Hypermarkets present new retail opportunity in China
A major new opportunity awaits companies in the hypermarket channel in China's tier 2 and tier 3 cities, according to market research company TNS, which reports that hypermarkets are taking hold there due to the lure of low prices, convenient one-stop shopping, accessible locations, and the integration of other retail facilities such as restaurants, cinemas and coffee houses that can turn a shopping trip into a shopper's day out.
Jason Yu, Regional Account Development Director for TNS Worldpanel in China, explained that, in the US particularly, stores such as Wal-Mart have been able to create an entirely new shopping culture. And this one-stop shop philosophy is now also capturing the attention of China's biggest spenders - the middle class consumer.
Shopping habits On average, China's middle class consumers visit hypermarkets every ten days, making for a frequent shopping pattern that owners of hypermarkets can bank on for a predictable revenue stream.
"It's no surprise that most international retailers are looking closely at China, a market where the grocery sector has continued to see rapid growth year-on-year above the rate of GDP expansion," noted Yu. "Hypermarkets are rushing in. In July, Carrefour opened its 100th hypermarket in China in Shaoxing, a prefecture level city with a population of 650,000. Wal-Mart's recent acquisition of Trust-mart is another notable development that underlines the growth story for hypermarkets."
Increasing grocery market share TNS Worldpanel China, which measures household consumption in 20 of China's provinces as well as Beijing, Tianjin, Shanghai and Chongqing, reports that the latest data shows that hypermarkets increased their share of the value of China's grocery sector in the country's 15 largest cities from 28.5% in 2005 to 29.8% in 2006.
The share in these largely provincial capital cities and municipalities - known as tier 1 cities - has continued to increase in 2007, reaching 30.1% in the first half of the calendar year. TNS is predicting a share for hypermarkets of 35% by the end of the decade, compared to the level of only 19.7% seen in 2001.
Contrast with supermarkets The hypermarket successes contrast with the country's supermarket sector which has recently experienced retrenchment. Supermarket share of value dropped from 28.4% in 2001 to 19.1% in the first half of 2007. TNS data shows the number of visits consumers make each year to supermarkets has declined since 2005, while the number has risen for hypermarkets over the same period.
As of mid-2007, hypermarkets had made their biggest impact in Shanghai where this channel accounted for more than 45% (by value) of the grocery sector. Hypermarkets are also dominating Hangzhou (37.9% share in mid June), Shenzhen (37.2%), Guangzhou (35.5%) and Chengdu (33.8%).
Winning factors Hypermarkets are defined here as retail facilities carrying comprehensive product ranges, including full lines of groceries and general merchandise, and in spaces often in excess of 4,000 square metres.
TNS says that hypermarkets are winning business for a variety of reasons, including:
- Low Prices Most hypermarkets are utilizing price cutting and "every day" low price strategies to attract shoppers into the store.
- One-Stop Shopping A wide range of food and non-food items are pulling Chinese families into the stores. Fresh food (including cooked ready-to-eat food) is playing a key role in attracting consumers into the store.
- Location Most Chinese hypermarkets are conveniently located in city centres or shopping malls close to residential communities and also offer free shuttle buses.
- Total Shopping Experience Restaurants, cinemas, department stores, and coffee shops are often located on the premises of a hypermarket, allowing people to plan other leisure activities around shopping.
Not all home-grown, though Hypermarket operators in China predominantly comprise international retailers. Among the companies leading this industry growth are Wal-Mart/Trust-Mart (US), Carrefour (France), Tesco (UK), and RT-Mart (Taiwan), with individual shares in the first half of 2007 of 4.7%, 4.4%, 2.7%, and 2.2%, respectively of China's grocery spend.
"The fact that even the market leader does not command a share above 5% reflects the current fragmented nature of the grocery trade," concluded Yu. "At the same time, it points to significant market opportunity arising from future market consolidation, which we believe will be inevitable."
Future market opportunities TNS also reports that there is a significant opportunity for hypermarkets to penetrate China's retail sector still further, since the hypermarket share of value stands at only 12.9% in tier 2 cities (prefecture-level cities) and 7.6% in tier 3 cities (county-level cities). According to Yu, the latest figures indicate there is still plenty of room for new hypermarkets: "A few international hypermarket operators are already looking into expanding into tier 2 and tier 3 cities, and numerous retailers are beginning to offer higher margin departments such as textiles, fresh food, and their own labels.
The hypermarket channel is a nascent industry whose turning point is still to come as the lack of competition in second-tier cities represents an opportunity for further development. However, to gain a profitable share in the hypermarket channel, retailers must act now as local competitors are faster at developing a multi-format portfolio to diversify business risks and capitalise on opportunities.