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China Retail Trends: Grocery in Lower-Tier Markets

(Summary description)China Retail Trends: Grocery in Lower-Tier Markets

China Retail Trends: Grocery in Lower-Tier Markets

(Summary description)China Retail Trends: Grocery in Lower-Tier Markets

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Over the past few years, consumption growth in tier 1 cities such as Beijing and Shanghai has slowed down as the retail market has become saturated to a certain extent. High rent and operation costs are not helping either. Thus, many grocery chains chose to go to lower-tier markets. Not only the local giants, like RT-MART, Vanguard etc. are driving their business in rural areas, some multi-national brands like Lawson also turned to this potential area. Lower tier markets are up and coming for retailers in China.

 

Lower-tier markets, literally means the markets in tier 3 to tier 6 cities, towns, and counties. Due to the fact that more and more industries moved inland from coastal provinces, a great number of returned population and consequent consumption upgrade bring huge potential for lower-tier markets. According to data in 2019 from the national bureau of statistics, more than 1 billion consumers are living in 228 towns of the Chinese lower-tier markets, accounting for 72% of all consumers, and its market size was about 1.719 Trillion yuan. The survey from CNRS-TGI also showed that some residents in lower tier markets had a familiar consumption preference approaching tier 1 cities, bringing opportunities for some higher-end formats such as fresh food market (as compared to the traditional wet market).  Meanwhile, the government plays an important role in encouraging the development of lower-tier markets by introducing a series of policies such as targeted poverty alleviation, expanding domestic demand and rural revitalization. Thus, it is a natural choice for retail chains to expand and meet the demands in the lower-tier markets.

 

 

source: Lower-tier Market Report Series

 

Below are some of the challenges and opportunities Chinese retailers are working on to break into the lower tier markets:  

 

Leveraging existing supply chain

 

With transportation infrastructure still lacking behind, less developed areas such as Tibet and some other inland provinces are still blue sea for major grocery store chains. It is also challenging for suppliers to cover all those areas. Grocery chains need to tackle supply chain issues before they can properly enter the lower-tier markets.

 

Example: Yonghui opened its first store in Tibet

For crucial retailing capability such as merchandise buying, Yonghui combines local buying and direct delivery to stores through the highway network. According to Yonghui’s internal region division, Tibet and Sichuan are in the same region, which indicates that Yonghui intends to drive business in Tibet by leveraging the powerful supply chain resources it has in Sichuan. Based on its supply chain platform ‘Yonghui1233’, commodity from all around China could be organized and delivered to supply their Tibet stores. Meanwhile, Yonghui also enhances its cooperation with local suppliers and producers to reduce costs and gain competitive advantage.

 

Source:Yonghui

 

 

Active optimization of assortment/product offering

 

Compared to tier 1 and tier 2 markets, consumers’ preferences in lower-tier markets are distinctly different . According to Ebrun research, the average age of key consumption force is 28.7 years of age in these markets, with a monthly income under 6000 yuan. However, most of them do not bear the burden of housing loans and car loan which may limit consumption power. Shorter working hours also allows them to have much longer shopping time. For such kind of consumers in lower-tier markets, offering cost-effective products according to specific consumer needs would be critical.

 

<p style=" text-align:="" />Source: Ebrun Research

 

 

Example: RT-Mart Super – prompt adjustment of product selection

RT-Mart Super store in Baoying implemented everyday low-price strategy since opening and adjust its product selection swiftly. One month before the store opening, RT-Mart Super distributed DM to neighboring communities.  Take Chilean Cherry for examples. At the very beginning, RT-Mart Super selected the JJ level Chilean cherry to sell, which was priced at 99 yuan/kg. When reviewing the performance of opening day, the store manager found the JJ level cherry’s sales was less than expectation, which may imply that it was beyond consumers’ spending power, so the store manager decided to replace it with J level at 59 yuan/kg and launch packed cherry at 29.9 yuan/box the following day. The timely adjustment of product did bring a better sales performance to the store.

 

Entering lower-tier markets via alliance/franchisee

 

Entering the lower-tier markets through cooperation with local company or franchisee can also be a feasible strategy. Grocery chains can enter the lower-tier markets with relatively less investment by leveraging existing local supply chain/partners, which could significantly reduce cost and potential risk when exploring these markets.

 

Example: Suning Retail Cloud Store

Sunin’s Retail Cloud Store is Suning’s first franchise busines unit, as well as the fastest developing since it was established in July 2017. By integrating household electrical appliances stores in the rural area, it expanded so fast in the lower-tier markets in excess of 3000 stores in 18 months. Take the Suning Retail Cloud Store in Xueyan (a town in Changzhou) as an example. The only Retail Cloud Store in this town was the sales champion of home appliance segment in Wuxi area in the first quarter of 2019. It created extraordinary sales records at 1.2 million yuan in the first three days after opening. In all 3000 Suning Retail Cloud Store, there are about 2500 operated by franchisees like the one in Xueyan.

 

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Suning retail cloud in Xueyan

 

Example: Japanese CVS chains cooperated with local companies

To enter new markets effectively, Lawson and 7-11 cooperated with local companies. Lawson cooperated with Jindian Business Chain Management (Hebei) Co., Ltd, which is a subsidiary of Tangshan Golden Spoon Company. Golden Spoon is the largest agricultural and produce product distributor in Tangshan. With more than 75% of agricultural supply market share,  Golden Spoon owns sufficient resources in operation and supply to support Lawson’s local business expansion.  Also, 7-11 chose Sanquan Food in Zhengzhou and Your-mart in Hunan province as partners. They are both local retail leaders with powerful supply chain resources.

 

The opening day of 7-11 in Zhengzhou

 

Unlike the fast-paced lifestyle in tier 1 and tier 2 cities, consumers in the lower-tier markets show much more preferences of ‘shop online’ and ‘experience offline’, which provides more room for offline business development.  To grasp the opportunity, grocery chains face the challenge of selecting the right product mix, and offering scenario-based shopping environment to meet the demand of the consumers in lower-tier markets. Plus, besides value-added services like on-premise catering, grocery chains also need to invest in educating consumers to migrate to digitalized platforms, such as e-payment and omnichannel shopping.

 

To sum up, logistic infrastructure and product/category management capabilities are critical for retailers entering the lower-tier markets.  Retailers should take into account the possibility of integration of local resources and localization of supply chain.  Last but not the least, lower-tier market’s uniqueness demands tailer-made operation and marketing plans in different regions, if retailers are serious about the lower-tier markets.

 

Reference:

Consumer Retail" of "China's lower-tier markets report": touch the real lower-tier markets

Yonghui Store Distribution in China

RT-Mart accelerates its "small", what imagination does the "Sinking Box Horse" have?

ATV 150 yuan: The first Tibet store has made a profit

Convenience stores have entered lower-tier markets, efficiency still rules

Zhang Jindong: Suning convenience store franchising its business, from efficiency to scale

Convenience Store in 2020: e-commerce, lower-tier markets & acquisition

3000 openings in 18 months: Suning retail cloud's "incorporation" of home appliance market in small towns

 


KT Wu
Feb 2021
Hanshow Retail Academy

 

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