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What the Experts Say?
Ten Highlights of China’s Commercial Sector
2016
Consumer market enters a “new normal”; consumption increasingly becomes a driver of growth1
Strategic partnerships in China’s commercial sector intensify; conglomerates with shared interests emerge5
“Internet Plus” initiative drives e-commerce expansion; mobile commerce and rural e-commerce high on the agenda3
Government delivers multiple policies to support distribution sector development; due implementation is crucial
2
Traditional retailers reinvent and upgrade; embracing “O2O” strategies becomes an industry consensus4
Cross-border e-commerce import businesses see rapid growth; new channels for commercial enterprises to transform and innovate7
Mass dining receives increasing attention; technology helps boost the development of new businesses, such as group-buying catering services and O2O food delivery
9Better business regulations, better consumption environment 10
Exploring innovative business practices and new retail formats; differentiating offerings with a greater focus on experience
6Express delivery sector enters a “new era of service”; new business models bring new opportunities
8
1
Fung Business Intel l igence Centre
Contents2 Foreword
3 About the Organisations
4 Expert Panel Members
5 Executive Summary
13 Ten Highlights for 2016
Trends that will Matter Most in 2016 and Implications for
Foreign Investors
7
2
Ten Highl ights of China’s Commercial Sector 2016
For the 13th consecutive year, the Fung
Business Intelligence Centre and the Expert
Committee of the China General Chamber of
Commerce jointly present their Ten Highlights
report to provide enterprises with a
comprehensive, insightful view of China’s latest
commercial developments. The report is
published in partnership with the China
Business Herald Research Institute.
2016 marks the beginning of China’s 13th
Five-Year Plan (2016-2020). With the country’s
ongoing transition to a more sustainable growth
model, a lower economic growth target at
around 6.5% is expected. However, as China
evolves into a more consumer-driven economy,
this transition is set to play a more significant
role in driving economic growth in the years
ahead. The Chinese government has been very
supportive in developing the commercial sector
and has promulgated a number of policies and
regulations to promote the orderly development
of sectors that include retail, e-commerce,
logistics, finance and many others. In particular,
the “Internet Plus” concept advocated by the
government calls for a new model to propel
traditional industries, given the proliferation of
Internet-based businesses. This will provide
myriad, new development opportunities for
commercial enterprises in the O2O era.
Moreover, the Belt and Road Initiative will
liberalise and facilitate trade and investment
between China and countries and regions
along those routes; it will also promote
cross-border e-commerce and other similar
innovations to bring consumers cheaper and
better imported products. Commercial
enterprises need to pay close attention to the
Initiative and make the most of opportunities
as they arise.
Ten Highlights of China’s Commercial Sector
2016 presents key factors identified after a
series of votes and formal, in-depth panel
discussions. The views of over 170 top-tier
experts were curated and are reflected
throughout the report. Over successive years,
the report has been welcomed by investors
eager to understand China’s latest commercial
trends and issues.
We would like to thank all panel members on
the Expert Committee of the China General
Chamber of Commerce for sharing their
insights. We also thank our colleagues at the
Fung Business Intelligence Centre for their
contributions and assistance.
Foreword
Teresa LamVice PresidentFung Business Intelligence Centre
Lucia LeungResearch ManagerFung Business Intelligence Centre
Chang Ka MunManaging DirectorFung Business Intelligence Centre
3
Fung Business Intel l igence Centre
About the Organisations
Fung Business Intelligence Centre
The Fung Business Intelligence Centre (FBIC) collects and
analyses market data on sourcing, supply chains,
distribution and retail. It also provides thought leadership
on technology and other key issues shaping their future.
Headquartered in Hong Kong, FBIC leverages unique
relationships and information networks to track and report
on trends and developments in China and other Asian
countries. In addition, its New York–based Global Retail &
Technology research team follows broader retail and
technology trends, specialising in how they intersect and
building collaborative knowledge communities around the
revolution occurring worldwide at the retail interface.
Since its establishment in 2000, the FBIC (formerly known
as the Li & Fung Research Centre) has served as the
knowledge bank and think tank for the Fung Group.
Through regular research reports and other publications, it
makes its market data, impartial analysis and expertise
available to businesses, scholars and governments around
the world. It also provides advice and consultancy services
to colleagues and business partners of the Fung Group on
issues related to doing business in China, ranging from
market entry and company structure, to tax, licensing and
other regulatory matters.
China Business Herald Research Institute
The China Business Herald Research Institute is an
affiliated research institute of the China Business Herald,
one of the leading national newspapers in China. The
Institute seeks to address debates in the distribution sector
in China, and measures and communicates the impact of
innovation and development of the industry as well as
commercial enterprises on the distribution sector from a
global perspective. The Institute has established
relationships with various government departments,
research institutes and universities and leading
corporations home and abroad.
The China General Chamber of Commerce
Founded in 1994, the China General Chamber of
Commerce (CGCC) is a quasi-government association
endorsed by the State Council. The CGCC has around
70,000 members, encompassing enterprises from retail,
distribution, services and tourism sectors, local commercial
chambers, national professional associations, intermediary
organisations and individuals.
Commissioned by the Chinese Government, the CGCC
consists of 14 committees, working on areas such as
retailing, wholesaling, public relations and industry
analyses etc.; it also supervises 40 national associations,
and over 30 newspapers and magazines published both
inside and outside China.
The Expert Committee of the China General Chamber of Commerce
The Expert Committee of the China General Chamber of
Commerce (ECCGCC), a sub-division of the CGCC,
comprises over 170 prominent experts from various
government departments, research institutes and
universities, leading corporations, professional
associations, consultancy firms and newspaper offices,
which include the Ministry of Commerce, the Chinese
Academy of Social Sciences, China Chain Store and
Franchise Association, the Development Research Centre
of the State Council, the Renmin University, the Capital
University of Economics and Business, and the Beijing
Technology and Business University, etc.
The ECCGCC serves as a platform for the experts to
exchange ideas on the development of commercial
enterprises and the distribution sector.
The Fung Group
The Fung Group is a privately-held multinational group of
companies headquartered in Hong Kong whose core
businesses are trading, logistics, distribution and retailing.
The Fung Group employs over 46,800 people across 40
economies worldwide, generating total revenue of more
than US$24.65 billion as of December 2014. Fung
Holdings (1937) Limited, a privately-held business entity
headquartered in Hong Kong, is the major shareholder of
the Fung group of companies.
4
Ten Highl ights of China’s Commercial Sector 2016
Expert Panel Members
Li TaoGroup Chief Representative – Northern ChinaLi & Fung Development (China) Limited, Fung Business Intelligence Centre; Deputy DirectorExpert Committee of the China General Chamber of Commerce
Liu HaifeiDirectorChina Research Institute of Business Economics, China General Chamber of Commerce
Liu JianhuDirectorExpert Committee of the China General Chamber of Commerce
Ren XingzhouDirector and Senior Research Fellow Institute of Market Economy, Development Research Centre of the State Council
Song Ze Research FellowInstitute of Finance and Trade Economics, Chinese Academy of Social Sciences
Teresa LamVice PresidentLi & Fung Development (China) Limited, Fung Business Intelligence Centre
Wan WenyingDirectorBeijing Capital Group Outlets (China) Limited
Wang XiaodongProfessorDepartment of Trade Economics, Renmin University of China
Wu GuohuaDeputy DirectorDepartment of Circulation Industry, Ministry of Commerce of the PRC
Xing HepingDeputy DirectorExpert Committee of the China General Chamber of Commerce
Yan JuyangSenior ReporterChina Business Herald
Yan YanchunDirectoreFuture Company Limited
Yang ZexuanGeneral ManagerDepartment of Commercial Properties Research, Wanda Group
Yu DiDeputy Secretary GeneralExpert Committee of the China General Chamber of Commerce
Zeng LingtongVice PresidentInternational Business Management Group
Zhang YulinDeputy Director and Research Fellow China Academy of International Trade and Economic Cooperation, Ministry of Commerce of the PRC
Cao JintangDeputy Secretary GeneralExpert Committee of the China General Chamber of Commerce
Cao LishengDeputy Secretary GeneralChina General Chamber of Commerce
Chang Ka MunManaging DirectorLi & Fung Development (China) Limited, Fung Business Intelligence Centre; Vice Chairman China General Chamber of Commerce
Chen JianmingDirectorYipu China
Chen LipingProfessorCollege of Business Administration, Capital University of Economics and Business
Deng LiDeputy Secretary GeneralChina General Chamber of Commerce
Fu LongchengVice ChairmanChina General Chamber of Commerce
Hu BinDeputy Editor-in-ChiefChina Business Herald
Lai YangDirectorInstitute of Commerce and Economics, Beijing Vocational College of Finance and Commerce
5
Fung Business Intel l igence Centre
Consumer market enters a “new normal”; consumption increasingly becomes a driver of growthChina is in the course of transitioning into a “new normal” economy. Along with domestic consumption, entrepreneurship and
innovation are set to be major generators of growth in the coming year. The role of the Internet is becoming more prominent in
driving transformation and upgrading traditional industries while facilitating the development of new business models. It is
expected that such innovative business models will facilitate the creation of new retail formats, distribution channels and
consumption patterns as well as helping industries transform and upgrade.
Government delivers multiple policies to support distribution sector development; due implementation is crucialThe government has placed strong emphasis on domestic trade. The State Council and relevant government departments
promulgated a number of major policies in 2015 to facilitate the development of the distribution sector. Major policy directions
include the creation of a better business environment, facilitation of regional development, e-commerce, “Internet Plus” and
online and offline integration (O2O) development, logistics and consumer services. It is believed that the government will
continue to launch more favourable policies and supporting measures to foster the growth of the distribution sector over the
coming years. Given the broad scope and complex principles enshrined in these policies, our experts urge the government
to place more emphasis on implementation.
“Internet Plus” initiative drives e-commerce expansion; mobile commerce and rural e-commerce high on the agendaChina’s e-commerce sector continues to attract the world’s attention with its explosive growth and transformative effect on the
commercial landscape. E-commerce is also a major driver of growth in the “new normal” economy as many traditional
industries have now embraced this digital channel. Meanwhile, the government’s “Internet Plus” strategy further supports the
growth of the sector, particularly mobile commerce and rural e-commerce.
Traditional retailers reinvent and upgrade; embracing “O2O” strategies becomes an industry consensusWhile O2O has been a term in use over the past few years, it was not until around 2015 that this went mainstream. To adapt to
the digital era, many retailers have increasingly leveraged advanced technologies to create a seamless shopping experience
across all channels – online, mobile and brick-and-mortar. A significant O2O development in 2015 was the manifestation of
different forms of O2O business practices across various industries, particularly service subsectors such as catering, travel,
education, automotive and real estate. This trend will continue into 2016 and become a norm in the commercial sector.
Moreover, to stay competitive, some retailers have made vigorous efforts to revamp, upgrade and explore new business
opportunities.
Strategic partnerships in China’s commercial sector intensify; conglomerates with shared interests emergeChina’s commercial sector witnessed robust business collaborations and partnership activities in 2015. Companies which
were rivals in the past have tended to redefine their competitive strategies and form business ecosystems to enhance their
offerings and regain a firmer foothold in the market. Compared to the past, the strategic alliance activities that took place in
2015 showed some distinctive features – modest strategic collaborations; a “step out” approach; and the integration of offline
and online businesses. It is expected that strategic partnerships between commercial enterprises will continue in 2016 and
over the next few years; the trend will be further accelerated through the compulsive force of “Internet Plus”.
Executive Summary
6
Ten Highl ights of China’s Commercial Sector 2016
Exploring innovative business practices and new retail formats; differentiating offerings with a greater focus on experience Today, many retail operators are encompassing a broader range of new formats, designs and technologies to respond to
rapidly changing needs of consumers. Specifically, shopping mall and department store operators are endeavouring to
provide more “experiential” elements to enhance their trade mix and diversify consumer offerings. On the other hand, a
number of large-scale traditional retail commercial property projects are becoming smaller-scale, in the hope of achieving a
better market position. This trend is set to continue over the coming year.
Cross-border e-commerce import businesses see rapid growth; new channels for commercial enterprises to transform and innovateChina’s cross-border e-commerce development has captured considerable attention globally. Many foreign brands and
retailers are selling their products via cross-border e-commerce platforms. At the same time, cross-border e-commerce is
increasingly becoming a popular way for retailers to transform their businesses. An increasing number of traditional retailers,
particularly department stores and large-scale supermarkets, which have suffered from slowing sales growth over recent
years, are actively tapping into cross-border e-commerce businesses.
Express delivery sector enters a “new era of service”; new business models bring new opportunitiesIn recent years, the express delivery sector has undergone rapid transformation and upgrading. Many express delivery
companies are constantly expanding their service offerings and improving service quality to keep pace with the changing
needs of the market. New business models are gaining popularity; they include community service store chains offering click
and collect services for online orders and crowd sourced delivery platforms connecting enterprises with part-time individuals
who can offer their time to provide delivery services.
Mass dining receives increasing attention; technology helps boost the development of new businesses, such as group-buying catering services and O2O food deliveryMass and casual dining have become mainstream in the catering sector in recent years. Alongside the rapid development of
e-commerce and mobile commerce, some digital catering platforms such as Baidu Waimai and Eleme are gaining popularity
as they provide group-buying catering and food delivery services. The catering sector is expected to enjoy rapid
development over the coming years. Meanwhile, mass and casual dining is set to see impressive growth.
Better business regulations, better consumption environment Despite the extraordinary development of China’s commercial sector over recent years, business malpractices remain a
major concern for the sector. In particular, food safety and product quality issues, concerns over online purchasing and
misleading and deceptive advertising have drawn extensive attention. The government has stepped up efforts to better
regulate the market; major initiatives include carrying out random quality inspections, passing the new Advertising Law and
working closely with local industry associations to strengthen supervision and regulation of the consumer goods market.
7
Fung Business Intel l igence Centre
Trends that will Matter Most in 2016 and Implications for Foreign Investors
What it takes to win?
Understanding and getting the most from the 13th FYP
Be vigilant and keeping up-to- date with government policies
Cultivating a “customer first” mentality and building experiential opportunities;
Quality of product and differentiation make a difference
Enhancing functionalities of mobile apps, integrating e-commerce with social selling
A strategic advantage is to leverage technologies and big data to understand customers better and provide better experiences
Anticipating disruptions and being more innovative
Achieving win-win: a stance increasingly open to partnerships and outside collaboration
Weaving the sharing concept into the O2O experience
Refining supply chain operations to keep pace with O2O and consumer demands
Speed to market and convenience is important
$
8
Ten Highl ights of China’s Commercial Sector 2016
Implications:
Understanding and getting the most from the 13th FYP.
Domestic consumption remains the key driver of growth for
China’s economy under the “new normal”. Increasing
urbanisation will further boost consumption and create
abundant opportunities for enterprises. The focus on
environmental protection and green development means
rising expectations on enterprises’ social and
environmental responsibilities. This will increase
compliance and regulatory costs and force enterprises to
invest more heavily in new technologies, energy-efficient
machinery and production processes. The end of the
one-child policy could boost the demand for baby and
child-related products and services such as infant formula,
baby care products, children’s wear, education and others.
Retailers should rethink their business strategies to seize
the window of opportunity.
13th Five Year PlanIn October 2015 the Central Committee of the Communist
Party of China approved the proposal on the 13th Five-Year
Plan (FYP) for 2016-2020. The focus was to seek growth
through economic transformation, optimising the industrial
structure, improving the environment and enhancing
quality and efficiency. The Plan sets a target of maintaining
medium-to-high growth, highlighting the ideas of
innovation, coordination, green development, opening up
and sharing, to fulfill its goals. Other key tasks in the 13th
FYP that impact the commercial sector include increasing
the urbanisation rate and allowing all couples to have two
children.
9
Fung Business Intel l igence Centre
Implications:
Cultivating a “customer first” mentality and building
experiential opportunities. Today, customers, not
companies, are driving business decisions. The phrase
“the customer is king” is more true than ever. The ability to
meet the needs of today’s empowered customers – quality
products, mobile, social, O2O – can make or break a
business. Winning players are those that can build
experiential opportunities and offer integrated experiences
at all touch points, based on a complete view of each
customer.
Quality of product and differentiation make a
difference. The seamless shopping experience is
imperative in the “Internet Plus” era, but product quality
and assortment are equally important as prices and
inventory availability become more transparent. Enterprises
poised to succeed are those that constantly review the
product mix and product assortment, advance product
development and, very importantly, differentiate
themselves. Enterprises have to constantly identify the
“white spaces” in the market. Some retailers, particularly
department store operators, have started to leverage
exclusive brands and private labels to make a difference.
New consumers and new expectations, a significant shift from conspicuous consumption to experience consumptionChina’s commercial sector will continue to be driven by
preferences of the rapidly growing Chinese millennials or
the so-called post-1980s and post-1990s generations over
the next five years. Thanks to rising income levels, China’s
new consumers are brand conscious and quality-
orientated, while at the same time they want the best
possible value for money. They also expect to have access
to a “long tail” of products, with huge product choices.
Meanwhile, personal experience matters considerably to
them. They are finding greater satisfaction in experience,
rather than static material possessions.
Chinese consumers are also interested in mobile shopping
and are avid users of social media. They want consistent
and seamless experiences across all touch points:
physical stores, online websites, mobile apps, social
media, and also via delivery. They expect to order, pick up,
receive and return products from anywhere, at any time
and via any channel.
Implications:
Be vigilant and keeping up-to-date with government
policies. To capitalise on opportunities brought about by
these initiatives, enterprises should pay close attention to
how these policies will affect their businesses and
operations. It is crucial for enterprises to constantly rethink
their strategies and be able to come up with innovative
ideas, new technologies and new business models.
Strong government support for the commercial sectorOver the past year, the Chinese government has been
determined to support the development of the commercial
sector. It has promulgated a number of policies to promote
the orderly development of various industries, including
retail, e-commerce, the services sector and logistics. The
government has also placed particular emphasis on O2O
development, the “Internet Plus” concept, and the Belt and
Road Initiative. The “Internet Plus “ concept marks the
launch of a new model for traditional industries based on
the evolution of the Internet – bringing together the mobile
Internet, cloud computing, big data and the Internet of
Things with modern manufacturing and fostering the
development of new industries to include e-commerce,
Internet finance and other digital developments. The Belt
and Road Initiative, meanwhile, provides tremendous
opportunities for enterprises in helping to facilitate
international trade and promote cross-border e-commerce.
Moreover, the 3.5 billion middle-class consumers within 65
economies along the Belt and Road routes also present
huge opportunities for commercial enterprises.
10
Ten Highl ights of China’s Commercial Sector 2016
Implications:
Anticipating disruptions and being more innovative. To
survive in the competitive market, enterprises must gear up
and prepare for ongoing disruptive trends. Consumer-
facing enterprises need to transform their business models
to adapt to new customer purchasing habits in the digital
age. They must run businesses in ways that are customer-
centric rather than operation-centric.
New business models, disruptive forcesNew technologies and new business models created by
ubiquitous mobile connectivity are reshaping – and
disrupting – the commercial landscape. An e-commerce
eco-system dominated by key Internet players such as
Alibaba, Tencent and Baidu has emerged in China over
recent years. Meanwhile, such companies are servicing
their ecosystem partners, and serving as “virtual
department stores” with a wide range of merchandise and
service offerings. More commercial enterprises are now
operating their businesses with innovative models. Forming
partnerships with leading Internet players is a common
strategy.
Implications:
A strategic advantage is to leverage technologies and
big data to understand customers better and provide
better experiences. Retailers need to embrace
technologies in all sales channels and ensure each
channel is seamlessly integrated. At the same time, they
have to better manage all the consumer data collected and
apply analytics that can generate actionable insights. The
more enterprises can “humanise” data, the more they are
likely to succeed.
Technological innovation and data analytics China’s commercial sector is benefitting from technological
advances. Many retailers are utilising various technologies
such as iBeacons, QR codes, digital shelves and data
analytics to provide more personalised services to
customers and enrich the shopping experience. For
instance, some brick-and-mortar retailers are leveraging
iBeacons as well as data analytics to provide customers
with location-specific and customised product information
and discount coupons, while others are using mobile apps
with geo-location functions to entice customers to visit
stores.
Implications:
Enhancing functionalities of mobile apps, integrating
e-commerce with social selling. Many enterprises have
gone online and set up mobile-enabled websites or mobile
apps. In the coming year, they need to step up their efforts
by incorporating more functions within apps so that
consumers not only use an app to look for product
information and receive location-specific discounts, but
use it to buy products in-store, purchase movie tickets and
make use of other adaptations of an app. The same goes
for social media. Enterprises need to use social networks
not only to market products but to actually sell them.
Mobile continues to be a fast driver of growth; social media is more than an information source — it is a key selling toolThe Internet and smartphones are becoming integral parts
of everyday life, and Chinese consumers have adopted
mobile connectivity as the dominant approach to
accessing the Internet. Indeed, the Internet has become
an important tool for information gathering, shopping,
communication, service scheduling, and other
opportunities. The use of social networks such as WeChat
is also becoming an integral part of the customer’s
shopping journey. Brands are increasingly using social
media to market their products, interact with customers
and provide various value-added services. Some big
retailers such as Gome and Haier have even started to sell
their merchandise via social networks by opening micro
stores on WeChat.
11
Fung Business Intel l igence Centre
Implications:
Weaving the sharing concept into the O2O experience.
The concept of the sharing economy is still new to China,
but our experts see huge development potential. As
outlined in the proposal on the 13th FYP, sustainable
growth will be one of the primary goals and development
aims for China in the coming years. The sharing economy
enables companies to achieve sustainable development
and helps alleviate certain social and environmental
concerns. To monetise the concept, companies have to
consider adopting “the sharing economy” business model
in their operations and weave the concept into the O2O
experiences they are creating. Leveraging well-established
digital platforms is an effective way to kick-start all-sharing
economic business models; these are hosted through
platforms that connect spare capacity and demand.
However, enterprises need to be aware of the potential
risks involved, such as safety issues, legal questions,
liability concerns and reputational risks.
The sharing economy is set to take offThe Internet makes it cheaper and easier than ever to
aggregate supply and demand, while technologies make it
easier for people to share excess items with each other.
This forms the basis of a sharing or collective economy,
which has become a global phenomenon. However, it was
not until recently that the concept started to gain
acceptance in China, due to a lack of trust in sharing. But
the widespread use of smartphones to access the Internet
has fuelled the growth of collective consumption. What has
emerged is a range of Internet or mobile-based services
that connect owners of underused assets with those willing
to pay to use them. Typical examples are taxi-hailing apps
such as Didi, Kuaidi and Yongche, along with lodging apps
such as Xiaozhu and Mayi. Recently, crowd sourced
delivery, a new type of delivery platform that utilises human
resources to take up local delivery jobs, has become
increasingly popular. These share-based services can offer
more convenient access, better pricing and more choice.
Implications:
Achieving win-win: a stance increasingly open to
partnerships and outside collaboration. Retailers have
to consider forming partnership with Internet giants to
pursue O2O opportunities. That said, retailers should be
mindful of all possible post-integration issues such as
conflicts of interests and differences in corporate cultures
and values, as these may hinder the integration process. If
these problems cannot be resolved, so-called integration
may lead to the opposite of a win-win outcome.
O2O is no longer a buzzword, enterprises cooperate with Internet giants to pursue O2OIn 2015, more retailers in China ventured into O2O. They
were leveraging mobile, social media and innovative
technologies to bridge the gap between offline, online and
mobile channels. Many formed partnerships with Internet
companies, to leverage their huge traffic flows as well as
their payment platforms, social media networks, big data
analytic tools and logistics capabilities. Significant
examples included the strategic partnership between
Alibaba Group and Suning Commerce, and between
JD.com and Yonghui Superstores, in August 2015.
In 2016, catering and services industries are expected to
show more rapid and significant O2O developments. Fresh
food home delivery, in particular, is developing rapidly but
at the same time competition within this segment is more
intense.
12
Ten Highl ights of China’s Commercial Sector 2016
Implications:
Speed to market and convenience is important. We
expect to see e-tailers investing in infrastructure such as
pick-up lockers, or partnering with convenience stores and
mom-and-pop stores in communities, focusing on
convenient pick-up services. Crowd sourced delivery
would be a way of solving the last-mile delivery hurdle. But
enterprises need to consider the potential problems that
this new model may bring, such as safety and liability
issues.
A “last mile” revolutionConsumers are now expecting fast delivery. Indeed, some
online players such as JD.com are offering same-day
delivery for products offered on its supermarket channel.
Others continue to make huge investments in logistics
infrastructure, as JD.com does now. Indeed, JD.com has
launched an O2O service platform, JD Daojia, to provide
crowd sourced delivery services. For example, after
shopping at local supermarkets, a JD Daojia user can
place an order on the company’s app and available
couriers then bid for it. The first courier to accept the order
secures the task.
At the same time, some traditional retailers are trying to
strengthen their “last mile” capabilities. Suning Commerce
Group, for instance, plans to open 1,500 service centres
and 12,000 franchise depots in lower-tier cities by the end
of 2015; these will provide pick-up points for online orders
and other value-added services for customers in those
cities and in rural areas.
Implications:
Refining supply chain operations to keep pace with
O2O and consumer demands. Enterprises need to put in
place supply chains that are nimble and flexible enough to
adapt to and anticipate the changing landscape – such as
O2O requirements, changing consumer needs and
shrinking product cycles. This requires good planning,
end-to-end supply chain visibility and clear communication
among supply chain players. Enterprises may need to
transform their business processes or apply new
technologies to fit new business requirements.
Supply chains become more complexIn today’s highly inter-connected digital world, traditional
brick-and-mortar companies are going online, while
pure-clicks are going physical. But selling online and
offline is very different in terms of product assortments,
warehousing and product return processes, among other
factors. This affects not only how companies do business
but also their relationships with customers, suppliers,
distributors and other trading partners. The rise of new
delivery and fulfillment options such as “click and collect”
and same-day delivery has further put a strain on
enterprises’ supply chains.
Moreover, as consumer preferences continue to shift and
become more unpredictable, enterprises’ supply chains
must remain nimble and able to respond quickly. At the
same time, the product cycle for many products is
shrinking. This also requires supply chains to be flexible
enough to fulfill the needs of shrinking cycles.
13
Fung Business Intel l igence Centre
1. Consumer market enters a “new normal”; consumption increasingly becomes a driver of growth
Online retail sales continued to record stunning growth in
2015, surging 33% yoy to 2,445.4 billion yuan in the period
January to October 2015, accounting for 10% of total retail
sales of consumer goods. Online retailing now plays a
more important role in the retail market, as increasing
numbers of consumers shift from purchasing offline to
online. Leaving aside online retail sales, the growth of
physical store retail sales was 8.6% yoy for the period
January to October 2015.
Growth of rural retail sales exceeded equivalent urban sales
Rural retail sales have been growing faster than urban
retail sales over recent years. Rural retail sales rose 11.8%
to reach 3,406.9 billion yuan in the period January to
October 2015, 1.2 ppt lower than in the same period of
2014. Urban retail sales expanded 10.4% yoy to 21,029
billion yuan, 1.4 ppt down from the same period in 2014.
The faster growth of rural retail sales was partly attributed
to the growth of rural household income, which outpaced
urban household income. In 1-3Q15, the per capita
disposable income of rural households increased
nominally by 9.5% yoy (or 8.1% yoy in real terms) to reach
8,297 yuan, while the per capita disposable income of
urban households rose by 8.4% yoy in nominal terms (or
6.8% yoy in real terms) to reach 23,512 yuan.
Weaker retail sales of automobiles, petroleum and related products
Retail sales of automobiles, petroleum and related
products grew at the lowest pace in the period January to
October 2015. Sales of petroleum and related products
registered -6.9% yoy growth, down 14.6 ppt from the same
period in 2014, while sales of automobiles registered 4.5%
yoy growth, down 4.1 ppt from the same period in 2014.
On the other hand, retail sales of telecommunications
equipment saw the most significant increase, up 35.9%
yoy in the period January to October 2015, and 9.5 ppt
higher than for the same period in 2014.
Reform has set the tone for the “new normal” in
China. The “new normal” is characterised by a shift
from high speed to medium-to-high growth. This
also presages more realistic and sustainable expansion to
come. The goal is to reduce reliance on exports and low
value-added manufacturing, and an increase in domestic
consumption, private-sector activities and services. In
2015, the government rolled out a series of policy initiatives
and reform measures to boost consumption and drive
economic growth (see Highlight #2 for details), providing a
sound basis for consumer market development.
Domestic trade: major developments in 2015GDP growth deceleration
China’s real GDP growth was 6.9% year-on-year (yoy) in
3Q15, down from 7.0% yoy in 2Q15. Over the period
1-3Q15, China’s nominal GDP amounted to 48.8 trillion
yuan, up 6.9% yoy in real terms. Such growth indicates
that the Chinese economy has been growing at a
moderating pace. The services sector has continued to
grow at a faster pace than the secondary sector. Services
sector value-added contributed 51.4% of China’s nominal
GDP in 1-3Q15, gaining 8.4% yoy in real terms in 1-3Q15.
By contrast, secondary sector value-added, which
contributed 40.6% of the country’s nominal GDP, increased
6.0% yoy in real terms over the same period. Meanwhile,
the role of consumption in driving economic growth has
strengthened. Consumption made up 58.4% of GDP
growth in 1-3Q15, 9.3 percentage points (ppt) higher than
in the same period of 2014.
Retail sales growth softened; online retail sales continued to surge
China’s nominal retail sales of consumer goods rose 10.6%
yoy to 24,435.9 billion yuan over the period January to
October 2015, with growth 1.4 ppt lower than in the same
period in 2014. Real growth was 10.6% yoy, down by 0.2
ppt compared with the same period in 2014. By month,
however, growth accelerated gradually as from June. Our
experts predict the nominal growth of retail sales to reach
10.6% yoy for 2015, down from 12% yoy for 2014.
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Ten Highl ights of China’s Commercial Sector 2016
What the experts sayChina is in the course of transitioning into a “new normal” economy. The 5th session of the 18th Communist Party of China
Central Committee approved the proposal on 13th Five-Year Plan (FYP) in October 2015, which sets out a new path for the new
stage of development (see “Trends that will matter most in 2016 and implications for foreign investors” for details). Our experts
highlight the following key points:
• Towards a steady growth path. The Chinese government reiterates its goal of building “a moderately prosperous society” by 2020 in the 13th FYP. The major quantitative targets include doubling China’s GDP and per capita income of both urban and rural households between 2010 and 2020. It hopes to maintain medium-to-high economic growth over the next five years. Our experts expect an average annual economic growth of 6.5% or above during 2016-2020.
• More supportive measures to boost consumption. Domestic consumption will continue to be the major driver of growth. The government is expected to announce more new measures to boost consumption, especially mass consumption, commodity housing, automobiles and travelling categories, and at the same time improve the quality of consumer products and services. Total retail sales of consumer goods are expected to grow at 10.2% yoy in 2016.
• Rural market to unleash potential. Eradicating poverty in rural areas is one of the major goals of the 13th FYP. The government will introduce a series of measures to lift 70 million rural dwellers out of poverty by 2020, further unleashing the consumption power of the rural market.
• Relaxation of one-child policy. China announced in October 2015 easing family planning restrictions to allow all couples to have two children. This is a positive sign for the retail sector as it helps boost baby and children-related consumption. The demand for infant formula, baby care products, children’s wear, toys and other products will increase significantly in the near future. Services such as baby care services and child education will probably be the new consumption focus.
Aside from domestic consumption, our experts think that entrepreneurship and innovation will become major generators of
growth in the coming year. In July 2015, the government announced the Guiding Opinions on Actively Propelling the Internet-
Plus Action Plan, highlighting the role of the Internet in driving transformation and upgrading traditional industries and facilitating
the development of new business models. It is expected that these innovative business models will facilitate the creation of new
retail formats, new distribution channels and new consumption patterns as well as helping industrial transformation and
upgrading.
Catering sales growth rebounded
Growth of catering sales recovered in 2015. Nominal
growth for catering sales rose 11.8% yoy in the period
January to October 2015, up by 2.1 ppt compared with the
same period in 2014, and 1.4 ppt higher than total retail
sales growth over the same period. O2O is taking off in
China’s catering sector, which has further boosted the
catering sales. Competition in the O2O fresh food home
delivery market is becoming fierce. Some O2O delivery
websites such as Eleme, Baidu Waimai, and Meituan
Waimai have become increasingly popular among young
consumers. Meanwhile, smaller catering enterprises have
been performing well. The growth for catering enterprises
below the designated size and individual catering
enterprises rose 13.6% yoy in the period January to
October 2015, up 0.4 ppt from the same period in 2014.
Large-scale retail enterprises saw slower growth, while smaller sized enterprises performed well
According to the China National Commercial Information
Centre, retail sales of 100 key large-scale retail enterprises
increased by 0.5% yoy in the period January to October
2015, up from 0.15% yoy in the same period in 2014. Sixty
two of the 100 key retailers recorded slower sales growth.
Slower store expansion and more store closures are
expected. On the other hand, thanks to the rise of
e-commerce and new business models and changing
consumer preferences, small- and micro-enterprises as
well as individual small retail enterprises have seen rapid
development over the past year. These have contributed to
the fast growth of mass-market consumption.
China is in the course of transitioning into a “new normal” economy.
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Fung Business Intel l igence Centre
2. Government delivers multiple policies to support distribution sector development; due implementation is crucial
pilot reforms related to domestic trade and distribution. The
Notice specifically laid out four major tasks: first, to explore
an innovation-driven mechanism for the distribution sector;
secondly, to establish a favourable business environment
with a sound supervisory mechanism and credit system;
thirdly, to guide infrastructure construction in various areas,
including wholesale farm product markets, community
service outlets and large-scale shopping centres; and
fourthly, to improve government management.
The State Council and relevant government
departments promulgated a number of major policies
in 2015 to facilitate the development of the distribution
sector, underlining the government’s strong emphasis on
domestic trade.
To deepen reform of the distribution sector, the General
Office of the State Council issued the Notice on Piloting
Reforms in Domestic Trade and Distribution System in Nine
Cities in August. The nine cities1 were chosen to carry out
1 The nine cities are Shanghai, Nanjing in Jiangsu Province, Zhengzhou in Henan Province, Guangzhou in Guangdong Province, Chengdu in Sichuan Province, Xiamen in Fujian Prov-ince, Qingdao in Shandong Province, Huangshi in Hubei Province, and Yiwu in Zhejiang Province.
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Ten Highl ights of China’s Commercial Sector 2016
Other major policy directions include the creation of a better
business environment, facilitation of regional development,
e-commerce, “Internet Plus” and O2O development, logistics
and consumer services.
Key policy directionsA better business environment
In August, the State Council promulgated the Opinions on
Promoting the Modernisation of Domestic Trade and Building
the Law-based Business Environment. The Opinions specify
that administrative organs are prohibited from abusing
administrative power to restrict and exclude competition; they
are also prohibited from using market dominant positions to
charge unreasonable fees or set up unreasonable trading
conditions. These initiatives are deemed essential for
creating a conducive business environment and stimulating
domestic trade.
Regional development
The distribution sector plays a crucial role in facilitating
regional development. In May, the Ministry of Commerce and
nine other ministries released the Layout Plan for National
Nodal Circulation Cities (2015-2020). The Plan stresses the
importance of speeding up the development of such national
nodal cities, as they form an important part of the national
transport network and facilitate the distribution of goods and
services. Meanwhile, they also contribute significantly to the
implementation of the Belt and Road Initiative and other
regional development plans, such as the Coordinated
Development Plan for Beijing, Tianjin and Hebei and the
Development Plan for the Yangtze River Economic Belt.
E-commerce, “Internet Plus” and O2O Development
The e-commerce sector has seen explosive growth over
recent years, created new demand for consumption while
opening up tremendous opportunities for business
innovation. The Opinions on Striving to Develop E-commerce
to Speed up the Cultivation of the New Economic Driving
Force promulgated by the State Council in May calls for a
deeper integration of e-commerce and other industries to
facilitate the synchronous development of industrialisation,
informatisation, urbanisation and agricultural modernisation.
Rural e-commerce and cross-border e-commerce particularly
caught the attention of the government in 2015.
• Rural e-commerce. Realising the importance of
e-commerce in facilitating agricultural development under
the “new normal” economy, the government announced
several key policies to boost the development of rural
e-commerce. In November, the General Office of the State
Council released the Guiding Opinions on the Promotion
of the Development of Rural E-commerce and the Circular
on Promoting Rural E-commerce Development. The two
policies aim to promote agricultural upgrading and rural
development, while stressing the importance of developing
modern agriculture and cultivating rural e-commerce
business. E-commerce is to be applied to wider fields in
rural areas such as to agricultural production, processing
and distribution.
• Cross-border e-commerce. The government has
placed great emphasis on cross-border e-commerce
development. In June, the General Office of the State
Council issued the Guiding Opinions on Promoting
the Healthy and Rapid Development of Cross-border
E-commerce, suggesting supportive measures in five
areas: (i) streamlining customs clearance procedures
for cross-border e-commerce exports and imports; (ii)
providing collective services for customs declaration,
examination and release of goods; (iii) clarifying and
formulating cross-border e-commerce import and export
tax policies; (iv) encouraging domestic banks and
third-party payment companies to launch cross-border
e-payment services; and (v) offering financing support
for key cross-border e-commerce projects such as credit
insurance.
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Fung Business Intel l igence Centre
Given the broad scope and complex principles enshrined in the government policies, our experts urge the government to place more emphasis on implementation.
Logistics
The rapid development of the logistics sector – especially
express delivery – is also a major government focus. It is
generally believed that express delivery is a new growth
area for the service industry and can support e-commerce
development to facilitate consumption upgrading and
allow enterprises to carry out target marketing. In October,
the State Council issued the Opinions on Promoting the
Development of the Express Delivery Sector, expecting to
establish a safe and efficient delivery network that provides
quality services to both urban and rural areas through
advanced technologies.
Consumer services
Consumption is a major growth driver in the “new normal”
economy. The government has stepped up efforts to
improve the consumer environment. In November, the
General Office of the State Council released the Guiding
Opinions on Accelerating the Development of Consumer
Services to Promote the Upgrading of Consumption
Structure, pushing to improve the infrastructure for public
services and build a better consumption environment. The
government will also strengthen supervision to protect the
rights and interests of consumers.
The implementation of the “Internet Plus” initiative in
promoting the development of e-commerce is high on the
government’s agenda. In July, the State Council
promulgated the Guiding Opinions on Actively Propelling
the Internet-Plus Action Plan, highlighting the role of the
Internet in driving transformation, upgrading traditional
industries and facilitating the development of new business
models.
O2O integration is another key government initiative. To
stimulate O2O integration and accelerate innovation,
transformation and advancement of commercial
distribution, the General Office of the State Council in
September released the Opinions on Promoting Online-
Offline Interaction to Expedite the Innovative Development,
Transformation and Upgrade of Commercial Circulation.
According to the Opinions, physical stores are encouraged
to adopt O2O initiatives and utilise advanced technologies,
such as the mobile Internet, big data and cloud
computing, to provide personalised products to
consumers. Stores are advised to cooperate with Internet
companies to roll out these services.
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Ten Highl ights of China’s Commercial Sector 2016
What the experts sayGiven the broad scope and complex principles enshrined in the government policies, our experts urge the government to place
more emphasis on implementation. Suggestions include the following priorities:
• To improve the business and consumption environment, strengthen monitoring and the tracking and recall system to ensure the safety and quality of goods.
• To severely punish the production and sale of counterfeit and shoddy products, and protect the rights and interests of consumers.
• To further expand the scope of the Business Tax (BT) to the Value-added Tax (VAT) reform programme by including consumer services in the reform. This would help to lower the tax rates for consumer services.
• To provide financial support for eligible commercial enterprises to expand their business. • To provide more land and price support, including favourable land policies for senior citizen care, healthcare and household
services.• To lower the electricity rates for commercial enterprises.• To lower transaction fees on bank cards, especially for the catering industry.• To reduce the toll charges for trucks on toll roads and bridges.
The Central Committee of the Communist Party of China approved the proposal on the 13th Five-Year Plan (FYP) in October
2015. The focus of the 13th FYP is to seek growth through economic transformation, deepening reforms to unleash
productivity, optimising industrial structure, improving the environment and enhancing quality and efficiency. As consumption
will remain a key component in driving economic development, our experts believe the government will continue to promote
consumption, with special focuses on smart, green, healthy and safe consumption. More favourable policies and supportive
measures to foster the growth of the distribution sector are expected in 2016, as well as over the entire 13th FYP period.
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Fung Business Intel l igence Centre
3. “Internet Plus” initiative drives e-commerce expansion; mobile commerce and rural e-commerce high on the agenda
merchandise value (GMV) on Singles’ Day amounted to
91.2 billion yuan, an increase of 60% yoy. Mobile shopping
also reached a record high, with 95 million people
purchasing items on mobile phones. Total mobile GMV
accounted for 68.7% of the total, reaching 62.0 billion
yuan.
The mobile revolution in China provides huge opportunities
for Internet players as well as mobile app developers.
Many traditional retailers are now deploying various O2O
strategies to provide a better shopping experience for
customers. One recent O2O trend is the application of
mobile shopping apps in brick-and-mortar stores. One
example is the “Miaojie” app created by Alibaba in May
2015. Equipped with location-based beacon technology,
the app allows retail operators to deliver location-specific
information, such as current deals and coupons and other
personalised services. The app also supports in-store
mobile payments. Another case is the “Feifan” app
developed jointly by Wanda Group, Baidu and Tencent in
July 2015. Customers can use the “Feifan” app at selected
Wanda shopping malls and department stores. The app
integrates data on merchants and consumers, allowing
retailers to analyse the information and carry out
personalised target marketing campaigns.
Rural e-commerce takes the lead As China’s urban e-commerce market nears saturation
after years of explosive growth, the rural e-commerce
market is becoming the new growth engine for online
sales. In June 2015, the number of Internet users in rural
areas rose to 186 million, accounting for 27.9% of the total
Internet population. The number of online shoppers in rural
areas reached 77.14 million, a 40.6% yoy increase against
the 16.9% yoy growth in urban areas, according to the
China Internet Network Information Center. Thanks to the
rise of affordable smartphones, mobile penetration in rural
areas has been increasing rapidly. Within the rural online
population, 81.9% are able to access the Internet via
mobile devices, reflecting high growth potential for
m-commerce development. Indeed, the government is
optimistic about such digital developments in rural areas.
In November 2015, the General Office of the State Council
released its Opinions on Promoting Rural E-commerce.
China’s e-commerce sector continues to attract the
world’s attention with its explosive growth and
transformative effect on the commercial
landscape. China has the world’s largest number of
Internet users and online shoppers, contributing
significantly to the phenomenal growth of the sector. As of
June 2015, China had 668 million Internet users, and 56%
of the Internet population shopped online. E-commerce is
now a major driver of growth in the “new normal” economy,
since many traditional industries have now embraced this
digital channel.
As pointed out under “Trends that will matter most in 2016
and implications for foreign investors”, the announcement
of the “Internet Plus” strategy by Premier Li Keqiang in his
March 2015 Government Work Report further supports the
growth of the sector. Our experts expect the online sector
will grow even faster in 2016, further driving the growth of
e-commerce. They identify two major forces that will shape
the e-commerce landscape in the coming year.
The continuing mobile revolution Chinese online shoppers are increasingly using mobile
devices to make purchases. The increasing penetration of
smartphones and growing prevalence of mobile payments
have made mobile shopping particularly popular. Data
from iResearch showed that the transaction value of the
online retail market amounted to 872.5 billion yuan in
2Q15, up 39.6% year-on-year (yoy) and accounting for
12.3% of the country’s total retail sales. Within the online
sector, the transaction value via mobile devices reached
443.5 billion yuan, up 133.5% yoy, growing at a rate faster
than the overall online retail market. According to the
National Bureau of Statistics, mobile commerce
(m-commerce) has been gaining market share at the
expense of PC-based transactions. In 2Q15, purchases on
mobile devices exceeded those generated on PCs for the
first time, accounting for 50.8% of online sales. Bain &
Company predicts that the share of m-commerce in online
retail transaction value will increase from 55% in 2015 to
70% in 2020.
Singles’ Day sales figures in 2015 also showed the growing
trend towards m-commerce. Alibaba’s total gross
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Ten Highl ights of China’s Commercial Sector 2016
policies and deepen rural distribution system reform; there is also an intention to establish new rural business models, nurture and develop rural e-commerce entities and develop a modern distribution and service network for rural products and services.
Realising the ample growth potential of the rural
e-commerce market, a number of leading retailers and
e-commerce players are adopting “going rural” strategies.
For instance, Suning Commerce Group has signed various
strategic partnerships with local governments to introduce
rural e-commerce initiatives. The company plans to open
1,500 service centres and 12,000 franchise depots in
lower-tier cities by the end of 2015, and employ 30,000
staff in the villages. On 25 September, 2015, Suning and
the State Council Leading Group Office of Poverty
Alleviation and Development signed a strategic
cooperation agreement to step up its poverty relief drive in
rural e-commerce. Leading e-commercial players such as
Alibaba and JD.com have also made substantial
investments in rural areas to expand their e-commerce
distribution networks.
The mobile revolution in China provides huge opportunities for Internet players as well as mobile app developers. Many traditional retailers are now deploying various O2O strategies to provide a better shopping experience for customers.
What the experts sayOur experts believe that the “Internet Plus” initiative will continue to drive e-commerce development and domestic
consumption in the coming year.
Recent measures have already contributed to this trend. In 2015 the government introduced a number of policies to place
greater emphasis on e-commerce when facilitating the upgrade and transformation of traditional retailers; in May and
September respectively these included the Opinions on Intensively Developing the E-commerce and Accelerating the
Cultivation of New Economic Power promulgated by the State Council and the Opinions on Promoting Online-Offline
Interaction to Expedite the Innovation Development, Transformation and Upgrade of Commercial Circulation announced by
the General Office of the State Council. They show the extent to which the government supports the development of
e-commerce. More such measures are expected in 2016.
While it is important for enterprises to implement their digital strategies, they must also strengthen their core competencies. At
the same time, enterprises need to leverage big data analytic tools to provide targeted products and services that consumers
wish to purchase. This is especially important in today’s consumer-centric environment.
The State Council estimates that the transaction value of
rural e-commerce will hit 460 billion yuan in 2016,
narrowing the gap with urban e-commerce.
In its support for rural e-commerce development, the
government introduced a number of policies to boost the
growth of the market in 2015. They included the following
measures:
• In October 2015, an executive meeting of the StateCouncil presided over by Premier Li Keqiang decidedto earmark 140 billion yuan to upgrade the ruraltelecom infrastructure, and improve e-commerce inless-developed rural areas. Broadband coverage isexpected to cover 98% of China’s villages by 2020.
• In September 2015, the Ministry of Agriculture, theNational Development Reform Commission and theMinistry of Commerce (MOFCOM) announced an actionplan to speed up e-commerce development for thefarming and agriculture sector, and to establish sounde-commerce infrastructure and policies in rural areas.
• In August 2015, the MOFCOM and another 18departments released the Circular on Promoting Rural E-commerce Development. The Circular aims to speedup rural infrastructure construction, improve government
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Fung Business Intel l igence Centre
4. Traditional retailers reinvent and upgrade; embracing “O2O” strategies becomes an industry consensus
A significant O2O development in 2015 was the
manifestation of different forms of O2O business practices
across various industries, particularly services subsectors
such as catering, travel, education, automotive and real
estate. This trend will continue into 2016 and become a
norm in the commercial sector.
Going smaller: community stores and small format retailers become popularSmall format shops, chiefly in the form of convenience
stores, have gained popularity over the years.
Convenience stores have the advantage of closer access
to customers, while offering quicker services.
Acknowledging the success of small format shops, some
traditional retailers have branched out into smaller-scale
stores. By adopting a multi-format strategy, they hope to
expand their business scope and create multiple income
streams. For instance, METRO China started operating
convenience stores in 2014, while Carrefour has also
recently experimented with the boutique supermarket
format by opening three “Easy Carrefour” stores in
Shanghai. Some traditional retailers, such as Rainbow
Department Store, have opened convenience stores to
support O2O initiatives; customers are provided with
pick-up services for online purchases in Rainbow
Department Store.
Meanwhile, community stores with precise and unique
positioning have been growing rapidly. These stores are
compact in size yet they can offer convenient lifestyle
products to surrounding local neighbourhoods. Examples
include mom and pop stores, bakeries, confectionery
shops, fresh fruit shops, cosmetics and beauty product
shops and baby product outlets. Life Commercial Chain,
part of the Better Life Group, also rolled out its “Yunhou
Wifi convenience stores” programme in June 2015. Yunhou
Wifi convenience stores, located in residential
communities, sell not only goods but provide courier
services, fresh breakfast foods and services, and offline
payment services, among others. Better Life believes the
number of Yunhou Wifi convenience stores will rise to
10,000 by the end of 2015. It hopes to leverage these
stores to consolidate its presence in residential
communities and better serve the needs of families.
For many traditional retailers in China, 2015 was
complex and tough. The slowdown in economic
growth, the government’s aggressive anti-corruption
campaigns, rising operating costs and fierce competition
from online retailers all posed major business challenges.
According to the China National Commercial Information
Centre, the first 10 months of 2015 saw retail sales of 50
key large-scale retail enterprises increase by a mere 0.5%
year-on-year (yoy), 1.3 percentage points higher than for
the same period of 2014. Among the 76 listed retail
enterprises in China, over 60% registered falls in both
sales and revenue in 1-3Q15.
Facing the economic slowdown, the China market has
witnessed a trend for store closures. In 1H15, there were
reportedly 121 store closures involving major retail
companies across the country, especially in tier 1 and tier
2 cities. Many leading traditional retailers also suffered
from poor performances. For example, New World
Department Store’s revenue for 1H15 plunged 86.6% yoy.
The difficult market conditions have and will inevitably
continue to exert pressure on retailers. To stay competitive,
some retailers have made vigorous efforts to revamp,
upgrade and explore new business opportunities.
Deployment of O2O strategies went mainstream in 2015, becoming an “industry consensus” While online and offline integration (O2O) has been a term
in use over the past few years, it was not until around 2015
that this went mainstream. To adapt to the digital era, many
retailers have increasingly leveraged advanced
technologies to create a seamless shopping experience
across all channels – online, mobile and brick-and-mortar.
The China Business Herald Research Institute estimates
that as at 2015 85% of the top 100 enterprise chains in
China have tapped into e-commerce and pursued digital
expansion. Moreover, an increasing number of traditional
retailers have formed partnerships with Internet giants
through mergers and acquisitions – or formed strategic
partnerships with them – with the aim of driving synergies
and enhancing their competitive edge.
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Ten Highl ights of China’s Commercial Sector 2016
Supply chain collaboration to drive synergiesWhile digitalisation, deployment of O2O strategies and the
concept of business innovation have all gained increasing
attention in 2015, collaboration among enterprises has also
become notable in the commercial sector. For instance, to
improve operational and supply chain efficiencies, some
enterprises have formed strategic partnerships with
upstream supply chain partners, hoping to aggregate
efforts in sourcing and move towards a globalised
merchandising platform. Here are selected examples:
• In June 2015, Li & Fung Trading (China) Holdings Ltd., Beijing Wangfujing Department Store and Shanghai Bailian Group formed a joint venture to develop private and proprietary brands and differentiate themselves from their competitors. This venture will also enable the partners to extend their global supply chains to form a substantial retail network serving the China market.
What the Experts SayIn the “new normal” era of slowing consumer demand and higher costs of physical expansion, it is critically important for
traditional retailers to move beyond their traditional strongholds. They have to extend their businesses to a new level to avoid
further deteriorating performances; they can do so by leveraging their strengths and uncovering potential within their
organisations, as well as by optimising product and service quality and adopting comprehensive O2O strategies.
In tandem, our experts believe that 2016 will see the emergence of a completely new battleground in the commercial sector,
given the backdrop of “Internet Plus” and O2O channel integration. They foresee the interaction between online and offline
enterprises becoming one of most active underlying developments. At the same time, new business models driven by
technologies will emerge and will have a huge impact on the market, while the transformation and testing of new formats by
traditional retailers will accelerate. More profound changes in the retail landscape in terms of diversification and retail format
specialisation will come on the scene in 2016, along with new O2O business models.
A significant O2O development in 2015 was the manifestation of different forms of O2O business practices across various industries, particularly services subsectors such as catering, travel, education, automotive and real estate. This trend will continue into 2016 and become a norm in the commercial sector.
• In July 2015, Lianhua Supermarket, Yonghui Supermarket, Wuhan Zhongbai Group and Shanghai Bailian Group formed an alliance to improve supply chain competitiveness. The alliance will share information, amalgamate big data as well as integrate respective logistics systems to optimise performances and improve competitiveness.
• In November 2015, Better Life Group joined hands with 22 enterprises including Rainbow Department Store and Shandong Jiajiayue Group to establish a “global joint procurement and crowd funding platform”, which is the first large-scale platform integrating online and offline procurement chains in China.
• In November 2015, Yonghui Superstores and CJ Freshway Corporation (a South Korean food giant), reached a strategic cooperation agreement to develop a global procurement and direct supply platform for fresh produce.
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Fung Business Intel l igence Centre
5. Strategic partnerships in China’s commercial sector intensify; conglomerates with shared interests emerge
areas, and actively seek partnerships at a blistering pace.
Strategic collaborations have emerged between
companies from within and outside individual sectors,
involving both offline and online formats, and are
profoundly reshaping the competitive landscape of China’s
commercial sector. Charts 1 and 2 show selected
examples of mergers and acquisitions (M&As) and
strategic partnerships in China’s retail sector in 2015.
China’s commercial sector witnessed robust
business collaborations and partnership activities
in 2015. Companies which were rivals in the past
have tended to redefine their competitive strategies and
form business ecosystems to enhance their offerings and
regain a firmer foothold in the market. Leading Internet
players such as Alibaba, Baidu and Tencent are
particularly aggressive when branching into new business
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Ten Highl ights of China’s Commercial Sector 2016
Source: Internet resources, compiled by Fung Business Intelligence Centre
Source: Internet resources, compiled by Fung Business Intelligence Centre
Chart 2: Major business alliances in China’s retail sector, 2015
Date of
announcement
Companies involved Features/objectives of collaboration
14 May • Dalian Wanda Group Co.
• China Vanke Co.
• To jointly develop commercial and residential real estate
projects and boost O2O businesses
18 May • Intime Retail (Group) Co.
• Alibaba Group
• Intime Retail appointed Alibaba’s CEO Zhang Yong as
chairman of the board and chairman of the strategic
development committee of Intime Retail, with effect from 5
June, 2015
• To jointly explore business opportunities and develop O2O
businesses
23 May • Li & Fung Trading (China) Holdings Ltd.
• Bailian Group Co.
• Beijing Wangfujing
Department Store Group Co.
• To form a joint venture company in Shanghai to develop
private labels of apparel and home product items
• To establish 300 new retail stores within three years
30 June • Dianping.com
• Parkson Department Store
• To provide O2O business solutions to 60 Parkson stores
15 July • Lianhua Supermarket
• Yonghui Superstores
• Zhongbai Holdings Group Co.
• Bailian Group Co.
• To integrate respective strengths of the companies in supply
chain management, procurement, data analysis and logistics
areas and to further develop their presence in China’s retail
market
17 July • Dangdang.com
• Better Life Group
• Dangdang.com to open an offline store in Better Life Group’s
shopping mall in Mexihu, Changsha City, Hunan Province
6 September • Dalian Wanda Group Co.
• Suning Commerce Group
• To work together to strengthen O2O development
• To introduce Suning.com products in Wanda Group retail
stores
4 November • Better Life Group
• 22 Chinese retailers, including
Rainbow Department Store,
Hefei Department Store
Group, Shandong Jiajiayue
Group and Meet All Group
• To jointly develop a global platform for group purchasing
• To integrate overseas sourcing capabilities of all companies
involved and leverage the aggregated purchasing power of
the consortium to obtain better pricing and contractual terms
and conditions from external suppliers
20 November • Yonghui Superstores
• CJ Group
• To form two joint venture companies to engage in overseas
procurement, fresh food processing, and development
of intermediate goods as well as B2C, B2B and O2O
businesses
Chart 1: Selected major M&As in China’s retail sector, 2015
Date of
announcement
Bidder
company
Target company Deal value Remark
7 August JD.com Yonghui Superstores 4.31 billion yuan Acquired 10% share of Yonghui
10 August Alibaba Group Suning Commerce Group 28.3 billion yuan Acquired 19.99% share of Suning
28 August Yonghui
Superstores
Lianhua Supermarket n/a Acquired 21.17% share of Lianhua;
became second largest shareholder of
Lianhua
19 November Pagoda Guoduomei n/a Conducted strategic M&As by means
of capital injection and stock swap
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Fung Business Intel l igence Centre
Distinctive features of commercial sector strategic collaboration
Modest strategic collaborations to achieve win-win situations
Compared to the past, the strategic alliance activities that
took place in 2015 showed some distinctive features.
Instead of acquisitions of majority stakes, many strategic
collaborations occurred in the form of joint ventures,
strategic cooperative agreements or cooperatives and
co-investments with counterparts; their intentions were to
combine, coordinate and manage collective resources
among allied partners and collaborate over key strategic
decisions. One example was the joint venture between Li &
Fung Trading (China) Holdings Ltd., Beijing Wangfujing
Department Store and Shanghai Bailian Group in June
2015 to develop private and proprietary brands
differentiated from competitors.
A “step out” approach to diversification
It is notable that companies are becoming more ambitious,
stepping out from their existing business boundaries. In the
past, corporate moves were mainly to expand business
categories to adjacent businesses or expand supply
chains to position parent companies in moving upstream or
downstream from existing businesses. In many cases,
enterprises now adopt a “step out” approach to tap into
completely new business areas through strategic
partnerships. Alibaba, for instance, has been relentlessly
expanding its e-commerce territory by tapping into
businesses that are totally unrelated to its parent
company’s business operations, aiming to spread its
interests far beyond its original concerns – including
Internet finance, department stores, media and film
making, among others.
An integration of offline and online retail
A predominant feature of the major business alliances in
China in 2015 was the integration of offline and online
businesses. In today’s O2O era, traditional retailers are
forming partnerships with Internet companies to better
equip them with tools to facilitate online and offline
shopping, such as payment tools, social media and big
data analytics. On the other hand, Internet companies are
searching for opportunities to reach consumers through
physical touch points. For example, Alibaba and Suning
Commerce jointly announced a strategic tie-up of the two
companies in August 2015. They will cooperate in various
areas including e-commerce, logistics and incremental
business through joint O2O initiatives.
Factors driving strategic partnership development
Strong government support
The 18th Communist Party of China Central Committee
highlights the importance of “innovation, coordination, the
environment, opening up and sharing” to fulfill its economic
goals. In particular, government incentives to boost mass
entrepreneurship and innovation are highly encouraging for
business activities in the form of strategic partnerships and
alliances.
“Internet Plus” initiative
Recently, many key players in China’s retail sector have
embraced the government’s “Internet Plus” strategy. The
“Internet Plus” initiative entails the integration of the mobile
Internet, cloud computing, big data and the Internet of
Things with modern manufacturing, fostering new industries
and business developments to include e-commerce, the
industrial Internet and Internet finance. The application of
the Internet in the commercial sector is a catalyst for
cooperation and partnership between companies. This is
especially true for leading players in different sectors so
that they can leverage respective strengths to consolidate
market position and compete for a larger share of the
market.
Companies which were rivals in the past have tended to redefine their competitive strategies and form business ecosystems to enhance their offerings and regain a firmer foothold in the market.
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Ten Highl ights of China’s Commercial Sector 2016
What the experts sayOur experts believe that the current wave of strategic partnerships and alliances in China’s commercial sector is intensifying
– with plenty of room for growth. The market is embracing the themes of openness, synergies and shared economies.
Companies should adopt a more holistic view and reflect on how they might benefit from strategic cooperation with their
traditional rivals.
It is expected that strategic partnerships between commercial enterprises will continue in 2016 and over the next few years;
the trend will be further accelerated by the compulsive force of “Internet Plus”. Moreover, the trend will expand in scale and
scope, spanning different industries and sectors. Indeed, intensified strategic alliances are set to give new impetus to China’s
economic transition.
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Fung Business Intel l igence Centre
6. Exploring innovative business practices and new retail formats; differentiating offerings with a greater focus on experience
• Entertainment: an internationally standardised ice skating rink with ice surface area of 1,800 sqm, a seven-house cinema, and a 5,000 sqm karaoke (KTV);
• Art and culture exhibition: a large-scale, multi-media Immortal Van Gogh Exhibition was held from 8 September to 6 December, 2015 in a 1,500 sqm exhibition space.
From a business perspective, Joy City Chaoyan hopes to
draw more foot traffic, build customer loyalty and above all,
increase retail sales to enhance the shopping centre’s
asset value.
Another example is Guangzhou-based Grandview Mall,
which has undergone a large-scale transformation. To
become a one-stop shopping destination bringing leisure,
entertainment and a unique experience to shoppers, the
mall has significantly increased the proportion of non-retail
shops, particularly family and child-related services and
facilities. For instance, it features a 4,000 sqm indoor
children’s themed park, a large ice skating rink, “Glacier
Bay”, and a 15-house cinema. Furthermore, a science
museum, a multi-functional art museum and a 15,000 sqm
aquarium are reportedly to open at the mall in 2016.
Beijing-based traditional department store operator
Modern Plaza, despite its relatively small operating area, is
to house a themed private movie theatre within its
department store by the end of 2015, with the aim of
providing an authentic shopping experience.
Stretching business boundaries: exploration of new business models and retail formats
An evolving retail landscape and changing consumer
needs have forced traditional retailers to think of new ways
to operate their businesses. Hi Department Store is a case
in point. It is the first domestic upscale lifestyle department
store to fully engage in direct merchandise sales. Unlike
other traditional department stores relying heavily on the
concessionary model, all Hi Department Store
merchandise is sourced exclusively by in-house buyers.
Bypassing distributors and agents, Hi Department Store
Today, retail operators are being forced to adapt to
the relentless surge of e-commerce. Their
businesses encompass a broader range of new
formats, designs and technologies to respond to rapidly
changing needs of consumers. Specifically, shopping mall
and department store operators are endeavouring to
provide more “experiential” elements such as leisure,
dining and entertainment to enhance their trade mix and
diversify consumer offerings, to attract more shoppers. The
trend towards providing an immersive shopping
experience is becoming a focal point.
Innovative retail practices
Traditional retailers to make shopping more “experiential”
Moving towards a lifestyle-cum-shopping destination
model and creating a unique shopping experience, some
traditional retail players have worked hard to explore new
shopping possibilities. A typical example is Joy City
Chaoyang in Beijing. In March 2015, Joy City Chaoyang
launched Joy Yard, a lifestyle-themed space on the 5th
and 6th floors of its shopping mall. Joy Yard marks an
important strategic initiative to demonstrate the concept of
experiential shopping by integrating a “lifestyle
experience” in its retail space. The landlord transformed
and renovated the 10,000 sqm areas into a brand new
concept of experiential shopping, with a large open area
and other green facilities, creating a spacious and
comfortable environment.
Joy City Chaoyang has sought to move away from a
traditional, retail-focused trade mix towards entertainment
or experience-based shopping. It reportedly adapted a
2:5:3 ratio for retail, food and beverage and experiential
elements. Selected experiential elements include:
• Family and kids: EE City – a role-playing theme park for children. Covering an area of 18,600 sqm and providing more than 70 simulations of real life occupations, EE City is a child-sized replica of real society. It covers all aspects of social life, including streets, hospitals, supermarkets, schools, airports and other facilities;
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Ten Highl ights of China’s Commercial Sector 2016
buyers source and select unique and creative
merchandise, aiming for “world cultures” within their
products. Physical stores in Guangzhou, Shanghai and
Beijing include bookstores “Hi Book”, cafés “Hi Café”, and
DIY areas called “Hi Class”, to provide social gathering
places for consumers to enrich their shopping journeys.
This new retail formats bring an avant garde shopping
experience to consumers, but also enhance the evolution
of China’s department sector in terms of personalised
procurement and sourcing, with greater consumer choice.
Jiangsu CKL, a regional supermarket and convenience
chain store operator, is another company that has adopted
new business models with the changing environment.
Eying the huge potential of the rural consumer market, the
operator has set up small-scale shopping centres in
counties and villages. Sizes of shopping centres are at
around 10,000 sqm and the ratio of retail to leisure is
roughly 3:7.
What the experts sayOur experts believe that in 2016 the notion of retail transformation, with new retail formats, will be manifested by wider scope
and perspective. Retail business will no longer be a simple relationship of buying and selling but involve the emotional and
social interactions between retailers and customers.
Recently, a number of large-scale traditional retail commercial property projects are turning into smaller-scale projects, in the
hope of achieving a better market position. This trend is set to continue over the coming year.
Integration of a myriad of retail formats which focus on consumer experience is likely across the retail sector in tier 1 and tier 2
cities. This trend could well continue to grow in 2016.
Finally, Chinese consumers are becoming more sophisticated and pay greater attention to detail and value for money. They
increasingly look for uniqueness and differentiation. Specialised and personalised offerings are key to successful sales.
An evolving retail landscape and changing consumer needs have forced traditional retailers to think of new ways to operate their businesses.
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Fung Business Intel l igence Centre
7. Cross-border e-commerce import businesses see rapid growth; new channels for commercial enterprises to transform and innovate
businesses – with five pilot zones established in Shanghai,
Chongqing, Hangzhou, Ningbo, and Zhengzhou in 2012,
followed by Guangzhou and Shenzhen in 2014. The Tianjin
Free Trade Zone became the eighth pilot zone in October
2015. Besides facilitating these zones, cross-border
e-commerce import businesses can also use other Free
Trade Zones (FTZs) and channels through qualified cities
approved by the government, including Fujian FTZ,
Nanjing, Qingdao, Pingtan, and Yantai.
“Direct mail” and “bonded area import” modelsCurrently, the import business on the cross-border
e-commerce platform is conducted under two modes of
operation: these are the “direct mail” and “bonded area
import” models. Under the direct mail model, consumers
buy goods from qualified e-commerce platforms and
products are shipped by international transportation to
reach consumers directly. As for the bonded area import
model, products are shipped in bulk and stored in bonded
warehouses within pilot cities before being shipped to
consumers that have placed orders online. The products
are shipped to customers after completing customs
clearance and inspection and quarantine procedures.
All imported products are regarded as personal
consumption items under the new cross-border
e-commerce models and are subject to taxes on personal
postal articles at various rates depending on the product
category. Currently there are four tax bands – 10%, 20%,
30% and 50% (see Chart 1). The tariffs are usually lower
than the tax rates for general trade.
Chart 1: Tax rates for personal consumption items
China’s cross-border e-commerce development has
captured the world’s attention. Many foreign
brands and retailers are selling their products via
cross-border e-commerce platforms. iResearch estimated
that the total value of China’s cross-border e-commerce will
reach 5.2 trillion yuan in 2015, of which 14.6% (or 759
billion yuan) will come from imports. The total value of
cross-border e-commerce imports is expected to increase
to 1.3 trillion yuan in 2017.
Drivers of growthOver recent years, there has been strong demand for
imported goods such as cosmetics and skin care
products, maternal and baby products, clothes, shoes and
accessories, jewellery and others. Ongoing concerns in
China over unsafe and counterfeit products have
undermined trust in many locally-produced goods,
pushing consumers towards overseas brands that are
generally perceived to be of higher quality. Another key
factor underpinning the growth of cross-border
e-commerce is the huge price differential between the
goods selling in the domestic and overseas markets.
Overseas brands selling in China need to pay import
duties, value-added tax and consumption tax. Moreover, it
is also a common practice for these brands to adopt a
higher pricing strategy in China, further widening the price
gap.
Indeed, many consumers are buying foreign products
directly through overseas online platforms or via various
third-party buying agents. However, there are problems
associated with these channels such as a lack of
guarantees of product authenticity, an inability to return
products, tax evasion, language barriers and difficulties in
payments, logistics and customs clearance.
Pilot zones for cross-border e-commerce import businessTo better regulate the market for imported goods and
promote the development of cross-border e-commerce,
the government has rolled out a number of favourable
policies, introducing several new regulations over the past
few years.
Since 2012, the government has set up a total of eight
cross-border e-commerce pilot zones for import
Product category Postal articles tax
Food and beverage 10%
Leather clothes and accessories 10%
Bags and shoes 10%
Apparel and textile 20%
General watches 20%
Luxury watches (10,000 yuan or
above)
30%
Cosmetics 50%
Skin care 50%
Source: China Customs
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Ten Highl ights of China’s Commercial Sector 2016
slowing sales growth over recent years, so cross-border
e-commerce offers a new alternative that can help them
compensate for losses. An increasing number of traditional
players have begun launching cross-border e-commerce
businesses. For example, Feiniu.com, the e-commerce
platform of Taiwan-based hypermarket chain RT-mart,
launched a cross-border channel in September 2015 to
sell mainly maternal and baby products such as milk
powder and diapers. Earlier, in June 2015, CR Vanguard
rolled out its shopping website Ewj.com, with a designated
cross-border channel selling selected overseas products.
Grandbuy Department Store, Mopark Department Store
and Rainbow Department Store have also started cross-
border e-commerce businesses. They have set up
cross-border shopping channels on their websites, while
also opening experiential stores in selected branches.
These stores sell both duty-paid products as well as
bonded imported goods. Duty-paid products are those
imported into China under general trade procedures.
Customers can buy the products in the stores and take
them away immediately. But for bonded products,
purchasers can only buy online or scan the product QR
codes to place orders. The goods are then shipped to
customers from the bonded warehouses.
A number of key logistics players in China such as SF
Express, Yunda Express and YTO Express have also
tested the cross-border B2C model, hoping to further
expand their business scope.
An easy option for foreign retailers to tap the China marketCross-border e-commerce has become a popular option
for foreign brands and retailers to sell in China, as this is a
comparatively easy means of tapping the lucrative China
market. Foreign players can sell their products in China via
authorised cross-border e-commerce platforms such as
Tmall Global, JD Worldwide, Suning.com and Ymatou.com.
Foreign brands and retailers do not need to obtain Chinese
business license or register a company in China, nor do
they need a physical presence in the country.
However, the success of the cross-border e-commerce
model depends very much on close collaboration between
supply chain partners. To avoid broken linkages and
supply chain gaps that might affect the purchasing
process, all key business processes need to be integrated
seamlessly, including product sourcing, logistics, payment,
and after-sales services.
One particular concern is that under the bonded import
channel, retailers have to bear the inventory risks when the
imported products are sent to bonded warehouses before
customers place their orders. Retailers need to accurately
forecast demand before they ship goods to a bonded
zone.
A new solution for traditional retailersTraditional retailers, including department stores and
large-scale supermarkets, have been suffering from
To better regulate the market for imported goods and promote the development of cross-border e-commerce, the government has rolled out a number of favourable policies, introducing several new regulations over the past few years.
What the experts sayOur experts believe cross-border e-commerce is increasingly becoming a popular way for retailers to transform their
businesses. This is particularly crucial within a tough retail environment. The ability to innovate and adjust the business model
to cater to the changing needs of customers is the key to success.
The 13th FYP referred to earlier highlights the importance of deepening institutional reform, increasing globalisation,
streamlining administration, improving the business environment and developing new business models to facilitate cross-
border e-commerce. Such an approach offers a sound basis for developing the sector.
To further promote this development, our experts urge the government to further strengthen the supervision of product quality,
streamline procedures, act against tax evasion and expand the number of pilot cities authorised to carry out cross-border
e-commerce import business.
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Fung Business Intel l igence Centre
8. Express delivery sector enters a “new era of service”; new business models bring new opportunities
e-commerce. SF Express set up its cross-border
e-commerce platform, Fengqu Haitao (fengqu.com,
formerly known as SF Haitao) in January 2015: the platform
offers mainly imported baby and maternal care products,
healthcare products, personal care products and
cosmetics. SF Express leverages its extensive logistics
network to deliver imported products to its warehouses
overseas, providing customs clearance and handling
domestic deliveries.
Cold chain logistics becomes a major area of focus
Chinese consumers are more quality-driven today and
increasingly demand fresh produce. Cold chain logistics
plays a crucial role in channeling fresh produce from farms
into the hands of customers. The development prospects
for cold chain logistics are huge. Some industry experts
predict the market for cold chain logistics will reach 470
billion yuan by 2017. With such large potential, many
express delivery companies are extremely keen to enter
the market. That said, the development of the cold chain
logistics sector is not without challenges. Huge capital
investment, stringent technology requirements and lack of
efficient cold chain logistics management systems are
among major drawbacks facing the development of cold
chain logistics.
China’s express delivery sector has seen
phenomenal growth over recent years, thanks to
the rapid development of e-commerce. This is
particularly the case for cross-border e-commerce and
rural e-commerce, as well as the growing O2O trend. In
2014, China’s express delivery market recorded the
aggregate business volume at 14 billion orders, up 52%
year-on-year (yoy). Total revenue generated by express
delivery companies was 204 billion yuan, up 42% yoy.
Indeed, China’s express delivery market has been growing
at an average rate of over 50% annually over the past 46
months, making it the world’s largest express delivery
market. In 1-3Q15, express delivery companies in China
handled around 13.7 billion orders, with total revenue
amounting to 187.9 billion yuan. The figures obtained in the
first three quarters of 2015 were almost higher than for the
entire year 2014.
In recent years, the express delivery sector has undergone
rapid transformation and upgrading. Many express
delivery companies are constantly expanding their service
offerings and improving service quality to keep pace with
the changing needs of the market. For example, to ensure
the timeliness of their services, some leading domestic
delivery companies such as SF Express and YTO Express
have invested in their own aircraft. Other courier
companies are providing varying types of value-added
services such as complete warehousing and distribution
solutions, night services and targeted solutions for different
industries. For the express delivery sector, enhancing
service quality is now a key element for success.
Key trends to watch
Express delivery companies transform into integrated logistics services providers
An increasing number of express delivery companies are
diversifying their businesses, with the aim of providing a
full spectrum of quality services to customers. A typical
example is SF Express. Over the past few years, the
company has been expanding from express delivery to
other parts of the supply chain, such as cold chain
logistics, supply chain finance and cross-border
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Ten Highl ights of China’s Commercial Sector 2016
New business models emerge in the O2O era; crowd sourced delivery gains popularity
Express delivery plays a significant role in today’s
commercial world where convenience and fast delivery
become more imperative than ever. This also helps pave
the way for O2O development by providing speedy
e-commerce fulfilment and convenient last-mile delivery. In
2012, SF Express launched its O2O initiatives by opening
community service store chains, Heike, across the country.
Heike stores provide click and collect services for
customers of SF Express’ online store, SF Best, and allow
customers to place online orders with smart devices.
Despite mixed comments on the Heike experience, SF
Express has taken a major step in rolling out innovative
business models.
Recently, a new type of delivery platform has become
popular while also encouraging people to take up local
delivery jobs. This is known as crowd sourced delivery. It is
a web or mobile-based courier service which leverages
large groups of geographically dispersed individuals to
match demand with supply, digitally. Crowd sourced
delivery connects enterprises with part-time individuals
who can offer their time to fill spare capacity. This helps
enterprises reduce their logistics costs, especially for
last-mile delivery. It also solves part of the last-mile delivery
problems resulting from e-commerce promotional spike
periods, and is particularly valuable for categories in which
fast delivery is needed, as with fresh produce. However,
there are some potential challenges associated with this
new delivery model such as safety issues, legal questions,
liability concerns and reputational risks.
Express delivery companies speed up rural logistics investment
China’s rural market is set to become a new source of
growth as the country moves towards a consumption-
driven economy. In particular, the increasing popularity of
online shopping in rural areas has contributed significantly
to online sales growth. Ali Research estimates that China’s
rural e-commerce market will reach 460 billion yuan in
2016.
The government has been very supportive towards the
development of rural e-commerce. In October 2015, the
State Council promulgated the Opinions on Promoting the
Express Delivery Sector. According to the Opinions, the
government will support the sector to work collaboratively
with modern agriculture, advanced manufacturing and
commercial enterprises. This could facilitate the
distribution of agricultural products from farms to cities,
and daily necessities from urban areas to rural areas.
Underpinned by the government’s initiatives to improve
logistics and distribution capabilities in rural areas, express
delivery companies can be anticipated to invest more in
rural logistics, and expedite their penetration into the rural
market.
Many express delivery companies are constantly expanding their service offerings and improving service quality to keep pace with the changing needs of the market.
What the experts sayAmid the increasing competition in the sector, a trend towards moving into integrated logistics services, with attendant
providers, is inevitable. As express delivery companies strive to transform and upgrade their businesses, our experts expect
consolidation to take place in the industry, driving more mergers and acquisitions.
The express delivery sector is expected to continue its robust growth in 2016. Yet, the public will focus increasingly on service
quality improvements rather than merely the growth rate on the proliferation of those services. Express delivery companies
should continue to transform and upgrade their businesses, and invest in innovation.
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Fung Business Intel l igence Centre
9. Mass dining receives increasing attention; technology helps boost the development of new businesses, such as group-buying catering services and O2O food delivery
companies striving to provide larger varieties of quality
menus alongside unique dining experiences and premium
services. As Chinese consumers become wealthier and
spend more on food and beverages, it is vital for catering
companies to identify ways of enhancing customer
satisfaction and meeting the needs of more sophisticated
consumers through personalised offerings. For example,
some restaurants undertake to serve dishes within 10
minutes after customers place their orders.
Technology makes a difference: restaurant apps, group-buying catering services and O2O food delivery become popular
In view of the growing popularity of e-commerce and
mobile commerce, an increasing number of catering
companies have launched mobile apps or have partnered
with catering e-commerce platforms to better engage
customers; alternatively they provide new forms of catering
services such as group-buying and O2O food deliveries.
For instance, some restaurants have launched dining apps
that enable customers to make reservations, receive
notification when their tables are ready, leave comments
and pay bills.
At the same time, some catering e-commerce platforms
such as Baidu Waimai and Eleme provide group-buying
catering and food delivery services. Central kitchen
facilities and advanced packaging technologies have
made it easier for companies to provide food delivery
services to nearby offices, schools, homes for the elderly
and the general community.
Catering enterprises form strategic alliances amid the fragmented market
Despite the rapid growth of domestic catering companies
over recent years, the catering market is still fragmented,
with no dominant large-scale regional players. According
to the China Cuisine Association, total revenue among the
top 100 catering enterprises reached 191.9 billion yuan in
2014, representing 8.3% of total revenue for the entire
catering industry. The top 100 catering enterprises also
saw sales grow 9.0% yoy, which is lower than the 9.7% yoy
growth rate for the entire industry over the same period. To
vie for greater share, some catering companies have
China’s catering sector has maintained steady
growth over the past two years. According to the
National Bureau of Statistics, in the first 10 months
of 2015, the country’s catering revenue reached 2.6 trillion
yuan, an increase of 11.8% year-on-year (yoy), 1.2
percentage points (ppt) higher than the increase in total
retail sales of consumer goods over the same period.
Being adversely affected by the slowing economy, as well
as the government’s anti-corruption policy, many catering
enterprises have restructured their businesses, particularly
in the high-end market. They have adjusted their operating
models and diversified to provide mass catering. The
results of such transformations have been positive.
Recent trends to watch
Mass consumption to drive market momentum
Since the implementation of the government’s anti-
corruption and frugality campaigns, food consumption and
entertainment spending by government officials has
decreased significantly. According to a survey conducted
by the China Cuisine Association, business meals
accounted for only 6.5% of total consumption, while dining
among friends, family meals and dining couples
accounted for 61.2%, 16.2% and 4.5%, respectively for
total consumption.
Mass and casual dining have become mainstream in the
catering sector. Some well-known upscale restaurant
chains have adjusted their positioning to target middle-
income consumers and capture the mass dining segment.
For example, Shanghai Min’s Family Restaurant, a new
dining concept under high-end restaurant chain Xiao Nan
Guo, and specialising in Shanghainese cuisine, offers
customers well-presented, value-for-money food and light
meals. Another upscale restaurant chain, Beijing Jingya,
has transformed some of its high-end restaurants into
stylish, seafood hotpot outlets. The chain also provides
catering services at railway stations.
“Experience” dining and “customised” consumption to flourish
Competition in the catering industry has become
increasingly intense with increasing numbers of catering
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Ten Highl ights of China’s Commercial Sector 2016
sought to form strategic alliances, while others have
cooperated with Internet players to form ecosystems.
Food safety and quality issues remain a huge concern
Food safety remains an important concern in China,
especially after the outbreak of the Shanghai Husi Food
tainted meat scandal in 2014. This incident created
serious, long-term consequences for the catering industry
as a whole. At the same time, in view of the increasing
popularity of healthy, organic and eco-friendly food, many
catering companies have devised relevant business
strategies to meet consumers’ changing demand.
Strong government support for the catering sector
In June 2014, the Ministry of Commerce promulgated the
Guiding Opinions on Accelerating the Development of
Mass Catering. The Opinions set out the government’s
objective of increasing the mass catering market share
Technology innovation will continue to drive the development of O2O catering. Catering enterprises should gear up and explore new forms of business such as home delivery, self-pick-up services and group-buying catering services.
from 80% to 85% of total sales within five years. This has
gained tremendous support from society and provincial
governments. Since then, some provincial governments
have also rolled out supportive measures to facilitate
development of the sector. For instance, in July 2014, the
Hangzhou Municipal Government promulgated the
Guiding Opinions on Accelerating the Transformation and
Upgrading of Catering Industry to Promote Stable and
Sustainable Development, highlighting the importance of
effectively exploring diversified business models, carrying
out business transformation by making full use of
e-commerce, focusing on mass consumers and constantly
exploring new growth points of consumption. Moreover, the
State Council executive meeting held on 19 July, 2015
agreed to grant greater tax concessions for small- and
micro-enterprises. Starting on 1 October, 2015, the
maximum annual tax income of small- and micro-
enterprises subject to “tax reduction by half” has been
raised from 200,000 to 300,000 yuan. This should have the
effect of reducing the tax burden on small catering
enterprises.
What the experts sayOur experts are optimistic about the development prospects for China’s catering industry. Since the economy is moving
towards a “new normal”, some relatively deep structural changes in the catering industry are expected. Have said that, the
catering sector is expected to enjoy rapid development over the coming years, thanks to booming Internet technology and the
improved living standards of Chinese consumers: 11% yoy growth rate in 2016 is anticipated. Mass and casual dining is set to
see huge growth in the coming year.
Technology innovation will continue to drive the development of O2O catering. Catering enterprises should gear up and
explore new forms of business such as home delivery, self-pick-up services and group-buying catering services. They can also
consider partnerships with leading Internet companies to provide O2O catering services.
In the digital era, it is important for catering enterprises to make good use of advanced technologies to improve business
efficiencies, enhance food quality and improve customer satisfaction. The use of central kitchens, operational chain models
and crowd sourced deliveries are among the better options.
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Fung Business Intel l igence Centre
Industry and Commerce (SAIC) handled 77,800 complaints
concerning online purchasing, up 356.6% year-on-year
(yoy). Moreover, of the total 20,135 complaints regarding
remote shopping handled by the China Consumers’
Association, 92.3% of cases were related to online
purchasing. According to data from the Supreme People’s
Court of China, consumer complaints about online
shopping filed with the People’s Court of Chaoyang District
in Beijing increased more than threefold since the
introduction of the new Consumer Protection Law in March
2014.
Online marketplaces become a breeding ground for shoddy and counterfeit products Along with the surge of consumer complaints over online
purchasing, issues regarding shoddy and counterfeit
products sold on online marketplaces are also among the
chief concerns. In 2014, the General Administration of
Quality Supervision, Inspection and Quarantine of China
(AQSIQ) carried out random quality inspections on 14
types of consumer products traded online. Almost a third
of these products failed the quality tests. A random
inspection conducted by SAIC in 2014 also found that over
40% of products sold online were counterfeit.
Clamping down on undesirable advertising activities with tougher advertising law False, misleading and deceptive advertising claims have
been rampant in China. Over recent years, the government
has stepped up efforts to better regulate the market. For
instance, the National People’s Congress passed
amendments to the Advertising Law of the People’s
Republic of China, with effect from 1 September, 2015. The
new Advertising Law clarifies what constitutes a
misleading advertisement. Advertisements that provide
incorrect information in relation to the performance,
function, origin, uses, quality, size, composition, prices,
manufacture and expiration dates of products will be
considered misleading. The use of superlatives including
“best”, “highest”, “national level” and other terms to tout
the quality of products are banned on all offline and online
advertising. The new law also imposes tougher
punishments and penalties, signifying the government’s
determination to combat false advertising that deceives
and misleads consumers.
10. Better business regulations, better consumption environment
With a growing capacity for innovation and
creativity, China’s commercial sector has
witnessed extraordinary progress over recent
years: it has become a major growth driver for the country’s
economic growth and domestic consumption.
Nevertheless, business malpractices remain a major
problem for the market. In particular, food safety and
product quality issues, concerns over online purchasing
and misleading and deceptive advertising have drawn
extensive attention. This has seriously affected consumer
confidence and undermined public trust.
Product quality ranks top among all consumer complaints According to the China Consumers’ Association, a total of
292,561 consumer complaints were received in 1H15, of
which 44.6% of cases were related to product quality
issues, while 20.5% concerned after-sales services and
13.7% focused on contracts. The cases concerning
product and service quality issues accounted for over 70%
of complaints, suggesting the quality of products and
fulfillment of service pledges are the chief concerns within
the consumer goods market. Meanwhile, an increasing
number of consumer complaints were related to expiration
dates on food items. Some food producers were reportedly
changing “best before” dates on food items so that these
could be sold after the original expiration dates.
Product quality44.6%
False advertising2.0%
Others 13.8%Counterfeits 0.9%
Safety 1.0%
Pricing 3.5%
Contracts 13.7%
After-sales services 20.5%
Source: China Consumers’ Association; compiled by Fung Business Intelligence Centre
Chart 1: Types of complaints received by China
Consumers’ Association, 1H15
Complaints against online purchasing on the rise With the growing popularity of e-commerce, complaints
against online purchases have increased sharply in China
over recent years. In 2014, China’s State Administration for
36
Ten Highl ights of China’s Commercial Sector 2016
What the experts sayGreater integrity and self-discipline among market participants are key to the orderly and healthy development of the
commercial sector. For business operators, the new Advertising Law and Consumer Protection Law send out a clear message
that rather than exploit consumer rights they should enhance their core competences to promote the quality of their products
and services, and foster corporate social responsibility. As a case in point, Alibaba’s online shopping platform Tmall
introduced insurance to guarantee the authenticity and quality of its products on 10 November, 2015, a day before the start of
the annual Singles’ Day online shopping festival. Such a move enables consumers who receive counterfeit products to enjoy
unconditional returns and refunds, with compensation set at four times the price paid.
A sound legal and well regulated business environment are also imperative for the growth of the commercial sector. In recent
years, the government has been working closely with local industry associations to strengthen supervision and regulation of
the consumer goods market, especially the online shopping sector. Our experts welcome the government’s action and hope
that it will further step up its effort in this area.
Our experts also believe that a regulatory mechanism needs to be launched to blacklist enterprises that have been involved in
corporate misconduct. Business operators that are blacklisted would receive appropriate punishment, or in more serious
cases even be prohibited from operating their businesses. At the same time, an incentive system could be introduced to
reward exemplary performances by business operators.
Greater integrity and self-discipline among market participants are key to the orderly and healthy development of the commercial sector.
Chart 2: Key provisions of the new Advertising Law
Key provisions Details
Prohibition of false/
misleading advertising
• Advertisements failed to provide correct information pertaining to the performance, function,
origin, uses, quality, size, composition, prices, manufacture and expiration dates of products will
be considered false or misleading
Ban on the use of
superlatives
• The use of superlatives such as “best” and “highest” as well as reference to the State such as
“state-level” or use of the national flag are prohibited on offline and online advertising
Joint liability for false/
misleading advertising
• Advertising spokespersons, advertisers, advertising agents and publishers may be jointly liable
for false or misleading advertisements
• Advertising agents or publishers risk civil liability if they fail to provide true contact information for
the advertiser(s)
• Advertising spokespersons must have used the product or service themselves before making
endorsements
Restrictions on
advertisement
communication
• Prior consent is required for electronic direct marketing or advertisements sent to home
addresses
• An unsubscribing facility as well as true and correct identities and contact details must be
indicated in electronic advertisements
Tougher controls on
advertisements for
specific products
Source: www.gov.cn; compiled by Fung Business Intelligence Centre
• Medical treatment, pharmaceutical and
medical devices
• Healthcare products
• Infant food
• Agricultural pesticides, veterinary medicines,
fodder and feed additives
• Seeds, planting and breeding
• Tobacco
• Alcoholic beverages
• Education and training
• Products or services with an expected
investment return
• Real estate
Fung Business Intelligence Centre, Member of the Fung Group
Authors
Teresa Lam and Lucia Leung (Fung Business Intelligence Centre)
Contributors
Christy Li and Tracy Chan (Fung Business Intelligence Centre)
Administrator
Yu Di (Secretariat of the Expert Committee of the China General Chamber of Commerce)
For more information
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