China’s retail environment is evolving as convenience, specialty, and online are growing by leaps and bounds. Hypermarkets, which redefined China’s retailing environment over the past decade, registered their first-ever drop in 2015, losing 0.2 percent value in the urban FMCG market as traffic dropped by 4.6 percent and volume per household sank by 4.7 percent (Bain Kantar Worldpanel 2016), due to competition and high market saturation in Tier 1 cities
According to Euromonitor, a growing number of Chinese retailers are shifting away from large store formats such as hypermarkets and
supermarkets to concentrate more on smaller store formats, like convenience stores. This move aims to not only meet consumers changing shopping emphasis on convenience, but to also follow an omnichannel strategy to maintain competitiveness. Convenience stores generated 13.2 percent growth in value in 2015 and had 8.5 percent penetration growth across all city tiers, catering to cash-rich, time-poor urban consumers (Bain Kantar Worldpanel 2016). Some of the leading players, such as Carrefour and Yonghui, aimed to segment the market even further, by launching Easy Carrefour and Yonghui Membership Stores, providing more premium products and in particular increasing the share of imported products.
Fruit specialty chains such as Pagoda are driving growth. This chain owns more than 1,000 outlets. It recently acquired Beijing-based Guoduomei’s share and is aggressively opening new stores in Beijing and Shanghai in 2017 (USDA FAS Annual Retail Foods Report – China).
Additionally, competition is increasing as China’s online sales continue to grow rapidly. China is the world’s largest e-commerce market, and online sales surpassed $670 billion in 2015. One of the main drivers of this exponential growth was sales of online fresh fruit. The online purchase of fresh produce is quickly becoming a preferred purchase channel for Chinese consumers, especially among young professionals in Tier I cities.
Fresh fruit suppliers can adapt offerings to be successful in both smaller formats and online
Based on a panel conversation at AsiaFruitLogistica 2016, China’s fresh food retail market is not a war between bricks-and-mortar and e-commerce channels. Fresh Produce Forum China’s retail panel – featuring executives from Ito-Yokado, Pagoda, Benlai and Jiuye Supply Chain Management – agreed that China’s multiple retail channels can co-exist and complement one another. Liu Youcai of online retailer Benlai said his sector had much to learn from retailers like Ito-Yokado and Pagoda, particularly when it came to handling and selling fresh produce. Jiuye’s Cory Guo said “offline retailers” had an overwhelming advantage in selling fresh produce, adding that online represented more of a marketing vehicle for telling a story and building a brand.
Suppliers can differentiate and focus on the consumer to drive growth in smaller formats
“The retail landscape is crowded, and technology has given consumers access to more information and greater power over the shopping experience than ever before. Shoppers will use whatever format best suits their needs for convenience, choice and value. Retailers must give shoppers a reason to choose them over their competitors, and it can’t just be about price,” Nielsen reports
Many strategies are available to suppliers who want to partner with small format retail customers. They include:
- Curating an assortment based on consumer demand
“Assortment is one of the top three influential reasons why consumers pick a particular store to shop. In fact, more than half of global respondents (54%) say their store-selection decision is highly influenced by whether the store has the products they want regularly in stock. Assortment decisions need to be guided more by the shopping mission and consumer demand,” according to Nielsen.
For a smaller format retailer, less space means they have to be even more proficient about their selection to remain competitive. Suppliers can support retailers by carefully curating their supply, as well as offering niche items based on consumers’ interests and previous purchasing behaviors.
- Creating exclusive brands for different retail formats
The Chinese consumer shops multiple channels. To help retail customers create differentiated experiences as they expand through different retail models, including online and offline formats, suppliers can help customize their assortment or create different brands for different formats.
Suppliers need to have an understanding of the consumer and their needs for each format in order to create exclusive offerings with retail customers.
Case Study: Pagoda, China’s winning “boutique” fruit retailer
Pagoda has a relationship with consumers to understand needs and works closely with suppliers
Founded in 2002, Pagoda is China’s largest fresh fruit retailer with 1,700 outlets across the country. Pagoda’s model is based on being a ‘boutique’ fruit retailer, aiming to select the best product for its customers. It sells only high-end produce, whether imported or domestic. This is why the company puts a lot of effort into maintaining a close relationship with suppliers, so as to always be able to rely on direct import sources. Contrary to the trend with other retail chains, Pagoda’s own brand is always in the premium segment with the highest fruit quality at affordable prices. Another of Pagoda’s distinctive aspects is its work on the shop floor and relationship with end consumers.
Pagoda works closely with suppliers
On the logistics side, Pagoda is now directly sourcing about 80 percent of the fruit and vegetable volumes it distributes, supplying its stores via its 3 major regional logistics centers (in Shanghai, Shenzhen and Guangzhou) and its 12 city warehouses. To ensure the quality of its produce, it imports directly from overseas suppliers with whom it strives to maintain close relationships. About a third of its products are directly sourced from abroad.
Peter Zhu, General Manager of the Commodity Center of Shenzhen Pagoda Orchard Industry Development Co., Ltd., gave an example of how Pagoda has been trying to adapt. He explained that despite the fact that Pagoda has been expanding its direct global sourcing of high-quality imported fruits since 2013, thanks to relaxed quarantine and inspection regulations and more varieties achieving access to the Chinese market, Pagoda has still suffered from a development bottleneck.
“Before there was a unified sourcing standard,” Zhu said. “But now we hope to source products that are up to our special requirements and standards and this has become a challenge to us without the support of fruit producers. But it needs time for more negotiations and discussions so that comprehension is reached between the two sides.”
Pagoda has multiple retail formats, an opportunity for different branding and selection for different channels
The award-winning retailer has also launched its own digital application. Zhu explained, “Our aim is to start selling our products online.” And the chain continues to innovate with the launch of the new store concept Sarahpick, a convenience format serving fresh food based on fruit and vegetables.
- Euromonitor Grocery Retailers in China December 2016
- Nielsen Think Smaller for Big Growth How to thrive in the new retail landscape June 2016
- THE FUTURE OF GROCERY E-COMMERCE, DIGITAL TECHNOLOGY AND CHANGING SHOPPING PREFERENCES AROUND THE WORLD APRIL 2015
- Duff & Phelps Food Retail Industry Insights – 2016
- USDA Foreign Agricultural Service Gain Report: Annual Retail Foods Report – China January 2017
- Kantar Worldpanel News Report: Dealing with two-speed China June 2016
- Eurofresh News “Pagoda: 1,540 stores by 2017”
- Eurofresh News “Pagoda: China’s ‘boutique’ fruit pioneer”
- Produce Report PMA Fresh Connections Successfully Held in China for the Fifth Time March 2017