EY Greater China

Consumer Products
and Retail Sector
Journal
Dec 2017
Dear Friends,

Greetings!

As many of us have already started thinking of yet another “New Year’s resolution”, it’s intriguing to notice that
so many have evolved in the world of Consumer and Retail. For one, consumption upgrade is clearly leading the
way across the year – and it really is happening. The market has just witnessed another record-setting 11-11,
and if we take a closer look at the category winners, it is obvious that many premium merchandises are speeding
up their pace and are already taking the lead as category killers. Another facet is relevant to a hypothetical yet
eminent “Big Bang in Consumerism” in the coming decade – who will emerge victorious among the incumbent big
names? Or may even replace them?

We have been able to share with you two very interesting perspectives in this current issue.

Firstly, Shutin Wah, Senior Manager, Corporate Finance Strategy, Ernst & Young (China) Advisory Limited has
presented a diagnostic of the Chinese restaurant market via his perspective of “Can restaurant investors and
operators still find growth in China?” The market reached RMB 4 trillion in 2016, yet is still growing in the single
digits, and the biggest issues that operators are facing are still scalability and profitability. Will there be room for
further growth, and what can operators do differently than they are currently? Drawing from his extensive
working experience in advising on the restaurant sector in China, Shutin has smoothly depicted a winning
framework: Location, Delivery, Customer Engagement and Innovation. Among the key elements of the
framework are also valuable insights on “where to grow” and a set of key success factors, just to name a few.
Most importantly, despite the not-very-favorable news in the sector starting a few years ago, “There are still
abundant opportunities for local and global operators to find growth, especially when compared to other major
markets globally”.

Secondly, in his article, “Smart Growth, Profitable Growth: Defining Issues for Today”, Ryan Zhou, Advisory
Services Director, Ernst & Young (China) Advisory Ltd has rightly pointed out that many are realizing the
difficulties in sustaining a reasonably favorable margin, as the market moves from “transactional” to
“transformational”, and fortunately there are multiple new alternatives to deal with these issues. Ryan has
articulated an innovative use of the combined approach – Managing Customer Profitability – that is built on
strategy and leverages an inter-related mechanism among process, system, governance and people to make
improved operational performance possible.

Finally, as the holiday season is approaching, I’d like to wish our dear readers a Merry Christmas and a Happy
New Year!

Enjoy reading – and looking forward to your comments.

Eric Chia Arnold Sun

Partner Partner
Greater China Consumer Products Sector Greater China Consumer Products Sector
Co-Leader Co-Leader

EY Greater China Consumer Products and Retail Sector Journal | 2

Can restaurant investors
and operators still find
growth in China?
Shutin Wah
Senior Manager, Corporate Finance Strategy
Ernst & Young (China) Advisory Limited
shutin.wah@cn.ey.com
 Synopsys: The dining and restaurant sector
is a huge market in China that continues to
grow, but operations have become more
difficult and compression of margins has
been a huge challenge for investors who lack
operational experience. Deep understanding
of target consumers and geographical
market nuances is essential for developing a
successful growth strategy. Four key success
factors include Location, Delivery, Customer
engagement and Innovation. Implementing a
successful strategy could drive growth and
operating margins that are at least 50%
higher than the market average, even for
established operators. This potential for
growth and improvement is critical for the
success or failure of deals in the industry.

EY Greater China Consumer Products and Retail Sector Journal | 4

China is the largest restaurant market in the world. 1With
restaurant spending at RMB 4 trillion in 2016 and annual
growth in the high single digits, it remains a focus of Restaurant outlets per capita in China, 2010-2016
investors both domestic and abroad. However, it is
2016
becoming ever more difficult to seek profitable growth as 6.4
the market continues along the path towards maturity. The outlets
per 1000
rising density of competition, stagnation of retail footfall and people

inflation of operating costs have all contributed towards the

compression of margins.
2010
4.5 40%
outlets
per 1000
people

Total Restaurant Spending, 2016

The density and accessibility of restaurants has increased
China (mainland)
Germany ~$612B Source: Euromonitor, EY Research and Analysis
~$47B (~¥4Tn)
2% 7%
CAGR '16-'21
UK
~$82B
2% Japan Restaurant Cost of Sales in China, 2010-2015
France ~$203B
USA
~$54B ~$14B 1%
~$542B
3% 1% ~$6B 4%
2%
Hong Kong
Singapore

China is the world’s largest market in restaurant spending

with the highest expected growth
Source: Euromonitor

Restaurant Market Size and Growth in China, 2010-2016

Bar: Line:
Market size YoY growth
Sector rebound Restaurant Gross Profit Margin in China, 2010-2015
from anti-graft
measures in 2013

Source: National Bureau of Statistics, EY-Parthenon Analysis

The market is gradually moving towards maturity

Source: Euromonitor Margins have been under pressure as operating costs

continue to rise

Source: National Bureau of Statistics, EY Analysis

1 Source: Euromonitor

EY Greater China Consumer Products and Retail Sector Journal | 5

Investors are starting to appreciate the difficulty of running
successful restaurant businesses and have become more
cautious about investing in this sector. The number of deals
has shrunk from around 9 deals per year in 2012 and 2013
to around 5 per year in 2015 and 2016. There has also
been an observed shift from private equity investment
towards acquisitions from strategic buyers, who have the
advantage of operational experience for driving value
creation. This also includes the trend of franchise buy-backs
(particularly among global brands of cafe and fast food
chains) in an attempt to improve operations and brand
control in China.
Trends in restaurant sector deals, China
(2012/2013 vs. 2015/2016)
By investor type By cuisine concept
Restaurant operators have Investors have become
become more active in more interested in non-
making investments, while Chinese casual dining
PEs have been shying away concepts
Source: Merger market, EY Research and Analysis
Through our work advising restaurant operators in China and
around the world, we have observed four key drivers of
success that can make the difference for profitable growth:
location, delivery, customer engagement and innovation.
EY Greater China Consumer Products and Retail Sector Journal |
1. Location
► Many restaurants have focused on opening new stores
to scale-up and drive top-line growth. However, this is
often at the expense of margins, especially when there
is a distraction from simultaneously driving same-store
sales growth
► With the rapid urbanization and expansion of
commercial real estate across all city tiers, the dilution
of customer traffic supports the rationale for a larger
number of smaller-sized outlets. Operators may run the
risk of building overly large stores if they fail to adjust
their expansion plans to include a rigorous analysis of
site traffic potential
► There are also considerable differences in the scale and
nature of market opportunities across geographies.
Operators need to be aware of macro-and behavioral
trends that are distinctive across geographic segments.
For example, a comparison between South, North and
East China:
► South China has a faster-growing and younger
population
► There is also a higher density of restaurants in the
South, which implies more competition, and is more
conducive for food delivery
► There are differences in dining preferences (flavor,
taste, cuisine type and price range). The South has
had greater preference for non-western and fine
dining, while the East has favored western casual
dining. The North shows generally slower growth,
with niche concepts and boutique restaurants faring
well.
► In addition to city selection, the optimization of store
network by location also needs to be reviewed from a
new lens. Some traditional hubs such as hypermarkets
and department stores are no longer generating traffic
like before, while theme-based locations (such as malls
that offer a full range of entertainment options, or
those with child and family themes) are gaining
popularity as consumers seek more purpose to their day
out. The prevalence of online shopping and food
delivery has already altered the needs, expectations and
behaviors for how consumers spend their time beyond
basic shopping and dining
6
 2. Delivery

Restaurant Market Segmentation in Tier 1 cities, 2016
► The rise of Third-Party Delivery Platforms (3PPs) since
2014 has disrupted consumers’ dining habits, as they
now have access to a much wider range of cuisines from
the comfort of their home or workplace. 3PPs have also
been welcomed by many restaurants as they help bring
incremental orders and drive up revenue without the
need for significant capital investment.

► Furthermore, 3PPs have evolved to become a major

marketing channel for restaurants to build localized
1.6%
2.3% brand awareness.
3.4%
► While this has led to quick growth for restaurants and has
2.7%
been a key driver of revenue growth in the past 3 years,
the profitability of such delivery orders via 3PPs has
deteriorated as the platforms have started to adjust their
pricing models. Gross margins on delivery orders could
CAGR 15-16 be over 10% points lower than that for dine-in. It has
Segment Growth become more important than ever for operators to
SH BJ GZ SZ
further analyze the overall economics and strategic value
Others 9% 4% 8% 8% of engaging 3PPs.
Formal Dining 6% 1% 8% 9% ► The economic advantage of engaging a 3PP generally
Casual Non diminishes with the number of orders, and many delivery-
9% 4% 9% 9%
Western focused restaurants have chosen to build an in-house
Casual Western 11% 5% 11% 12% delivery team, especially in that it also enables them to
have better control of delivery time and quality. At an
Fast Food Non
Western
7% 3% 9% 9% average cost of between RMB 5 and RMB 10 charged by
3PPs per order, restaurant outlets that deliver over 30 to
Fast Food Western 4% 2% 9% 9%
50 orders per day should investigate the economics of
Economic Dining 5% 2% 7% 7% building an in-house team.

Growth in the restaurant markets of Guangzhou and Shenzhen

was generally faster; western-style formal dining and casual dining are
more established
in Shanghai and Beijing China Delivery Food Market, 2010-2015

Definitions: Economic Dining typically <Rmb20 /head; Fast Food Rmb 21-40
/head; Casual Dining Rmb41-100/head; Formal Dining >Rmb100 /head;
Others include cafes, kiosks and dessert
Source: Euromonitor, Dianping.com, EY Interviews with Restaurant
Operators, and Analysis

Food delivery has outpaced restaurant growth at ~20% CAGR,

largely driven by 3PPs

Source: Wind, Euromonitor, EY Analysis

EY Greater China Consumer Products and Retail Sector Journal | 7

3. Customer engagement A review and comparison of successful and unsuccessful
restaurant operators shows that successful strategies and
► Understanding consumers and capturing market trends is
implementation of the above factors could drive double digit
critical to staying relevant. Key trends observed in China
growth and superior operating margins.
include:

► A generation of consumers that are urban, pressed

for time and digitally savvy Key success factors of selected restaurant groups
Chinese dining Chinese dining
Hotpot chain
► The pursuit of healthy food and lifestyles group group
Revenue RMB 19 Billion RMB 14 Billion RMB 9 Billion
20
► Valuing authentic flavors, origins and brand stories 13 Operating
9.8% 0.4% 5.5%
margin
► Family themes fare well as children are the center of Revenue
RMB 28 Billion RMB 20 Billion RMB 12 Billion
(& 13-16
( 13% CAGR) ( 13% CAGR) ( 11% CAGR)
Chinese families; and CAGR)
20
16 Operating
► Consumer appreciation of personalized services and margin 17.2% 3.0% 12.2%
(& 13-16 ( 7.4% increment) ( 2.6% increment) ( 6.7% increment)
willingness to pay for experiences increment)
Location
Delivery
Customer
Major consumer trends and themes
engagement
Young: Innovation
Who Urbanized Post-1990 Families 1. Refocused on the
Generation 1. Continued 1. Embarked on
casual dining
aggressive store turn-around
segment to
expansion while strategy since
diversify
maintaining a fast 2013, including
Healthy & Authentic customer base
/ casual rationalization of
Convenience and brought in
What they natural & original positioning stores
new concepts
seek 2. Built in-house 2. Created new from overseas
Personalized Value for Highlights delivery team in concepts and
& Experiential money 2. Cautiously
2015; redesigned menu for casual
expanded store
delivery menu dining and with
network for only
and proposition family friendly
concepts with
Anytime, (leveraging store themes
proven success
Social Mobile anywhere, network)
How 3. Introduced
anyhow 3. Collaborated with
3. Refined store productized items
they 3PPs to drive
decor in 2016 for home-cooking
interact More delivery revenue
Trust Participation
informed
Successful restaurant operators have managed to grow with double
digits and uplift operating margins
Changes to consumer profiles and expectations have disrupted how
brands need to serve them Source: China Hotel Association, EY Research and Analysis

Conclusion: The restaurant sector in China has gone through

3. Innovation
► Constant innovation is key to staying relevant to an
evolving customer base in a competitive market.
Innovation comes in many forms, including around
marketing (online and social media), menu design, store
dé cor, ordering systems, pricing and promotions, among
many others.
► Our research and econometric analysis of restaurant
operators around the world have indicated there exists a
persistent 2 to 4% penalty for mature concepts that lack
innovation, when compared against the growth of
category innovators.
► In the current digital era, building buzz on the internet
can be highly effective for brands. Some restaurants in
China have reinvented their identity through developing
menu items that can be marketed as “explosive sales
products”, made popular through social media marketing
and promotion by web celebrities.
a period of volatility and is gradually moving towards
maturity. Nevertheless, there are still abundant
opportunities for local and global operators to find growth,
especially when compared to other major markets globally.
Given the massive scale of the market, the restaurant sector
could yield a stable stream of revenue and profitability for
investors keen to ride the wave of rising consumer affluence
in China. However, it has become increasingly difficult to
generate growth and profitability. Brands need to be more
thoughtful than ever in developing their strategies and
investment theses that are relevant to the latest trends.
Deep understanding of target consumers and the local
market environment will be critical for developing a
successful growth strategy.
For more details on how we can help, please contact the EY
Corporate Finance Strategy team

EY Greater China Consumer Products and Retail Sector Journal | 8

Smart growth, profitable
growth: defining issues for
today
Ryan Zhou
Director, Advisory Services
Ernst & Young (China) Advisory Limited
ryan.lq.zhou@cn.ey.com
 Overview
The consumer product and retail market is
experiencing a transformational era. A
recent EY survey of consumer products
executives globally found:
1) 75% believe it is now much more difficult
to sustain profitable growth
2) 75% believe traditional methods of value
creation are increasingly being disrupted;
and
3) 68% believe fueling growth requires
significant changes to business
operations and differentiated strategies
and capabilities

EY Greater China Consumer Products and Retail Sector Journal | 10

Challenging the ‘try quick, fail quick’ philosophy In EY’s experience, companies that have aggressively
addressed these issues and continuously improved, scaled
In China, consumers are changing faster and gaining in
and delivered sustained organizational capabilities and
power. The retail market is becoming more complicated and
cultures of revenue growth management have delivered
decentralized, emerging route-to-market options are
significant value – increases in net sales value of 2% to 6%,
disrupting the traditional modes of operation, and cost to
increases in gross margin by 25bps to 500bps, deceases in
serve is harder to control than in other markets. Companies
trade investment by 5% to 10% , decreases in time or HC
become more and more conservative, applying the ‘try quick,
cost by 10% to 30%, decreases in expenses by 1% to 10%,
fail quick’ approach. The challenge for consumer product
and decreases in commercial IT cost by 5% to 10%.
companies and their customers (retailers) lies in new
spending pillars, new route-to-market technics and Global, medium-capability Regional, low-capability
rebuilding new systematic organization capability. The companies: medium/high levels companies: high levels of
of inefficient promotional inefficient promotional
transactional model is no longer driving growth; a race to the spending spending
Global, medium-/low-capability
bottom on price is eroding margins. Tailoring products and companies: medium/high levels of
Best-in-class inefficient promotional spending
approaches to local and location based tastes is complex,
but increasingly necessary.

The best companies find and maintain the balance between

cost reduction and the strategies and capabilities that fuel
<1% 1% 2% 3% 4% 5% 6% >6%
growth. In our view, there are two aspects can bring both
immediate changes and long-term benefits:

1) Systematic and Strategic Revenue Growth Management;

and We define revenue growth management as the optimization
of all trade terms, pricing and promotional activities that
2) Effective Route-To-Market and Supply Chain Rebuilding
account for the difference between gross and net revenue.
1. Systematic revenue growth management on the
agenda for CEOs Revenue Growth Management…
… translates brand and route-to-consumer strategies into executable customer plans:
In the new growth era of the Consumer Product and Retail the right Product… in the right Place… at the right Price… and Promotion…
market in China, the ‘default’ strong double digit growth for
multinationals has gone; companies are striving for growth Category & Route-to-
Brand Strategy Consumer Strategy
and margin in recent years, especially for giant corporations.
EY analysis shows that profitability (average EBIT margin)
COORDINATE

Product Place Price Promotion

OPTIMISE

shrank by a third from 11.7% to 8.1% in the past 10 years for NPD & Ranging, Consumer Trade Promotion
Pack Layout & Pricing Terms & Calendars
major APAC regional and local players. The reasons for the Price Shopper Strategy Customer &
Architecture Marketing Pricing ROI
decline mainly include: 1) a slowdown in the macro retail
economy; 2) increased competition in a more crowded
market; and 3) reconsolidation and modernization of trades
Category Customer Plans (JBP)
necessitating frequent changes of market operation models.
INTEGRATE
“Inability to define the right promotion strategy due to poor
…providing predictable, profitable and sustainable Net Revenue growth.
analytics and ROI, inability to scrutinize the promotion plans
impacting trade spending optimization efforts…”

“Overspending of the trade spending budget is common and

active controls need to be in place, the excess spending is
often charged into the next financial year… Permanent price
reduction (PPR) is a part of G2N; it is always not managed
properly due to lack of internal controls and cross-functional
pre- and post-evaluation.”

EY Greater China Consumer Products and Retail Sector Journal | 11

We believe the following five aspects are interconnected,
and that revenue management is not an IT system, but a
core competency and new winning factor in today’s China
Consumer Product and Retail industry. It starts with
strategy and ends with people and culture rebuilding.
5) People & Culture: Define clear roles and responsibilities
1) Strategy: Establish what consumers, categories and
brands will drive growth – tie that growth to the markets,
channels and primary accounts that will deliver the
growth
4) Governance: Implement national, regional and local
governance structures and cadences – deploy standard
metrics and performance dashboards that identify
performance drivers and outliers
(RACI) at global, regional and local levels; develop an
organizational structure that enables effective RM and
customer investment; align incentives with category,
channel and account targets

2) Process: Deploy common cross-category/cross-market Core Components of Managing Customer Profitability

process steps for proactive revenue management –
establish the Nestlé Purina RM way of working and
integrate it into core commercial processes

3) Systems and Tools: Standardize and cleanse G2N data for

convenient use; deploy user-friendly advanced analytic
planning tools for modern trade and visibility reporting for
traditional trade

MC MC
Strategy
Consistent
Targets & Tone MC Optimized Price MC
LC Pack
from the Top
Aligned Architecture
Strategy Across Optimized
Conditional Brands, MC
LC Trade Terms LC Promotion
Categories, Architecture
Process Framework Channels and
Closed-Loop
Promotion Developing and Accounts
Integrated IBP,
Planning and HC Deploying PPA HC JBP and S&OP
Execution
Planning, Holistic
Executing and MC Investment in HC
MC Monitoring JBP
People & Culture Trade Terms Development
Defined Career Aligned
Clear Roles, Compensatio
Responsibilitie LC Paths and MC
Relevant n and
s and Incentives
Accountability External Data Training
Standard
Integration & Planning/
HC Performance MC MC
JBP Tools
Systems/tools Data Monitoring
AI Tools for
Harmonization Predictive/
and P&L Visibility Standard Promo
MC ROI Tools MC Prescriptive
By Product, Analytics
Channel and Infused
Customer Integrated
Global, Regional Channel & Planning
and Local LC Customer HC
Governance Governance Development Matrixed Brand,
Structure Structure
Cascading Sales, CoE and
Performance Customer Supply
Targets and Chain Performance
Dashboards Mgmt. (by major
category)

LC Low complexity

MC Medium complexity

HC High complexity

EY Greater China Consumer Products and Retail Sector Journal | 12

Effective trade terms frameworks are built to drive profitable
growth on a proven foundation across channels and
investment buckets for both trading basics and growth
building. Companies need to develop a set of principles to
inform the design of their trade investment framework,
based on commercial priorities, including that:
1) Customers are aware of and understand the incentives
offered
2) There is one simple, logical and defensible framework
3) Investment is made in demand and efficiency drivers
4) The structures deliver realistic sales freedom within a
governance framework; and
5) The framework is beneficial for customers and covers all
investments made in customer processes

EY Global Trade Terms Framework (CPG)

One list price Growth schemes

Moving to a consistent and Incentivizing our customers
legally defensible list price to capture market share and
for accurate comparison of achieve
Rewarding Rewarding
investment levels
our most customers
efficient through
customers Basic trading Sales drivers conditional,
for Rewarding individual Rewarding customers who
incentive
operating in customers and channels for effectively activate our
based
the way we basic behaviors and buying brands at the POS
schemes that
want them patterns build our
to operate business

Efficiency JBP and promotions

Rewarding efficient Rewarding customers who
customers for optimizing agree to a joint growth plan
processes and fulfillment and deliver on high ROI
costs brand building

EY Greater China Consumer Products and Retail Sector Journal | 13

We defined the key success factors in Revenue Management
as:
1) Developing holistic Revenue Growth Management
frameworks and governance
(a) Develop a holistic strategic revenue management
Strategy for a period of ~3 years
(b) Central leadership and KPIs are critical for successful
execution, ensuring alignment across all key functions
and preventing their operation in siloes
2) Applying a tailored approach
(a) Standardize strategy across geographies, channels and
categories, yet respect retailer operation models for
centralization and decentralization of managed spending
buckets
(b) Select top performing key accounts and apply a tailored
approach – customize promotions, assortments and
packaging to suit their individual needs
3) Collaborating with key accounts
(a) Select key partners and jointly develop and execute a
win-win SRM plan; monitor trade promotion processes
and create space strategies
(b) Create Joint Business Planning processes and teams
4) Establishing performance management systems
EVENT
MONTHLY
QUARTERLY
ANNUAL
National/ MARKET/ CHANNEL/ CHANNEL/ CUSTOMER/ CUSTOMER/ STORE/
Regional CATEGORY CATEGORY BRAND BRAND
EY Greater China Consumer Products and Retail Sector Journal | 14
(a) Analyze the impact of promotions on monthly basis (ROI)
and invest in trade promotion optimization (TPO) and
trade promotion management (TPM) tools to allow for
better trade investment decisions
(b) Evaluate distributors and differentiate pricing guidelines
and discount policies based on their performance,
efficiency and adherence to planned store execution.
Systematically improve distributor capability to reach
more consumers more effectively
5) Using advanced analytics
(a) Use advanced analytics and establish systems to gather
more granular data from a variety of sources when
making trade or promotion decisions – by customer, by
channel and by product
(b) Use data and systems to improve in-store execution,
trade performance optimization and innovation
(c) Sufficient data granularity is required for multiple
insights to deliver a series of marginal gains, which will
aggregate to real value
(d) Our experience tells us that companies with strong
commercial analytics capabilities generate 22% higher
operating income than their lowest peers
(e) This new data framework is illustrated below
Operating
Income
Pocket Margin
Gross margin
NSV
GSV
SKU SKU
2. Right Product, Right Location, Right Route-To-
Market and Supply Chain Model Rebuilding
EY research highlights C-suite priorities for improvement
that remain constant despite the changing retail landscape.
1) Optimize in-store retail execution based on the demands
of different shoppers – 100%
2) Improve product portfolio, assortment and space
management performance – 77%
3) Improve multi-channel interaction and conversion – 76
4) Leverage improved shopper analytics – 67%
In China, C-suite executives also highlight the importance of
‘Back to Fundamentals’ when using the New Digital Way.
There is no argument today but that online and offline
functions work best when integrated. Leveraging this
integration has the potential to provide significant
advantages over purely online or purely offline players.
However, companies need to re-engineer their organizations
to capture this omni-channel opportunity, which can become
the next generation growth accelerator and key
differentiator between winners and losers. Importantly, this
is not a problem for sales departments only, as companies
face challenges across a range of functions and departments.
Supply chain members need to ask themselves ‘How can we
segment the supply chain to meet the different product and
channel demands?’ ‘How can we have a single view of the
consumer across all channels, including returns?’ CMOs need
to ask their marketing teams, ‘How can we ensure our
products and promotions align with the needs of the omni-
channel consumer?’ CFOs need to ask their entire
organization ‘How can we get visibility of cost to serve by
channel and ROI evaluation for trade promotions among
channels?’ CEOs and HR need to ask ‘How do we evolve our
organization to prioritize omni-channel?’

Embed
B&M beverage omni-channel
Embrace
will generate supply chain strategy
omni-channel
75% of revenue in the corporate
as the critical
in five years, down strategy
driver of
from 95% today
growth

Prioritize agility
81% Omni-channel and responsiveness
in the design of omni- Re-engineer
believe that the growth risks diluting the supply chain
channel
supply margins in the sector service models to deliver healthy omni-
chain is not fit Only 38% say omni- channel growth
for purpose for channel initiatives
omni-channel are margin
accretive

Collaborate
with value chain
partners to enable
seamless data visibility
and actionable
insight

EY Greater China Consumer Products and Retail Sector Journal | 15

There are two key foundations needed to embrace an
omni-channel strategy – location based market and
consumer segmentation, and digital route to market
rebuilding. Due to the availability of big data in China, we
are more capable than ever of having a clear picture of who
our consumers are, what their habits are, what product
assortment is most suitable for them and what promotion
methods attract them. As a result, product portfolio,
assortment and space management need to be connected
with consumers or shoppers according to specific
geographical locations, rather than the traditional way of
channel by market. The key challenge today is how to
rebuild organizations to make different functions work
seamlessly and collaboratively.

School Zone High-end neighborhood

People Demographic Residence demographic

► Age of residence ► Number of outlets

► Habits of residence ► Express delivery

► Number of households
► Females 18-25
with kids

High-end Commercial Building Mass-Medium Shopping Mall

People Demographic Point of interest of surrounding
infrastructure
► Active traffic time
► Number of outlets
► Number of outlets
► Number of bus stations
► Number of outlets is
repeated ► Number of outdoor
billboards

EY Greater China Consumer Products and Retail Sector Journal | 16

Secondly, the progress of urbanization in China is
phenomenal. The target is to achieve a 60% urbanization
rate nationally by 2020; at the end of 2016 the percentage
was 57.4%. From global experience, the progress of
urbanization will remain fast until it reaches 65%. Every 1%
increase in urbanization means an increase of 20 million
city-dwellers. This suggests that for the next 5-10 years
China will continue this extraordinary trend in population
movement. 1 At the same time, China already has more than
240 cities with a population over 500,000, 1/4 of the total
number of world cities with populations over 500,000.
When the urbanization rate reaches 65%, the number of
large cities will double as well. As a result, the retail
landscape for cities and rural areas will continuously and
rapidly evolve. The cost to serve will remain high.
Meanwhile, market participants are driving innovation to
reach 4-5 million traditional, small but evolving outlets, in
particular in lower-tier cities and fast urbanizing towns and
rural areas. Digital Route-to-market, enabled by e-
commerce suppliers, has become extremely active in the
past 6 to 12 months. More than 4 key national e-B2B
players, more than 5 regional e-B2B players, plus multiple
regional focused e-suppliers in each province are rushing
into the market, mainly providing order management and
logistics management, and some are providing product and
assortment management for those 4 million small outlets.

Number of key e-B2B platforms

Traditional supply chain and RTM is no
longer fit for purpose. In an increasingly
digital world, e-B2B has emerged as National e-B2B Players Key Local e-B2B Players
critical in the CP route-to-market value

4+
chain. How do we best reach more than
4 million stores in over 2,000 cities in
China?

Digital RTM
Cross-province
Strategy Regional e-B2B Players

5+
A key e-tailer
is opening 234
warehouses across
China to cover 2,646
cites to allow 2 day
delivery for e-B2B

Source: EY summary

1 Source: China Statistical Yearbook - 2016

EY Greater China Consumer Products and Retail Sector Journal | 17

This innovation offers the opportunity for manufacturers on
the other side of the ecosystem a chance to reduce the cost-
to-serve, improve efficiency and rapidly expand coverage to
capture the opportunity created by this trend towards
urbanization. However, this ecosystem has not been well
established yet from our point of view. Taken together with
the fragmented market, we can see the potential for short-
term pain as well as opportunity.
In our view, the ecosystem for digital route-to-market needs
to be re-engineered and integrated with a balanced design
that suits existing operating models. There is no instant
solution. This should cover outlet master data management,
supply chain integration and redesign, outlet throughput
management, joint business development, cash flow
management, pricing and assortment management, order
and customer management, supported by the leadership and
culture change mechanism.

1 Transformation program management 2 Master outlet information 3 Service delivery

► Category and market insights to
► Independent major program management update
► Big data enables rolling
support new retail channels or outlet
expertise owners in sourcing better products,
► Benefits identification and management
updates and refreshment
to capture end customer more efficient operations models and
capability for synergy from current RTM deeper industry knowledge
model to new digital RTM retail and emerging
► Coaching to upgrade customers’
channel data to improve
► Experienced commercial management of
multiple business organization capability
risks and opportunities assessment ► Cash management to maximize trade
processes
► Board level stakeholder management value
► Better real time channel
knowledge ► Trade investment management
segmentation improves cost-to-serve and G2N

Leadership and Program Management

Outlet Master Information Management

Cash Trade
Category & Training &
Shared supply Throughput management & investment &
market organization
chain management customer price
insights capability
incentives management

Digital Order and Customer Management

4 Supply chain rebuilt
► Moving to more effective
advanced cost-to-serve analytics
► Accurate channel segmentation
based on cost-to-serve analytics
► Rigorous alignment of supply
chain service requirements by
segment based on real
commercial value
5 Throughput management
► Suppliers offer tools and KPI guidelines
for logistics providers
► Digital KPI tracking methods
► Independent third party measurement
and ongoing quality improvement
6 Digital order and customer management
► UX management
► Shared business service for order
management and customer centers to
improve the business customer
experience
► Ongoing quality measurement and
improvement mechanism

Source: EY Digital Route-to-market approach

In conclusion, the China Consumer Product and Retail market is entering a transformational era. Balancing costs to find a
profitable operation model and capturing opportunities effectively by balancing existing and innovative routes-to-market will
be the winning recipe for major players in the market.

EY Greater China Consumer Products and Retail Sector Journal | 18

Contact us EY | Assurance | Tax | Transactions | Advisory

About EY
Eric Chia
EY is a global leader in assurance, tax, transaction and advisory
Partner services. The insights and quality services we deliver help build
Advisory Services trust and confidence in the capital markets and in economies the
world over. We develop outstanding leaders who team to deliver
Ernst & Young (China) Advisory Ltd on our promises to all of our stakeholders. In so doing, we play a
+ 86 21 2228 3388 critical role in building a better working world for our people, for
our clients and for our communities.
eric.chia@cn.ey.com
EY refers to the global organization, and may refer to one or
Alfred Yin more, of the member firms of Ernst & Young Global Limited,
each of which is a separate legal entity. Ernst & Young Global
Partner Limited, a UK company limited by guarantee, does not provide
Assurance Services services to clients. For more information about our organization,
please visit ey.com.
Ernst & Young Hua Ming LLP
+ 86 21 2228 2152 © 2017 Ernst & Young (China) Advisory Limited
All Rights Reserved.
alfred.yin@cn.ey.com
APAC no. 03005854
ED None.
Arnold Sun
Partner This material has been prepared for general informational purposes only
and is not intended to be relied upon as accounting, tax or other
Transaction Services professional advice. Please refer to your advisors for specific advice.
Ernst & Young (China) Advisory Ltd
+ 86 21 2228 5235 ey.com/china

arnold.sun@cn.ey.com Follow us on WeChat

Scan the QR code and stay up to date with the latest EY news.

Audrie Xia
Partner
Tax Services
Ernst & Young (China) Advisory Ltd
+ 86 21 2228 2886
audrie.xia@cn.ey.com