Redefine the Norms of Retailing in a Multichannel World
Keynote Speech on the 13th China Retail Industry Convention
Guo Geping, President, CCFA
The great external pressures on Chinese economy in 2011, such as increasing prices, renminbin appreciation and growing costs, have exerted direct and continued impact on the country’s retail industry, which has seen attention, criticism and expectation of unprecedented scale from the society and government.
China’s retail industry is at its juncture right now, experiencing dramatic changes in its ecosystem with its old structure phasing out and its new rules coming into view. Therefore, the theme of this conference is “Redefine the Norms of Retailing in a Multichannel World”.
I. Development of Retail industry in New Ecosystem
New ecosystem is the new environment where retailers live, including the relationship between different stakeholders—consumer, supplier, employee and competitor.
1. The Latest Consumer Trend
First, polarization of consumption structure. At one end, high-end consumers promote the development of high-end department store, high end supermarket and all kind of boutique stores. At the other end, as living costs are increasing, most consumers are paying more attention to product value, hoping for good value for their money.
Second, increased attention to quality. Consumers are more concerned than ever about food safety and have greater awareness in protecting their rights. Retailers that can balance quality and price are able to win trust and preference from consumers.
Third, more online activities. Consumer behavior and their shopping experience are more involved with online and mobile platforms. On the one hand, a new generation of consumers shows preference to shopping online. On the other hand, consumers usually visit online stores before they decide to buy.
2. New Roles of Retailers and Suppliers
Supplier, as a key link in chain store sector, is one of the determinants of chain store’s operation efficiency and their competitiveness. At present, there are several new points that feature the cooperation between small and medium-sized suppliers and chain enterprises. First, supplier’s role as creditor is weakened. 25% of retailer’s financing came from supplier’s loan in 2010, compared with 27% in the previous year, and it was the lowest level since 2007, according to CCFA’s Survey on Retailer’s Capital Chain. As suppliers suffer from the deterioration of financing environment, it is not a sustainable way for retailers to be over-dependent on the accounting period of supplier and it is also harmful to retailers themselves. Second, quality control should be extended up along supply chain. Product quality and price control, problems that find their roots in the upper reaches of the supply chain, cannot be resolved by chain enterprises and their stores only. CCFA’s Food Safety Report showed that the greatest threat of food safety in supermarkets came from supply chain. Therefore, retailers and suppliers grow more and more inter-dependent on each other. Third, change of cooperation mode. The development of private brand has become the common focus of chain stores in supermarket, department store and specialty store formats.
3. New Challenges in Human Resources
The main challenges facing the retail industry right now are the conflict between retailer’s continued expansion and the lack of human resources. CCFA’s Human Resources Development Report showed that the new stores that the top 100 Chinese retailers open in the coming three years need a total of over 1 million employees. Supply of low-level employees cannot meet the demand while medium- and high-level workers are moving to emerging business formats like e-commerce.
In chain enterprises, there are different salary structure and different culture in high-level and low-level employees. As labor intensive companies, chain enterprises should make more efforts and provide more incentives than other industries to retain their low-level workers, who have low wages and low social status. 51% of retailers said they had been working on it while 31% said they planned to, according to a survey during a leadership summit. Many companies have put forward great ideas in this aspect, such as how to improve worker’s happiness and how to improve their sense of responsibility and their capability of execution through employee stock ownership trust and stock option incentive plan. Worker’s sense of responsibility is on the top of job requirement list when it comes to hiring low-level staff, according to our survey. That’s why we use “business environment” in the past but “ecosystem” right now. The essence of an ecosystem is harmonious development and compatible symbiosis.
II. New Structure of Industry’s Development
There are several changes in the new structure.
1. New Business Formats for New Markets
Shopping centers and online retailers are decisive forces in changing retail market structure. At present, shopping centers and online retailers are on their fast track of development and their market share is also quite high. However, we should pay high attention to commercial real estate, which is developing so rapid that it may produce an excessive quantity of business area and waste social resources.
Many retailers invested on building online platform and some achieved success in their online business. CCFA’s Research Report on Online Retail of Chain Enterprises showed that it was an important trend that bricks-and-mortar chain stores were marketing online. Unlike tradition retailing, online business needs big investment and has a long payback period. Due consideration and careful research are necessary before we make investment in this field.
Specialty stores and exclusive stores, which have better control over supply chain, enjoyed an increase of over 50%, the best performance among all business formats in the year. Some listed department stores grew by about 40% and some large-scale supermarkets by about 20% this year.
2. New Opportunity in Unbalanced Regional Structure
The number of retail outlets is close to its saturation point in the first- and second-tier cities and the niche market is experiencing segmentation and distortion. CCFA gathered the data concerning population and retail outlets in particular cities of particular regions and produced Report on Retail Outlet Distribution Feature in Urban Areas that covers Beijing, Chongqing and Taiyuan. The report showed that there were still regions for potential expansion in first- and second-tier cities. Community supermarkets and convenience stores offered more fresh food and ready-to-serve food according to features at their locations and they were committed to providing all kinds of services to local residents.
Markets in third- and fourth-tier cities are becoming mature and are giving renewed opportunities and development potential to chain enterprises. Many chain retailers based in those cities achieved good results.
3. Excessive Competition Brings Industry Changes
Generally speaking, market concentration rate of China’s retail industry remains low. The sales volume of top 100 retailers only constituted 11% of total retail sales of consumer goods in 2010, a number that was far lower than that in developed countries. Excessive competition can be found among particular business formats in different regions. According to CCFA KPI database, average number of visitors in typical stores dropped by 2.5% by the end of third quarter in 2011 and gross margin down by 0.5%. Excessive competition will lead to retailer’s lowered profitability, pose threat to the region’s medium- and small-sized companies and bring merger, acquisition and even bankruptcy.
Innovation as Core in New Structure and as Tool to Win Competition
III. New Rules for New Situation
New rules in retail industry refer to rules built by government, by companies and by the industry itself. Government establishes laws and regulations to ensure the industry’s harmonious development and it strengthens the implementation of its policies through supervision and law enforcement efforts. Companies build their rules for the coordination of their interests. We see improved rules and regulations in companies after several years of development. However, we should put emphasis on the interests of our employees. The rules should treat workers well and protect their enthusiasm so that companies can improve their productive forces and competitiveness because worker’s consciousness and capability of serving others are the roots for company’s productivity. Industry rules, made or proposed by industry associations, are aimed at balancing the relationship between competitors. For the rules in the above three layers, industry members should reach consensus on those that are the least binding and are the least enforceable. Therefore, we would like to offer three concrete proposals for the industry’s development and for building its rules:
(1). To improve and standardize relations between suppliers and retailers by signing sales and purchase agreement and service agreement. At the meeting yesterday, Mr. Wang Tian, president of Better Life Commercial, explained his proposal on this aspect and it is also the proposal he gave on this year’s session of the National People’s Congress. Modern retailers not only procure products from suppliers, but also provide additional services, such as logistics, posters, special display, advertising and exhibition stands. Retailers provide their services and it is legitimate for them to charge suppliers. During the survey on yesterday’s leadership summit, we put the proposal to voting and those who were for its implementation constituted 47%, those who agreed on its implementation with government support 37% and those who were against it 16%.
We hope that when the industry reaches consensus on the issue, we can strive to win government support and to produce a standard agreement format for reference at the same time.
(2). To boost domestic demand and create new demand by tapping traditional festivals and traditional culture. Traditional festivals are busy season but our products are not rich in variety and are mainly focused on food, such as sweet dumplings for Lantern Festival, rice dumplings for Dragon Boat Festival and moon cakes for Mid-Autumn Festival. On my business trip to the United States during Christmas, I saw that nearly half of the products in a supermarket were for the holiday season, with a small number of foods but a large number of non-food offerings. Consumer demand for food is limited so suppliers can only change their packaging and price. That’s why there have been foods with excessive packaging and whopping prices. In Chinese traditions, every festival has its meaning and retailers should tap these meanings and develop non-food products so that we can improve our sales as well as spread traditional Chinese culture.
A single company has limited capabilities and CCFA hopes to build a platform, on which companies, including retailers, suppliers and media, can work together to tap traditional culture and to develop products that can carry such traditions. We can also make promotions so that we can not only spread Chinese culture but also make some contribution to stimulating consumption and building market prosperity.
(3). To improve worker’s welfare by offering leave or shortening working hours on the first day of the Spring Festival. The idea was put to discussion on the leadership summit with 62% saying yes but it needs consensus from the industry, 33% saying yes and they will respond to CCFA’s appeal and 5% saying no. The Spring Festival is the most important holiday for Chinese people. The whole family used to go shopping on the first day of Chinese lunar calendar, but they choose to relax themselves in other ways now. Workers hope to have more time with their families. Besides, the sales on that day are just one quarter of the total during the holiday season and retailers have to pay higher wages.
We hope that the industry can reach a consensus, to provide guidance to consumer behavior and to offer one day off to workers to let them have more time with their families.
These are my three proposals on how to improve relationship between suppliers and retailers, how to stimulate domestic demand and how to offer care to our customers. Though they are detailed proposals, we hope to see that the industry can reach consensus and we will work together to push them forward. Large-scale enterprises and key enterprises should build themselves as role models in terms of abiding by the rules. At the same time, they should also run their operations according to the rules and take their own responsibilities. That is to say, responsibility is the core of new rules.
China Chain Store & Franchise Association has shared with you its views in building new ecosystem and establishing new rules, views that we hope would bring benefits to the industry and promote common development. We also expect that the industry can take on its responsibilities and obligations at the same time. In the new ecosystem, companies should balance the relationship between consumer, supplier and peer companies so as to work together for cooperation and harmonious development.