City retailer ranking: Suzhou overtakes Shenyang, but other cities’ rankings remain unchanged
The gap in retailer presence between the leading cities of Shanghai and Beijing and the other 18 surveyed cities has narrowed over the last three years. While many international retailers still prefer to open their first China stores in Beijing and Shanghai, they often plan to expand to cities such as Chengdu, Hangzhou or Shenzhen not long afterward.
Five years ago, in 2014, Beijing and Shanghai had roughly five times the number of stores that the other 18 cities had on average. By mid-2019, this multiple had fallen to four times the average number in the other 18 cities, with retailers expanding faster in recent years in Guangzhou, Shenzhen and other second-tier cities. While cities such as Chengdu and Nanjing may have all the same brands that are present in Shanghai and Beijing (albeit in fewer numbers), there are still many retailers (40% of those tracked) that have yet to establish a presence in other second-tier markets such as Xiamen, Zhengzhou and Ningbo.
Retailer index and ranking, 2019
1. Shanghai 98
2. Beijing 87
3. Shenzhen 44
4. Chengdu 39
5. Hangzhou 35
6. Guangzhou 34
7. Chongqing 28
8. Wuhan 28
9. Nanjing 26
Brands’ balancing act: Established brands slow expansion while emerging brands step up the pace
The evolving online and digital experiences that consumers have through mobile payments and mini-programmes have bolstered consumer spending. Consequently, international brands are allocating more resources to develop online platforms to reach a wider range of consumers. Retailers have also invested more in key flagship stores with better fit-outs, broader product ranges and more experienced staff, in order to improve the in-store experience and quality of service provision and provide a more engaging retail experience.
Mainstream brands are now well-established, and the store expansion rate of the 8 retail categories tracked slowed 5.2 percentage points (ppts) year-on-year (YoY) to 4.3.% in the 12 months to June 2019. Coffee shop chains were the only category whose expansion rate exceeded 10%.
Future growth will increasingly need to come from more novel and innovative brands and those that target particular slices of society, including insurgent start-ups, brands with heritage culture or niche cosmetics.
Overseas opportunities: Digital and fashion brands lead overseas expansion, Southeast Asia is a key focus
Local retailers are seeking new opportunities in overseas markets and finding them primarily by acquiring overseas brands (primarily for domestic expansion). Chinese brands are expanding internationally and receiving wider recognition for value for money. Some brands have targeted rapidly growing emerging markets to increase revenue and gain market share while others have focused on leading international cities to enhance brand profile and go after the world’s top 1%.
Digital electronics, fashion and electric vehicle brands appear to be most active in terms of overseas expansion. Southeast Asia is the favoured destination for Chinese brands, accounting for 33% of all existing stores, followed by 21% in East Asia (including Hong Kong, Macau and Taiwan).
Savills data shows that average rent for China’s most expensive high street is equivalent to that of prime high streets in Europe’s second-tier cities. Southeast Asia markets offer very competitive rents and have proved very popular with Chinese brands.
Optimistic outlook: Future growth returns to fundamentals with products and consumers at the core
As uncertainties surrounding the China-US trade dispute continue to weigh on China’s manufacturing and export sectors, the central government has been taking steps to shore up the economy by transforming and enhancing financial markets and encouraging consumers to continue spending. Tariff cuts on a variety of imported consumer goods have helped to buoy certain segments of the market while personal income-tax cuts and reform of the value-added tax should bolster consumer confidence and take-home pay.
China’s market size and positive long-term outlook should continue to give retailers confidence despite the short-term uncertainty. Market demand for quality retail brands remains robust, supported by a growing middle class and the rising influence of a younger generation of consumers. Effectively reaching and engaging with these savvy consumers will require brands to create more innovative concepts, customise products and digitise the retail experience.