Stores, online vendors brace for retail war

AS China continues its policy of shifting the engine of economic growth to consumer spending from government investment in 2013, the focus will be on the battle between online and traditional retailers, and on the emergence of purchasing power in smaller cities.

Retail sales next year are forecast to rise 14.6 percent to 23.7 trillion yuan (US$3.8 trillion), according to the State Information Center, a think tank under the National Development and Reform Commission. That pace of growth will be slightly above this year's expected rate.

Demographics play into the outlook. China's urban population, which outnumbered rural dwellers last year for the first time, is expected to account for 70 percent of the total population by 2030, according to the World Bank.

Concentrations of people with rising incomes offer huge potential for modern retail facilities. At the same time, the mounting passion for all things digital will help boost online selling. That's particularly true in less developed cities across China, where consumers don't always have access to a full spectrum of merchandise through traditional channels.

Increasing domestic consumption is a key tenet of the Chinese government's current Five-Year (2011-2015) Plan, as the nation seeks to reduce its reliance on exports. The State Information Center report hinted that government incentives may be introduced to encourage more personal spending, such as subsidies on the purchases of energy-efficient home appliances.

Personal consumption

Although personal consumption in China is rising, it still contributes only a third of GDP, about half that of the United States, consultant firm McKinsey said in its annual consumer report.

The share of urban households with sufficient disposable income to afford a family car and small luxury goods will increase sixfold to 57 percent by 2020, according to the report.

Retailers certainly are trying to push consumers to dig deeper into their pockets during the traditional winter shopping season that includes New Year and Spring Festival.

Taobao, China's largest online shopping site, took in 19.1 billion yuan during a 24-hour promotion on November 11. The so-called Singles Day offered at least 50 percent discounts on a massive range of products.

Taobao said at the beginning of December that it achieved 1 trillion yuan of sales in the first 11 months this year. That is equivalent to 5.4 percent of the nation's total retail sales last year.

Department stores, faced with stiff competition from online vendors, countered with big sales campaigns at the beginning of December, a month earlier than usual.

Local retail chain Printemps Department Store promised each consumer who spent 11,000 yuan on a single purchase at one counter a free iPhone5. Nearly 500 iPhones were distributed during the three-day promotion, the department store said, without giving the exact sales figures.

What bricks-and-mortar retailers can still offer the consumer is a "shopping experience" not replicated online. People can peruse and handle merchandise, try on clothes, sniff perfumes. Can traditional offline stores expand online successfully?

"More brands will come to realize the importance of online channels next year, but they need to have a carefully designed strategy to differentiate their online and offline channels," said Xiao Mingchao, deputy general manager of Beijing-based research firm Sinomonitor.

Think twice

"Price wars are usually not sustainable and vendors need to think twice before they start selling products online."

At the same time, consumers in inland cities still tend to trust brands with established retail channels, and brands that have large counters at department stores or franchised stores on major commercial streets usually find it more easy to win consumers' heart, Xiao added.

According to Eric Chen, research director at TNS China, "Online and offline retailers have different roles in the retail market. Online vendors still have a huge growth potential, but for consumers seeking a better shopping experience, department stores and other retail outlets are still indispensable."

Many consumers still use online shopping sites to compare prices, but trot off to department stores for purchases because of personalized customer service and a comfortable shopping environment, he added.

He estimated that more brands will move to online sales channels and in the coming years online vendors' transaction size will grow even higher, especially in categories like home appliances.

In the end, it's not necessarily an "either-or" scenario for retailing, most analysts said. Online and offline retailers can enjoy growth in sales, and their development can evolve into a complementary relationship beneficial to both.

Increasingly, the focus of retailing in China is turning to the untapped potential of lower-tier cities, where traditional shopping patterns still prevail and incomes are rising.

Media investment firm GroupM's survey of more than 10,000 consumers in third- and fourth-tier cities this year showed average household income grew to 5,961 yuan, nearly doubled that of three years ago. Spending power is on the rise.

As much as 68 percent of respondents suggested that they are willing to pay higher prices for premium products of better quality.

"Relatively low living costs in lower-tier cities means they have more money and time to pursue a better quality of life," said GroupM Chief Knowledge Officer Eve Lo.

According to TNS China's Chen, lower-tier cities provide huge expansion opportunities for retail chain operators in the new year.

But, he cautioned, "retailers need to diversify their product offerings in lower-tier cities and pay more attention to in-store service."

At the same time, Internet use is rising in inland and smaller cities. That widens the access for online retailers.

Alibaba said that online spending from third- and fourth-tier cities grew more than 60 percent annually, in some regions even doubling from a year ago. That compared with a 40 percent increase in online sales in top tier cities like Shanghai and Beijing.