Consumer needs are becoming more individualised and diverse along with the rising middle class in China, driven by the notable increase in household income, finds a study jointly conducted by Deloitte Touche Tohmatsu and China Chain Store & Franchise Association (CCFA).
The "Multi-Format Retailing: The Road to Future Development of Enterprises" report shows consumers are less price sensitive, while they have become more aware of the brands and cost-effectiveness of the products. A majority of 67.1% of the chain enterprises agree that multi-format retailing is inevitably the future trend of the industry. However, 16.4% of the respondents believe it is not necessarily applicable to every enterprise.
Under various internal and external factors, China retail chain industry is or will be undergoing a critical period of challenges and opportunities with a lot of significant changes, notes the report.
"Over the last decade, China's rapid economic growth has prompted the fast moving development of the retail industry. At present, the global economy is recovering with embedded risks and China's economy is facing various problems, including inflationary pressure. For China's retail industry, however, boosting factors continue to exist from the level of macro-economic environment or individual consumers. This rapid growth is an irreversible trend in China’s retail industry," says Eric Tang, National Leader of Deloitte China Consumer Business & Transportation Industry.
The survey analysed the objectives of different enterprises in implementing multi-format retailing strategy. It shows 78.8% of the respondents cited “meeting the diversified needs of consumers” as their primary objective, followed by “reducing competition pressure and diversifying operating risks” (70.6%) and “achieving differentiated competition” (61.6%).
Respondents highlighted that the rapid development of information and logistics technology provided the technical possibility for them to implement multi-format retailing strategy. The diversified needs of consumers and consumption structures are reflected in many aspects, including the diversified consumption structures for different regions and different consumer groups, and the diversified consumption of a single region and a single consumer group. The diversified consumption structure allows the co-existence of emerging and traditional consumption and provides more opportunities to invest in multi-format retailing in the market.
“Along with the rapid development of China’s retail industry, competition is becoming increasingly fierce, especially in regional markets,” Tang notes. “Competition among the large number of retailers has led to the gradual saturation in traditional regional retail markets. Multi-format retailing benefits companies by providing new room for growth and helping them enter into more refined markets with strong development potentials. In addition, many companies have resorted to differentiation as their competition strategy because of the futility of pricing tactics. Differentiation strategy is built upon the accurate positioning and understanding of target customers. On that basis, companies would provide distinctive products and services, adopting multi-format retailing to satisfy the different and multi-level of consumer needs," he says.
A majority of the respondents (67.1%) believe multi-format retailing is the inevitable development trend of the industry; however, only 26.5% indicated that they would implement this strategy in the next three years because of a lot of difficulties in implementation. Around 54.1% of the respondents cited inadequate professionals as one of the difficulties and another 50.7% said they were troubled by the backward management standards. Other difficulties include low level of logistics and distribution support (45.9%), huge capital pressure (43.2%), backward IT development (40.4%) and complicated product structure management (24.0%).
Based on the findings of the survey, market, corporate capabilities, strategy and management are key factors for companies to decide whether to adopt multi-format retailing or not. The survey found that half of the companies take the followings as decisive factors: logistics and distribution support, procurement capabilities and potential growth of target market. Besides, over 40% of the respondents consider client research, capital and IT standards as decisive factors, which are also related to their own corporate capabilities.
For those companies which are about to implement or have implemented multi-format retailing, despite the difference in concerns, around 76.7% of the respondents considered accurate market positioning and consumer demand analysis as important approaches for pursuing multi-format retailing. Other strategies include establishing suitable talent mechanism for corporate development (56.2%), source procurement and farmer-to-supermarket connection (50.7%) and raising management efficiency and reducing operating costs (45.2%).
Jennifer Xu, Enterprise Risk Services Managing Partner of Deloitte Southern China and Member Director of the CCFA says that companies will have to effectively control risks to avoid potential losses caused by internal and other external factors.
"Under the demand for diversification, enterprise should realize that market capacity for each consumer group will not be too big and small-scale stores will definitely have greater advantages in satisfying the demand of these small consumption groups. Therefore, in the future retail market, large and small stores will coexist to meet different consumer demands. Brand building is even more important. The living space for retail companies is significantly narrowed due to fastidious customers, intense competition, and extremely low profit margins.
Branding can deliver value to consumers and help achieve a profit margin which is above the industrial average," says Xu.
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