarkets, supermarkets, department stores and specialty stores for the same period are 1.7%, 0.5%, -1.2% and -3.3%. Due to their huge size, inclusiveness, and focus on customer experience, shopping malls are viewed as a safe harbor in retail industry and have delivered a better growth result in recent years. We also notice that the fever in the construction of shopping malls spreading among many businesses makes the competition fiercer and the pressure on profit heavier. It is foreseeable that shopping malls will be built to reflect differentiation, brand names, and chain operations in the future. In comparison, convenience stores will continue growing rapidly to penetrate deeply in mature markets and fill the void markets in the years to come due to lower investment, shorter cycle to maturity as well as convenience in space, time and service and closeness to consumers.

Figure 2-9 Comparison between average revenue growth in sampled stores of different types of operation for the two years of 2013 and 2014


Integration in the retail sector picks up speed and the capital market remains vibrant

The year 2014 witnessed a noticeably faster pace in mergers and acquisitions in the retail sector where companies were actively in hunt for M&A opportunities and targets. According to statistics from Merger Market, compared to 2013, the total scale of M&A

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deals in the retail sector in China increased 4.5 folds, scale of M&A deals among domestic Chinese enterprises increased 4.73 folds, scale of M&A deals where foreign companies acquired Chinese enterprises increased 4.97 folds, while scale of M&A deals that involved Chinese companies acquiring foreign enterprises fell by 49.8%.

Mergers and acquisitions as a whole demonstrated some new characteristics in 2014:

Promising M&A prospect

M&A deals offer both parties the benefit of making up for ones shortages with the others advantages, sharing of resources, on/offline integration and O2O deployment to drive the two-way integration between physical commerce and e-commerce. In March 2014, Alibaba Group made a HK$ 5.37 billion strategic investment in Intime Retail (Group) Co. Ltd to form a joint venture that aimed at building an on/offline-integrated commercial infrastructure system for the future. Once the deal is concluded, Alibaba will hold 9.9% stake in Intime Retail (Group) Co. Ltd as well as HK$-denominated convertible bonds worth approximately 3.71 billion. It is stipulated in the contract that in the next three years, Alibaba Group is entitled to convert the convertible bonds to the common shares of Intime Retail (Group) Co. Ltd so that it will ultimately have no less than 25% stakes in the later provided that legal requirements are fulfilled.

Foreign companies encounter strong competition from local rivals

The brutal competition in the retail business and uncertainty in the international economic landscape at present cause foreign retail companies to favor more prudent routes in terms of capital distribution and mode of profitability. On the other hand, having seen the potential of huge demand in the future, local retailers have sped up and intensified their pace of opening up new stores. It is more likely that Chinese companies will try to grab shares in the international market through foreign brands. In May 2014, CR Vanguard, the largest retail company in China, successfully acquired the foreign-owned Tesco to form a multi-type retail joint venture company, in which Tesco invests its China business in cash and hold 20% stake while CR Vanguard holds the remaining 80%. Following the deal, all the 135 former Tesco stores become CR Vanguard stores and the Tesco brand is discontinued in China.

M&A across types of operation becomes increasingly popular

The retail industry has unveiled its M&A activities across types of operation. Businesses seek to have a sustainable profitability through mergers and acquisitions that facilitate the operating strategy adjustment and the attainment of a diversified development. On December 22, Wu-Mart signed a contract with Kingfisher Group of UK and agreed to pay 140 million in pound sterling (equivalent of RMB1.4 billion) in exchange for 70% stocks in B&Q China. Following the conclusion of the deal, Kingfisher still holds 30% of B&Qs stocks. This acquisition is viewed in the industry as across two types of operation that are farthest apart.


Dynamic M&A activities among Chinese companies

The total size of M&A deals among Chinese companies in 2014 alone was far more than that of 2011 to 2013 combined. It also set the record in terms of the single-transaction amount. Under the circumstances of a slowing macro economy, Chinese retail companies seek to rapidly optimize resource allocation, increase market share and gain competitive edge through M&A and integration. In May 11, 2014, Better Life Commercial Chain Share Co., Ltd announced its acquisition of 100% stake in Guangxi Nancheng Department Store Co. Ltd. The total acquisition amount of RMB1.57 billion makes it the largest M&A transaction among Chinese companies in the retail sector in recent years.

Figure 2-10 M&A scales in retail sector ($million)

2.2 Trends Online retail continues to grow at a high speed

The online retail market continues its momentum of rapid growth in 2014 with the market share further expanding. The development of e-commerce remains fast thanks to the popularization of internet and network terminals, constant innovation in payment technology and speedy improvement in the efficiency in logistics and distribution. According to the data of 2014 China Online Shopping Market published by iResearch (see below), the total amount of transaction in Chinas online shopping market in 2014 reached 2.81 trillion yuan, representing a yoy growth of 48.7%, 10.7 percentage points lower than a year before, and for the first time in recent years the 50% level is broken. Regardless, the share of online shopping market continues rising. In 2014, revenue from online shopping accounted for about 10.71% of the total retail sales of consumer goods with the online penetration rate breaking 10% for the first time, indicating that the competitiveness and operating dynamics of online shopping are way ahead of the traditional physical retailing. With an exceptionally fast development in mobile shopping

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and the channels getting closer to consumers, the online retail market is expected to remain growing at a rapid rate.

Figure 2-11 Scale of transactions in the online shopping market in China

Data source: iResearch

Physical retailers speed up transformation and intensify efforts to enhance customer experience

Record number of physical chain stores are closed

Statistics show that a total of 201 stores were closed by major national retail chains (department store, supermarket) in 2014, representing a yoy growth of 474.29% from the 35 closed stores in 2013 and a new record in history. Among them, 12 are department stores and 146 are supermarkets. Attention needs to be given to the fact that 118 closed stores were owned by foreign retail enterprises, accounting for 75% of the total number of the closed stores (including the Sino-foreign joint venture Postmark). Tier II and tier III cities in Jiangsu, Zhejiang and Anhui have seen most stores closed. A document internally circulated in China Wanda Group on July 13, 2015 revealed its plan to close more than 40 stores that incurred heavy losses in Jinan, Tangshan, Jiangmen, Wenzhou, Shenyang and Jingzhou in Hubei. It also planned to make some adjustments to and reduce the operating spaces in some stores in Baoshan of Shanghai, Quanzhou, Xiangyang and other places. Affected by factors such as rental contract expiry, structural adjustment, weak profitability and transformation, physical retail enterprises have chosen to close some stores to better optimize their business deployment.

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Physical retailing embraces new technology and emphasizes customer experience improvement

Despite many challenges they are facing now, physical stores will not disappear. It becomes extremely critical for physical stores to differentiate operation and enhance customer experience if they want to increase sales. Emerging technologies used in routine operations can help provide convenience to the customers and also lift up the stores management level. These innovative technologies provide strong support to retailers in precisely detecting consumer needs, guiding the route in consumption, and satisfying consumer behaviors, thus effectively increasing opportunity and volume of transactions. In the meantime, they enable retailers to offer richer, more fashionable and customized information services to customers. Yonghuis Bravo YH, Letus future supermarket and Suning supermarket all shed lights on the development of physical retailing. More factors of technology will be reflected in shopping malls, department stores, mass marketplaces and neighborhood supermarkets to speed up their pace into the age of smart retailing. Major technology applications to be used in the retail industry include:

Locate consumers and match their locations with their interests. The app is able to retrieve and analyze the information about consumers record of consumption and social activities through GPS, indoor map and hotspot technologies. It can then push to the consumers the contents they may be interested in at relevant locations.

Collect data to predict consumer behaviors. By digging in consumers data such as where they live, routine schedule, interests and hobbies and social behaviors etc, the app is able to predict the consumers next move and provide them with the services and products in which they are likely to be interested.

Real-time scene management. Based on the information about location and environment, the app can adjust itself to meet consumers needs on a more customized and precise basis so that it becomes handy to the consumers when they are in need of a certain resource or system.

Retail sector is transforming to an all-channel mode and O2O industry chain becomes complete gradually

O2O became the first priority for many physical retail enterprises in 2014. Starting with feiniu.com of RT-Mart and yunhou.com of Better Life Commercial Chain Share Co, many well-known retailers have intensified investment in e-commerce. In the meantime, e-commerce retailers represented by Intime Retail (Group) Co Ltd that received strategic investment from Alibaba Group proactively seek to cooperate with physical retailers, symbolizing that a transformation into an all-channel business by integrating online and offline resources has become the collective action of the retail industry. Data from iResearch show that the O2O market grew to the size of RMB200 billion in 2014 and is expected to reach the size of RMB465.54 billion in 2015. In 2014, the top 100 chain department stores in China contributed a total amount of online transaction of RMB6.1


billion at a penetration rate of about 1.6%, which is expected to go further higher in the future when more traditional enterprises open their online business. In 2015, Alibaba invested RMB28.3 billion in Suning Appliance Co., Ltd while JD.com spent RMB4.3 billion to acquire stakes in Yonghui Superstore, marking the arrival of the time when the retail sector becomes two-wheel drived: online and offline. In addition to the multiple and diversified channels of shopping, consumers will experience a change of lifestyle that offers conveniences from life to all kinds of incremental services.

Figure 2-11 Online transaction amount from chain department store enterprises in China


Enterprises compete in O2O deployment

Taking advantage of the huge online traffic in their respective platforms and through self-marketing, connecting to the platform of a third party or cooperating with traditional large retail stores, the three internet conglomerates BAT (Baidu, Alibaba, Tencent) start to construct all-inclusive O2O ecological chains. The traditional retail enterprises, on the other hand, choose to build their own platforms that have the functions from searching, placing order, making payment to delivery in addition to cooperating with BAT. With the areas of investment made by internet giants increasing, O2O industry chain improving and mobile payment getting more mature, retail enterprises are forced to undergo the transformation into an all-channel business in order to solve problems rising from resource barriers, distribution of interests between online and offline business as well as marketing and promoting.

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Table 2- 1 O2O deployment

Enterprise O2O deployment

From offline to online

Suning Appliance

Suning.com went live in 2010. Suning later consolidated all the online and offline prices in 2013 and changed its name to Suning Appliance Co., Ltd, poised for an all-commodity market. As an effort of integrating online and offline business, Suning makes the two back-end systems connect to each other. Consumers now can buy anything that is offered online and when a commodity is out of stock in a certain store, consumers are guided through an online ordering process and can wait for delivery at home. To enhance the customer experience and service quality, Suning also makes attempts to launch return/change of commodities in physical stores, one-hour express delivery after a commodity leaves the warehouse and smile while service, etc.

RT-Mart

RT-Mart joined Uitox from Taiwan to establish feiniu.com, which went live on January 16, 2014, in an effort to make up for the limited shelf space in offline stores, create an O2O mode that is based on RT-Marts more than 300 physical stores across the country, and deeply integrate online and offline resources to build an all-channel operation that best serves its customers.

Wangfujing

Beijing Wangfujing Department Store (Group) Co.,Ltd integrates its online and offline operations on the foundation of physical stores through multiple channels in the mode of N+1: N represents building new channels on the foundation of new technologies, including the web-based official shopping website, web-based platform flagship store, WAP mall on the mobile platform, WeChat Mall, APP, E-shopping guild workbench, in-store self-service terminals and 24-hour virtual storage rack.

Better Life Commercial Chain Share Co

It acquired yunhou.com and developed three core products payment by earned points, personal consumption finance and pre-paid services. It integrates and connects consumers and merchants through the platform and provides third-party group purchase and booking, operation of advertising and online traffic services.

Gome

Gomes O2O comprises of three parts: online 1+1+N development, online channel + mobile terminal + social joint operation on points and supply platform, in the hope to build consumption scenarios from searching, placing orders, taking delivery to making payment by executing an all-channel deployment strategy using mobile internet to connect offline with online channels. In addition to its own online platform, Gome also keeps good partnerships with TMall, Amazon and Dangdang, aiming at constructing a comprehensive open platform.


Enterprise O2O deployment

Shijitianle

Glorious Oriental acquired Shijitianle Mansion to open up dongpi.wang, which integrates resources and builds platform for the business of logistics and delivery, warehousing, and providing safe shopping environment. The O2O built by dongpi.wang has a physical experience square with a business area of 120,000 square meters near Beijing West Railway Station that showcases commodities it sells, while its online outlet provides free internet marketing services to the merchants that open stores in the physical experience square. Shijitianle has offline stores in Beijing, Shanghai, Shandong and Shanxi. It promotes a concept of one hundred stores in one hundred cities to open up experience stores in the cities selected by quality customers to support delivery of what have been ordered online, as an attempt to reinforce the advantages of dongpi.wang.

Cross-sector LBX Pharmacy

LBX Pharmacy online store announced its strategic cooperation with meituan.com in May 11, which, based on the foundation of internet finance O2O, integrates offline stores, online self-run platforms and e-commerce channels to offer diversified medication services to consumers.

From online to offline

Online travel websites

Online travel websites join hands with e-commerce giants to establish platforms that benefit both. Recently tuniu.com and JD.com announced their strategic cooperation and JD.com will invest USD350 million to acquire tuniu.com shares. After the acquisition, tuniu.com will be the exclusive operator for JDs travel-vacation channel. By taking advantage of JD.coms overseas online traffic and massive customer base, tuniu.com aims to provide better service to customers. In the meantime, JD.com will offer its users more and better online travel consumption experience in the hope to build the best online e-commerce platform in China.

Tencent

Tencent builds an O2O ecological chain through WeChat platform as entrance: supported by WeChat payment, it integrates local services for life including Didi Taxi and dianping.com to create a closed loop that enables online and offline interactions.

Yummy77

As an E-commerce platform specializing in fresh foods, Yummy77 also operates offline neighborhood stores that stracte the customers who have experienced its offline service to its online platform for more business.

Data source: Deloitte Analytics, Processed from publicly available information

Last-kilometer delivery may be solved by convenience stores

Logistics has not kept pace with the enterprises on the way to transform into the all-channel O2O operations. E-commerce enterprises are hindered by the difficulty in the last-kilometer delivery due to insufficient logistics infrastructure in cities and the varied, sometimes unsatisfactory, service quality in logistics enterprises. The following four


methods are taken by e-commerce enterprises in an attempt to solve this problem, among which, the integration of idle resources and smartly taking advantage of neighborhood convenience stores become the key. However, such a mode has pushed up costs for O2O start-ups and prevented O2O enterprises from growing as fast as expected, leaving the ultimate goal of delivery to the door unattained. From a long-term development perspective, many O2O modes need to continue the search for effective ways to lower losses in logistics so that they can outgrow the stage of capital investment and build a functioning industry circulatory system to fundamentally meet the supply-and-demand requirements by businesses and consumers alike.

Figure 2-13 Last-kilometer service modes


Cross-border e-commerce becomes new growth engine and vertical e-commerce businesses continue to emerge.

Cross-border e-commerce becomes new growth engine and the share of import keeps rising steadily

The cross-border e-commerce transactions in China reached RMB4.2 trillion in 2014, growing by 33.3% on yoy basis. Fueled by favorable state policies, the push by willing industry participants and constant improvement of the industry chain, the cross-border e-commerce is expected to continue expanding at a steadily fast pace. In 2014, 85.4% of cross-border e-commerce transactions came from export and the remaining 14.6% came from export. Although the cross-border e-commerce in China has just started, with the

Build own distribution center

Fresh food O2O, catering O2O

Invest heavily on distribution centers to fundamentally reduce the delivery time to the minimum and guarantee the quality of all the goods delivered.

Invest in distribution service

spots near neiborhoods

Neighborhood O2OO2O enterprises build numerous service spots in the places not covered by regular logistics service or more demanding in logistics. Deliveries are first made to these spots, and then to the residents in nearby neighborhood, or picked up by buyers.

On-the-spot service

Housekeeping O2O, Beauty O2O

Control resources of service providers who have certain special skills and offer them to customers who are in need. For example, aiyibang.com and helijia.com run an O2O business that sends salarized, specially trained housekeepers and nail technicians to service the customers and publicizes service contents on their respective platforms.

Integrate idle resources to

provide express services

Fresh food O2OMake use of idle logistics resources to lower costs and provide express delivery services. Deliverymans after-work time or off-work days may be used to run temporary delivery errands. Owners of convenience stores near neighborhood or office buildings may be mobilized for delivery for extra compensation. While doing this, the system dispatches the goods to be delivered to the nearest idle resources who then complete the last stage of the delivery.


Chinese consumers quest for imports surging, the share of import is likely to increase rapidly. However, the impact of state policies will keep the growth in the share of imports by cross-border e-commerce businesses at a steady pace. Shopping overseas provides a new growth engine for the retail industry. It will attract online and offline enterprises from across the world to deploy in cross-border e-commerce, sparking fierce competition.

Figure 2-15 Scale of cross-border e-commerce transactions in China

Figure 2-16 Import & export structure in cross-border e-commerce transactions in China

Data source: CECRC, Deloitte Analytics

Table 2-2 Shopping overseas becomes a new growth engine for e-commerce

Overseas expansion

Major domestic e-commerce enterprises expand their business externally in 2014. Examples include g.taobao.com from taobao.com, TMall international, the shopping overseas section on jumei.com, and the cross-border e-commerce project team in Suning. In the meantime, e-commerce conglomerate Alibaba will speed up its penetration into the US market through more investment to expedite business deployment in the US and compete with local brands such as Amazon. Recently, Alibaba continues buying the shares of Zulily to increase its holding of Zulily A shares to 11.5 million that have a market value of USD1.156 billion. It has become the largest foreign shareholder of Zulily, an e-commerce business specializing in mother and baby products in the US.

Domestic expansion

The gradual easing of cross-border e-commerce policies has attracted foreign e-commerce enterprises to Chinas overseas shopping market. Farmaline, a European large e-commerce pharmacy, has opened a Chinese website where Chinese consumers can purchase more than 30,000 products that are paid through UnionPay and have the purchased products delivered directly to them. Farmaline, as the largest e-commerce business in Belgium easily accessible from many places in Europe, is able to provide the fullest variety of big-brandname commodities from France, Germany and other European countries at cheaper prices than other similar platforms even after logistics costs are added.

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Factors that contribute to the continuous development of cross-border e-commerce

Leaders from the State Council have put the cross-border e-commerce in high priority. On July 26, 2013, General Office of the State Council issued Some Opinions on Measures to Drive Steady Growth of Import and Export and Structural Adjustment. It introduces specific supporting policies including the classification of subjects that are authorized to operate e-commerce exporting, establishing a new type of customs supervision that adapts to e-commerce exporting and enables statistics by categories, establishing adaptive mode of inspection and supervision, supporting regular collection and payment of foreign exchanges by enterprises, encouraging banking and payment institutions to provide payment service for cross-border e-commerce, adopting adaptive tax policies and building an e-commerce export credit system, helping solve the problems in customs, inspection and quarantine, tax as well as collection and payment of foreign exchanges, etc.

Set up pilot zones to provide customs clearance service in cross-border e-commerce trade. Pilots are set up in 7 cities including Shanghai, Chongqing, Hangzhou, Ningbo, Zhengzhou, Guangzhou and Shenzhen and focuses are given to bonded import, direct purchase or export. All the brand names in e-commerce, logistics and retail enterprises are solicited to these pilot zones to create an economy of scale to some degrees. In addition, the above policies issued by General Office of the State Council are applicable in all the pilot cities in an attempt to drive the overall cross-border e-commerce development.

The establishment of free trade zones in shanghai, Tianjin and Nansha has attracted large enterprises to the cross-border e-commerce and has made the industry grow in a healthier and more standardized way. In the meantime, a large quantity of lower-priced imported products will be flooding in.

The continuously increasing emphasis on cross-border e-commerce platforms by traditional enterprises as well as the seemingly unquenchable crave by Chineese consumers for well-known brandname foreign products that are fine in quality but cheaper in price will turn the cross-border e-commerce into a new driver in the trade development in the future.

B2C increases in market share and is developing in concert with B2B

In 2014, B2B cross-border transactions accounted for an absolutely dominating 93.5% of the entire scale of cross-border e-commerce transactions in China. As the industry is seeing a trend of increasingly smaller cross-border e-commerce retailers and more diversified channels in which the products move from factories to consumers, cross-border orders become more fragmented and are in smaller amount. Combined with the advancement in logistics and internet technologies, the share of B2C transactions is


going to climb in the future. However, due to its larger transactional amounts and steady orders, B2B will remain as the most important mode in the exploitation of overseas market by Chinese enterprises in the foreseeable future. B2C, on the other hand, is closer to and directly interacts with consumers and is thus better able to understand the market demands. With mutual complementation outweighing competition, B2B and B2C are likely to be developed in concert.

Figure 2-17 Structure of B2B and B2C in the scale of cross-border e-commerce transactions in China 2010-2015

Data source: CECRC

E-commerce giants intensify cross-border efforts

In China, the number of cross-border e-commerce platforms has exceeded 5,000. Out of more than 200,000 cross-border e-commerce enterprises, 80% are from cities such as Guangzhou and Ningbo that have foreign trade traditions. E-commerce giants in cross-border led by Alibaba, JD and Amazon, and soon to be followed by yhd.com, dangdang.com and vip.com, have started implementing their cross-border e-commerce strategies in an effort to speed up deployment and seize more market shares. In the meantime, other cross-border e-commerce enterprises such as ymatou.com, metao.com, mia.com and mgpyh.com have intensified their efforts in building their respective brand names in vertical subsegments such as mother and baby, beauty and clothing markets.

Table 2-3 Cross-border e-commerce giants and their strategic moves

Cross-border e-commerce

giants Cross-border e-commerce strategies

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Alibaba

In May 2014, Alibaba announced its cooperation with ShopRunner, an e-commerce logistics company in US, to enable Chinese users to directly order overseas products through Alibabas platform. Alibaba makes cross-border e-commerce deployment through sudutong and TMall international and connect the data in alipay collected in the Double 11 grand promotion with the customs information system to further expand the overseas market through the assistance of big data. On May 5 of this year, Alibaba announced in Hangzhou that 1688.com, a procurement and wholesale website owned by Alibaba, will officially add the platform that supplies goods around the globe. As a key component of Alibaba Groups strategy in cross-border importing, the platform serves as a medium that links the sellers from countries of origin with retailers in China.

JD.com

At the end of 2012, JD.com launched the English version of its website to make it accessible to overseas buyers. On April 15, 2015, the global purchase business went live via JDs website where 500-600 merchants gather to offer hundreds of thousands of categories of commodities. JD also announces that it will clear the channels for cross-border e-commerce customs clearance and bonded warehouse, work with the government to open five ports of entry to cross-border e-commerce by the end of the year, and add more SKUs to the product categories. Teams formed by experts from JD will be sent to overseas to carry out negotiations.

Amazon

Amazon set up its office in Shanghai Free Trade Zone in August 2014 and has since built the cross-border e-commerce platform within the FTZ to enable Chinese consumers to buy directly from other countries via Amazon website. In early November 2014, Amazon (China) announced to open six major overseas spots that offer direct-delivery service to Chinese buyers who can directly purchase from more than 80 million commodities sourced from US, UK, France, Germany, Spain and Italy. Meanwhile, Amazon participated in the Double 11 grand promotion through buy overseas + direct delivery to China.


Physical retailers test the water in cross-border e-commerce

In their continuous search for ways to counteract e-commerce competitors and in the transformation into online businesses, physical retail enterprises target the cross-border e-commerce as a future direction. In the second half of 2014, Chongqing Department Store started its venture into cross-border e-commerce by launching the sjgo365.com platform. In April 2015, MOPARK opened its offline experience store, the first department store cross-border e-commerce O2O in Guangzhou. Now the mode will be expanded across all the stores across the company. In May, Guangzhou Department Store announced the launch of its cross-border e-commerce channel and concurrently opened 3 experience stores. On July 1st, ewj shop owned by CR Vanguard opened its shop in Qianhai Free Trade Zone that offer more than 500 commodities directly shipped from Hong Kong including toiletry, articles of everyday use, imported and fresh foods etc. On July 21, Tianhong (Rainbow) announced its launch of Tianhong Daojia (Tianhong delivered to your home) that moved its offline business to online the platform, as well as the cross-border e-commerce experience stores that brought its online business to


physical offline stores. This was the second O2O transformation in Tianhongs execution of an all-channel strategy. Due to policy restrictions, cross-border e-commerce only started in the second half of 2014. That put online and offline enterprises at about the same start line and online enterprises have not shown an apparent advantage over the physical retailers.

Risks and barriers cross-border e-commerce enterprises have to face

Cross-border e-commerce enterprises are in a start-up phase where cross-market, cross-country, cross-culture and cross-custom problems will pose risks and create barriers to the steady growth. Mainly the risks and barriers are of two types:

First, cross-border supply chain management. The two most problematic phases are management of overseas suppliers and execution of cross-border logistics. Due to the difficulty in the sourcing of high quality products, many import e-commerce platforms have weaker control over overseas suppliers. As a result, fakes or imitations have brought tremendous negative impact on the import e-commerce business. Meanwhile, cross-border logistics that relies on transshipment companies subjects the logistics chain to breaking, causing a slower speed of customs clearance and insufficient expected tariff management ability that discount consumer experience.

Second, supervisory policy direction needs a systematic clarification. Currently, each pilot zone applies relevant policies differently. In addition, policies regarding taxes on small-amount importing that directly affects consumer interests are not clear. Small-amount foreign trade is beset by problems such as evading tax, commodity inspection and non-tariff barriers, as well as insufficient after-sale service and credit crisis etc.


Figure 2-18 Market share of scale of transactions through B2C online shopping websites in China 2014

Data source: iResearch, Deloitte Analytics

Mobile shopping goes mainstream and mobile e-commerce brings new hopes to retailers

Data from CECRC show that as of December 2014, the scale of mobile online transactions in China reached RMB928. 5 billion, a yoy growth of 240% over 273.1 billion in 2013, and is continuing the trend of fast growth. According to the latest statistics from iResearch, in the first quarter of 2015, Chinas mobile shopping market grew to a size of RMB362.34 billion, representing a yoy growth of 168.3%, and is still growing rapidly. In the overall online shopping market, transactions conducted through mobile platforms account for 47.8% and are moving up quickly. Since 2015, all the major e-commerce platforms and many traditional brandname enterprises have expedited their deployment on, added more business capacity to and improved the services for mobile platforms, pushing the number of mobile users and amount of transactions via mobile platforms to grow exponentially. With the mobile payment technology further improving and penetrating, it is expected that mobile shopping transaction amounts will seize more than half of the overall online shopping market share in China in 2015.

The Report on Data of the E-commerce in County Regions (first issue) (Report) published by AliResearch shows that on the Alibaba retail platform, the amount of mobile shopping in county regions in 2014 broke RMB200 billion, representing a yoy growth of more than 250% and outgrowing online shopping of the same period by a large margin. In the villages and towns where physical retailers have a weak presence, mobile shopping shows signs of a strong growth momentum and is hopeful to become a new blue sea for retail enterprises aimed at expanding their markets.

61.40%18.60%

3.20%2.90%

1.70%

1.40% 1.30%1.30% 0.70%

7.60%

tmall.com jd.com suning.com vip.com gome.com

yhd.com dangdang.com amazon.cn jumei.com other


Figure 2-19 2011-2016 Scale of mobile online transactions in China

Data source: CECRC

Figure 2-20 China online transactions contributed by PC platform and mobile platform


Businesses speed up efforts in seizing the mobile market share

In the first quarter of 2015, Ali Wireless continued to hold a dominating position in the enterprise mobile platform market, accounting for 84.5% of mobile shopping market share. JD.com and VIP.com both saw a moderate rise, accounting for 5.2% and 2.8% respectively in the mobile platform market share. Other enterprises not viewed as core players in the mobile platform market also recorded growth to a certain degree, rising from 4.2% in the fourth quarter of 2014 to 4.6% in the first quarter of 2015. Meanwhile, all enterprises have sped up their efforts in seizing more mobile market shares through holiday promotions, opening up mobile overseas purchasing and WeChat stores, further fueling the fierce competition in the mobile shopping market.

496%

295%240%

84.30%42.10%

0%

100%

200%

300%

400%

500%

600%

0

5000

10000

15000

20000

25000

30000

2011 2012 2013 2014 2015e 2016e

Scale of transactions (RMB 100 million) Growth %

74.10% 69.60% 66.00% 60.00% 52.20%

25.90% 30.40% 34.00% 40.00% 47.80%

0%10%20%30%40%50%60%70%80%90%

100%

2014Q1 2014Q2 2014Q3 2014Q4 2015Q1

Amount of online transactions conducted via mobile platforms (%)

Amount of online transactions conducted via PC platforms (%)


Table 2.5

Taobao

Launched 3.8 Life Festival on its mobile platform to enhance the convenience of online shopping experience, also introduced Taoxiaopu tool to lower the threshold for sellers to open stores on mobile platforms.

JD.com

Distributed virtual Hongbao (red-paper bags with money inside) for a total amount of RMB100 million through WeChat and mobile QQ in the Spring Festival to promote brand awareness and drive mobile platform users loyalty.

VIP.com Brought group purchasing onto the mobile platform and added APPs for subsegments to emphasize the sub-categories on the mobile platform.

Jumei.com Intensified efforts in overseas purchasing business, Jisumianshuidian (top speed duty free shop) leads its growth on the mobile platform.

Traditional enterprises

Traditional enterprises such as Suning.com, Gome.com, dangdang.com, yhd.com, and Amazon have gone all out on the mobile platform in an attempt to grab more mobile market shares through mobile WeChat stores, mobile overseas purchasing and holiday promotions via mobile platforms.

Other mobile shopping enterprises

One example is Meilishuo.com that has brought its independent mobile overseas purchasing APP to live and connected with WeChat wallet to get more online traffic.

Data source: Deloitte Analytics, processed from publicly available information, iResearch

Figure 2-21 Market share by mobile shopping enterprises in China in terms of scale of transaction

Notes: Mobile VIP etc. include: Mobile VIP, Mobile Suning, Mobile Gome, Mobile yhd, Mobile jumei, mobile dangdang, mobile Amazon and mmb. Data source: iResearch

87.40% 86.50% 84.50% 86.00% 84.50%

3.30% 4.50% 4.60% 4.50% 5.20%4.60% 4.80% 5.70% 5.30% 5.70%4.70% 4.20% 5.20% 4.20% 4.60%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2014Q1 2014Q2 2014Q3 2014Q4 2015Q1e

Ali Wireless Mobile JD Mobile VIP etc. Others


III Hypermarkets and supermarkets

3.1 Statistics collected from sample supermarkets and hypermarkets 03 enterprises that mainly operate supermarkets and hypermarkets have responded to the questionnaire. Among them, 29, or 28%, have a revenue of over RMB10 billion; 14% report a revenue between RMB5-10 billion; and the enterprises that have a revenue below RMB5 billion account for 58%.

Figure 3-1 Distribution of sample supermarkets and hypermarkets by revenue

Average scale of enterprises

The average revenue from the 103 sampled supermarket enterprises in 2014 was RMB11.36 billion with annual growth rate remaining at 2.6%, lowering than the average growth rate of 4.5% across all the sampled enterprises. The growth rate in the number of stores was 1.4% while the growth rate in business area was 8.6%, indicating that the average area per store increased. In the meantime, the number of employees fell by 0.5%, indicating that enterprises chose to cut operating costs by cutting the number of employees to cope with the rapidly rising labor cost. Below store analysis shows that the average efficiency per square meter and efficiency per head in the stores of the sample supermarkets and hypermarkets increased from a year before.

above RMB10

billion20%

RMB5-10 billion

38%

RMB5-10 billion

14%

above RMB10

billion28%


Figure 3-2 Average scale of sample supermarket and hypermarket enterprises

Expenses

The labor cost remained as the largest expense in supermarkets and hypermarkets, accounting for 54.4%, followed by rents and utilities, accounting for 31.1% and 14.5% respectively. Among them, labor cost fell by 0.1 percentage points, rents increased by 0.7 percentage points while utilities dropped 0.6 percentage points, reflecting how hard enterprises tried to cut expenses in a costly environment.

Figure 3-3 Expense structure in sample supermarket and hypermarket enterprises

Note: Among the sample enterprises in 2014, 60.2% own stores. Among these enterprises, averagely, the number of owned stores accounted for 20.4% of total stores.

110.7

4.3

73.4

10.2

113.6

4.4

79.7

10.2

2.6%

1.4%

8.6%

-0.5%

-2.0%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

-

20.0

40.0

60.0

80.0

100.0

120.0

revenue (RMB100million)

number of stores (100) business area (10,000square meters)

number of employees(1,000)

2013 2014 growth %

30.4% 31.1%

54.5% 54.4%

15.1% 14.5%

0%

20%

40%

60%

80%

100%

2013 2014

rents labor utilities


Figure 3-4 Expenses of sample supermarket and hypermarket enterprises

Internet retail business

37% of the sample supermarket and hypermarket enterprises engage in internet retail business. The average annual internet sales revenue was RMB37.57 million, accounting for 0.9% of total revenue. Although it was higher than the 0.2% from a year before, its contribution to total enterprise revenue was low.

Proprietary brand

6.4%42% of sample supermarket and hypermarket enterprises owned proprietary brands, which generated a revenue equaling to 6.4% of total revenue.

3.2 Operating conditions in the sample stores of hypermarkets We classify the sample stores by the size of business area in accordance with the national standard of retail type classification: hypermarkets that have more than 6,000 square meters of business area, and normal supermarkets (supermarkets) that have less than 6,000 square meters in business area. This section is specifically dedicated to the operating conditions of the sampled stores in hypermarkets and the following section will cover the operating conditions of sampled stores in supermarkets.

Among the hypermarkets responding to the questionnaire, 25 sampled stores have complete data and have operated more than one year, each of them has a better operating performance and represents best level in the industry. Out of the 25 stores, 14 are located in tier I and tier II cities, and 11 are located in tire III and tire IV cities. The average business area is 11,000 square meters with the lowest at 6,000 square meters and highest at 23,000 square meters. The average revenue is RMB260 million with the lowest being RMB80 million and highest being RMB690 million.

14160.42494

2540

151016_cb_china power of retailing 2015_cn.docx

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