From Wal-Mart to Mum and Pap Shop
Predicament of traditional retailers and quandary of marketers With no doubt, Chinese traditional retailers (independent grocers, mom-and-pop shops, cooperatives and free markets) are in trouble as the consequence of the rapid growth of modern retailers and e-commerce. Firstly, big-box retailers (Wal-Mart, Carrefour, TESCO, etc. ) in China have set strong foothold in big cities and started to penetrate to medium-scale cities, taking control of areas with high population density.
Consumers are attracted by the lower prices they offer and broader choice of product categories. In the next place, chained convenience stores (Family-Mart, 7-11) are becoming increasingly ubiquitous in China and have occupied locations of high traffic, which weaken one of traditional retailers’ competitive advantages — spatial convenience. Last, online retail sales (T-mall, Yi-hao-dian, etc) have exploded in recent years in China, and it is easy to see why.
Online retailers can predictably provide convenient, informative, and personalized experiences for vastly different types of consumers. They not only offer lower price but unique home-shopping experience to the customers. On the other hand, marketers of China consumer goods companies are realizing that they are more difficulty in maintaining good relationships and earning easy profits from traditional retailers. First, major retailers are moving in, driving down the sales & margins of traditional retailers in the vicinity.
Falling volumes, in turn, raise the cost of selling to and serving them. Second, the appeal to the market size has attracted more and more competitors and brands, thus intensifying the competition for small stores’ limited shelf and cash. Gradually, marketers found themselves losing the bargaining power in persuading retailers to follow some promotional rules or hard to motivate them by incentive schemes that once proved potent before.
Third, the sales data provided by the small retailers are unreliable, making accurate forecast impossible and thus increasing logistics and promotion costs. Huge market size and advantages of traditional retailers Although Chinese traditional retailers are in hot water and becoming hard-to-serve, no marketers of consumer goods companies in China are going to withdraw from the channel as it is still crucial for any companies who set to expand and sustain their business in this country with total population as many as 1. bn. In US, marketers are used to modern retailing channels.
If a company gets shelf space in Safeway and Kroger and Wal-Mart, its products are available to virtually 100% of the population. However, in China the rate is about 62%. The remaining 38% share represents a market as huge as US$ 190bn per year, and is taken up by the seemingly negligible and rudimentary mom-and-pop stores. Even in different regions of China, the share of modern retailers is highly diverse.
In the most developed Chinese cities, like Shanghai, Beijing and Guangzhou, modern retailing represents more than 75% of sales. While in middle and west cities, the rates are all below 50% without exception. Therefore, how to leverage the traditional retailers in China to make your products available to as many consumers as possible is always a big challenge to the marketers of China consumer goods companies. As Bill Johnson, CEO of Heinz said in his interview with HBR, “In emerging markets, you must make sure you sell in channels that are relevant to the local population”.
We may wonder why the traditional retailers are so resilient that, even under pressures from both modern retailing and e-commerce, they are still able to survive and continue attracting customers to buy from them at higher price. As a matter of fact, traditional retailers have the competitive advantages that neither modern nor online retailers possess. First and foremost, most of them are located in same neighborhoods or blocks as their target customers, who don’t have cars or aren’t good at using computers.
Next, affinity has been fostered between the shop owners and their regular customers as they probably live in same neighborhood and has good friendship. Third, the small scale of the shops allows them to serve areas with low population densities or limited purchasing power, where neither modern retailers nor courier companies (online retailer must rely on local courier company to deliver the goods) are economically viable. The last but a bit disgraced reason is that, some of the small shops are illegally operated, which means they don’t need to pay taxes and thus reduce the operating cost.
In-depth study on the marketing strategy of traditional retailers It is just because the huge market size and their unique advantages, marketers of China consumer goods companies have never played down the importance of traditional retailers in boosting the sales in this country. For a long time, the companies have already built up cozy and profitable business relationships with the traditional retailers by providing them with favorable supports and unified benefits; they also established multi-level distribution channels to make sure even the most far-flung retailers are able to have the inventory on the shelf.
However, this model is now being more and more challenged as modern retailers are on the march in China. Even worse, to tap into the market of online trading, more and more consumer goods companies drew up the online marketing strategy by cooperating with e-commerce giants, which further deteriorated their relationship with traditional retailers. 1. One-size-fits-all and costly incentive scheme and promotion activities In China, marketers of consumer goods companies are used to geographically segment their market into several tiers, normally as what suggested by prestigious consulting firms.
In most cases, First-tier cities are most economically developed with biggest population, like Beijing, Shanghai, Guangzhou and/or Shenzheng; Second-tier are normally capitals or large cities in coastal provinces of east China; third-tier cities are capitals of inland provinces, while the rest are all grouped into fourth-tier which are less attractive for the companies. (The company may continue segmenting the fourth-tier cities into fifth-tier or even sixth-tier if necessary.
When formulating the channel strategy aimed at traditional retailers, usually marketers take the average disposal income, total population, average aging and purchasing preference into account and then work out several marketing plans and each of them applies to all cities in a specific city tier. For each traditional retails (private groceries, corner shops, mom-and-pop stores, etc) in the city, it just follows the same supportive, incentive & promotional program which is devised on the basis of city tier.
Afterwards, sales forces are sent to approach the shop owners, informing them of the incentives, providing them with promotional materials, guiding the shelf layout and product display tricks. Some companies also provide the small shops with long-lived assets for free, like refrigerators or coolers. They sign agreements with the shop owners to guarantee certain sales volumes or provide superior shelf space, and promise that ownership of these assets might be transferred to shops if the conditions can be met.
This model has been prevailed for a long time and proved successful, but it is really costly considering the massive quantity of traditional retailers in China. In recent years, modern retailers are opening more big-box stores in first-tier cities, marching from suburb to downtown. In the meantime, they have penetrated into second-tier or third-tier cities, directly colliding with once-profitable small stores.
To make things worse, with the advent of e-commerce, spatial convenience is no longer the advantage of traditional retailers. Shoppers are enjoying the experience of shopping-at-home by just clicking the mouse. As the consequence, revenue and profit from the traditional retailers are down sharply. Most of the investment in promotional material is down the drainage; the long-lived assets placed at site are impaired on company’s balance sheet and will continually erode its profit.