The Retail Market in China 2019

China has a vast retail market, which is set to overtake the US this year, according to a recent report by eMarketer, a New York-based market research company.

China’s economy is the second largest, only trumped by the US. A major portion of that vast economy is occupied by a retail market set to expand by nearly 9% by the end of this year. This comes after a report last year on government work, in which Chinese Premier Li Keqiang vowed to strengthen the crucial role of consumption in driving economic growth and widen China’s market.

In addition to government efforts, China has the world’s largest middle-income group, who hugely contribute to the retail market — and a number of them are tourists entering Hong Kong, and spending billions of dollars every year. Despite economic downturn, there has not been a negative impact on the spending habits of this particular group — rather a positive increase in consumption. This sees an economy which is no longer heavily reliant on fixed-asset investment and exports, but rather the retail sector.

China’s Q1 Growth so far in 2019:

Retail sales in China have increased by 8.7% year-on-year in March 2019, this is significantly faster than the 8.2% gain in the previous period, and higher than market expectations, which were set to be an 8.4% gain. Since September last year, this has been China’s greatest rise in retail.

Retail sales advanced further for: garments; personal care; home appliances; furniture; oil & oil products; telecoms and building materials. This shows that the spending nature of China’s population is widespread throughout many sub-markets, creating huge opportunity for prospective businesses throughout a range of retail industry sectors.

It is important to note that over 85% of retail sales came from urban areas, whilst only 14.7% came from rural areas of China, this demonstrates increases of 8.2% and 9.2% YOY, respectively.

Retail opportunities in Mainland China

There is a plenty of opportunity for retail companies in Mainland China. There are currently 4,600 shopping malls in China, this compares to only 416 in 2001. In terms of brick and mortar space, there is an abundance. Locations of malls range from the inner city to the suburbs, hence catering to a wide variety of customers. Although the prevalence of luxury brand stores is minimal in many areas, the opportunities for affordable luxury brands are particularly attractive. Despite ladies’ spending growing at a faster pace than men’s, this does not close the market, but rather opens it up more. Trends on women’s spending habits show much more revenue opportunity for companies wanting to sell to the Chinese (or any other market).

As China urbanises and the middle-income group increases exponentially, consumption growth continues to be high. The majority of the Chinese upper middle-class have a strong internet presence, and an increase in online retail shopping is evident. This means that companies uninterested in the overheads paired with a physical retail space have strong potential in Chinese ecommerce market.

The retail market in Hong Kong

Hong Kong has a very sophisticated retail market. As aforementioned, it is the main destination of tourists from Mainland China. On the global stage, Hong Kong is on the forefront of the international retail market and the territory boasts the highest sales performances per square metre in the world. Similar to Mainland China, Hong Kong’s retail and consumer market has exciting projected growth. In comparison to the Mainland, Hong Kong has an extremely high density of luxury brand stores, such as Gucci, Prada, Louis Vuitton and Chanel. Spending is constantly high, brand-dedication exists, and the average age of the luxury goods consumer is younger than the majority of other international markets.

Setting up in order to enter China’s retail market

Hong Kong: the major barrier to entry into the Hong Kong market is rent. To rent retail space in Hong Kong, a company should expect to pay the highest rates in the world — with average rates lingering around $40,000 per square metre per year. Although overheads are high, Hong Kong is a very important aspect to entering the Chinese, and even the wider Asian market. It provides huge prospects for high-end brands catering towards those with extensive disposable income; however, for brands outside of the luxury market, Hong Kong might not be absolutely essential to break into China’s retail market.

Setting up the business

Naturally, with a rapidly expanding and developing economy, many would find it enticing to expand an existing brand or start a new business in China. Breaking into the retail industry can be risky; however, with high demand for prestigious Western brands, the reward for opening business in China can be extremely high. Potential businesses must be informed of the business environment in China before committing.

One of the most common legal types for retail in China is called a ‘Joint Venture’. This is where one would incorporate a Chinese company with a local Chinese partner (person or firm) — hence it is pertinent to have a business partner whom you are comfortable with and can trust. It is essential for a brand to protect its intellectual property, assure that the company has registered with the State Intellectual Property Office; otherwise, your identity and name could be legally copied.

There are ways to have business in China without incorporating in the country. One obvious way would be by making China a distribution channel. Again, it is imperative to find a trusting partner. Additionally, compared to other countries, in order to profitably distribute in China, it is important for the company to work with several different distributors. This is due to the sheer size of the country (fourth largest in the world), and the regional differences within such a large market.

Another method would be through Foreign Direct Investment. Of course, the company might not benefit from all the advantages of incorporating in China, but it still means it can reap the rewards of a trading relationship with the Chinese economy.

Franchising is an option in China; however, the restriction is that only enterprises can take part in business as franchisors. The enterprise ought to adhere to a “2+1” rule, meaning that it needs to run at least two outlets which are direct-owned for more than one year in any part of the world — a local entity is no longer essential.

Additionally, another option would be a 托管, ‘tuoguan’. This is a form of trusteeship between the companies and an operator who is an expert in the market. This means the trustee accepts clients’ commissions, in accordance with a predetermined contract. This cutting-edge method might be something to further research if you are looking to break into the Chinese retail market.

Finally, if a company would like to tap into the massively expanding online retail (E-Tail) market, it is imperative to use one of the popular ecommerce platforms which consumers are familiar with and use on a regular basis, such as Tmall, Taobao, JD, and WeChat (a popular social media platform).

The retail market in China is massive and is rapidly expanding on a daily basis. This poses a huge opportunity for brands wishing to expand into the Asian market, or to launch in China, opening doors into the world’s second biggest economy. Although very different to Western markets, it’s no question that China is the path to the biggest market in 2019.