China’s economic slowdown, rising salaries and rents, and the explosion of e-commerce have put immense pressure on traditional retailers with large networks of physical outlets. But reports of the impending demise of physical retail in China are greatly exaggerated.
The Chinese government reported 10% retail growth in China for 2015. While lower than in previous years, it’s still a remarkable number, especially compared with most large retail markets like the US or the EU. And the number is supported by sustained confidence among Chinese consumers.
Despite the rapid rise of ecommerce, physical retail still rules in China for several reasons:
1) Experience – Even in heavy e-commerce categories such as consumer electronics, only a small portion (roughly 10%) of all consumers stay online for their entire purchase journey. Most end up visiting a physical store to seek advice and to get a firsthand look and feel for the products they are about to purchase.
2) Retailtainment –In our recent survey of Chinese consumers, 64% find shopping one of the best ways to spend time with the family, compared to only 43% in 2012. Mall developers are addressing this need with large entertainment areas that include restaurants, playgrounds for kids, and cinemas.
3) Scale and growth – While there’s no doubt that ecommerce has seen explosive growth in recent years, and will continue to do so, let’s not forget that the vast majority of retail consumption in China continues to be done in stores, and more than half of retail growth last year came from physical stores.
So, why do many physical retailers struggle in China, and what can they do to change this?
Out of the 10% overall retail growth, physical retail grew around 6% last year. It’s a surprising number, as many physical retailers have been reporting much lower growth numbers, particularly when looking at the most important KPI of all: same-store growth.
Why is that? As always in China, it comes down to not fixating on averages: 6% physical retail growth is an average number across all regions, formats, and categories.
Also, let’s not forget that China has still seen very significant expansion of physical retail space. Department stores and hypermarkets have been negatively impacted by this trend as shoppers today often prefer to buy at malls and specialist retailers.
Here are a few ways physical retailers can regain profitable growth in China:
1) Format renewal – Smaller retail formats are the name of the game and all retailers are urgently looking into designing those to address Chinese consumers’ need for convenience and to boost store productivity.
2) Re-purposing property – To provide a shopping experience that is tailored to the needs of China’s increasingly demanding consumers looking for premium shopping experiences, a major upgrade of retail space is needed. This holds true for department stores as well as for shopping malls and hypermarkets.
3) O2O – While the term “O2O” may feel over-used, it is critical. Driving store traffic from “online to offline” as well as converting sales from “offline to online” need to be part of every retail concept today. For some retailers, the objective may be to drive sales, for others it may be about customer experience, and for others it may be about after-sales.
4) Efficiencies – China is no longer a low-cost market: salary and rent increases have led to overly high cost positions for retailers. If they haven’t already started, now is the time for retailers to look into ways to drive greater efficiency so they can regain their competitive edge and restore profitability.
China’s retail growth remains healthy, and physical retail will continue to be a very important element of that growth. Retailers that are quick to adapt to the new market reality will be better positioned to gain market share and increase profits.
Daniel Zipser is a Partner at McKinsey & Company in Shanghai, and leads the Greater China Consumer & Retail Practice. Please reach out and connect with him here on LinkedIn.