In the distribution and retail sectors of China, big online operators such as Baidu, Alibaba, and Tencent (BAT) were more likely than traditional retailers (department stores, supermarkets, etc.) to take the lead in developing a variety of business models by collecting a large amount of customer data and leveraging the latest technologies. This trend is now showing signs of a change. We asked Nomura Research Institute’s Liu Fang and Yutaka Go about the changes in China’s distribution and retail industry.
Current Status of China’s Distribution and Retail Industry
Signs of Changes in the Chinese Distribution and Retail Industry
Under these circumstances, there are three signs of changes that NRI is focusing on, in its outlook for the distribution and retail industry in China.
Sign 1: Development of New Business Planning, SPA and Service Industry
The products of HEYTEA, a tea chain launched in 2017, are known for not only being tasty but also colorful and photogenic. The company already has 160 stores throughout China, and it is common for people to wait in line for more than an hour at any store. For young Chinese people, the shopping process is not limited to just buying and drinking the tea; it also involves taking pictures while standing in line as well as of the products and sharing them on social media.
Sign 2: Horizontal Expansion of E-commerce Supply Chains
Small and medium retail outlets remain the main distribution channel in provincial cities and rural regions of China. Additionally, three to four agency traders mediate products from manufacturers to consumers in a multi-step structure, resulting in higher distribution costs and higher prices for the same products in provincial cities than in large cities.
In order to solve this problem, offline companies are utilizing the supply chain network created by e-commerce companies over the past several years. Jingdong (JD), which operates the e-commerce site JD.com, provides an efficient order management system in which orders made through a mobile application are sent directly from JD's warehouse to shops. This system is mainly used by shops in rural areas and provincial cities. Alibaba, China's largest e-commerce company, has invested in companies with specialized supply chains, such as alcoholic beverages. Alibaba is strengthening its supply chain by providing its own data analysis and digital technology, in addition to expanding the order management system similar to that of JD. Since Alibaba's own supply chain is not as strong as JD.com, it aims to further strengthen it by investing in other companies.
Sign 3: Alliances and M&A with Overseas Manufacturers
Overseas investments and M&A by Chinese companies have continued to increase under the government's Belt and Road Initiative. Recently, such cases are increasing in the healthcare field, including the acquisition of a major Australian health food company by a Chinese powdered milk maker, and 10% investment of a Chinese insurance company in Tsumura, a Japanese herbal medicine maker.
The purpose of these investments by Chinese companies is to acquire expertise in areas such as quality control and manufacturing technology and to acquire the right to sell famous overseas brands in China. Since supply chain and manufacturer functions are indispensable for acquiring bona fide consumers, capital alliances, business alliances, and M&As with overseas companies possessing such expertise will accelerate further in the future.
Changing Approach of China's Distribution and Retail Industry from Focus on Expansion to Pursuit of Quality
Based on the above signs, we can expect a noticeable shift in the future trends of China’s distribution and retail industry, from a focus on expansion to the pursuit of quality. The construction of an ecosphere (which encompasses all businesses related to daily life, such as retail, e-commerce, services, and finance) by major online businesses will be completed. This will lead to an expansion in investment areas to strengthen the quality of products and services, and the quality of supply chains.
The Chinese distribution and retail industry, Alibaba and Tencent in particular, have accumulated consumer big data. Leveraging this strength will enable further innovation in business models in the industry and strengthen supply chains. In order to achieve this, it is essential for them to cooperate with not only Chinese companies but with overseas companies as well.
Chinese companies are attracted by the supply chain expertise cultivated by the Japanese distribution and retail industry, and the product development and manufacturing expertise cultivated by Japanese manufacturers. Thus, opportunities for strategic alliances and M&A between Japanese and Chinese companies will increase in the future.
Nomura Research Institute, Ltd.
Corporate Communications Department