china's retail from mckinsey & co CN

Riding China’s Retail Revolution

Faith Woon


China is currently in the midst of a major economic restructuring. For decades, the country has relied primarily on exports, industrial manufacturing and government investment as the key drivers of growth. However, with rising US-trade tensions and mounting public debt – only worsened by the COVID-19 pandemic – this model is no longer sustainable. 

As a result, President Xi Jinping has launched a set of reforms aimed at facilitating China’s transition from an exports manufacturing hub to a consumption-led economy, with a focus on the production of high-value consumer goods and services. These have been largely successful to date. Private consumption has grown at around 8.3% per annum. In 2018, China’s retail market surpassed the US to become the largest retail market in the world. 

Let’s take a look at some of the key trends shaping the future of retail in China.

Harnessing the power of mass consumption 

China’s retail sector is being reinvented by new technologies and the emergence of e- commerce giants (namely Alibaba, JD and Pinduoduo) seeking to capitalise on the growing middle class, rapidly evolving consumer tastes and regulatory landscape ripe for technological innovation. 

With almost 800 million internet users, more than double that in the US, UK and Australia combined, China is home to the world’s largest and fastest-growing e-commerce market. Online and offline modes of shopping are blending together to create an era of ‘new retail’, bringing more convenience, comfort and better experiences for consumers.

The rising affluence of urban Chinese consumers is continuing to fuel consumption with higher levels of discretionary spending and ‘premium’ products increasingly being sought out. Alibaba’s Singles Day demonstrates the sheer magnitude of the Chinese appetite for consumer products – the company alone generates more online sales on Singles Day (US$38 billion) than the entire US market does for Thanksgiving (US$4.2 billion), Black Friday (US$7.4 billion) and Cyber Monday (US$9.4 billion) put together. 

Digital ecosystems dominate 

But Alibaba is not just an e-commerce company. The Group also owns the world’s largest mobile payment platform (AliPay), the highest-valued fintech globally (Ant Financial), an international logistics network (Cainiao), digital healthcare platform (Alibaba Health) and cloud computing service (Aliyun), among many other business lines. 

In China, mergers and acquisitions abound, enabling local brands to reach unprecedented scale and build thriving digital ecosystems spanning across multiple industries, deeply entrenched within the everyday lives of Chinese consumers. A famous example is the merger of group-buying sites Meituan and Dianping in 2017, resulting in the birth of a ‘super-app’ – a one-stop-shop for users offering all the functionalities of Groupon, Yelp, Uber Eats and Airbnb, plus more. 

Tencent’s WeChat is likewise an indispensable part of daily life; more than a billion monthly users use the app to chat, post ‘moments’, play games, purchase goods, make doctor’s appointments and even apply for loans. WeChat’s social network channels are also heavily leveraged by Pinduoduo to drive e-commerce user engagement and growth, in an increasingly interconnected and complex ecosystem. With such a tremendous amount of data on their hands, these companies are able to develop powerful new capabilities, fulfil a range of customer needs and improve the overall user experience, mobilising an ever-growing class of Chinese netizens. 

alibaba tencent
Chinese tech giants are building massive digital ecosystems.
Source: BCG

Far from its potential 

Even though China’s e-commerce market may seem staggering at its present size, there is still significant room for growth. More than 500 million of China’s 1.4 billion residents currently do not have access to the internet, presenting a huge untapped opportunity for online retailers. As sales in the urban cities begin to plateau, many of the big e-commerce players are increasingly prioritizing expansion into lower-tier rural areas. Alibaba has already established thousands of ‘Taobao villages’ across China, with more than 100 active e-shops or where over 10% of households engage in e-commerce, creating over 30 million new jobs in the process, while JD is targeting geographically-isolated regions with plans to build a network of over 10,000 drone airports in the future. 

Having recognised the role of e-commerce in poverty alleviation and economic development, the Chinese government is also playing an active role in promoting rural connectivity through private-sector partnerships, subsidies for rural drone development and numerous e-commerce training programs. The impact has been profound – online sales provided China’s 832 poverty-stricken counties with US$33.8 billion in revenue last year and consumption growth in these areas is far outpacing national averages. 

An investment opportunity?

China’s rapidly evolving consumer landscape presents many opportunities for businesses and investors alike. The sectors benefiting the most include technology, retail and healthcare.

consumer-focused economy-china's-retail-revolution-unituom-unitunimelb
The ‘new’ China’s return on equity is outstripping the ‘old’.
Source: MSCI, Bloomberg, PineBridge Investments

Despite the powerful growth of the economy though, Chinese equities have lagged behind. Many listed companies show huge earnings potential, yet are still fairly valued and generally cheaper than their Western counterparts. 

undervalued-chinese-equities-china-retail-revolution-unituom-unitunimelb
Valuations are attractive for Chinese equities.
Source: Hong Kong Exchange, PineBridge Investments

The best companies in China are cheaper than the best US companies.

Charlie Munger, Vice Chairman of Berkshire Hathaway, 2018

On the downside, China’s equity market is fairly premature and heavily dominated by retail investors (82%), making it extremely volatile. However, as institutional investment rises and China becomes more integrated into the global financial system, prices are expected to stabilise. 

Furthermore, foreign investment has risen substantially in recent years due to increasing liberalisation. It wasn’t until the introduction of the Shanghai-HK Stock Connect in 2014 and the Shenzhen-HK Stock Connect in 2016, that international investors could freely access stocks from the mainland. This was soon followed by the partial inclusion of China’s A-shares in numerous major MSCI indexes, a signal of the growing significance of Chinese equities in global portfolios. Companies like Baidu, Alibaba and Tencent (known collectively as BAT) have already gained considerable international attention, and with rising consumption levels, as well as the government’s efforts to encourage technological innovation, we can expect to see more big winners emerge in the future.

In any case, it’s safe to say that China is the next big economy to watch.


Sources

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Feature image source:  迎合更有经验的数字消费者, 引领电商的新增长– McKinsey Greater China


Edited by Gary Palar

Disclaimer: The views expressed in this article are solely that of the author’s, and do not necessarily reflect the position of UNIT nor the University of Melbourne. The advice given is general in nature and does not consider an individual’s personal financial circumstance. Transacting off this information is done so at one’s own risk, and individuals are encouraged to consult a finance professional before making investment decisions based off of this article.

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