Transformation of Traditional Retail Industry

 

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The MUJI flagship store in Chengdu, Sichuan Province.

 

By Wang Jiping

The rapid development of e-commerce has led to a general decline in traditional retail sales around the world.

At the beginning of this year, Walmart announced plans to close 269 stores globally. The US mega department store Macy’s announced plans to lay off 4,800 employees and close 40 US stores.

This tide of store-closures in the global retail industry has also had an impact in China. In 2014, Fitch IBCA issued a report stating that China’s retail industry was set to face serious challenges over the course of the next 12-18 months, due to the slowdown of the Chinese economy, insufficient domestic demand, a surplus number of department stores and intensified competition from other modes of retail sales.

Although the development path of the retail industry has remained bumpy throughout 2016, both Chinese state-owned and foreign-funded enterprises need to adapt to survive this period of increased competition.

Situation Remains Bleak

Eighty large-scale retail enterprises were sampled for their performance in 2015 by the China Commerce Association for Retail. Statistics show that their gross sales increased by 9.3 percent year-on-year, whereas total profits decreased by 12.05 percent, and sales profit ratio decreased by 19.53 percent. This stagnation has led to widespread store closures across China.

Financial results filings for the first six months of 2016 show that at a number of large retail enterprises in China, this decline has continued. For example, Xinhua Department Stores achieved sales revenue of 3.7 billion yuan (US$570 million) in the first half of the year, a 0.72 percent decrease year-on-year, while its net profit decreased by 69.24 percent year-on-year. Hangzhou Jiebai Group achieved sales revenue of 2.52 billion yuan (US$387.7 million) in the first half of the year, an 8.77 percent decrease year-on-year. Its net profit was about 110 million yuan (US$16.92 million), a 20.52 percent decrease year-on-year. The same-store sales of the China Yintai Investment Company declined by 4.1 percent in the first half of the year. Yintai owns 45 stores in China, 43 of which have operated for more than one year. Half of those stores have seen sales decline.

Lai Yang, president of the Beijing Circulation Strategy Research Institute, said that China’s retail industry developed quickly from the 1980s to the early 2000s. Now, however, changes in the industry brought about by e-commerce are seeing retail firms struggle.

In addition to general online shopping, mobile shopping via apps has exploded. It is evident that the consumers’ consumption patterns have entered the era of “cloud consumption” – making purchases whenever and wherever you want. The variety of products online is more than that of traditional department stores. The efficient and convenient online shopping keeps up with the pace of life of modern consumers. Therefore, Lai believes that consumers no longer depend upon traditional retail stores. Although some department stores have built their own online shopping platforms to attract consumers with online-to-offline advertising schemes, given the overwhelming number of domestic and “overseas shopping” websites, consumers are no longer attracted to department store websites without special offers. This leaves retailers with little room for growth.

Zhao Yumin, director of the Institute of Commodity Research at the Chinese Academy of International Trade and Economic Cooperation under China’s Ministry of Commerce, explained that traditional department stores differ from supermarkets of fast moving consumer goods in that the goods sold in department stores are usually slow moving consumer goods. Such goods have come a long way through distribution channels with added price. This limits access to a diversity of consumers. What’s more, department stores usually cover a large area in expensive business districts – rents pinch profits.

Adapting to Succeed

How will the retail industry develop, given current circumstances? Industry experts believe that the industry should evolve and grow in the way of shopping malls developed by Wanda Group, a large chain of shopping malls in China.

It is evident that the consumers’ consumption patterns have entered the era of “cloud consumption” – making purchases whenever and wherever you want.

 

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The MIXC Shopping Center in Hangzhou, Zhejiang Province.

 

Lai Yang noted that the sales of slow moving consumer goods alone can no longer support the development of the industry, because such goods are no match for online shopping in either variety or efficiency and convenience. While some customers head to department stores to shop, others simply use them as places to spend time with family and friends. Therefore, the retail industry should develop in a direction that meets customers’ needs for leisure, social gathering, quality of life and family fun.

“It is also important for the industry to try to enhance customers’ shopping experience by creating unique characteristics that distinguish themselves from the competition,” said Zhao Ping, an expert on consumption at the China Council for the Promotion of International Trade Academy.

Another way is to make their goods monopolized, customized or even personalized. This can give stores access to certain consumer group, so that they can obtain a unique position in the market.

MUJI, a Japanese retail chain, has implemented such a strategy to perfection. It has forged a unique shopping atmosphere in the world consumer market with modern consumption concepts, such as “purchasing on demand”, a minimalist concept. In MUJI stores, customers are free to try cosmetics at the dressing table, even if merely out of curiosity and without intent to purchase anything. It’s very rare that store employees will push the goods on display. Instead, they allow the customers to have direct contact with the goods and try for themselves, which adds to the shopping experience consumers can only have in a physical store. Online, products can not be tried before purchase. This leads consumers to enjoy their shopping experience, which boosts customer loyalty.

After decades of strong economic growth, young people in China are the most important demographic for retailers to target. This is a generation that expects not only high quality of the goods on their shopping list, but also a strong sense of individuality and a brand they hold in high esteem. Emphasizing these kinds of advantages could prove a game changer for the retail industry.

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