By Wai-Chan Chan and Anne Tse
May 12, 2007
China is arguably the most tempting retail market in the world, but it is also among the toughest to crack. Supply-chain difficulties resulting from its vast geographical expanse are magnified by even greater regional variations in consumer tastes and preferences.
Its sheer scale and diversity mean that attempting to apply a one-size-fits-all retail model is doomed to fail. This does not just hold for foreign retailers trying to gain a foothold; it also applies to regional retailers trying to establish a nationwide presence. Most packaged consumer goods companies are well aware of these challenges and have carried out extensive consumer preference surveys. However, these insights are not sufficient for their retailer counterparts. What they need to better understand is not what Chinese consumers buy and why but, rather, how they shop and what it takes to get them to not only visit their stores but to spend money while they are there.
Chinese consumers are certainly spending. The Chinese market was worth US$800 billion in retail sales last year, behind only the US and Japan, and is bigger than the rest of Asia combined. It is also the fastest-growing retail market in the world. We estimate that it will contribute about 30 per cent to worldwide net retail sales growth between 2003 and 2008, or 60 per cent of all growth, if the US is excluded. Within five years, the market will be worth US$1.3 trillion annually.
However, interviews with retailers in China show that many are not making the profits they are aiming for, and many are still fine-tuning their formats as they try to better understand shoppers' needs.
To find out what these needs are, McKinsey & Company launched a global survey covering 6,000 shoppers in the four so-called BRIC economies (Brazil, Russia, India and China), and 2,000 of their counterparts in France and the US.
Unlike most consumer research, which tends to highlight attitudes towards products and brands, our survey focused on "how" Chinese consumers shop - who they shop with, when they shop, why they shop, and the experiences they look for. It compared behaviour in three product categories - food, apparel and consumer electronics.
The study showed that Chinese consumers spend more time shopping than their global counterparts, spending 9.8 hours a week in stores, compared with the BRIC average of 7.2 hours a week and just 3.6 hours a week in the US. A total of 41 per cent of Chinese respondents identified shopping as a favoured leisure activity.
Chinese shoppers also show less loyalty to any one retail format and certainly any single shop, making it more difficult for retailers to capture a higher share of their customers' wallets. Only 50 per cent of Chinese consumers saw themselves as a loyal customer of at least one store, compared with 59 per cent for the BRIC average, and 67 per cent in France. Only 30 per cent of Chinese spend more than 50 per cent of their money in any one retail category at their main store, compared with 80 per cent of consumers in the US.
Although Chinese consumers are price conscious, common perceptions that they always seek the cheapest items are wrong. Quality and freshness are key drivers, with 52 per cent believing that cheap means poor quality, compared with just 16 per cent in the US. As a result, just 12 per cent of Chinese consumers bought the cheapest food, regardless of quality, while 24 per cent of French consumers did so.
They also have a pronounced "fresh obsession", with concerns that such food will spoil being the biggest incentive for frequent food purchases, rather than the more typical drivers of saving money or preserving food.
Chinese shoppers were also surprisingly aspirational, with 60 per cent wanting to see branded products in their stores even if they could not afford them, while 69 per cent said they would buy more such products if they had more money. Importantly for retailers, the survey also showed that the right sales approach can encourage shoppers to splurge. On average, 43 per cent of the items Chinese shoppers buy are not on their lists when they enter a store. Many admitted, during focus groups, that this tendency was partly in response to in-store promotional events, and partly due to salesmen's recommendations.
Our interviews with retailers show that many recognise they are not delivering the optimal retail experience for their customer base. Common problems are that formats are not optimal for the location, stores are oversized, the product range does not have the right balance between generating shopper excitement and enhancing floor space productivity, and supply chains are unwieldy. All of these result from establishing the wrong format for the location and the local shoppers.
Going forward, the ability to master these shopper insights and get the format right will become increasingly important. First, retailers need to make better use of limited and increasingly expensive space. Since 2000, rental costs have climbed 60 per cent on average, and wages between 30 and 40 per cent. The supplier base is also consolidating, shifting the balance of power from retailers and making it much harder for them to negotiate margins. Lastly, retailers are aggressively expanding into second- and third-tier cities, and sometimes even rural areas. Potential savings in capital expenditure or labour costs will be outweighed by a much lower average sales productivity, challenging profitability further.
If retailers are failing to crack the code of shopper behaviour and make profits in the more lucrative first-tier cities, they are not going to make money if they take the same approach into the interior. But, for those who get the mix right, even China's fickle consumers won't stand in the way of the glorious sound of ringing tills.
Wai-Chan Chan is a partner in McKinsey & Company's Hong Kong office and Anne Tse is an associate principal in its Hong Kong office. The authors would like to acknowledge the contribution of Richard Cheung to this article.
This article was originally published in the South China Morning Post.
