Monday, April 27, 2009

Chinese Consumer - Market Dynamics in Retail

Good friend and colleague who is a global leader in retail innovation, Mr. Tony Tsai, Chief Executive Officer – BHG Retail Innovation Institute & Executive VP Operations – The BJ Hualian Hypermarket Co. forwards an excellent article from Nielsen called "Changing Market Dynamics in China's Retail Industry".

The article states of the consumer product goods while touching on the fast moving consumer goods:

"The government’s retail statistics show a slowdown in retail sales over the last six months from 22 percent growth year on year in Quarter 3 to 19 percent in December and 15 percent in February. This slowdown is certainly reflected in FMCG as well. When looking through Nielsen data, specifically in the Modern Trade channel, there is a significant slowing from a 13 percent growth in Q4 2008 to two percent in Jan/Feb 09."

Mr. Tsai and I had discussed, interestingly sitting in Dubai a few years back while we were conducting an analysis of Gulf retail markets, how retail growth in emerging regions like Gulf begins with super market arena in tier 1 cities is followed by hyper and mini growth. What I was curious about was what happens with tier 2 and then tier 3, where the consumer desires for the experience of the tier 1 cities and the super markets? Inevitably it is consumer economics driven. As tier 1 cities grow larger and harder to navigate, hyper and mini marts start to provide the essentials of daily consumption while the weekend trips are reserved to the super "stores".

In case of China, Mr. Tsai had shared about 6 months ago that the workers who do not have work in the cities are returning to the tier 2 and tier 3 cities and towns. The Nielsen reports the results of this:

"Lower tier cities, where the spend on food and beverages represent roughly 40 percent of household expenditure, are achieving double digit growth, however the growth is potentially being fueled by the fact that more workers are staying in their hometowns as less job opportunities exist due to factory closures in South China. Another factor could also be that consumers are moving from villages to the towns to do their shopping as well as downgrading to lower priced products."

Also, Mr. Tsai back then highlighted that fluctuations in economics of a rapidly growing region like Gulf will impact consumer behavior, such as brand switching. I felt that bargain hunting may start to play a role in the consumers decisions

The nielsen report validates these predictions for the rapidly growing region like China impacted with economic woes:

"Consumers are changing their purchasing behavior ... with the significant increase in promotional activity, are being ‘trained’ to buy more on promotion. This highlights the importance of price right now with 85 percent of Modern Trade shoppers paying more attention to price promotions."

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