China’s Offline Retail Challenge

China's Offline Retail Challenge

In the past decades, the Chinese retail market has experienced a significant transformation from traditional to modern, and is now again being disrupted by e-commerce. Since 1992, China's retail market developed with the country’s rising economy and changing consumption habits. New and modern shop formats have been introduced during this period, such as department stores, hyper/supermarkets, convenience stores, exclusive stores, and other forms of business, which are shaping China’s modern retail landscape until now.


What threats are China's offline retail facing?

After 2003, with the establishment of Alibaba’s Taobao platform, China consumers’ consumption habits have been changed dramatically by E-commerce. In 2020, China's e-commerce transaction volume reached 4.9 trillion EUR, with 4.5% growth compared to 2019. The average daily parcel volume reached 227 million. Alibaba achieved 63.3 billion EUR transaction volume on one single day during the Double 11 Festival (11th November).

E-commerce provides extra value through four key advantages to compete with offline retail:

  • Cheaper price: e-commerce retailer can simplify the supply chain system to reduce the profits of middlemen, thereby providing cheaper prices. At the same time, the larger sales network covered by e-commerce platform can provide greater sales which lead to lower operational costs per unit.
  • More product categories: e-commerce platform brings together merchants from various regions to provide different types of goods, customers can buy products from all over the country on a single platform.
  • Convenient delivery service: based on the e-commerce needs, China has developed a strong logistic network to support e-commerce. Consumers can await their products being delivered to their home for 6 hours to 3 days after purchasing.
  • Higher information transparency: e-commerce platforms integrate a lot of social listening such as product review, which can be a great pre-purchase reference for new buyers.

COVID-19 has further reduced people's willingness to shop offline and increased consumers’ requirements for offline shopping environment, such as higher requirements for hygiene and health in wet markets. At the same time, offline shopping will be also subject to regulatory restrictions, such as local lockdowns, as the pandemic continues. Those impacts are expected to continue for 2 to 3 years in the future.

How does it affect China offline retailers?

China's retail giants are experiencing unprecedented challenges in the face of the impact of e-commerce and COVID-19. Walmart has closed more than 70 stores in China since 2015. Metro has sold 80% of the share to Wumart. Carrefour China sold 80% of the share to Suning. Tesco China sold to CR Vanguard and exited China market. Domestic brands are also struggling, Lianhua as the leading local payer has suffered losses for nearly five consecutive years till now, although they sold 18% of its equity to Alibaba to get help, there was still no way to reverse the decline. Rising operating costs and rents, as well as the difficulty of increasing foot traffic to stores, are forcing retailers to start closing stores or turning to other formats.

How are China's offline retailers coping?

Offline retailers are aware of the challenges, some of them are trying to transform themselves to adapt to the dynamic environment, the trends emerging under the intensive transformation are:

  • Smaller store size: hypermarkets and supermarkets are gradually closing large-area stores, and new stores are mostly small-sized to reduce the cost.
  • Closer to community: COVID-19 has activated consumers’ demand for nearby purchases, community residents are more inclined to buy daily necessities in convenience stores around the neighborhood. More and more retailers are opening small area stores nearby residential living communities.
  • Less and leaner product categories: offline retailers start to optimize their product categories based on analysis of consumers preference to satisfy the changing consuming habit, such as the general increase in the proportion of fresh food in hypermarkets and supermarkets.
  • Online service development: most of the offline retailers have established their own online shopping platform and some of them cooperated with e-commerce giants to expand their sales channel

China’s retail market is fast-paced and dynamic, every change will have impacts on all stakeholders in the market. Deploying strategies ahead of time to quickly adapt to new trends is a difficult but necessary task for every player.