R decades of super-charged growth, China is in the midst of a major attempt to re-shape its economy and put it on a more sustainable path. As the rate of expansion slows, a stream of sluggish summer data caused concern among markets and commentators. Too much attention can be paid to monthly macro numbers, especially since a decline has long been on the cards. But there is no doubting the extent of the challenge facing the world’s second biggest economy as it tries to move up the value chain from the 1980s model of cheap labour, cheap capital and strong export markets.
STRENGTH AMID THE GLOOM
At the core of the re-balancing policy is the need to increase consumption as a growth driver to replace dependence on fixed asset investment. Progress has been slower than the leadership hoped, but the retail sector reflects the strengths amid the current air of gloom surrounding China.
To start with, the sector’s sustained growth of 10 per cent annually in recent years looks pretty healthy, and sales growth is likely to remain at that level into 2016. This will be driven by key factors including growing urban and rural disposable income; a push by retailers to penetrate further into smaller cities; increasing online retail sales; a recovery in the housing market; and the stabilisation of the domestic stock markets.
What is striking is the way in which, within this £2.7 trillion sector, the balance is shifting between domestic and foreign operators, to the benefit of the former, and e-commerce is powering ahead, sparking a surge in M&A activity. Retail mergers and acquisitions are likely to continue into 2016, as online stores and delivery services join hands with bricks-and-mortar retailers anxious to improve their bottom lines through increased multi-channel sales.
Many Western brands have been slow to capitalise on the shifting conditions in the retail environment as the consumer story rapidly evolves. This will allow many domestic companies to occupy more market space by utilising their on-the-ground knowledge of the shifting trends in consumer attitudes.
Total retail sales increased 10.5 per cent year-on-year to £1.9 trillion between January and August, but what catches the attention is the 36.5 per cent jump in online sales over this period to £224bn.
High street stores and supermarket chains have bemoaned the slide in sales growth as online retailers syphoned off traditional revenue streams, but a good example of how the sector is evolving is provided by the decision of one of the largest electronics and domestic appliance retailers to expand its physical footprint while furthering its already sizeable online presence.
Nanjing-based Suning last month signed a £2.96bn agreement with Internet giant Alibaba under which the two companies will use each other’s big logistics chain to get more product directly to people’s homes. This will integrate Suning’s extensive physical sales platform with its online store and Alibaba’s domestic internet dominance.
Suning then went on to sign an agreement this month with property giant Wanda that will allow the retailer to open stores in the latter’s commercial projects across China. This kind of collaboration could be a model for online retailers that want a physical store presence, while traditional bricks-and-mortar retailers can increase online sales in a market which many have been slow to exploit.
While many domestic retailers – such as Suning – have long had a substantial online presence, a large number of Western firms have been slow to execute plans to pick up on this trend.
Only in late July did Walmart announce that it would finalise its takeover of Mainland online store and delivery service Yihaodian to boost its online sales, at a time when most Western chains are belatedly realising they have been losing traction in a rapidly changing market – a realisation likely to be behind the decision by Germany’s Metro chain to open an online store with Alibaba’s Tmall.com.
As consumers adapt to a shifting economy, foreign retailers should heed the adjustment in local spending habits. Otherwise, they will find domestic players moving steadily ahead outside the saturated confines of the major cities, as they recognise that retail will play a growing role in China’s overall economic story.
Fergus Naughton is a senior China analyst at Trusted Sources, the independent emerging markets research service.