What the Experts Say? Ten Highlights of China’s ......Strategic partnerships in China’s commercial sector intensify; conglomerates with shared interests emerge China’s commercial

What the Experts Say?

Ten Highlights of China’s Commercial Sector

2016

Consumer market enters a “new normal”; consumption increasingly becomes a driver of growth1

Strategic partnerships in China’s commercial sector intensify; conglomerates with shared interests emerge5

“Internet Plus” initiative drives e-commerce expansion; mobile commerce and rural e-commerce high on the agenda3

Government delivers multiple policies to support distribution sector development; due implementation is crucial

2

Traditional retailers reinvent and upgrade; embracing “O2O” strategies becomes an industry consensus4

Cross-border e-commerce import businesses see rapid growth; new channels for commercial enterprises to transform and innovate7

Mass dining receives increasing attention; technology helps boost the development of new businesses, such as group-buying catering services and O2O food delivery

9Better business regulations, better consumption environment 10

Exploring innovative business practices and new retail formats; differentiating offerings with a greater focus on experience

6Express delivery sector enters a “new era of service”; new business models bring new opportunities

8

1

Fung Business Intel l igence Centre

Contents2 Foreword

3 About the Organisations

4 Expert Panel Members

5 Executive Summary

13 Ten Highlights for 2016

Trends that will Matter Most in 2016 and Implications for

Foreign Investors

7

2

Ten Highl ights of China’s Commercial Sector 2016

For the 13th consecutive year, the Fung

Business Intelligence Centre and the Expert

Committee of the China General Chamber of

Commerce jointly present their Ten Highlights

report to provide enterprises with a

comprehensive, insightful view of China’s latest

commercial developments. The report is

published in partnership with the China

Business Herald Research Institute.

2016 marks the beginning of China’s 13th

Five-Year Plan (2016-2020). With the country’s

ongoing transition to a more sustainable growth

model, a lower economic growth target at

around 6.5% is expected. However, as China

evolves into a more consumer-driven economy,

this transition is set to play a more significant

role in driving economic growth in the years

ahead. The Chinese government has been very

supportive in developing the commercial sector

and has promulgated a number of policies and

regulations to promote the orderly development

of sectors that include retail, e-commerce,

logistics, finance and many others. In particular,

the “Internet Plus” concept advocated by the

government calls for a new model to propel

traditional industries, given the proliferation of

Internet-based businesses. This will provide

myriad, new development opportunities for

commercial enterprises in the O2O era.

Moreover, the Belt and Road Initiative will

liberalise and facilitate trade and investment

between China and countries and regions

along those routes; it will also promote

cross-border e-commerce and other similar

innovations to bring consumers cheaper and

better imported products. Commercial

enterprises need to pay close attention to the

Initiative and make the most of opportunities

as they arise.

Ten Highlights of China’s Commercial Sector

2016 presents key factors identified after a

series of votes and formal, in-depth panel

discussions. The views of over 170 top-tier

experts were curated and are reflected

throughout the report. Over successive years,

the report has been welcomed by investors

eager to understand China’s latest commercial

trends and issues.

We would like to thank all panel members on

the Expert Committee of the China General

Chamber of Commerce for sharing their

insights. We also thank our colleagues at the

Fung Business Intelligence Centre for their

contributions and assistance.

Foreword

Teresa LamVice PresidentFung Business Intelligence Centre

Lucia LeungResearch ManagerFung Business Intelligence Centre

Chang Ka MunManaging DirectorFung Business Intelligence Centre

3


About the Organisations

Fung Business Intelligence Centre

The Fung Business Intelligence Centre (FBIC) collects and

analyses market data on sourcing, supply chains,

distribution and retail. It also provides thought leadership

on technology and other key issues shaping their future.

Headquartered in Hong Kong, FBIC leverages unique

relationships and information networks to track and report

on trends and developments in China and other Asian

countries. In addition, its New York–based Global Retail &

Technology research team follows broader retail and

technology trends, specialising in how they intersect and

building collaborative knowledge communities around the

revolution occurring worldwide at the retail interface.

Since its establishment in 2000, the FBIC (formerly known

as the Li & Fung Research Centre) has served as the

knowledge bank and think tank for the Fung Group.

Through regular research reports and other publications, it

makes its market data, impartial analysis and expertise

available to businesses, scholars and governments around

the world. It also provides advice and consultancy services

to colleagues and business partners of the Fung Group on

issues related to doing business in China, ranging from

market entry and company structure, to tax, licensing and

other regulatory matters.

China Business Herald Research Institute

The China Business Herald Research Institute is an

affiliated research institute of the China Business Herald,

one of the leading national newspapers in China. The

Institute seeks to address debates in the distribution sector

in China, and measures and communicates the impact of

innovation and development of the industry as well as

commercial enterprises on the distribution sector from a

global perspective. The Institute has established

relationships with various government departments,

research institutes and universities and leading

corporations home and abroad.

The China General Chamber of Commerce

Founded in 1994, the China General Chamber of

Commerce (CGCC) is a quasi-government association

endorsed by the State Council. The CGCC has around

70,000 members, encompassing enterprises from retail,

distribution, services and tourism sectors, local commercial

chambers, national professional associations, intermediary

organisations and individuals.

Commissioned by the Chinese Government, the CGCC

consists of 14 committees, working on areas such as

retailing, wholesaling, public relations and industry

analyses etc.; it also supervises 40 national associations,

and over 30 newspapers and magazines published both

inside and outside China.

The Expert Committee of the China General Chamber of Commerce

The Expert Committee of the China General Chamber of

Commerce (ECCGCC), a sub-division of the CGCC,

comprises over 170 prominent experts from various

government departments, research institutes and

universities, leading corporations, professional

associations, consultancy firms and newspaper offices,

which include the Ministry of Commerce, the Chinese

Academy of Social Sciences, China Chain Store and

Franchise Association, the Development Research Centre

of the State Council, the Renmin University, the Capital

University of Economics and Business, and the Beijing

Technology and Business University, etc.

The ECCGCC serves as a platform for the experts to

exchange ideas on the development of commercial

enterprises and the distribution sector.

The Fung Group

The Fung Group is a privately-held multinational group of

companies headquartered in Hong Kong whose core

businesses are trading, logistics, distribution and retailing.

The Fung Group employs over 46,800 people across 40

economies worldwide, generating total revenue of more

than US$24.65 billion as of December 2014. Fung

Holdings (1937) Limited, a privately-held business entity

headquartered in Hong Kong, is the major shareholder of

the Fung group of companies.

4


Expert Panel Members

Li TaoGroup Chief Representative – Northern ChinaLi & Fung Development (China) Limited, Fung Business Intelligence Centre; Deputy DirectorExpert Committee of the China General Chamber of Commerce

Liu HaifeiDirectorChina Research Institute of Business Economics, China General Chamber of Commerce

Liu JianhuDirectorExpert Committee of the China General Chamber of Commerce

Ren XingzhouDirector and Senior Research Fellow Institute of Market Economy, Development Research Centre of the State Council

Song Ze Research FellowInstitute of Finance and Trade Economics, Chinese Academy of Social Sciences

Teresa LamVice PresidentLi & Fung Development (China) Limited, Fung Business Intelligence Centre

Wan WenyingDirectorBeijing Capital Group Outlets (China) Limited

Wang XiaodongProfessorDepartment of Trade Economics, Renmin University of China

Wu GuohuaDeputy DirectorDepartment of Circulation Industry, Ministry of Commerce of the PRC

Xing HepingDeputy DirectorExpert Committee of the China General Chamber of Commerce

Yan JuyangSenior ReporterChina Business Herald

Yan YanchunDirectoreFuture Company Limited

Yang ZexuanGeneral ManagerDepartment of Commercial Properties Research, Wanda Group

Yu DiDeputy Secretary GeneralExpert Committee of the China General Chamber of Commerce

Zeng LingtongVice PresidentInternational Business Management Group

Zhang YulinDeputy Director and Research Fellow China Academy of International Trade and Economic Cooperation, Ministry of Commerce of the PRC

Cao JintangDeputy Secretary GeneralExpert Committee of the China General Chamber of Commerce

Cao LishengDeputy Secretary GeneralChina General Chamber of Commerce

Chang Ka MunManaging DirectorLi & Fung Development (China) Limited, Fung Business Intelligence Centre; Vice Chairman China General Chamber of Commerce

Chen JianmingDirectorYipu China

Chen LipingProfessorCollege of Business Administration, Capital University of Economics and Business

Deng LiDeputy Secretary GeneralChina General Chamber of Commerce

Fu LongchengVice ChairmanChina General Chamber of Commerce

Hu BinDeputy Editor-in-ChiefChina Business Herald

Lai YangDirectorInstitute of Commerce and Economics, Beijing Vocational College of Finance and Commerce

5


Consumer market enters a “new normal”; consumption increasingly becomes a driver of growthChina is in the course of transitioning into a “new normal” economy. Along with domestic consumption, entrepreneurship and

innovation are set to be major generators of growth in the coming year. The role of the Internet is becoming more prominent in

driving transformation and upgrading traditional industries while facilitating the development of new business models. It is

expected that such innovative business models will facilitate the creation of new retail formats, distribution channels and

consumption patterns as well as helping industries transform and upgrade.

Government delivers multiple policies to support distribution sector development; due implementation is crucialThe government has placed strong emphasis on domestic trade. The State Council and relevant government departments

promulgated a number of major policies in 2015 to facilitate the development of the distribution sector. Major policy directions

include the creation of a better business environment, facilitation of regional development, e-commerce, “Internet Plus” and

online and offline integration (O2O) development, logistics and consumer services. It is believed that the government will

continue to launch more favourable policies and supporting measures to foster the growth of the distribution sector over the

coming years. Given the broad scope and complex principles enshrined in these policies, our experts urge the government

to place more emphasis on implementation.

“Internet Plus” initiative drives e-commerce expansion; mobile commerce and rural e-commerce high on the agendaChina’s e-commerce sector continues to attract the world’s attention with its explosive growth and transformative effect on the

commercial landscape. E-commerce is also a major driver of growth in the “new normal” economy as many traditional

industries have now embraced this digital channel. Meanwhile, the government’s “Internet Plus” strategy further supports the

growth of the sector, particularly mobile commerce and rural e-commerce.

Traditional retailers reinvent and upgrade; embracing “O2O” strategies becomes an industry consensusWhile O2O has been a term in use over the past few years, it was not until around 2015 that this went mainstream. To adapt to

the digital era, many retailers have increasingly leveraged advanced technologies to create a seamless shopping experience

across all channels – online, mobile and brick-and-mortar. A significant O2O development in 2015 was the manifestation of

different forms of O2O business practices across various industries, particularly service subsectors such as catering, travel,

education, automotive and real estate. This trend will continue into 2016 and become a norm in the commercial sector.

Moreover, to stay competitive, some retailers have made vigorous efforts to revamp, upgrade and explore new business

opportunities.

Strategic partnerships in China’s commercial sector intensify; conglomerates with shared interests emergeChina’s commercial sector witnessed robust business collaborations and partnership activities in 2015. Companies which

were rivals in the past have tended to redefine their competitive strategies and form business ecosystems to enhance their

offerings and regain a firmer foothold in the market. Compared to the past, the strategic alliance activities that took place in

2015 showed some distinctive features – modest strategic collaborations; a “step out” approach; and the integration of offline

and online businesses. It is expected that strategic partnerships between commercial enterprises will continue in 2016 and

over the next few years; the trend will be further accelerated through the compulsive force of “Internet Plus”.

Executive Summary

6


Exploring innovative business practices and new retail formats; differentiating offerings with a greater focus on experience Today, many retail operators are encompassing a broader range of new formats, designs and technologies to respond to

rapidly changing needs of consumers. Specifically, shopping mall and department store operators are endeavouring to

provide more “experiential” elements to enhance their trade mix and diversify consumer offerings. On the other hand, a

number of large-scale traditional retail commercial property projects are becoming smaller-scale, in the hope of achieving a

better market position. This trend is set to continue over the coming year.

Cross-border e-commerce import businesses see rapid growth; new channels for commercial enterprises to transform and innovateChina’s cross-border e-commerce development has captured considerable attention globally. Many foreign brands and

retailers are selling their products via cross-border e-commerce platforms. At the same time, cross-border e-commerce is

increasingly becoming a popular way for retailers to transform their businesses. An increasing number of traditional retailers,

particularly department stores and large-scale supermarkets, which have suffered from slowing sales growth over recent

years, are actively tapping into cross-border e-commerce businesses.

Express delivery sector enters a “new era of service”; new business models bring new opportunitiesIn recent years, the express delivery sector has undergone rapid transformation and upgrading. Many express delivery

companies are constantly expanding their service offerings and improving service quality to keep pace with the changing

needs of the market. New business models are gaining popularity; they include community service store chains offering click

and collect services for online orders and crowd sourced delivery platforms connecting enterprises with part-time individuals

who can offer their time to provide delivery services.

Mass dining receives increasing attention; technology helps boost the development of new businesses, such as group-buying catering services and O2O food deliveryMass and casual dining have become mainstream in the catering sector in recent years. Alongside the rapid development of

e-commerce and mobile commerce, some digital catering platforms such as Baidu Waimai and Eleme are gaining popularity

as they provide group-buying catering and food delivery services. The catering sector is expected to enjoy rapid

development over the coming years. Meanwhile, mass and casual dining is set to see impressive growth.

Better business regulations, better consumption environment Despite the extraordinary development of China’s commercial sector over recent years, business malpractices remain a

major concern for the sector. In particular, food safety and product quality issues, concerns over online purchasing and

misleading and deceptive advertising have drawn extensive attention. The government has stepped up efforts to better

regulate the market; major initiatives include carrying out random quality inspections, passing the new Advertising Law and

working closely with local industry associations to strengthen supervision and regulation of the consumer goods market.

7


Trends that will Matter Most in 2016 and Implications for Foreign Investors

What it takes to win?

Understanding and getting the most from the 13th FYP

Be vigilant and keeping up-to- date with government policies

Cultivating a “customer first” mentality and building experiential opportunities;

Quality of product and differentiation make a difference

Enhancing functionalities of mobile apps, integrating e-commerce with social selling

A strategic advantage is to leverage technologies and big data to understand customers better and provide better experiences

Anticipating disruptions and being more innovative

Achieving win-win: a stance increasingly open to partnerships and outside collaboration

Weaving the sharing concept into the O2O experience

Refining supply chain operations to keep pace with O2O and consumer demands

Speed to market and convenience is important

$

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Implications:

Understanding and getting the most from the 13th FYP.

Domestic consumption remains the key driver of growth for

China’s economy under the “new normal”. Increasing

urbanisation will further boost consumption and create

abundant opportunities for enterprises. The focus on

environmental protection and green development means

rising expectations on enterprises’ social and

environmental responsibilities. This will increase

compliance and regulatory costs and force enterprises to

invest more heavily in new technologies, energy-efficient

machinery and production processes. The end of the

one-child policy could boost the demand for baby and

child-related products and services such as infant formula,

baby care products, children’s wear, education and others.

Retailers should rethink their business strategies to seize

the window of opportunity.

13th Five Year PlanIn October 2015 the Central Committee of the Communist

Party of China approved the proposal on the 13th Five-Year

Plan (FYP) for 2016-2020. The focus was to seek growth

through economic transformation, optimising the industrial

structure, improving the environment and enhancing

quality and efficiency. The Plan sets a target of maintaining

medium-to-high growth, highlighting the ideas of

innovation, coordination, green development, opening up

and sharing, to fulfill its goals. Other key tasks in the 13th

FYP that impact the commercial sector include increasing

the urbanisation rate and allowing all couples to have two

children.

9


Implications:

Cultivating a “customer first” mentality and building

experiential opportunities. Today, customers, not

companies, are driving business decisions. The phrase

“the customer is king” is more true than ever. The ability to

meet the needs of today’s empowered customers – quality

products, mobile, social, O2O – can make or break a

business. Winning players are those that can build

experiential opportunities and offer integrated experiences

at all touch points, based on a complete view of each

customer.

Quality of product and differentiation make a

difference. The seamless shopping experience is

imperative in the “Internet Plus” era, but product quality

and assortment are equally important as prices and

inventory availability become more transparent. Enterprises

poised to succeed are those that constantly review the

product mix and product assortment, advance product

development and, very importantly, differentiate

themselves. Enterprises have to constantly identify the

“white spaces” in the market. Some retailers, particularly

department store operators, have started to leverage

exclusive brands and private labels to make a difference.

New consumers and new expectations, a significant shift from conspicuous consumption to experience consumptionChina’s commercial sector will continue to be driven by

preferences of the rapidly growing Chinese millennials or

the so-called post-1980s and post-1990s generations over

the next five years. Thanks to rising income levels, China’s

new consumers are brand conscious and quality-

orientated, while at the same time they want the best

possible value for money. They also expect to have access

to a “long tail” of products, with huge product choices.

Meanwhile, personal experience matters considerably to

them. They are finding greater satisfaction in experience,

rather than static material possessions.

Chinese consumers are also interested in mobile shopping

and are avid users of social media. They want consistent

and seamless experiences across all touch points:

physical stores, online websites, mobile apps, social

media, and also via delivery. They expect to order, pick up,

receive and return products from anywhere, at any time

and via any channel.

Implications:

Be vigilant and keeping up-to-date with government

policies. To capitalise on opportunities brought about by

these initiatives, enterprises should pay close attention to

how these policies will affect their businesses and

operations. It is crucial for enterprises to constantly rethink

their strategies and be able to come up with innovative

ideas, new technologies and new business models.

Strong government support for the commercial sectorOver the past year, the Chinese government has been

determined to support the development of the commercial

sector. It has promulgated a number of policies to promote

the orderly development of various industries, including

retail, e-commerce, the services sector and logistics. The

government has also placed particular emphasis on O2O

development, the “Internet Plus” concept, and the Belt and

Road Initiative. The “Internet Plus “ concept marks the

launch of a new model for traditional industries based on

the evolution of the Internet – bringing together the mobile

Internet, cloud computing, big data and the Internet of

Things with modern manufacturing and fostering the

development of new industries to include e-commerce,

Internet finance and other digital developments. The Belt

and Road Initiative, meanwhile, provides tremendous

opportunities for enterprises in helping to facilitate

international trade and promote cross-border e-commerce.

Moreover, the 3.5 billion middle-class consumers within 65

economies along the Belt and Road routes also present

huge opportunities for commercial enterprises.

10


Implications:

Anticipating disruptions and being more innovative. To

survive in the competitive market, enterprises must gear up

and prepare for ongoing disruptive trends. Consumer-

facing enterprises need to transform their business models

to adapt to new customer purchasing habits in the digital

age. They must run businesses in ways that are customer-

centric rather than operation-centric.

New business models, disruptive forcesNew technologies and new business models created by

ubiquitous mobile connectivity are reshaping – and

disrupting – the commercial landscape. An e-commerce

eco-system dominated by key Internet players such as

Alibaba, Tencent and Baidu has emerged in China over

recent years. Meanwhile, such companies are servicing

their ecosystem partners, and serving as “virtual

department stores” with a wide range of merchandise and

service offerings. More commercial enterprises are now

operating their businesses with innovative models. Forming

partnerships with leading Internet players is a common

strategy.

Implications:

A strategic advantage is to leverage technologies and

big data to understand customers better and provide

better experiences. Retailers need to embrace

technologies in all sales channels and ensure each

channel is seamlessly integrated. At the same time, they

have to better manage all the consumer data collected and

apply analytics that can generate actionable insights. The

more enterprises can “humanise” data, the more they are

likely to succeed.

Technological innovation and data analytics China’s commercial sector is benefitting from technological

advances. Many retailers are utilising various technologies

such as iBeacons, QR codes, digital shelves and data

analytics to provide more personalised services to

customers and enrich the shopping experience. For

instance, some brick-and-mortar retailers are leveraging

iBeacons as well as data analytics to provide customers

with location-specific and customised product information

and discount coupons, while others are using mobile apps

with geo-location functions to entice customers to visit

stores.

Implications:

Enhancing functionalities of mobile apps, integrating

e-commerce with social selling. Many enterprises have

gone online and set up mobile-enabled websites or mobile

apps. In the coming year, they need to step up their efforts

by incorporating more functions within apps so that

consumers not only use an app to look for product

information and receive location-specific discounts, but

use it to buy products in-store, purchase movie tickets and

make use of other adaptations of an app. The same goes

for social media. Enterprises need to use social networks

not only to market products but to actually sell them.

Mobile continues to be a fast driver of growth; social media is more than an information source — it is a key selling toolThe Internet and smartphones are becoming integral parts

of everyday life, and Chinese consumers have adopted

mobile connectivity as the dominant approach to

accessing the Internet. Indeed, the Internet has become

an important tool for information gathering, shopping,

communication, service scheduling, and other

opportunities. The use of social networks such as WeChat

is also becoming an integral part of the customer’s

shopping journey. Brands are increasingly using social

media to market their products, interact with customers

and provide various value-added services. Some big

retailers such as Gome and Haier have even started to sell

their merchandise via social networks by opening micro

stores on WeChat.

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Implications:

Weaving the sharing concept into the O2O experience.

The concept of the sharing economy is still new to China,

but our experts see huge development potential. As

outlined in the proposal on the 13th FYP, sustainable

growth will be one of the primary goals and development

aims for China in the coming years. The sharing economy

enables companies to achieve sustainable development

and helps alleviate certain social and environmental

concerns. To monetise the concept, companies have to

consider adopting “the sharing economy” business model

in their operations and weave the concept into the O2O

experiences they are creating. Leveraging well-established

digital platforms is an effective way to kick-start all-sharing

economic business models; these are hosted through

platforms that connect spare capacity and demand.

However, enterprises need to be aware of the potential

risks involved, such as safety issues, legal questions,

liability concerns and reputational risks.

The sharing economy is set to take offThe Internet makes it cheaper and easier than ever to

aggregate supply and demand, while technologies make it

easier for people to share excess items with each other.

This forms the basis of a sharing or collective economy,

which has become a global phenomenon. However, it was

not until recently that the concept started to gain

acceptance in China, due to a lack of trust in sharing. But

the widespread use of smartphones to access the Internet

has fuelled the growth of collective consumption. What has

emerged is a range of Internet or mobile-based services

that connect owners of underused assets with those willing

to pay to use them. Typical examples are taxi-hailing apps

such as Didi, Kuaidi and Yongche, along with lodging apps

such as Xiaozhu and Mayi. Recently, crowd sourced

delivery, a new type of delivery platform that utilises human

resources to take up local delivery jobs, has become

increasingly popular. These share-based services can offer

more convenient access, better pricing and more choice.

Implications:

Achieving win-win: a stance increasingly open to

partnerships and outside collaboration. Retailers have

to consider forming partnership with Internet giants to

pursue O2O opportunities. That said, retailers should be

mindful of all possible post-integration issues such as

conflicts of interests and differences in corporate cultures

and values, as these may hinder the integration process. If

these problems cannot be resolved, so-called integration

may lead to the opposite of a win-win outcome.

O2O is no longer a buzzword, enterprises cooperate with Internet giants to pursue O2OIn 2015, more retailers in China ventured into O2O. They

were leveraging mobile, social media and innovative

technologies to bridge the gap between offline, online and

mobile channels. Many formed partnerships with Internet

companies, to leverage their huge traffic flows as well as

their payment platforms, social media networks, big data

analytic tools and logistics capabilities. Significant

examples included the strategic partnership between

Alibaba Group and Suning Commerce, and between

JD.com and Yonghui Superstores, in August 2015.

In 2016, catering and services industries are expected to

show more rapid and significant O2O developments. Fresh

food home delivery, in particular, is developing rapidly but

at the same time competition within this segment is more

intense.

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Implications:

Speed to market and convenience is important. We

expect to see e-tailers investing in infrastructure such as

pick-up lockers, or partnering with convenience stores and

mom-and-pop stores in communities, focusing on

convenient pick-up services. Crowd sourced delivery

would be a way of solving the last-mile delivery hurdle. But

enterprises need to consider the potential problems that

this new model may bring, such as safety and liability

issues.

A “last mile” revolutionConsumers are now expecting fast delivery. Indeed, some

online players such as JD.com are offering same-day

delivery for products offered on its supermarket channel.

Others continue to make huge investments in logistics

infrastructure, as JD.com does now. Indeed, JD.com has

launched an O2O service platform, JD Daojia, to provide

crowd sourced delivery services. For example, after

shopping at local supermarkets, a JD Daojia user can

place an order on the company’s app and available

couriers then bid for it. The first courier to accept the order

secures the task.

At the same time, some traditional retailers are trying to

strengthen their “last mile” capabilities. Suning Commerce

Group, for instance, plans to open 1,500 service centres

and 12,000 franchise depots in lower-tier cities by the end

of 2015; these will provide pick-up points for online orders

and other value-added services for customers in those

cities and in rural areas.

Implications:

Refining supply chain operations to keep pace with

O2O and consumer demands. Enterprises need to put in

place supply chains that are nimble and flexible enough to

adapt to and anticipate the changing landscape – such as

O2O requirements, changing consumer needs and

shrinking product cycles. This requires good planning,

end-to-end supply chain visibility and clear communication

among supply chain players. Enterprises may need to

transform their business processes or apply new

technologies to fit new business requirements.

Supply chains become more complexIn today’s highly inter-connected digital world, traditional

brick-and-mortar companies are going online, while

pure-clicks are going physical. But selling online and

offline is very different in terms of product assortments,

warehousing and product return processes, among other

factors. This affects not only how companies do business

but also their relationships with customers, suppliers,

distributors and other trading partners. The rise of new

delivery and fulfillment options such as “click and collect”

and same-day delivery has further put a strain on

enterprises’ supply chains.

Moreover, as consumer preferences continue to shift and

become more unpredictable, enterprises’ supply chains

must remain nimble and able to respond quickly. At the

same time, the product cycle for many products is

shrinking. This also requires supply chains to be flexible

enough to fulfill the needs of shrinking cycles.

13


1. Consumer market enters a “new normal”; consumption increasingly becomes a driver of growth

Online retail sales continued to record stunning growth in

2015, surging 33% yoy to 2,445.4 billion yuan in the period

January to October 2015, accounting for 10% of total retail

sales of consumer goods. Online retailing now plays a

more important role in the retail market, as increasing

numbers of consumers shift from purchasing offline to

online. Leaving aside online retail sales, the growth of

physical store retail sales was 8.6% yoy for the period

January to October 2015.

Growth of rural retail sales exceeded equivalent urban sales

Rural retail sales have been growing faster than urban

retail sales over recent years. Rural retail sales rose 11.8%

to reach 3,406.9 billion yuan in the period January to

October 2015, 1.2 ppt lower than in the same period of

2014. Urban retail sales expanded 10.4% yoy to 21,029

billion yuan, 1.4 ppt down from the same period in 2014.

The faster growth of rural retail sales was partly attributed

to the growth of rural household income, which outpaced

urban household income. In 1-3Q15, the per capita

disposable income of rural households increased

nominally by 9.5% yoy (or 8.1% yoy in real terms) to reach

8,297 yuan, while the per capita disposable income of

urban households rose by 8.4% yoy in nominal terms (or

6.8% yoy in real terms) to reach 23,512 yuan.

Weaker retail sales of automobiles, petroleum and related products

Retail sales of automobiles, petroleum and related

products grew at the lowest pace in the period January to

October 2015. Sales of petroleum and related products

registered -6.9% yoy growth, down 14.6 ppt from the same

period in 2014, while sales of automobiles registered 4.5%

yoy growth, down 4.1 ppt from the same period in 2014.

On the other hand, retail sales of telecommunications

equipment saw the most significant increase, up 35.9%

yoy in the period January to October 2015, and 9.5 ppt

higher than for the same period in 2014.

Reform has set the tone for the “new normal” in

China. The “new normal” is characterised by a shift

from high speed to medium-to-high growth. This

also presages more realistic and sustainable expansion to

come. The goal is to reduce reliance on exports and low

value-added manufacturing, and an increase in domestic

consumption, private-sector activities and services. In

2015, the government rolled out a series of policy initiatives

and reform measures to boost consumption and drive

economic growth (see Highlight #2 for details), providing a

sound basis for consumer market development.

Domestic trade: major developments in 2015GDP growth deceleration

China’s real GDP growth was 6.9% year-on-year (yoy) in

3Q15, down from 7.0% yoy in 2Q15. Over the period

1-3Q15, China’s nominal GDP amounted to 48.8 trillion

yuan, up 6.9% yoy in real terms. Such growth indicates

that the Chinese economy has been growing at a

moderating pace. The services sector has continued to

grow at a faster pace than the secondary sector. Services

sector value-added contributed 51.4% of China’s nominal

GDP in 1-3Q15, gaining 8.4% yoy in real terms in 1-3Q15.

By contrast, secondary sector value-added, which

contributed 40.6% of the country’s nominal GDP, increased

6.0% yoy in real terms over the same period. Meanwhile,

the role of consumption in driving economic growth has

strengthened. Consumption made up 58.4% of GDP

growth in 1-3Q15, 9.3 percentage points (ppt) higher than

in the same period of 2014.

Retail sales growth softened; online retail sales continued to surge

China’s nominal retail sales of consumer goods rose 10.6%

yoy to 24,435.9 billion yuan over the period January to

October 2015, with growth 1.4 ppt lower than in the same

period in 2014. Real growth was 10.6% yoy, down by 0.2

ppt compared with the same period in 2014. By month,

however, growth accelerated gradually as from June. Our

experts predict the nominal growth of retail sales to reach

10.6% yoy for 2015, down from 12% yoy for 2014.

14


What the experts sayChina is in the course of transitioning into a “new normal” economy. The 5th session of the 18th Communist Party of China

Central Committee approved the proposal on 13th Five-Year Plan (FYP) in October 2015, which sets out a new path for the new

stage of development (see “Trends that will matter most in 2016 and implications for foreign investors” for details). Our experts

highlight the following key points:

• Towards a steady growth path. The Chinese government reiterates its goal of building “a moderately prosperous society” by 2020 in the 13th FYP. The major quantitative targets include doubling China’s GDP and per capita income of both urban and rural households between 2010 and 2020. It hopes to maintain medium-to-high economic growth over the next five years. Our experts expect an average annual economic growth of 6.5% or above during 2016-2020.

• More supportive measures to boost consumption. Domestic consumption will continue to be the major driver of growth. The government is expected to announce more new measures to boost consumption, especially mass consumption, commodity housing, automobiles and travelling categories, and at the same time improve the quality of consumer products and services. Total retail sales of consumer goods are expected to grow at 10.2% yoy in 2016.

• Rural market to unleash potential. Eradicating poverty in rural areas is one of the major goals of the 13th FYP. The government will introduce a series of measures to lift 70 million rural dwellers out of poverty by 2020, further unleashing the consumption power of the rural market.

• Relaxation of one-child policy. China announced in October 2015 easing family planning restrictions to allow all couples to have two children. This is a positive sign for the retail sector as it helps boost baby and children-related consumption. The demand for infant formula, baby care products, children’s wear, toys and other products will increase significantly in the near future. Services such as baby care services and child education will probably be the new consumption focus.

Aside from domestic consumption, our experts think that entrepreneurship and innovation will become major generators of

growth in the coming year. In July 2015, the government announced the Guiding Opinions on Actively Propelling the Internet-

Plus Action Plan, highlighting the role of the Internet in driving transformation and upgrading traditional industries and facilitating

the development of new business models. It is expected that these innovative business models will facilitate the creation of new

retail formats, new distribution channels and new consumption patterns as well as helping industrial transformation and

upgrading.

Catering sales growth rebounded

Growth of catering sales recovered in 2015. Nominal

growth for catering sales rose 11.8% yoy in the period

January to October 2015, up by 2.1 ppt compared with the

same period in 2014, and 1.4 ppt higher than total retail

sales growth over the same period. O2O is taking off in

China’s catering sector, which has further boosted the

catering sales. Competition in the O2O fresh food home

delivery market is becoming fierce. Some O2O delivery

websites such as Eleme, Baidu Waimai, and Meituan

Waimai have become increasingly popular among young

consumers. Meanwhile, smaller catering enterprises have

been performing well. The growth for catering enterprises

below the designated size and individual catering

enterprises rose 13.6% yoy in the period January to

October 2015, up 0.4 ppt from the same period in 2014.

Large-scale retail enterprises saw slower growth, while smaller sized enterprises performed well

According to the China National Commercial Information

Centre, retail sales of 100 key large-scale retail enterprises

increased by 0.5% yoy in the period January to October

2015, up from 0.15% yoy in the same period in 2014. Sixty

two of the 100 key retailers recorded slower sales growth.

Slower store expansion and more store closures are

expected. On the other hand, thanks to the rise of

e-commerce and new business models and changing

consumer preferences, small- and micro-enterprises as

well as individual small retail enterprises have seen rapid

development over the past year. These have contributed to

the fast growth of mass-market consumption.

China is in the course of transitioning into a “new normal” economy.

15


2. Government delivers multiple policies to support distribution sector development; due implementation is crucial

pilot reforms related to domestic trade and distribution. The

Notice specifically laid out four major tasks: first, to explore

an innovation-driven mechanism for the distribution sector;

secondly, to establish a favourable business environment

with a sound supervisory mechanism and credit system;

thirdly, to guide infrastructure construction in various areas,

including wholesale farm product markets, community

service outlets and large-scale shopping centres; and

fourthly, to improve government management.

The State Council and relevant government

departments promulgated a number of major policies

in 2015 to facilitate the development of the distribution

sector, underlining the government’s strong emphasis on

domestic trade.

To deepen reform of the distribution sector, the General

Office of the State Council issued the Notice on Piloting

Reforms in Domestic Trade and Distribution System in Nine

Cities in August. The nine cities1 were chosen to carry out

1 The nine cities are Shanghai, Nanjing in Jiangsu Province, Zhengzhou in Henan Province, Guangzhou in Guangdong Province, Chengdu in Sichuan Province, Xiamen in Fujian Prov-ince, Qingdao in Shandong Province, Huangshi in Hubei Province, and Yiwu in Zhejiang Province.

16


Other major policy directions include the creation of a better

business environment, facilitation of regional development,

e-commerce, “Internet Plus” and O2O development, logistics

and consumer services.

Key policy directionsA better business environment

In August, the State Council promulgated the Opinions on

Promoting the Modernisation of Domestic Trade and Building

the Law-based Business Environment. The Opinions specify

that administrative organs are prohibited from abusing

administrative power to restrict and exclude competition; they

are also prohibited from using market dominant positions to

charge unreasonable fees or set up unreasonable trading

conditions. These initiatives are deemed essential for

creating a conducive business environment and stimulating

domestic trade.

Regional development

The distribution sector plays a crucial role in facilitating

regional development. In May, the Ministry of Commerce and

nine other ministries released the Layout Plan for National

Nodal Circulation Cities (2015-2020). The Plan stresses the

importance of speeding up the development of such national

nodal cities, as they form an important part of the national

transport network and facilitate the distribution of goods and

services. Meanwhile, they also contribute significantly to the

implementation of the Belt and Road Initiative and other

regional development plans, such as the Coordinated

Development Plan for Beijing, Tianjin and Hebei and the

Development Plan for the Yangtze River Economic Belt.

E-commerce, “Internet Plus” and O2O Development

The e-commerce sector has seen explosive growth over

recent years, created new demand for consumption while

opening up tremendous opportunities for business

innovation. The Opinions on Striving to Develop E-commerce

to Speed up the Cultivation of the New Economic Driving

Force promulgated by the State Council in May calls for a

deeper integration of e-commerce and other industries to

facilitate the synchronous development of industrialisation,

informatisation, urbanisation and agricultural modernisation.

Rural e-commerce and cross-border e-commerce particularly

caught the attention of the government in 2015.

• Rural e-commerce. Realising the importance of

e-commerce in facilitating agricultural development under

the “new normal” economy, the government announced

several key policies to boost the development of rural

e-commerce. In November, the General Office of the State

Council released the Guiding Opinions on the Promotion

of the Development of Rural E-commerce and the Circular

on Promoting Rural E-commerce Development. The two

policies aim to promote agricultural upgrading and rural

development, while stressing the importance of developing

modern agriculture and cultivating rural e-commerce

business. E-commerce is to be applied to wider fields in

rural areas such as to agricultural production, processing

and distribution.

• Cross-border e-commerce. The government has

placed great emphasis on cross-border e-commerce

development. In June, the General Office of the State

Council issued the Guiding Opinions on Promoting

the Healthy and Rapid Development of Cross-border

E-commerce, suggesting supportive measures in five

areas: (i) streamlining customs clearance procedures

for cross-border e-commerce exports and imports; (ii)

providing collective services for customs declaration,

examination and release of goods; (iii) clarifying and

formulating cross-border e-commerce import and export

tax policies; (iv) encouraging domestic banks and

third-party payment companies to launch cross-border

e-payment services; and (v) offering financing support

for key cross-border e-commerce projects such as credit

insurance.

17


Given the broad scope and complex principles enshrined in the government policies, our experts urge the government to place more emphasis on implementation.

Logistics

The rapid development of the logistics sector – especially

express delivery – is also a major government focus. It is

generally believed that express delivery is a new growth

area for the service industry and can support e-commerce

development to facilitate consumption upgrading and

allow enterprises to carry out target marketing. In October,

the State Council issued the Opinions on Promoting the

Development of the Express Delivery Sector, expecting to

establish a safe and efficient delivery network that provides

quality services to both urban and rural areas through

advanced technologies.

Consumer services

Consumption is a major growth driver in the “new normal”

economy. The government has stepped up efforts to

improve the consumer environment. In November, the

General Office of the State Council released the Guiding

Opinions on Accelerating the Development of Consumer

Services to Promote the Upgrading of Consumption

Structure, pushing to improve the infrastructure for public

services and build a better consumption environment. The

government will also strengthen supervision to protect the

rights and interests of consumers.

The implementation of the “Internet Plus” initiative in

promoting the development of e-commerce is high on the

government’s agenda. In July, the State Council

promulgated the Guiding Opinions on Actively Propelling

the Internet-Plus Action Plan, highlighting the role of the

Internet in driving transformation, upgrading traditional

industries and facilitating the development of new business

models.

O2O integration is another key government initiative. To

stimulate O2O integration and accelerate innovation,

transformation and advancement of commercial

distribution, the General Office of the State Council in

September released the Opinions on Promoting Online-

Offline Interaction to Expedite the Innovative Development,

Transformation and Upgrade of Commercial Circulation.

According to the Opinions, physical stores are encouraged

to adopt O2O initiatives and utilise advanced technologies,

such as the mobile Internet, big data and cloud

computing, to provide personalised products to

consumers. Stores are advised to cooperate with Internet

companies to roll out these services.

18


What the experts sayGiven the broad scope and complex principles enshrined in the government policies, our experts urge the government to place

more emphasis on implementation. Suggestions include the following priorities:

• To improve the business and consumption environment, strengthen monitoring and the tracking and recall system to ensure the safety and quality of goods.

• To severely punish the production and sale of counterfeit and shoddy products, and protect the rights and interests of consumers.

• To further expand the scope of the Business Tax (BT) to the Value-added Tax (VAT) reform programme by including consumer services in the reform. This would help to lower the tax rates for consumer services.

• To provide financial support for eligible commercial enterprises to expand their business. • To provide more land and price support, including favourable land policies for senior citizen care, healthcare and household

services.• To lower the electricity rates for commercial enterprises.• To lower transaction fees on bank cards, especially for the catering industry.• To reduce the toll charges for trucks on toll roads and bridges.

The Central Committee of the Communist Party of China approved the proposal on the 13th Five-Year Plan (FYP) in October

2015. The focus of the 13th FYP is to seek growth through economic transformation, deepening reforms to unleash

productivity, optimising industrial structure, improving the environment and enhancing quality and efficiency. As consumption

will remain a key component in driving economic development, our experts believe the government will continue to promote

consumption, with special focuses on smart, green, healthy and safe consumption. More favourable policies and supportive

measures to foster the growth of the distribution sector are expected in 2016, as well as over the entire 13th FYP period.

19


3. “Internet Plus” initiative drives e-commerce expansion; mobile commerce and rural e-commerce high on the agenda

merchandise value (GMV) on Singles’ Day amounted to

91.2 billion yuan, an increase of 60% yoy. Mobile shopping

also reached a record high, with 95 million people

purchasing items on mobile phones. Total mobile GMV

accounted for 68.7% of the total, reaching 62.0 billion

yuan.

The mobile revolution in China provides huge opportunities

for Internet players as well as mobile app developers.

Many traditional retailers are now deploying various O2O

strategies to provide a better shopping experience for

customers. One recent O2O trend is the application of

mobile shopping apps in brick-and-mortar stores. One

example is the “Miaojie” app created by Alibaba in May

2015. Equipped with location-based beacon technology,

the app allows retail operators to deliver location-specific

information, such as current deals and coupons and other

personalised services. The app also supports in-store

mobile payments. Another case is the “Feifan” app

developed jointly by Wanda Group, Baidu and Tencent in

July 2015. Customers can use the “Feifan” app at selected

Wanda shopping malls and department stores. The app

integrates data on merchants and consumers, allowing

retailers to analyse the information and carry out

personalised target marketing campaigns.

Rural e-commerce takes the lead As China’s urban e-commerce market nears saturation

after years of explosive growth, the rural e-commerce

market is becoming the new growth engine for online

sales. In June 2015, the number of Internet users in rural

areas rose to 186 million, accounting for 27.9% of the total

Internet population. The number of online shoppers in rural

areas reached 77.14 million, a 40.6% yoy increase against

the 16.9% yoy growth in urban areas, according to the

China Internet Network Information Center. Thanks to the

rise of affordable smartphones, mobile penetration in rural

areas has been increasing rapidly. Within the rural online

population, 81.9% are able to access the Internet via

mobile devices, reflecting high growth potential for

m-commerce development. Indeed, the government is

optimistic about such digital developments in rural areas.

In November 2015, the General Office of the State Council

released its Opinions on Promoting Rural E-commerce.

China’s e-commerce sector continues to attract the

world’s attention with its explosive growth and

transformative effect on the commercial

landscape. China has the world’s largest number of

Internet users and online shoppers, contributing

significantly to the phenomenal growth of the sector. As of

June 2015, China had 668 million Internet users, and 56%

of the Internet population shopped online. E-commerce is

now a major driver of growth in the “new normal” economy,

since many traditional industries have now embraced this

digital channel.

As pointed out under “Trends that will matter most in 2016

and implications for foreign investors”, the announcement

of the “Internet Plus” strategy by Premier Li Keqiang in his

March 2015 Government Work Report further supports the

growth of the sector. Our experts expect the online sector

will grow even faster in 2016, further driving the growth of

e-commerce. They identify two major forces that will shape

the e-commerce landscape in the coming year.

The continuing mobile revolution Chinese online shoppers are increasingly using mobile

devices to make purchases. The increasing penetration of

smartphones and growing prevalence of mobile payments

have made mobile shopping particularly popular. Data

from iResearch showed that the transaction value of the

online retail market amounted to 872.5 billion yuan in

2Q15, up 39.6% year-on-year (yoy) and accounting for

12.3% of the country’s total retail sales. Within the online

sector, the transaction value via mobile devices reached

443.5 billion yuan, up 133.5% yoy, growing at a rate faster

than the overall online retail market. According to the

National Bureau of Statistics, mobile commerce

(m-commerce) has been gaining market share at the

expense of PC-based transactions. In 2Q15, purchases on

mobile devices exceeded those generated on PCs for the

first time, accounting for 50.8% of online sales. Bain &

Company predicts that the share of m-commerce in online

retail transaction value will increase from 55% in 2015 to

70% in 2020.

Singles’ Day sales figures in 2015 also showed the growing

trend towards m-commerce. Alibaba’s total gross

20


policies and deepen rural distribution system reform; there is also an intention to establish new rural business models, nurture and develop rural e-commerce entities and develop a modern distribution and service network for rural products and services.

Realising the ample growth potential of the rural

e-commerce market, a number of leading retailers and

e-commerce players are adopting “going rural” strategies.

For instance, Suning Commerce Group has signed various

strategic partnerships with local governments to introduce

rural e-commerce initiatives. The company plans to open

1,500 service centres and 12,000 franchise depots in

lower-tier cities by the end of 2015, and employ 30,000

staff in the villages. On 25 September, 2015, Suning and

the State Council Leading Group Office of Poverty

Alleviation and Development signed a strategic

cooperation agreement to step up its poverty relief drive in

rural e-commerce. Leading e-commercial players such as

Alibaba and JD.com have also made substantial

investments in rural areas to expand their e-commerce

distribution networks.

The mobile revolution in China provides huge opportunities for Internet players as well as mobile app developers. Many traditional retailers are now deploying various O2O strategies to provide a better shopping experience for customers.

What the experts sayOur experts believe that the “Internet Plus” initiative will continue to drive e-commerce development and domestic

consumption in the coming year.

Recent measures have already contributed to this trend. In 2015 the government introduced a number of policies to place

greater emphasis on e-commerce when facilitating the upgrade and transformation of traditional retailers; in May and

September respectively these included the Opinions on Intensively Developing the E-commerce and Accelerating the

Cultivation of New Economic Power promulgated by the State Council and the Opinions on Promoting Online-Offline

Interaction to Expedite the Innovation Development, Transformation and Upgrade of Commercial Circulation announced by

the General Office of the State Council. They show the extent to which the government supports the development of

e-commerce. More such measures are expected in 2016.

While it is important for enterprises to implement their digital strategies, they must also strengthen their core competencies. At

the same time, enterprises need to leverage big data analytic tools to provide targeted products and services that consumers

wish to purchase. This is especially important in today’s consumer-centric environment.

The State Council estimates that the transaction value of

rural e-commerce will hit 460 billion yuan in 2016,

narrowing the gap with urban e-commerce.

In its support for rural e-commerce development, the

government introduced a number of policies to boost the

growth of the market in 2015. They included the following

measures:

• In October 2015, an executive meeting of the StateCouncil presided over by Premier Li Keqiang decidedto earmark 140 billion yuan to upgrade the ruraltelecom infrastructure, and improve e-commerce inless-developed rural areas. Broadband coverage isexpected to cover 98% of China’s villages by 2020.

• In September 2015, the Ministry of Agriculture, theNational Development Reform Commission and theMinistry of Commerce (MOFCOM) announced an actionplan to speed up e-commerce development for thefarming and agriculture sector, and to establish sounde-commerce infrastructure and policies in rural areas.

• In August 2015, the MOFCOM and another 18departments released the Circular on Promoting Rural E-commerce Development. The Circular aims to speedup rural infrastructure construction, improve government

21


4. Traditional retailers reinvent and upgrade; embracing “O2O” strategies becomes an industry consensus

A significant O2O development in 2015 was the

manifestation of different forms of O2O business practices

across various industries, particularly services subsectors

such as catering, travel, education, automotive and real

estate. This trend will continue into 2016 and become a

norm in the commercial sector.

Going smaller: community stores and small format retailers become popularSmall format shops, chiefly in the form of convenience

stores, have gained popularity over the years.

Convenience stores have the advantage of closer access

to customers, while offering quicker services.

Acknowledging the success of small format shops, some

traditional retailers have branched out into smaller-scale

stores. By adopting a multi-format strategy, they hope to

expand their business scope and create multiple income

streams. For instance, METRO China started operating

convenience stores in 2014, while Carrefour has also

recently experimented with the boutique supermarket

format by opening three “Easy Carrefour” stores in

Shanghai. Some traditional retailers, such as Rainbow

Department Store, have opened convenience stores to

support O2O initiatives; customers are provided with

pick-up services for online purchases in Rainbow

Department Store.

Meanwhile, community stores with precise and unique

positioning have been growing rapidly. These stores are

compact in size yet they can offer convenient lifestyle

products to surrounding local neighbourhoods. Examples

include mom and pop stores, bakeries, confectionery

shops, fresh fruit shops, cosmetics and beauty product

shops and baby product outlets. Life Commercial Chain,

part of the Better Life Group, also rolled out its “Yunhou

Wifi convenience stores” programme in June 2015. Yunhou

Wifi convenience stores, located in residential

communities, sell not only goods but provide courier

services, fresh breakfast foods and services, and offline

payment services, among others. Better Life believes the

number of Yunhou Wifi convenience stores will rise to

10,000 by the end of 2015. It hopes to leverage these

stores to consolidate its presence in residential

communities and better serve the needs of families.

For many traditional retailers in China, 2015 was

complex and tough. The slowdown in economic

growth, the government’s aggressive anti-corruption

campaigns, rising operating costs and fierce competition

from online retailers all posed major business challenges.

According to the China National Commercial Information

Centre, the first 10 months of 2015 saw retail sales of 50

key large-scale retail enterprises increase by a mere 0.5%

year-on-year (yoy), 1.3 percentage points higher than for

the same period of 2014. Among the 76 listed retail

enterprises in China, over 60% registered falls in both

sales and revenue in 1-3Q15.

Facing the economic slowdown, the China market has

witnessed a trend for store closures. In 1H15, there were

reportedly 121 store closures involving major retail

companies across the country, especially in tier 1 and tier

2 cities. Many leading traditional retailers also suffered

from poor performances. For example, New World

Department Store’s revenue for 1H15 plunged 86.6% yoy.

The difficult market conditions have and will inevitably

continue to exert pressure on retailers. To stay competitive,

some retailers have made vigorous efforts to revamp,

upgrade and explore new business opportunities.

Deployment of O2O strategies went mainstream in 2015, becoming an “industry consensus” While online and offline integration (O2O) has been a term

in use over the past few years, it was not until around 2015

that this went mainstream. To adapt to the digital era, many

retailers have increasingly leveraged advanced

technologies to create a seamless shopping experience

across all channels – online, mobile and brick-and-mortar.

The China Business Herald Research Institute estimates

that as at 2015 85% of the top 100 enterprise chains in

China have tapped into e-commerce and pursued digital

expansion. Moreover, an increasing number of traditional

retailers have formed partnerships with Internet giants

through mergers and acquisitions – or formed strategic

partnerships with them – with the aim of driving synergies

and enhancing their competitive edge.

22


Supply chain collaboration to drive synergiesWhile digitalisation, deployment of O2O strategies and the

concept of business innovation have all gained increasing

attention in 2015, collaboration among enterprises has also

become notable in the commercial sector. For instance, to

improve operational and supply chain efficiencies, some

enterprises have formed strategic partnerships with

upstream supply chain partners, hoping to aggregate

efforts in sourcing and move towards a globalised

merchandising platform. Here are selected examples:

• In June 2015, Li & Fung Trading (China) Holdings Ltd., Beijing Wangfujing Department Store and Shanghai Bailian Group formed a joint venture to develop private and proprietary brands and differentiate themselves from their competitors. This venture will also enable the partners to extend their global supply chains to form a substantial retail network serving the China market.

What the Experts SayIn the “new normal” era of slowing consumer demand and higher costs of physical expansion, it is critically important for

traditional retailers to move beyond their traditional strongholds. They have to extend their businesses to a new level to avoid

further deteriorating performances; they can do so by leveraging their strengths and uncovering potential within their

organisations, as well as by optimising product and service quality and adopting comprehensive O2O strategies.

In tandem, our experts believe that 2016 will see the emergence of a completely new battleground in the commercial sector,

given the backdrop of “Internet Plus” and O2O channel integration. They foresee the interaction between online and offline

enterprises becoming one of most active underlying developments. At the same time, new business models driven by

technologies will emerge and will have a huge impact on the market, while the transformation and testing of new formats by

traditional retailers will accelerate. More profound changes in the retail landscape in terms of diversification and retail format

specialisation will come on the scene in 2016, along with new O2O business models.

A significant O2O development in 2015 was the manifestation of different forms of O2O business practices across various industries, particularly services subsectors such as catering, travel, education, automotive and real estate. This trend will continue into 2016 and become a norm in the commercial sector.

• In July 2015, Lianhua Supermarket, Yonghui Supermarket, Wuhan Zhongbai Group and Shanghai Bailian Group formed an alliance to improve supply chain competitiveness. The alliance will share information, amalgamate big data as well as integrate respective logistics systems to optimise performances and improve competitiveness.

• In November 2015, Better Life Group joined hands with 22 enterprises including Rainbow Department Store and Shandong Jiajiayue Group to establish a “global joint procurement and crowd funding platform”, which is the first large-scale platform integrating online and offline procurement chains in China.

• In November 2015, Yonghui Superstores and CJ Freshway Corporation (a South Korean food giant), reached a strategic cooperation agreement to develop a global procurement and direct supply platform for fresh produce.

23


5. Strategic partnerships in China’s commercial sector intensify; conglomerates with shared interests emerge

areas, and actively seek partnerships at a blistering pace.

Strategic collaborations have emerged between

companies from within and outside individual sectors,

involving both offline and online formats, and are

profoundly reshaping the competitive landscape of China’s

commercial sector. Charts 1 and 2 show selected

examples of mergers and acquisitions (M&As) and

strategic partnerships in China’s retail sector in 2015.

China’s commercial sector witnessed robust

business collaborations and partnership activities

in 2015. Companies which were rivals in the past

have tended to redefine their competitive strategies and

form business ecosystems to enhance their offerings and

regain a firmer foothold in the market. Leading Internet

players such as Alibaba, Baidu and Tencent are

particularly aggressive when branching into new business

24


Source: Internet resources, compiled by Fung Business Intelligence Centre

Source: Internet resources, compiled by Fung Business Intelligence Centre

Chart 2: Major business alliances in China’s retail sector, 2015

Date of

announcement

Companies involved Features/objectives of collaboration

14 May • Dalian Wanda Group Co.

• China Vanke Co.

• To jointly develop commercial and residential real estate

projects and boost O2O businesses

18 May • Intime Retail (Group) Co.

• Alibaba Group

• Intime Retail appointed Alibaba’s CEO Zhang Yong as

chairman of the board and chairman of the strategic

development committee of Intime Retail, with effect from 5

June, 2015

• To jointly explore business opportunities and develop O2O

businesses

23 May • Li & Fung Trading (China) Holdings Ltd.

• Bailian Group Co.

• Beijing Wangfujing

Department Store Group Co.

• To form a joint venture company in Shanghai to develop

private labels of apparel and home product items

• To establish 300 new retail stores within three years

30 June • Dianping.com

• Parkson Department Store

• To provide O2O business solutions to 60 Parkson stores

15 July • Lianhua Supermarket

• Yonghui Superstores

• Zhongbai Holdings Group Co.

• Bailian Group Co.

• To integrate respective strengths of the companies in supply

chain management, procurement, data analysis and logistics

areas and to further develop their presence in China’s retail

market

17 July • Dangdang.com

• Better Life Group

• Dangdang.com to open an offline store in Better Life Group’s

shopping mall in Mexihu, Changsha City, Hunan Province

6 September • Dalian Wanda Group Co.

• Suning Commerce Group

• To work together to strengthen O2O development

• To introduce Suning.com products in Wanda Group retail

stores

4 November • Better Life Group

• 22 Chinese retailers, including

Rainbow Department Store,

Hefei Department Store

Group, Shandong Jiajiayue

Group and Meet All Group

• To jointly develop a global platform for group purchasing

• To integrate overseas sourcing capabilities of all companies

involved and leverage the aggregated purchasing power of

the consortium to obtain better pricing and contractual terms

and conditions from external suppliers

20 November • Yonghui Superstores

• CJ Group

• To form two joint venture companies to engage in overseas

procurement, fresh food processing, and development

of intermediate goods as well as B2C, B2B and O2O

businesses

Chart 1: Selected major M&As in China’s retail sector, 2015

Date of

announcement

Bidder

company

Target company Deal value Remark

7 August JD.com Yonghui Superstores 4.31 billion yuan Acquired 10% share of Yonghui

10 August Alibaba Group Suning Commerce Group 28.3 billion yuan Acquired 19.99% share of Suning

28 August Yonghui

Superstores

Lianhua Supermarket n/a Acquired 21.17% share of Lianhua;

became second largest shareholder of

Lianhua

19 November Pagoda Guoduomei n/a Conducted strategic M&As by means

of capital injection and stock swap

25


Distinctive features of commercial sector strategic collaboration

Modest strategic collaborations to achieve win-win situations

Compared to the past, the strategic alliance activities that

took place in 2015 showed some distinctive features.

Instead of acquisitions of majority stakes, many strategic

collaborations occurred in the form of joint ventures,

strategic cooperative agreements or cooperatives and

co-investments with counterparts; their intentions were to

combine, coordinate and manage collective resources

among allied partners and collaborate over key strategic

decisions. One example was the joint venture between Li &

Fung Trading (China) Holdings Ltd., Beijing Wangfujing

Department Store and Shanghai Bailian Group in June

2015 to develop private and proprietary brands

differentiated from competitors.

A “step out” approach to diversification

It is notable that companies are becoming more ambitious,

stepping out from their existing business boundaries. In the

past, corporate moves were mainly to expand business

categories to adjacent businesses or expand supply

chains to position parent companies in moving upstream or

downstream from existing businesses. In many cases,

enterprises now adopt a “step out” approach to tap into

completely new business areas through strategic

partnerships. Alibaba, for instance, has been relentlessly

expanding its e-commerce territory by tapping into

businesses that are totally unrelated to its parent

company’s business operations, aiming to spread its

interests far beyond its original concerns – including

Internet finance, department stores, media and film

making, among others.

An integration of offline and online retail

A predominant feature of the major business alliances in

China in 2015 was the integration of offline and online

businesses. In today’s O2O era, traditional retailers are

forming partnerships with Internet companies to better

equip them with tools to facilitate online and offline

shopping, such as payment tools, social media and big

data analytics. On the other hand, Internet companies are

searching for opportunities to reach consumers through

physical touch points. For example, Alibaba and Suning

Commerce jointly announced a strategic tie-up of the two

companies in August 2015. They will cooperate in various

areas including e-commerce, logistics and incremental

business through joint O2O initiatives.

Factors driving strategic partnership development

Strong government support

The 18th Communist Party of China Central Committee

highlights the importance of “innovation, coordination, the

environment, opening up and sharing” to fulfill its economic

goals. In particular, government incentives to boost mass

entrepreneurship and innovation are highly encouraging for

business activities in the form of strategic partnerships and

alliances.

“Internet Plus” initiative

Recently, many key players in China’s retail sector have

embraced the government’s “Internet Plus” strategy. The

“Internet Plus” initiative entails the integration of the mobile

Internet, cloud computing, big data and the Internet of

Things with modern manufacturing, fostering new industries

and business developments to include e-commerce, the

industrial Internet and Internet finance. The application of

the Internet in the commercial sector is a catalyst for

cooperation and partnership between companies. This is

especially true for leading players in different sectors so

that they can leverage respective strengths to consolidate

market position and compete for a larger share of the

market.

Companies which were rivals in the past have tended to redefine their competitive strategies and form business ecosystems to enhance their offerings and regain a firmer foothold in the market.

26


What the experts sayOur experts believe that the current wave of strategic partnerships and alliances in China’s commercial sector is intensifying

– with plenty of room for growth. The market is embracing the themes of openness, synergies and shared economies.

Companies should adopt a more holistic view and reflect on how they might benefit from strategic cooperation with their

traditional rivals.

It is expected that strategic partnerships between commercial enterprises will continue in 2016 and over the next few years;

the trend will be further accelerated by the compulsive force of “Internet Plus”. Moreover, the trend will expand in scale and

scope, spanning different industries and sectors. Indeed, intensified strategic alliances are set to give new impetus to China’s

economic transition.

27


6. Exploring innovative business practices and new retail formats; differentiating offerings with a greater focus on experience

• Entertainment: an internationally standardised ice skating rink with ice surface area of 1,800 sqm, a seven-house cinema, and a 5,000 sqm karaoke (KTV);

• Art and culture exhibition: a large-scale, multi-media Immortal Van Gogh Exhibition was held from 8 September to 6 December, 2015 in a 1,500 sqm exhibition space.

From a business perspective, Joy City Chaoyan hopes to

draw more foot traffic, build customer loyalty and above all,

increase retail sales to enhance the shopping centre’s

asset value.

Another example is Guangzhou-based Grandview Mall,

which has undergone a large-scale transformation. To

become a one-stop shopping destination bringing leisure,

entertainment and a unique experience to shoppers, the

mall has significantly increased the proportion of non-retail

shops, particularly family and child-related services and

facilities. For instance, it features a 4,000 sqm indoor

children’s themed park, a large ice skating rink, “Glacier

Bay”, and a 15-house cinema. Furthermore, a science

museum, a multi-functional art museum and a 15,000 sqm

aquarium are reportedly to open at the mall in 2016.

Beijing-based traditional department store operator

Modern Plaza, despite its relatively small operating area, is

to house a themed private movie theatre within its

department store by the end of 2015, with the aim of

providing an authentic shopping experience.

Stretching business boundaries: exploration of new business models and retail formats

An evolving retail landscape and changing consumer

needs have forced traditional retailers to think of new ways

to operate their businesses. Hi Department Store is a case

in point. It is the first domestic upscale lifestyle department

store to fully engage in direct merchandise sales. Unlike

other traditional department stores relying heavily on the

concessionary model, all Hi Department Store

merchandise is sourced exclusively by in-house buyers.

Bypassing distributors and agents, Hi Department Store

Today, retail operators are being forced to adapt to

the relentless surge of e-commerce. Their

businesses encompass a broader range of new

formats, designs and technologies to respond to rapidly

changing needs of consumers. Specifically, shopping mall

and department store operators are endeavouring to

provide more “experiential” elements such as leisure,

dining and entertainment to enhance their trade mix and

diversify consumer offerings, to attract more shoppers. The

trend towards providing an immersive shopping

experience is becoming a focal point.

Innovative retail practices

Traditional retailers to make shopping more “experiential”

Moving towards a lifestyle-cum-shopping destination

model and creating a unique shopping experience, some

traditional retail players have worked hard to explore new

shopping possibilities. A typical example is Joy City

Chaoyang in Beijing. In March 2015, Joy City Chaoyang

launched Joy Yard, a lifestyle-themed space on the 5th

and 6th floors of its shopping mall. Joy Yard marks an

important strategic initiative to demonstrate the concept of

experiential shopping by integrating a “lifestyle

experience” in its retail space. The landlord transformed

and renovated the 10,000 sqm areas into a brand new

concept of experiential shopping, with a large open area

and other green facilities, creating a spacious and

comfortable environment.

Joy City Chaoyang has sought to move away from a

traditional, retail-focused trade mix towards entertainment

or experience-based shopping. It reportedly adapted a

2:5:3 ratio for retail, food and beverage and experiential

elements. Selected experiential elements include:

• Family and kids: EE City – a role-playing theme park for children. Covering an area of 18,600 sqm and providing more than 70 simulations of real life occupations, EE City is a child-sized replica of real society. It covers all aspects of social life, including streets, hospitals, supermarkets, schools, airports and other facilities;

28


buyers source and select unique and creative

merchandise, aiming for “world cultures” within their

products. Physical stores in Guangzhou, Shanghai and

Beijing include bookstores “Hi Book”, cafés “Hi Café”, and

DIY areas called “Hi Class”, to provide social gathering

places for consumers to enrich their shopping journeys.

This new retail formats bring an avant garde shopping

experience to consumers, but also enhance the evolution

of China’s department sector in terms of personalised

procurement and sourcing, with greater consumer choice.

Jiangsu CKL, a regional supermarket and convenience

chain store operator, is another company that has adopted

new business models with the changing environment.

Eying the huge potential of the rural consumer market, the

operator has set up small-scale shopping centres in

counties and villages. Sizes of shopping centres are at

around 10,000 sqm and the ratio of retail to leisure is

roughly 3:7.

What the experts sayOur experts believe that in 2016 the notion of retail transformation, with new retail formats, will be manifested by wider scope

and perspective. Retail business will no longer be a simple relationship of buying and selling but involve the emotional and

social interactions between retailers and customers.

Recently, a number of large-scale traditional retail commercial property projects are turning into smaller-scale projects, in the

hope of achieving a better market position. This trend is set to continue over the coming year.

Integration of a myriad of retail formats which focus on consumer experience is likely across the retail sector in tier 1 and tier 2

cities. This trend could well continue to grow in 2016.

Finally, Chinese consumers are becoming more sophisticated and pay greater attention to detail and value for money. They

increasingly look for uniqueness and differentiation. Specialised and personalised offerings are key to successful sales.

An evolving retail landscape and changing consumer needs have forced traditional retailers to think of new ways to operate their businesses.

29


7. Cross-border e-commerce import businesses see rapid growth; new channels for commercial enterprises to transform and innovate

businesses – with five pilot zones established in Shanghai,

Chongqing, Hangzhou, Ningbo, and Zhengzhou in 2012,

followed by Guangzhou and Shenzhen in 2014. The Tianjin

Free Trade Zone became the eighth pilot zone in October

2015. Besides facilitating these zones, cross-border

e-commerce import businesses can also use other Free

Trade Zones (FTZs) and channels through qualified cities

approved by the government, including Fujian FTZ,

Nanjing, Qingdao, Pingtan, and Yantai.

“Direct mail” and “bonded area import” modelsCurrently, the import business on the cross-border

e-commerce platform is conducted under two modes of

operation: these are the “direct mail” and “bonded area

import” models. Under the direct mail model, consumers

buy goods from qualified e-commerce platforms and

products are shipped by international transportation to

reach consumers directly. As for the bonded area import

model, products are shipped in bulk and stored in bonded

warehouses within pilot cities before being shipped to

consumers that have placed orders online. The products

are shipped to customers after completing customs

clearance and inspection and quarantine procedures.

All imported products are regarded as personal

consumption items under the new cross-border

e-commerce models and are subject to taxes on personal

postal articles at various rates depending on the product

category. Currently there are four tax bands – 10%, 20%,

30% and 50% (see Chart 1). The tariffs are usually lower

than the tax rates for general trade.

Chart 1: Tax rates for personal consumption items

China’s cross-border e-commerce development has

captured the world’s attention. Many foreign

brands and retailers are selling their products via

cross-border e-commerce platforms. iResearch estimated

that the total value of China’s cross-border e-commerce will

reach 5.2 trillion yuan in 2015, of which 14.6% (or 759

billion yuan) will come from imports. The total value of

cross-border e-commerce imports is expected to increase

to 1.3 trillion yuan in 2017.

Drivers of growthOver recent years, there has been strong demand for

imported goods such as cosmetics and skin care

products, maternal and baby products, clothes, shoes and

accessories, jewellery and others. Ongoing concerns in

China over unsafe and counterfeit products have

undermined trust in many locally-produced goods,

pushing consumers towards overseas brands that are

generally perceived to be of higher quality. Another key

factor underpinning the growth of cross-border

e-commerce is the huge price differential between the

goods selling in the domestic and overseas markets.

Overseas brands selling in China need to pay import

duties, value-added tax and consumption tax. Moreover, it

is also a common practice for these brands to adopt a

higher pricing strategy in China, further widening the price

gap.

Indeed, many consumers are buying foreign products

directly through overseas online platforms or via various

third-party buying agents. However, there are problems

associated with these channels such as a lack of

guarantees of product authenticity, an inability to return

products, tax evasion, language barriers and difficulties in

payments, logistics and customs clearance.

Pilot zones for cross-border e-commerce import businessTo better regulate the market for imported goods and

promote the development of cross-border e-commerce,

the government has rolled out a number of favourable

policies, introducing several new regulations over the past

few years.

Since 2012, the government has set up a total of eight

cross-border e-commerce pilot zones for import

Product category Postal articles tax

Food and beverage 10%

Leather clothes and accessories 10%

Bags and shoes 10%

Apparel and textile 20%

General watches 20%

Luxury watches (10,000 yuan or

above)

30%

Cosmetics 50%

Skin care 50%

Source: China Customs

30


slowing sales growth over recent years, so cross-border

e-commerce offers a new alternative that can help them

compensate for losses. An increasing number of traditional

players have begun launching cross-border e-commerce

businesses. For example, Feiniu.com, the e-commerce

platform of Taiwan-based hypermarket chain RT-mart,

launched a cross-border channel in September 2015 to

sell mainly maternal and baby products such as milk

powder and diapers. Earlier, in June 2015, CR Vanguard

rolled out its shopping website Ewj.com, with a designated

cross-border channel selling selected overseas products.

Grandbuy Department Store, Mopark Department Store

and Rainbow Department Store have also started cross-

border e-commerce businesses. They have set up

cross-border shopping channels on their websites, while

also opening experiential stores in selected branches.

These stores sell both duty-paid products as well as

bonded imported goods. Duty-paid products are those

imported into China under general trade procedures.

Customers can buy the products in the stores and take

them away immediately. But for bonded products,

purchasers can only buy online or scan the product QR

codes to place orders. The goods are then shipped to

customers from the bonded warehouses.

A number of key logistics players in China such as SF

Express, Yunda Express and YTO Express have also

tested the cross-border B2C model, hoping to further

expand their business scope.

An easy option for foreign retailers to tap the China marketCross-border e-commerce has become a popular option

for foreign brands and retailers to sell in China, as this is a

comparatively easy means of tapping the lucrative China

market. Foreign players can sell their products in China via

authorised cross-border e-commerce platforms such as

Tmall Global, JD Worldwide, Suning.com and Ymatou.com.

Foreign brands and retailers do not need to obtain Chinese

business license or register a company in China, nor do

they need a physical presence in the country.

However, the success of the cross-border e-commerce

model depends very much on close collaboration between

supply chain partners. To avoid broken linkages and

supply chain gaps that might affect the purchasing

process, all key business processes need to be integrated

seamlessly, including product sourcing, logistics, payment,

and after-sales services.

One particular concern is that under the bonded import

channel, retailers have to bear the inventory risks when the

imported products are sent to bonded warehouses before

customers place their orders. Retailers need to accurately

forecast demand before they ship goods to a bonded

zone.

A new solution for traditional retailersTraditional retailers, including department stores and

large-scale supermarkets, have been suffering from

To better regulate the market for imported goods and promote the development of cross-border e-commerce, the government has rolled out a number of favourable policies, introducing several new regulations over the past few years.

What the experts sayOur experts believe cross-border e-commerce is increasingly becoming a popular way for retailers to transform their

businesses. This is particularly crucial within a tough retail environment. The ability to innovate and adjust the business model

to cater to the changing needs of customers is the key to success.

The 13th FYP referred to earlier highlights the importance of deepening institutional reform, increasing globalisation,

streamlining administration, improving the business environment and developing new business models to facilitate cross-

border e-commerce. Such an approach offers a sound basis for developing the sector.

To further promote this development, our experts urge the government to further strengthen the supervision of product quality,

streamline procedures, act against tax evasion and expand the number of pilot cities authorised to carry out cross-border

e-commerce import business.

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8. Express delivery sector enters a “new era of service”; new business models bring new opportunities

e-commerce. SF Express set up its cross-border

e-commerce platform, Fengqu Haitao (fengqu.com,

formerly known as SF Haitao) in January 2015: the platform

offers mainly imported baby and maternal care products,

healthcare products, personal care products and

cosmetics. SF Express leverages its extensive logistics

network to deliver imported products to its warehouses

overseas, providing customs clearance and handling

domestic deliveries.

Cold chain logistics becomes a major area of focus

Chinese consumers are more quality-driven today and

increasingly demand fresh produce. Cold chain logistics

plays a crucial role in channeling fresh produce from farms

into the hands of customers. The development prospects

for cold chain logistics are huge. Some industry experts

predict the market for cold chain logistics will reach 470

billion yuan by 2017. With such large potential, many

express delivery companies are extremely keen to enter

the market. That said, the development of the cold chain

logistics sector is not without challenges. Huge capital

investment, stringent technology requirements and lack of

efficient cold chain logistics management systems are

among major drawbacks facing the development of cold

chain logistics.

China’s express delivery sector has seen

phenomenal growth over recent years, thanks to

the rapid development of e-commerce. This is

particularly the case for cross-border e-commerce and

rural e-commerce, as well as the growing O2O trend. In

2014, China’s express delivery market recorded the

aggregate business volume at 14 billion orders, up 52%

year-on-year (yoy). Total revenue generated by express

delivery companies was 204 billion yuan, up 42% yoy.

Indeed, China’s express delivery market has been growing

at an average rate of over 50% annually over the past 46

months, making it the world’s largest express delivery

market. In 1-3Q15, express delivery companies in China

handled around 13.7 billion orders, with total revenue

amounting to 187.9 billion yuan. The figures obtained in the

first three quarters of 2015 were almost higher than for the

entire year 2014.

In recent years, the express delivery sector has undergone

rapid transformation and upgrading. Many express

delivery companies are constantly expanding their service

offerings and improving service quality to keep pace with

the changing needs of the market. For example, to ensure

the timeliness of their services, some leading domestic

delivery companies such as SF Express and YTO Express

have invested in their own aircraft. Other courier

companies are providing varying types of value-added

services such as complete warehousing and distribution

solutions, night services and targeted solutions for different

industries. For the express delivery sector, enhancing

service quality is now a key element for success.

Key trends to watch

Express delivery companies transform into integrated logistics services providers

An increasing number of express delivery companies are

diversifying their businesses, with the aim of providing a

full spectrum of quality services to customers. A typical

example is SF Express. Over the past few years, the

company has been expanding from express delivery to

other parts of the supply chain, such as cold chain

logistics, supply chain finance and cross-border

32


New business models emerge in the O2O era; crowd sourced delivery gains popularity

Express delivery plays a significant role in today’s

commercial world where convenience and fast delivery

become more imperative than ever. This also helps pave

the way for O2O development by providing speedy

e-commerce fulfilment and convenient last-mile delivery. In

2012, SF Express launched its O2O initiatives by opening

community service store chains, Heike, across the country.

Heike stores provide click and collect services for

customers of SF Express’ online store, SF Best, and allow

customers to place online orders with smart devices.

Despite mixed comments on the Heike experience, SF

Express has taken a major step in rolling out innovative

business models.

Recently, a new type of delivery platform has become

popular while also encouraging people to take up local

delivery jobs. This is known as crowd sourced delivery. It is

a web or mobile-based courier service which leverages

large groups of geographically dispersed individuals to

match demand with supply, digitally. Crowd sourced

delivery connects enterprises with part-time individuals

who can offer their time to fill spare capacity. This helps

enterprises reduce their logistics costs, especially for

last-mile delivery. It also solves part of the last-mile delivery

problems resulting from e-commerce promotional spike

periods, and is particularly valuable for categories in which

fast delivery is needed, as with fresh produce. However,

there are some potential challenges associated with this

new delivery model such as safety issues, legal questions,

liability concerns and reputational risks.

Express delivery companies speed up rural logistics investment

China’s rural market is set to become a new source of

growth as the country moves towards a consumption-

driven economy. In particular, the increasing popularity of

online shopping in rural areas has contributed significantly

to online sales growth. Ali Research estimates that China’s

rural e-commerce market will reach 460 billion yuan in

2016.

The government has been very supportive towards the

development of rural e-commerce. In October 2015, the

State Council promulgated the Opinions on Promoting the

Express Delivery Sector. According to the Opinions, the

government will support the sector to work collaboratively

with modern agriculture, advanced manufacturing and

commercial enterprises. This could facilitate the

distribution of agricultural products from farms to cities,

and daily necessities from urban areas to rural areas.

Underpinned by the government’s initiatives to improve

logistics and distribution capabilities in rural areas, express

delivery companies can be anticipated to invest more in

rural logistics, and expedite their penetration into the rural

market.

Many express delivery companies are constantly expanding their service offerings and improving service quality to keep pace with the changing needs of the market.

What the experts sayAmid the increasing competition in the sector, a trend towards moving into integrated logistics services, with attendant

providers, is inevitable. As express delivery companies strive to transform and upgrade their businesses, our experts expect

consolidation to take place in the industry, driving more mergers and acquisitions.

The express delivery sector is expected to continue its robust growth in 2016. Yet, the public will focus increasingly on service

quality improvements rather than merely the growth rate on the proliferation of those services. Express delivery companies

should continue to transform and upgrade their businesses, and invest in innovation.

33


9. Mass dining receives increasing attention; technology helps boost the development of new businesses, such as group-buying catering services and O2O food delivery

companies striving to provide larger varieties of quality

menus alongside unique dining experiences and premium

services. As Chinese consumers become wealthier and

spend more on food and beverages, it is vital for catering

companies to identify ways of enhancing customer

satisfaction and meeting the needs of more sophisticated

consumers through personalised offerings. For example,

some restaurants undertake to serve dishes within 10

minutes after customers place their orders.

Technology makes a difference: restaurant apps, group-buying catering services and O2O food delivery become popular

In view of the growing popularity of e-commerce and

mobile commerce, an increasing number of catering

companies have launched mobile apps or have partnered

with catering e-commerce platforms to better engage

customers; alternatively they provide new forms of catering

services such as group-buying and O2O food deliveries.

For instance, some restaurants have launched dining apps

that enable customers to make reservations, receive

notification when their tables are ready, leave comments

and pay bills.

At the same time, some catering e-commerce platforms

such as Baidu Waimai and Eleme provide group-buying

catering and food delivery services. Central kitchen

facilities and advanced packaging technologies have

made it easier for companies to provide food delivery

services to nearby offices, schools, homes for the elderly

and the general community.

Catering enterprises form strategic alliances amid the fragmented market

Despite the rapid growth of domestic catering companies

over recent years, the catering market is still fragmented,

with no dominant large-scale regional players. According

to the China Cuisine Association, total revenue among the

top 100 catering enterprises reached 191.9 billion yuan in

2014, representing 8.3% of total revenue for the entire

catering industry. The top 100 catering enterprises also

saw sales grow 9.0% yoy, which is lower than the 9.7% yoy

growth rate for the entire industry over the same period. To

vie for greater share, some catering companies have

China’s catering sector has maintained steady

growth over the past two years. According to the

National Bureau of Statistics, in the first 10 months

of 2015, the country’s catering revenue reached 2.6 trillion

yuan, an increase of 11.8% year-on-year (yoy), 1.2

percentage points (ppt) higher than the increase in total

retail sales of consumer goods over the same period.

Being adversely affected by the slowing economy, as well

as the government’s anti-corruption policy, many catering

enterprises have restructured their businesses, particularly

in the high-end market. They have adjusted their operating

models and diversified to provide mass catering. The

results of such transformations have been positive.

Recent trends to watch

Mass consumption to drive market momentum

Since the implementation of the government’s anti-

corruption and frugality campaigns, food consumption and

entertainment spending by government officials has

decreased significantly. According to a survey conducted

by the China Cuisine Association, business meals

accounted for only 6.5% of total consumption, while dining

among friends, family meals and dining couples

accounted for 61.2%, 16.2% and 4.5%, respectively for

total consumption.

Mass and casual dining have become mainstream in the

catering sector. Some well-known upscale restaurant

chains have adjusted their positioning to target middle-

income consumers and capture the mass dining segment.

For example, Shanghai Min’s Family Restaurant, a new

dining concept under high-end restaurant chain Xiao Nan

Guo, and specialising in Shanghainese cuisine, offers

customers well-presented, value-for-money food and light

meals. Another upscale restaurant chain, Beijing Jingya,

has transformed some of its high-end restaurants into

stylish, seafood hotpot outlets. The chain also provides

catering services at railway stations.

“Experience” dining and “customised” consumption to flourish

Competition in the catering industry has become

increasingly intense with increasing numbers of catering

34


sought to form strategic alliances, while others have

cooperated with Internet players to form ecosystems.

Food safety and quality issues remain a huge concern

Food safety remains an important concern in China,

especially after the outbreak of the Shanghai Husi Food

tainted meat scandal in 2014. This incident created

serious, long-term consequences for the catering industry

as a whole. At the same time, in view of the increasing

popularity of healthy, organic and eco-friendly food, many

catering companies have devised relevant business

strategies to meet consumers’ changing demand.

Strong government support for the catering sector

In June 2014, the Ministry of Commerce promulgated the

Guiding Opinions on Accelerating the Development of

Mass Catering. The Opinions set out the government’s

objective of increasing the mass catering market share

Technology innovation will continue to drive the development of O2O catering. Catering enterprises should gear up and explore new forms of business such as home delivery, self-pick-up services and group-buying catering services.

from 80% to 85% of total sales within five years. This has

gained tremendous support from society and provincial

governments. Since then, some provincial governments

have also rolled out supportive measures to facilitate

development of the sector. For instance, in July 2014, the

Hangzhou Municipal Government promulgated the

Guiding Opinions on Accelerating the Transformation and

Upgrading of Catering Industry to Promote Stable and

Sustainable Development, highlighting the importance of

effectively exploring diversified business models, carrying

out business transformation by making full use of

e-commerce, focusing on mass consumers and constantly

exploring new growth points of consumption. Moreover, the

State Council executive meeting held on 19 July, 2015

agreed to grant greater tax concessions for small- and

micro-enterprises. Starting on 1 October, 2015, the

maximum annual tax income of small- and micro-

enterprises subject to “tax reduction by half” has been

raised from 200,000 to 300,000 yuan. This should have the

effect of reducing the tax burden on small catering

enterprises.

What the experts sayOur experts are optimistic about the development prospects for China’s catering industry. Since the economy is moving

towards a “new normal”, some relatively deep structural changes in the catering industry are expected. Have said that, the

catering sector is expected to enjoy rapid development over the coming years, thanks to booming Internet technology and the

improved living standards of Chinese consumers: 11% yoy growth rate in 2016 is anticipated. Mass and casual dining is set to

see huge growth in the coming year.

Technology innovation will continue to drive the development of O2O catering. Catering enterprises should gear up and

explore new forms of business such as home delivery, self-pick-up services and group-buying catering services. They can also

consider partnerships with leading Internet companies to provide O2O catering services.

In the digital era, it is important for catering enterprises to make good use of advanced technologies to improve business

efficiencies, enhance food quality and improve customer satisfaction. The use of central kitchens, operational chain models

and crowd sourced deliveries are among the better options.

35


Industry and Commerce (SAIC) handled 77,800 complaints

concerning online purchasing, up 356.6% year-on-year

(yoy). Moreover, of the total 20,135 complaints regarding

remote shopping handled by the China Consumers’

Association, 92.3% of cases were related to online

purchasing. According to data from the Supreme People’s

Court of China, consumer complaints about online

shopping filed with the People’s Court of Chaoyang District

in Beijing increased more than threefold since the

introduction of the new Consumer Protection Law in March

2014.

Online marketplaces become a breeding ground for shoddy and counterfeit products Along with the surge of consumer complaints over online

purchasing, issues regarding shoddy and counterfeit

products sold on online marketplaces are also among the

chief concerns. In 2014, the General Administration of

Quality Supervision, Inspection and Quarantine of China

(AQSIQ) carried out random quality inspections on 14

types of consumer products traded online. Almost a third

of these products failed the quality tests. A random

inspection conducted by SAIC in 2014 also found that over

40% of products sold online were counterfeit.

Clamping down on undesirable advertising activities with tougher advertising law False, misleading and deceptive advertising claims have

been rampant in China. Over recent years, the government

has stepped up efforts to better regulate the market. For

instance, the National People’s Congress passed

amendments to the Advertising Law of the People’s

Republic of China, with effect from 1 September, 2015. The

new Advertising Law clarifies what constitutes a

misleading advertisement. Advertisements that provide

incorrect information in relation to the performance,

function, origin, uses, quality, size, composition, prices,

manufacture and expiration dates of products will be

considered misleading. The use of superlatives including

“best”, “highest”, “national level” and other terms to tout

the quality of products are banned on all offline and online

advertising. The new law also imposes tougher

punishments and penalties, signifying the government’s

determination to combat false advertising that deceives

and misleads consumers.

10. Better business regulations, better consumption environment

With a growing capacity for innovation and

creativity, China’s commercial sector has

witnessed extraordinary progress over recent

years: it has become a major growth driver for the country’s

economic growth and domestic consumption.

Nevertheless, business malpractices remain a major

problem for the market. In particular, food safety and

product quality issues, concerns over online purchasing

and misleading and deceptive advertising have drawn

extensive attention. This has seriously affected consumer

confidence and undermined public trust.

Product quality ranks top among all consumer complaints According to the China Consumers’ Association, a total of

292,561 consumer complaints were received in 1H15, of

which 44.6% of cases were related to product quality

issues, while 20.5% concerned after-sales services and

13.7% focused on contracts. The cases concerning

product and service quality issues accounted for over 70%

of complaints, suggesting the quality of products and

fulfillment of service pledges are the chief concerns within

the consumer goods market. Meanwhile, an increasing

number of consumer complaints were related to expiration

dates on food items. Some food producers were reportedly

changing “best before” dates on food items so that these

could be sold after the original expiration dates.

Product quality44.6%

False advertising2.0%

Others 13.8%Counterfeits 0.9%

Safety 1.0%

Pricing 3.5%

Contracts 13.7%

After-sales services 20.5%

Source: China Consumers’ Association; compiled by Fung Business Intelligence Centre

Chart 1: Types of complaints received by China

Consumers’ Association, 1H15

Complaints against online purchasing on the rise With the growing popularity of e-commerce, complaints

against online purchases have increased sharply in China

over recent years. In 2014, China’s State Administration for

36


What the experts sayGreater integrity and self-discipline among market participants are key to the orderly and healthy development of the

commercial sector. For business operators, the new Advertising Law and Consumer Protection Law send out a clear message

that rather than exploit consumer rights they should enhance their core competences to promote the quality of their products

and services, and foster corporate social responsibility. As a case in point, Alibaba’s online shopping platform Tmall

introduced insurance to guarantee the authenticity and quality of its products on 10 November, 2015, a day before the start of

the annual Singles’ Day online shopping festival. Such a move enables consumers who receive counterfeit products to enjoy

unconditional returns and refunds, with compensation set at four times the price paid.

A sound legal and well regulated business environment are also imperative for the growth of the commercial sector. In recent

years, the government has been working closely with local industry associations to strengthen supervision and regulation of

the consumer goods market, especially the online shopping sector. Our experts welcome the government’s action and hope

that it will further step up its effort in this area.

Our experts also believe that a regulatory mechanism needs to be launched to blacklist enterprises that have been involved in

corporate misconduct. Business operators that are blacklisted would receive appropriate punishment, or in more serious

cases even be prohibited from operating their businesses. At the same time, an incentive system could be introduced to

reward exemplary performances by business operators.

Greater integrity and self-discipline among market participants are key to the orderly and healthy development of the commercial sector.

Chart 2: Key provisions of the new Advertising Law

Key provisions Details

Prohibition of false/

misleading advertising

• Advertisements failed to provide correct information pertaining to the performance, function,

origin, uses, quality, size, composition, prices, manufacture and expiration dates of products will

be considered false or misleading

Ban on the use of

superlatives

• The use of superlatives such as “best” and “highest” as well as reference to the State such as

“state-level” or use of the national flag are prohibited on offline and online advertising

Joint liability for false/

misleading advertising

• Advertising spokespersons, advertisers, advertising agents and publishers may be jointly liable

for false or misleading advertisements

• Advertising agents or publishers risk civil liability if they fail to provide true contact information for

the advertiser(s)

• Advertising spokespersons must have used the product or service themselves before making

endorsements

Restrictions on

advertisement

communication

• Prior consent is required for electronic direct marketing or advertisements sent to home

addresses

• An unsubscribing facility as well as true and correct identities and contact details must be

indicated in electronic advertisements

Tougher controls on

advertisements for

specific products

Source: www.gov.cn; compiled by Fung Business Intelligence Centre

• Medical treatment, pharmaceutical and

medical devices

• Healthcare products

• Infant food

• Agricultural pesticides, veterinary medicines,

fodder and feed additives

• Seeds, planting and breeding

• Tobacco

• Alcoholic beverages

• Education and training

• Products or services with an expected

investment return

• Real estate

Fung Business Intelligence Centre, Member of the Fung Group

Authors

Teresa Lam and Lucia Leung (Fung Business Intelligence Centre)

Contributors

Christy Li and Tracy Chan (Fung Business Intelligence Centre)

Administrator

Yu Di (Secretariat of the Expert Committee of the China General Chamber of Commerce)

For more information

Secretariat of the Expert Committee of the China General Chamber of Commerce

25 Yuetan North Street, Beijing, China; Postcode: 100834

Phone: (010) 6606 2250 Fax: (010) 6606 2250

Email: [email protected] http://www.chinabt.net

Fung Business Intelligence Centre

10/F, LiFung Tower, 888 Cheung Sha Wan Road, Kowloon, Hong Kong

Phone: (852) 2300 2470 Fax: (852) 2635 1598

Email: [email protected] https://www.fbicgroup.com/

China Business Herald Research Institute

No. 1, Baoguosi, Xi Cheng District, Beijing; Postcode: 100053

Phone: (101) 6304 4753 Fax: (101) 8312 8832

Email: [email protected] http://www.zgswcn.com

@ Copyright 2016 Fung Business Intelligence Centre, Secretariat of the Expert Committee of the China General Chamber of

Commerce (ECCGCC) and the China Business Herald Research Institute. All rights reserved.

Though Fung Business Intelligence Centre, the Secretariat of the ECCGCC and the China Business Herald Research Institute

endeavor to ensure the information discussed in this material is accurate and updated, no legal liability can be attached as to

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