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  1. Analysis
November 29, 2013

China briefing: Retailers look to China for growth opportunities

China's grocery market has been growing at a rapid pace for several years. Representing one fifth of the world's population, this emerging market has become a significant opportunity for foreign investors seeking overseas growth. Michelle Russell reports.

China’s grocery market has been growing at a rapid pace for several years. Representing one fifth of the world’s population, this emerging market has become a significant opportunity for foreign investors seeking overseas growth. Michelle Russell reports.

Last year, China surpassed the US to become the world’s largest food and grocery retail market, according to figures from IGD. It is now valued at more than US$1tn and is forecast to be worth $1.5tn by 2016.

A surge in the number of higher-income earners and a soaring demand for more premium products, have all helped fuel this growth, making it an attractive proposition for both international and domestic players.

As a result, foreign and domestic retailers are expanding quickly in China with new formats emerging as the opportunity grows.

The country’s largest grocery retailer, Sun Art Retail, recently booked profit growth that outpaced sales gains during the first nine months of the year. The retailer has been pursuing a strategy to expand via store openings and is set to launch an online delivery business in the fourth quarter of this year.

Meanwhile, US grocer Wal-Mart also recently outlined plans to open stores and distribution centres in China over the next three years. The world’s largest retailer plans to develop further in the country’s tier-two, tier-three and tier-four cities, focusing on its supercentres and Sam’s Club warehouse stores.

Another foreign player, France’s Carrefour has pledged to open 25 hypermarkets annually, while UK grocer Tesco last month entered into a deal to merge its Chinese business with local retailer China Resources Enterprise.

“China is an enormous market that has continuing, very strong growth, whereas a lot of other markets around the world are not growing to the same level or on the same type of scale,” James Roy, senior analyst at China Market Research Group, tells just-food. “There are great opportunities, not just because of the size and pace of growth but also because of the key advantages that foreign brands can have. The Chinese are not nationalistic about brands, they are very interested in foreign brands.”

Indeed, Andrew Cosgrove, global consumer products analyst at Ernst & Young, says the “sheer importance” of the Chinese market, in terms of growth, is “unparalleled” in terms of opportunity in the next five years.

“It is really a multi-polar world we’re operating in now and in that world, for me, there are two must-win markets, one being the US and the other being China.”

And the opportunity in this market is stemming from the growth of the affluent middle class and a generation coming through that has “known nothing other than growth”, Cosgrove says.

Business Monitor International forecasts that by 2018, 63% of households will fall into the $10,000+ income bracket, representing the key demographic for increased household spending on luxury items. At the present time, 73.8% of households fall into the bottom wage bracket of $5,000+.

“The Chinese consumer is maturing very fast and appreciating quality more. This new generation … are internationally aware, social media using people,” Cosgrove adds.

This increasing social awareness has resulted in the advent of online grocery retailing in China, which is expected to take off considerably in the next few years.

“There is a really strong boom in terms of e-commerce and that is something that is only just beginning to affect grocery sales,” says Roy. “Consumers are beginning to buy food online and that is something that is really poised to take off. Wal-Mart is a major [e-commerce] player and is well-positioned to take advantage of the trend.

“People who are working more and have less time. This is more true in the larger cities like Beijing where you have double income households and the time to shop is less. The willingness to buy food online is really getting there.”

Roy says retail e-commerce is growing at around 90-100% per year in terms of spend and is poised to overtake the US as the largest e-commerce market in the world.

“We are looking at between 30-40% annual growth over the next five years. For grocery it’s starting from a much smaller base so you’ll see much higher growth rates,” he predicts.

While Sun Art, the local venture of French retailer Auchan, holds the lead grocery retail position in China, followed by China Resources Enterprises, it is Wal-Mart that has stolen the march in online grocery, Cosgrove says. Other players are smaller, local players, he suggests.

“Wal-Mart has a strong position. For the other two, food is an area they could certainly go into.”

Cosgrove, however, questions whether there retailers are actually making a profit from online grocery at the present time.

“Simply because of the scale and the model, it’s just a hard model still. You can see the challenges grocery firms have to turn that into profit in the Western markets.”

The format that has made money for retailers in China, however, has been the hypermarket. Last year Sun Art overtook Wal-Mart as the country’s top hypermarket chain, with around a 12.8% share of the market, topping Wal-Mart’s 11.2%. Carrefour is China’s third largest hypermarket operating with around an 8.1% share, according to Euromonitor.

“You are seeing hypermarkets expanding, simply because of economic growth and land,” Cosgrove says. “More than half of all the retail space under construction in the world is going on in China.”

However, Steve Chow, an analyst at Kingsway Group Research in Hong Kong, told Reuters that the “rapid growth era” for hypermarket operations could be over. “It’s not as easy as before to generate profit by simply opening new stores.”

Indeed, a need and increasing desire for convenience has emerged in China, threatening to overtake hypermarkets as the largest channel.

“There have been a lot of players shift their formats or have to shift,” Roy tells just-food. “Wal-Mart is now having to close a lot of under-performing stores. They’re very used to having the very big box stores in the US, and that’s not a format that is now as successful in China. Consumers here buy fewer items per trip, they want something easy to get to on public transport and are looking for something on a smaller scale where they can buy for the next day or two.”

A levy introduced by the Government two years ago on plastic bags also precipitated more of a shift towards fewer purchases and more frequent trips, Roy says.

“We expect that to be the case for the foreseeable future. Chinese consumers don’t like shopping in these massive stores. It’s just not convenient for their lifestyles.”

As a result, in order to remain competitive, supermarket and hypermarket chains are developing new store formats to suit differing local market needs, and are having to adapt their product and service offerings to differentiate themselves from their competitors.

These aren’t the only challenges facing retailers in China at the present time, however, and the most obvious of which is food safety.

“All grocery retailers are selling local products as well as international,” Cosgrove says. “Every day there is a food safety scare in China and we have seen how quickly an aisle can be emptied of products as a result.”

Roy concurs: “A big issue all retailers have to be watchful over is the quality of their sourcing and labelling. There is a lot of scrutiny right now in terms of products being labelled correctly. Some level of mistakes will inevitably happen so and there can be heavy consequences.”

Cosgrove, however, points to the need for foreign investors to joint forces locally in order to make a success of any potential Chinese venture.

“From a retail perspective its tough because in general, grocery retailers haven’t really succeeded outside of their own markets unless they have been able to make local acquisitions. You see a number of companies go into markets organically and it’s really hard. Consumer product firms have had a much more successful strategy. The right choice of partner and how you work with them really is the differentiator.”

He also says retailers have to be “incredibly granular” in their approach to China, given the vast number of cities with in the country – 122 of those with a population of more than 1m.

“There are parts that are poorer than Africa and parts that are richer than Switzerland so you really have to look at your operation.”

“Almost everybody, when they first enter China, starts in the tier one cities on the coast. What is hard though is, the world is competing in China. You’re not just competing with local firms, you’re competing with every other retail and consumer goods company under the sun. It’s a really intensely tough market but the scale of the opportunity is enormous.”

Cosgrove says that, in a market that is changing so rapidly, it is important companies adapt to keep up with that pace of change. 

As for the future of China’s retail scene, Business Monitor International believes the sector will continue to expand “vigorously” over the next few years

“We are particularly positive about the future growth prospects for transport spending; however, we expect the highest proportion of the household budget to be spent on food and drink.”

Click here for the rest of just-food’s management briefing on China.

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