10 Trends Highlight CHINA - 2010-2011

Eventorganizer
TheExpertCommitteeoftheChinaGeneralChamberofCommerce
Reportpublicationsproduction
Li&FungResearchCentre,MemberofLi&FungGroup
Authors
FrancescaLimandCarolMa(Li&FungResearchCentre)
Administrator
YuDi(SecretariatoftheExpertCommitteeoftheChinaGeneralChamberofCommerce)
Formoreinformation
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Phone:(010)66062250 Fax:(010)66062250
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What do Experts Say?
Ten Highlights of Chinas
Commercial Sector, 20102011
WhatdoExpertsSay?
TenHighlightsofChinasCommercialSector,20102011
SecretariatoftheExpertCommitteeof
ChinaGeneralChamberofCommerce
1
Foreword
n the past two years, China has faced the many challenges of the global fnancial crisis. Fortunately,
with relatively solid economic fundamentals and huge governmentinspired measures to boost
domestic consumption, Chinas economy has demonstrated strong resilience. In particular, Chinas
consumermarkethascapturedtheattentionofmanywithitsimpressivegrowthinthepostcrisisera.
Today, the worst of fnancial crisis seems to be behind us. The year 2011 marks the beginning of
Chinas12thFiveYearPlanboostingdomesticconsumptionwillbeoneofthekeythemes.Ongoing
urbanization, improving household income, and supportive government measures are bringing huge
opportunitiestocommercialbusinesses.
To gear commercial enterprises up forthe opportunities, the Expert Committee ofthe China General
Chamber of Commerce (ECCGCC !"#$%&'()*+,-') joined forces with Li & Fung
Research Centre ( ./01!2) of the Li & Fung Group for the seventh year to launch the
TenHighlightsofChinasCommercialSector,20102011(theTenHighlights).
TheTenHighlights,ofwhichselectionanddisseminationareconductedannually,offersenterprisesa
comprehensiveoverviewofChinaslatestcommercialdevelopments.Theeventachievedtremendous
success in previous years and the English reports on the Ten Highlights were highly regarded by
foreignmediaandinvestorsasusefulhandbookstograspthelatestcommercialissuesandtrendsin
China.
Copyright 2011 Li & Fung Research Centre and Secretariat of the Expert Committee of the China General Chamber of
Commerce(ECCGCC).Allrightsreserved.
ThoughLi&FungResearchCentreandtheSecretariatoftheECCGCCendeavortoensuretheinformationdiscussedinthis
materialisaccurateandupdated,nolegalliabilitycanbeattachedastothecontentshereof.Reproductionorredistributionof
thismaterialwithoutthepriorwrittenconsentoftheLi&FungResearchCentreortheSecretariatofECCGCCisprohibited.
20102011
2
Contents
Foreword ............................................................................................................................................1
Contents ...........................................................................................................................................2
Chapter1 Introduction........................................................................................................................3
Chapter2 ExecutiveSummary...........................................................................................................7
Chapter3 ImplicationsforForeignInvestors...................................................................................10
Chapter4 TenHighlightsofChinasCommercialSector,20102011................................................13
1. Withgrowinggovernmentattention,thegrowthmodelofChinasretailand................................13
distributionsectorissettochangeinthe12
th
FiveYearPlanperiod
2. Domesticconsumptionsetstogrowstronglyin2011realretailsales.........................................15
growth may slightly decline due to infation
3. Onlineretailingcontinuestoregisterstunninggrowthgrowing....................................................18
popularityofbricksandclicksmodel,onlineretailingplatform
operators investing in own logistics and fulfllment facilities,
andtheriseofgrouppurchasewebsitesareimportanttrendstowatch
4. Silvermarketsetstobecomeanewgrowthpointindomesticconsumption................................21
5. Goinggreeniscatchingretailersrealattentioneffortsbegintobearfruits...................................23
6. Meatandvegetabletraceabilitysystemtobeinfullswingamidincreasing..................................25
foodsafetyawareness
7. Retailersaccelerateformatrevampsandinnovationtocaterto....................................................27
increasinglydiversecustomerneeds
8. Expansionofrailwaynetworkssetstotransformthecommercialandretaillandscape.................29
9. Commercialpropertymarketseesstronginvestmentthedevelopmentof...................................32
commercialstreetshaswonattention
10.Retailanddistributionenterprisesfaceeverincreasingcoststhereare.......................................34
growingcallsfortheChinesegovernmenttohelplowerthecostsofdoingbusiness
WhatdoExpertsSay?
3
Chapter1 Introduction
SelectionoftheTenHighlightsofChinasCommercialSector20102011
The ten highlights of China's commercial sector for 2010 and 2011 were identifed after a series of
voting and formal, indepth panel discussions. This year, views of over 160 toptier experts were
collected.
This event is organized by the Expert Committee of the China General Chamber of Commerce
(ECCGCC !"#$%&'()*+,-'), a prestigious association comprising government
officials, scholars, consultants, commentators, industry association representatives and top
managementofcommercialenterprisesinChina.
Li & Fung Research Centre is proud to publish this report together with the Secretariat of the
ECCGCCbyamalgamatingthebestintellectualtalentinChina,webelievethisreportwillshedsome
lightonthekeydevelopmenttrendsofChinascommercialsector.
AbouttheOrganizations
TheChinaGeneralChamberofCommerce
!"#$%&'
Founded in 1994, the China General Chamber of Commerce (CGCC) is a quasigovernment
association endorsed by the State Council.The CGCC has around 70,000 members, encompassing
enterprisesfromretail,distribution,servicesandtourismsectors,localcommercialchambers,national
professionalassociations,intermediaryorganizationsandindividuals.
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
40nationalassociations,andover30newspapersandmagazinespublishedbothinsideandoutside
China.
TheExpertCommitteeoftheChinaGeneralChamberofCommerce
!"#$%&'()*+,-'
The Expert Committee of the China General Chamber of Commerce (ECCGCC), a subdivision of
the CGCC, comprises over 160 prominent experts from various government departments, research
institutes and universities, leading corporations, professional associations, consultancy frms and
newspaper offces, which include the Ministry of Commerce, the Development Research Centre of the
State Council, the National Development and Reform Commission, the Renmin University, the Tsing
HuaUniversity,andtheChineseAcademyofSocialSciences,etc.
20102011
4
The ECCGCC serves as a platform for the experts to exchange ideas on the development of
commercialenterprisesandthedistributionsector.
Li&FungGroup
./01
The Li & Fung Group is a Hong Kongbased multinational company with three distinct core
businesses:sourcing,distribution,andretailing.FoundedinGuangzhouin1906,theLi&FungGroup
achievedanannualturnoverofaroundUS$16.0billionin2009.Today,theLi&FungGroupoperates
in some 40 economies worldwide and employs over 33,000 people. One of its core competencies is
SupplyChainManagement(SCM).
./23!4
Li&FungResearchCentreistheresearchinstituteoftheLi&FungGroup.Itservesasaknowledge
bank on China's economy, industries, logistics and distribution sector, with its research scope
coveringthewholespectrumoftheentiresupplychain,fromideas,production,distribution,retailingto
consumers.Italsooffersresearchanalysesandconsultingservicestocolleaguesandclients.
TheCentrehasbeenactivelypromotingtheapplicationofSCM.TheCentrepublishedthebookThe
Orchestrator of Global Supply Chain Management (Second Edition) in 2009, which is regarded as
averyusefulreferenceamongbusinessmenandacademiainChina.TheCentrealsosupportedthe
launchof100YearsofLi&FungandCompetinginaFlatWorldinChina.
WhatdoExpertsSay?
5
ExpertPanelMembers
Cao Jintang, Director of nformation and News Division, Administrative Offce, China General Chamber
ofCommerce
345 !"#$%&'6789:;;<
Chang Ka Mun, Managing Director, Li & Fung Development (China) Limited, Li & Fung Research
Centre
=)> ./?@( !") AB7C./01!2DEFG
ChenLiping,Professor,FacultyofManagement,CapitalUniversityofEconomicsandBusiness
HIJ KLMNOPQR#STUVWXYZ
FanShiyu,ChiefEditor,ChinaBusinessHeraldNews
[\] !"#^_`a
FuLongcheng,DirectorGeneralofResearchUnit,ChinaGeneralChamberofCommerce
bcd !"#$%&'018WX
HongTao,Professor,BeijingTechnologyandBusinessUniversity
ef gh*#QRMNRiYZ
HuangGuoxiong,Professor,SchoolofBusiness,ReminUniversityofChina
j"k !"lmQR#RiYZ
LiuHaifei,SeniorEconomist,ChinaResearchInstituteofBusinessEconomics
nop !##$MN01!2qrMNC
LiuJianhu,ViceSecretaryGeneral,ChinaGeneralChamberofCommerce
nst !"#$%&'uvw<
PeiLiang,SecretaryGeneral,ChinaChainStoreandFranchiseAssociation
xy !"z{M|}'vw<
Ren Xing Zhou, Senior Research Fellow and Director, Institute of Market Economy, Development
ResearchCentreoftheStateCouncil
X~ "Si?@01!2MN01<01-
SongZe,ResearchFellow,InstituteofFinanceandTradeEconomics,theChineseAcademyofSocial
Sciences
!"'RiO#$MN018WX01-
20102011
6
SunMing,Researcher,DepartmentofMarketOperationRegulation,MinistryofCommerceofthePRC
#SEC0-
WanWenying,ExpertCommitteeMember,ChinaGeneralChamberofCommerce
!"#$%&'(),-
Wang Chengrong, VicePresident, Professor, Beijing Management Cadres College of Finance &
Commerce,BeijingVocationalCollegeofFinance&Commerce
d YZ ghO$RighOTURi
ZengLingtong,VicePresident,BeijingB.E.E.EnterpriseManagementConsultingFirm
gh$TUAB7Cu_
ZhangBin,SecretariatofExpertCommittee,ChinaGeneralChamberofCommerce
= !"#$%&'()*+,-'vw;u;<
Zhang Jing, Former Director, Department of MarketAdministration, StateAdministration for Industry
andCommerce.
=M ")*#_TUCC<
Zhou Qiang, Offcer, Department of Market System Development, Ministry of Commerce of PRC
#SsCWX
WhatdoExpertsSay?
7
Chapter2 ExecutiveSummary
Chinas consumer market has demonstrated strong resilience in the postcrisis era. The year 2011
marks the beginning of Chinas 12th FiveYear Plan boosting domestic consumption will be high on
the government agenda. With impressive economic growth and huge government efforts to reorient
thecountryseconomicgrowthmodeltobecomemoreconsumerdriven,Chinasretailandconsumer
marketpresentshugeopportunities.
Today, retail and consumer companies home and abroad are casting their eyes on China, bringing
exciting changes to Chinas commercial landscape. To win in the market, enterprises must keep
abreast of the latest market developments. Here is a brief summary of the Ten Highlights of
CommercialSector,20102011:
1. With growing government attention, the growth model of Chinas retail and
th
FiveYearPlanperiod
AcceleratingthetransformationofeconomicgrowthmodelisoneofthechieftargetsofChinas
12
th
FiveYear Plan. Going forward, China will adopt a more proconsumption growth model. In
thisregard,Chinasretailanddistributionsectorshallplayabiggerroleinthefuture.Weexpect
theChinesegovernmenttoputmoreattentiontopromotingabettermarketenvironmentforretail
and distribution sector. Enterprises, on the other hand, will gradually change their proft models
and place more focus on effciency, quality, and sustainability. China's retail and distribution sector
issettomoveinanewdirection.
2. Domesticconsumptionsetstogrowstronglyin2011realretailsalesgrowthmay
sIightIy decIine due to ination
With relatively solid economic fundamentals, our experts believe that Chinas domestic
consumption will register robust growth in the coming year. Nonetheless, chances are infation will
continue its upward trend in 2011, with CP growth stronger in the frst half of the year; it is likely
that infation will cast clouds on consumption sentiment, which may drag down real retail sales
growth.
3. Online retailing continues to register stunning growth growing popularity of
bricksandclicks model, online retailing platform operators investing in own
logistics and fulfillment facilities, and the rise of group purchase websites are
importanttrendstowatch
Onlineretailingwillcontinueitsstronggrowthmomentumin2011.Theriseofonlineretailinghas
broughtexcitingchangestotheretailandcommerciallandscapeinChina,ofwhich,ourexperts
point out three major trends to watch. First, the bricksandclicks model will become more
popular,astraditionalretailersinChinafeelthepressuretorespondtotheeverexpandingonline
20102011
8
retailingmarket.Second,astheserviceleveloflogisticsservicesprovidersinChinastillvaries,it
islikelythatonlineretailingplatformoperatorsinChinawillcontinuetoincreasetheirinvestment
in own logistics and fulfillment. Third, the rapid increase in the number of group purchase
websitesinChinaisanothermajortrend.
4. Silvermarketsetstobecomeanewgrowthpointindomesticconsumption
Chinaisagingfast.Itisforecastthatbytheendofthe12
th
FiveYearPlan,theelderlypopulation
will reach 200 million, accounting for 15% of Chinas total population. The rise of elderly
consumerspresentshugeopportunities.Thesilvermarketissettobecomeanewgrowthpointin
domesticconsumptioninthecomingyears.Today,Chinassilvermarketisunderservedwithalot
of unfulflled demand. Enterprises are advised to tailor their products and services for the elderly
totapthehugepotential.
5. Goinggreeniscatchingretailersrealattentioneffortsbegintobearfruits
RetailersinChinaaregettingmoreserioustowardsgoinggreen.Overthepastfewyears,some
larger retailers have embarked on a series of green initiatives, such as launching energy-effcient
stores and requiring their suppliers to go green, to name just a few. We are happy to see that
these efforts are beginning to bear fruits. Looking ahead, we expect gogreen initiatives will
receivestrongergovernmentsupport.
6. Meat and vegetable traceability system to be in full swing amid increasing food
safetyawareness
There are growing concerns for food safety and product quality in China. To address the food
safety issues, the Chinese government has taken steps to build a safer food supply chain.
In 2010, a pilot scheme on a traceability system for meat and vegetables was launched. By
improving traceability from farm to table, it is hoped that consumers interests can be better
protected.
7. Retailers accelerate format revamps and innovation to cater to increasingly
diversecustomerneeds
Competition in Chinas retail market has intensified in the past few years. Facing headto
head competition, retailers are seeking different ways to win the hearts of highly diverse and
increasinglydiscerningChineseconsumers.Thefocusofretailersisgraduallyshiftingfromscale
expansion to operational excellence. For instance, retailers in China are accelerating format
revampsandinnovationtoattractcustomerfootfalls.Manynowdevelopamultiformatapproach
to cater to the needs of different customer profles.
WhatdoExpertsSay?
9
8. Expansion of railway networks sets to transform the commercial and retail
landscape
Railway transportation such as subways, light rail transit and intercity passenger lines have
witnessed robust development in China. Rapidlydeveloping railway networks are transforming
Chinas commercial and retail landscape. Large daily passenger flows, particularly at inter
changerailwaystations,havecreatednewbusinessopportunitiesinstationsandnearbyareas.
NewcommercialclustersinthevicinityofrailwaystationsareemergingacrossChina.
9. Commercial property market sees strong investment the development of
Amid series of tightening measures by the Chinese government to cool down the residential
propertymarket,manypropertydevelopersinChinahaveturnedtheireyestotheopportunities
in the commercial property market in the past year. Capital fow into China's commercial property
marketlookssettocontinuein2011.Inparticular,thedevelopmentofcommercialstreetsacross
China has caught much attention. Our experts expect that the supply of foor space of commercial
streetswillcontinuetoriseinthecomingyears.
10. Retail and distribution enterprises face everincreasing costs growing calls for
theChinesegovernmenttohelplowerthecostsofdoingbusiness
In recent years, retail and distribution enterprises in China have faced rising business costs.
Undoubtedly, increasing market competition has driven up overhead costs such as rental and
labor there are some structural issues behind the high transaction costs facing Chinas retail
and distribution sector which are inherent in the countrys policy framework, such as fewer tax
concessions and higher electricity tariffs. Industry players urge the government to take steps to
helplowerthecostsofdoingbusiness.
20102011
10
Chapter3 ImplicationsforForeignInvestors
We are optimistic that Chinas consumer market will deliver strong growth in 2011 this will bring
lucrative business opportunities for investors. Nonetheless, competition is increasingly fierce
companiesmustbewellpreparedtoridethegrowthwave.
RidingtherisingtideofChinasconsumptiongrowth
Governmentinitiativestoboostconsumptionwillcontinue
The government will spend tremendous efforts on boosting domestic private consumption in the
12
th
FiveYearPlan.Inthepastfewyears,manyofthegovernmentsproconsumptioninitiatives,
such as the household appliances and automobile tradein policies, are stimulusdriven. Our
experts expect that the impact of most stimulus policies would gradually recede by the end
of 2011. Looking ahead, the Chinese government shall pay more attention to fundamentally
improvingthebusinessenvironmentfortheretailanddistributionsector.
For instance, to safeguard consumers' interests, the Chinese government has put in place a pilot
schemeonatraceabilitysystemformeatandvegetablesin2010.Webelievemoreinitiativesto
improveconsumptionsafetytocome.Itislikelythatenterpriseswillfaceincreasingcompliance
costs.
Keepingacloseeyeonlatestpolicydevelopments
There are some structural issues behind high costs of doing business facing China's retail and
distributionsectorwhichareinherentinChinaspolicyframework,suchasfewertaxconcessions
and higher electricity tariffs. Many industry players have pointed out that these run against the
governmentsgoalstoboostdomesticconsumptionandhaveurgedthegovernmenttotakesteps
tochangethepicture.Businessesshouldkeepacloseeyeonlatestpolicydevelopments.
nfation uncertainty will continue to cast shadows on consumption sentiment in 2011. n fact,
the Chinese government has already adopted a tighter monetary policy towards the end of
2010tocheckliquidityenterprisesmayfacetightercreditconditions,andpotentialassetsprice
fuctuations.
Enhancingcompetitivenessisthenameofthegame
Market competition in China is intensifying; operation costs are climbing too. Differentiated
positioning and continuous improvement in products and services are a must for enterprises to
stay ahead of competition. Enterprises should not expect quick and easy profts.
WhatdoExpertsSay?
11
China is a country with many markets. Enterprises that can address the needs of different
consumer profles have a better chance of success. To adapt to local markets, companies must
customize their products and services for the tastes of local consumers for instance, growing
numbers of retailers in China have embarked on format revamps and innovations to ft in well with
localmarkets.
China's population is aging fast. The silver market is bringing lots of opportunities. Marketers
shouldwatchtheshiftsinconsumerstastesandpreferencesduetothechangingdemographics.
Besides,theelderlysegmentiscomplexwithallthevariantsofwealth,health,age,experience,
preferences and needs, etc. Given the heterogeneity, providers and retailers of goods and
servicesmusthaveindepthknowledgeoftheeldersinordertoprovidecustomizedofferings.
Tappingthepotentialofonlineretailing
We are positive on the growth prospect of online retailing in China. ndeed, online platform is an
effectivedoorwaytoreachChinasexpandingnumberofonlineshoppersweseearisingtrend
for enterprises to pursue a multichannel strategy.That said, multichannel integration can be a
challenge. Enterprises are advised to pay extra attention to pricing strategy to maintain online
and offine consistency in order to avoid online channels cannibalizing sales of physical stores,
as well as potential confict of interests with existing distributors and franchisees. To address the
issues,enterprisescanconsiderlaunchingexclusivelabelsorproductofferingsforonlinesales,
or having an identical pricing policy for online and offine items.
Logistics and fulfllment will continue to be the major obstacle of China's online retailers in near
future.Apartfromoutsourcingandpartnership,someonlineretailersalsooptforinvestingintheir
own logistics and fulfllment facilities in China. Enterprises should take into account factors such
ascosts,investmentoutlay,operationscaleandservicescoverage,etcinmakingtheirlogistics
and fulfllment strategies.
Group purchase websites are more and more popular in China. Enterprises may consider
leveraginggrouppurchasewebsitestocreatenoisefortheirproductsandservices.
Sustainabilityisastrategicshiftthatisheretostay
Going green has caught retailers' real attention in recent years. Foreign retailers in China have
long been more proactive in launching green initiatives, and domestic retailers are stepping
up efforts too. We are happy to see that the conservation efforts are beginning to pay off
some leading players have already achieved substantial savings in utilities bills. We believe
sustainability is a trend that is here to stay. It is prudent for enterprises to take sustainability
into account when defining strategies, managing supply chains and communicating with their
customers.
20102011
12
Pickingtherightgroundforbattle
Rapidly-developing infrastructural projects are changing China's retail landscape. New
commercial clusters in the vicinity of railway stations are emerging across China, bringing new
business opportunities. Nonetheless, customer footfalls of some already developed business
districtsmaybediverted.
On the other hand, we see strong investment in China's commercial property market, especially
in commercial street projects, in recent years. Supply of commercial properties should continue
to grow. Enterprises are advised to keep their fngers on the pulse of latest infrastructural and
commercialpropertydevelopment,andconstantlyreviewtheirretaillocationstrategies.
WhatdoExpertsSay?
13
Chapter4 TheTenHighlightsofChinasCommercial
Sector,201011
1. With growing government attention, the growth model of Chinas retail and
th
FiveYearPlanperiod
The year 2011 marks the beginning of Chinas 12
th
FiveYear Plan accelerating the transformation
of the country's economic growth model is one of the chief targets. Boosting domestic consumption
andfosteringthedevelopmentoftheservicesectorarehighonthegovernmentagendathesehave
profoundimplicationsforChinasretailanddistributionsector.
Our experts believe that China's retail and distribution sector will play a bigger role in the next fve
years. Promoting a better environment for Chinas retail and distribution sector will win growing
government attention; enterprises, too, are expected to place more focus on effciency, quality, and
sustainability,apartfromsheerscaleexpansion.
Chinasretailanddistributionsectortomoveinanewdirection
Ourexpertsexpectchangesinthreemajorareas:
1. Enterprises to focus on efciency, quaIity, and sustainabiIity
Many retail and distribution enterprises in China have attached great importance to scale
expansion in the past many years meanwhile, efficiency and quality of services are often
overlooked.Goingahead,itishopedthatenterpriseswouldpayspecialattentiontooperational
excellence.
ndeed, many enterprises have long placed signifcant weight on absolute indicators, such as
sales revenue, capital expenditure and market share, in respective performance assessments.
Toachieveoperationalimprovement,ourexpertssuggestthatmoreattentionshouldbegivento
relative performance indicators such as proft margins, expense ratios, sales per capita, inventory
turnover, conversion rate and energy intensity, etc. Besides, retail and distribution enterprises
are advised to refne their positioning and marketing strategies to improve their competitiveness,
insteadofsolelylookingforsheerscaleexpansion.
2. RetaiIers to change their prot modeIs
Owing to market liberalization, retail chain operators have been rapidly expanding their infuence
in China in the past decade. Many retailers have taken advantage of their strong market power
and introduced cumbersome charges to suppliers such as entrance fees, promotion and
20102011
14
marketingcharges,andlistingfeesfornewproducts,etc.Tensionbetweenretailersandsuppliers
isnotuncommon.ThemistrustamongsupplychainpartnersinChinahashamperedinformation
sharing in theentire value chain and led tobullwhip effects.Enterprises are growingly aware of
therepercussionsandmanyarestrivingtochangethepicture.
Instead of relying on rentals or entrance fees as major sources of revenue, more and more
retailers are now exploring ways to change their proft models, such as launching private label
businesses, promoting direct sourcing and improving merchandising practices to offer faster
customerresponse.Ontheotherhand,asmanyretailersmovetostreamlinetheirsupplychains,
Chinas distributors and wholesalers are compelled to move up the value curve. The traditional
middlemens buy and sell model is under a great deal of pressure. To survive in the market,
wholesaleplayersmustconstantlyreinventthemselvesandprovidemorevalueaddedservices.
3. Government to pay greater attention to promoting a more favorable market
environment
The Chinese government has launched a series of proconsumption initiatives in the past few
years many of which, such as the household appliances and automobile tradein policies, are
mainly stimulusdriven. Our experts believe that the impact of most stimulus policies would
gradually fade by the end of 2011 they suggest that the Chinese government should put more
focusonimprovingthebusinessenvironmentduringthe12
th
FiveYearPlanperiod.
To avoid duplicative investment, the Ministry of Commerce (MOFCOM) should lead and co
ordinate the government efforts to tackle some deeprooted problems facing Chinas retail and
distribution sector. Important themes should include improving business regulations, promoting
industrycredibility,loweringbusinessoperationcostsofChinasretailanddistributionenterprises,
improving consumption safety, and enhancing distribution effciency in China's rural areas. Besides,
ourexpertsalsoadvocateestablishinglongtermfundstosupportdomestictradedevelopment.
Changingforthebetter
All in all, we should expect the development focus of Chinas retail and distribution sector to shift
fromscaleexpansiontooperationalexcellence.AsChinasretailanddistributionenterprisesadopta
healthier growth approach, we shall see a more competitive and effcient retail and distribution sector
in the next fve-year plan period.
WhatdoExpertsSay?
15
2. Domesticconsumptionsetstogrowstronglyin2011realretailsalesgrowthmay
sIightIy decIine due to ination
Chinas domestic consumer market has demonstrated strong resilience in the post stimulus era.
According to the National Bureau of Statistics (NBS), the total retail sales of consumer goods grew
nominally by 18.4% yearonyear (yoy) to reach 13,922 billion yuan in JanuaryNovember 2010. Our
experts estimated that the 2010 fullyear nominal growth of retail sales would stay at approximately
18.5%; the infation-adjusted growth would be around 15.1%, 1.8 percentage points lower than that of
2009.
Lookingahead,withrelativelysolideconomicfundamentals,ourexpertsbelievethatChinasdomestic
consumption will continue its strong growth in 2011, although retail sales growth may slightly decline
due to infation.
Chinasconsumermarket:majordevelopmentsin2010
1. Driven by governmentinspired measures, retail sales in automobiles, petroleum
andrelatedproducts,andhomeappliancesgrewimpressively
In the past two years, the government has put great emphasis on boosting domestic private
consumption. Key initiatives pertinent to the retail sector include offering subsidies to home
appliances and automobiles purchases, and encouraging tradein of these categories, etc.
These governmentinspired measures have significantly boosted the retail sales performance
of automobiles, petroleum and related products, and home appliances. In January November
2010, retail sales growth of the above categories grew strongly by 34.5%, 34.5% and 26.9%
yoy respectively, outpacing the growth they achieved in 2009. The government initiatives
have stimulated domestic private consumption our experts estimated that these categories
contributedto37.7%ofthetotalretailsalesgrowthoftheperiod.
2. Salesofgold,silverandjewelrydemonstratedthestrongestgrowth
Salesofgold,silverandjewelryincreasedby45.8%yoytoreach113.7billionyuaninJanuary
November2010growthwasthehighestamongallcategories.Thestunninggrowthcanpartlybe
attributable to consumers buying gold or jewelries as infation hedge. The sharp rise in precious
metals prices due to the US dollar depreciation against RMB also leads to higher absolute
growth.
3. Increase in agricultural prices food, in particular, contributed significantly to

headlineCPIgrowth
Induced by food price spikes, Chinas consumer price index (CPI) has been trending north
throughout 2010. The price index of food, which weighs around onethird in CPI accounting,
20102011
16
contributed to almost 75% of headline CPI growth. Food prices continue to surprise to the
upside in the second half of year, as Chinas macro control on the property market has driven
much of the excess liquidity into the commodity market. Excess liquidity, coupled with hoarding
andspeculation,hasplayedaroleinthesharprisesinagriculturalpricessuchasgarlic,sugar,
cotton,andapples,etc.
Furthermore, our experts warn that ontheground impressions might suggest higher actual
infation in China. t is prudent for the Chinese government to take steps to manage the infation
expectationsofthepublic.
4. Urbanretailsalesregisteredstrongergrowth
UrbanretailsalesregisteredstrongergrowthinJanuarytoNovember2010.Urbanandruralretail
salesreached12,042.9and1,879.5billionyuanintheperiod,upnominallyby18.7%and16.0%
yoy respectively. Stronger urban retail sales growth can be attributable to 1) a large number of
migrant workers moving to their hometowns amid waves of factory closures during the fnancial
crisishavereturnedtocitiesin20102)wavesofnaturaldisastershavehurtruralconsumption
sentiment and 3) change in statistical classifcations by the NBS
1
rural area has been redefned
as "towns, instead of "counties or below since 1Q 2010. The previous defnition of rural area
includesalargernumberofgeographiesthatpossessstrongerpurchasingpower.
5. Largescaleretailenterprisesenjoyedhighersalesgrowth
Largescale retail enterprises in general enjoyed higher sales growth in 2010.According to the
ChinaNationalCommercialInformationCenter,salesof100largescalekeyretailenterprisesin
China climbed by 22.3% in the frst three quarters of 2010, up by 9.1 percentage points compared
to the same period in 2009.The growth was higher than the overall retail sales growth (18.3%)
in China. This suggests that consumption sentiment in China has largely recovered from the
financial turmoil hitting China in Q4 2008 more Chinese consumers are willing to open their
wallets and trade up again. Strong income growth, increase in general price indices, and
governmentinitiativestoboostdomesticconsumptionalsofavorheadlinesalesgrowthoflarge
scaleretailenterprises.
FavorabIe macro conditions for domestic consumer market in 2011; ination remains
themajorconcern
Most of our experts believe that 2011 will be another strong year for Chinas domestic consumer
market. Facing global economic uncertainties and increasing threats of market protectionism,
reorienting the economy structure to be more consumptiondriven has become the top agenda of
the Chinese government.The Chinese government has spent huge efforts to boost domestic private
1 Prior to 1Q10, urban area was defined as cities and rural area was defined as counties or below. Categories were re
categorizedtocitiesandtownsintheNBSannouncementsince1Q10.
WhatdoExpertsSay?
17
consumption,suchasinvestingheavilyininfrastructureandpublichousing,andacceleratingincome
reform.Theseshallbodewellforthedomesticconsumermarketintheyearahead.
Having said that, infation uncertainty remains the biggest challenge to consumption sentiment in
China. The second round of quantitative easing of the US, and the depreciation of the US dollar
against the RMB further increase the risk of imported infation. Overall, our experts believe that CP
will continue to climb in 2011, with the growth in the frst half stronger than the second half.
To curb infation, the State Council announced 16 administrative measures in November 2010,
which should help stabilise food prices in 2011. Besides, the Chinese government has announced
to tighten its monetary policy from appropriately loose to prudent to check liquidity in 2011. Our
experts welcome the monetary tightening of the Chinese government to combat infation. They further
point out that relevant government authorities should be cautious when managing pricing policies on
importantcommoditiesandutilities,whichmayexacerbateincreaseinCPI.
Atthesametime,ourexpertshopethatthegovernmentcanstrikeaverybalancebetweenachieving
economic growth and containing infation in 2011. They point out that investment gains in asset and
property markets have helped a lot of companies in China to absorb increase in cost as well as
downwardpressureonpricesinthepastfewyears.Theywarnthattooaggressivethegovernments
tightening measures may bring swings in the asset prices, which will pose negative impacts on
Chinesecompanies.
20102011
18
3. Online retailing continues to register stunning growth growing popularity of
bricksandclicks model, online retailing platform operators investing in own
Iogistics and fuIIIment faciIities, and the rise of group purchase websites are
importanttrendstowatch
Onlineretailingcontinuestoregisterstunninggrowthin2010.AccordingtoiResearch,thetransaction
value of Chinas online retailing
2
market reached 263 billion yuan in 2009, registering a stellar 105%
yearonyear (yoy). Growth momentum of Chinas online retailing market continues to be strong in
the frst half of 2010 transaction value grew by 103 % yoy in the frst half of 2010 to reach 213.3
billionyuan.Itisestimatedthattheonlineretailingmarketsizewouldexceed500billionyuanin2010,
accounting for around 3% of the total retail sales of consumer goods in China. Going forward, it is
expected that China's online retailing market will continue to fourish.
The rise of online retailing has brought exciting changes to the retail and commercial landscape in
China.Inparticular,ourexpertspointoutthreemajortrendstowatchin2011.
Threeimportanttrendstowatchin2011
1. Growingpopularityofthebricksandclicksmodel
Traditional retailers in China are feeling the pressure to respond to the evergrowing online
retailing
market an increasing number of them have now embarked on a bricksandclicks

strategy to extend consumer reach.According to the China Chain Store and Franchise
Association,31outoftheTop100retailers(Top100s)in2009havelaunchedtheirownbusiness
toconsumers (B2C) online retailing platforms, compared to only 7 out of theTop 100s in 2008.
ExamplesincludeTesco,Suning( ),WangfujingDepartmentStores( -)and
theLiqunGroup( .).
Indeed,thepresenceofphysicalstoresgivesmanytraditionalretailersanedgeovertheirpure
clicks counterparts. For instance, Meiyijia ( ), a convenience store chain operator in
Dongguan, illustrates the efforts by traditional retailers to integrate etail with existing physical
stores Meiyija launched its virtual shopping mall which greatly enriches the merchandise
portfolioofthecompany(previouslylimitedbystorespace)meanwhile,itsnetworkofover2,000
physicalstoresin13citiesinGuangdonghasfacilitatedhomedeliveriesaswellascustomerin
storepickups.
Having said that, traditional retailers going bricksandclicks is not without its challenges
pricing is one of the most prominent ones. Bricksandclicks retailers are advised to pay extra
2 AccordingtoiResearch,scaleofonlineretailingmarketisthesumofcustomertocustomer(C2C)andbusinesstoconsumer
(B2C)transactionvalue.ScaleofC2Conlineretailingmarketiscalculatedbythetotalvalueofpurchases,includingthaton
theB2CarmofC2Cplatforms.ScaleofB2Conlineretailingmarkethasexcludeddownloadpaymentsofdigitalproducts,air
tickets, online pill payment services as well as offine sales of B2C platform operators.
WhatdoExpertsSay?
19
attention to pricing strategy to maintain online and offine consistency in order to avoid online
channels cannibalizing sales of their physical stores and potential conflict of interests with
existing distributors and franchisees. To address the issues, for instance, retailers can launch
exclusivelabelsorproductofferingsforonlinesales.Indeed,someretailerssuchasUniqlohave
an identical pricing policy for items selling both online and offine; some other players deploy the
onlinechannelonlyforclearancesales.
2. Online retailing platform operators investing in own logistics and fulfillment
facilities
China is huge and diverse. Logistics and fulfllment are long considered being one of the biggest
obstacles facing online retailing platform operators. Most products are delivered to designated
locationsrequestedbycustomersbycourierormail.Butshipmentdelaysandpaymentcollection
still bother many online retailing giants. Indeed, the logistics flow of online retailing platform
operators is complicated as they often have to handle a much larger number of SKUs (stock
keeping units) at a time this poses extra challenges on warehousing, sorting, picking and
packing,etc.
AlthoughChinasthirdpartlylogisticsindustryhasbeendevelopingfastinrecentyears,service
level of China domestic logistics services providers still varies a lot and substantial monitoring
is needed on the other hand, services of internationalstandard logistics service providers are
too expensive for many.As a result, in addition to outsourcing and partnership with logistics
service providers, some established online platform operators have chosen to handle logistics
and fulfllment in-house to minimize problems in delivery, which hurts user experience and brand
reputation. For instance, 360 Buy ( h#) reportedly handles around 70% of shipment in
house. The company has invested in its own logistics and fulfllment facilities since 2009. Today,
360 Buy offers "1-day-delivery promise in regions covered by its four logistics and fulfllment
hubs in Beijing, Shanghai, Guangzhou and Chengdu. 360 Buy has won widespread appeal for
itslogisticsservicesstandards.Dangdang( ) also has six logistics and fulfllment hubs in
Beijing,Shanghai,Guangzhou,Chengdu,WuhanandZhengzhoutohandlenationwidedelivery
customers can now enjoy 2dayguarantee delivery services in 19 key Chinese cities. It is
reported that Dangdang has shortened its shipment delivery period by 2 days with its initiatives
to improve logistics and fulfllment. On the other hand, JoyoAmazon ( )willaddthree
moreoperationcenterstoatotalofteninChinabytheendof2010toenhancethequalityofits
deliveryservices.AndVancl( )hasalsosetupitsownexpressdeliverycompany.
The initiatives taken by online retailing platform operators to enhance distribution effciency is
well understood. Nonetheless, some experts also caution the heavier fnancial burden of platform
operatorsduetotheincreaseininvestmentoutlays.
20102011
20
3. Grouppurchasewebsitesgraspwidespreadattention
Anotherimportantdevelopmentistherapidincreaseinthenumberofgrouppurchase(tuangou)
websitesinChina.AccordingtoiResearch,therewere1,008grouppurchasewebsitesinChina
as of September 2010, covering a wide range of merchandise and service categories such as
books,apparel,audiovisualproducts,homeelectronics,catering,automobilesandairtickets,etc.
ThegrowthinthenumberofgrouppurchasewebsitesinChinaisstaggering.Infact,therewere
only21grouppurchasewebsitesinChinainMarch2010.BytheendofSeptemberof2010,the
transactionvalueofgrouppurchasewebsitesinChinareached1.2billionyuan.
Someprominentgrouppurchasewebsitesincludetuanmei( ),nuomi( ),lashou(
),andmeituan( ).Thegrouppurchasewebsitesconnectthousandsofonlineusers
tosignuptogethertobuythesameproductstogetabulkdiscount.Ifacertainnumberofpeople
sign up for the offer, the deal becomes available to all. But if a predetermined minimum is not
met,noonegetsthedealthatday.
In fact, China has a long tradition of group purchase and Chinese consumers are no strangers
to the group purchase concept. And these days, infation is a growing concern of many; huge
bargainofferedbygrouppurchasewebsitesisabigmagnet.
Despite the rapid growth, the development of group purchase websites in China is immature.
The China International Electronic Commerce Center (CIECC) under the Ministry of Commerce
(MOFCOM) has put in place a non-compulsory quality certifcation and rating system for online
businesses in 2010, with the aim to protect customers interests. Out of the more than 300
applications by group purchase websites, however, less than 10% of the websites got credit
certifcates by November 2010.
WhatdoExpertsSay?
21
4. Silvermarketsetstobecomeanewgrowthpointindomesticconsumption
Today, China is one of the worlds rapidly aging
3
societies. By the end of 2009, there were 167.14
million people aged 60 or above in China, accounting for 12.5% of China's total population. It is
forecasted that by the end of the 12th FiveYear Plan, the elderly population will reach 200 million,
accountingfor15%ofthetotalpopulation.
Givenitssheersizeandincreasingdynamism,theelderlygroupisbecominganincreasinglyimportant
marketforce.Thesilvermarket(i.e.themarketfortheelderly)issettobecomeanewgrowthpointin
domesticconsumptioninthecomingyears.
Developmentofsilvermarket:aglobalphenomenon
In fact, population aging is taking place in most countries of the world the trend of aging is
accelerating as baby boomers enter their old age. Over 700 million people worldwide were over
60 years of age in 2009, accounting for 11% of the worlds total population by 2050, the number is
expected to rise to 2 billion, or 22% of worlds total population. The rise of elderly consumers has
receivedwidespreadrecognitioninmanycountries.Forinstance,statisticssuggestedthattheelders
accountfor47%ofdiscretionaryspendingpowerintheUS.Acrosstheworld,elderlyconsumersarea
growinglyimportantforcetobereckonedwith.Chinaisnoexception.
SilvermarketinChina:avastmarketfullofhugeopportunities
ThegrowthinChinaselderlypopulationalsooffershugepotentialforthesilvermarket.TheChinese
elderly population is an increasingly important consumer segment. According to the China National
Committee on Age, elderly people in China spent around 1.4 trillion yuan in 2010; this fgure is
expectedtoriseto4.3trillionyuanby2020,makingitoneofthefastestgrowingsegments.
Despite growing demand from the burgeoning Chinese elderly market, the provision of elderly
relatedproductsandservicesisinadequate.Theneedsanddemandoftheelders,byandlarge,are
often unmet.According to a survey conducted by the China National Committee onAge, 90% of the
surveyed elders were not satisfed with the existing products and service offerings. This is attributed to
thefactthatmanyprovidersofgoodsandservicesstillperceivetheelderlyaspassiveconsumerswith
limitedpurchasingpower,andthuspaylessattentiontothem.
EIderIy consumers: a unique and diverse group
Huge demand from the elders offers ample opportunities for providers and retailers of goods and
services targeting the silver market. However, the elderly group is a rather complex segment with all
thevariantsofwealth,health,age,experience,preferencesandneeds,etc.Giventheheterogeneityof
3 The United Nations defnes an aging society as one in which 10% or more of its population are 60 years of age or older.
Chinahasbecomeanagingsocietysince1999.
20102011
22
thisgroup,tosucceedinthemarket,providersandretailersofgoodsandservicesmusthaveindepth
knowledgeoftheelders,inordertobeabletooffercustomizedproductsandservicesofferings.
Indeed,thereareshiftsinconsumerstastesandpreferencesduetoaging.Eldersingeneralhavea
greater spending on services than products. With deteriorating physical and health conditions, they
demand more healthcare and medical services, social and recreational facilities, etc. Moreover, the
increasing number of empty nest families also means greater demand for a comprehensive range
of eldercare services.As most elders tend to shop in local residential communities, both developers
of residential communities as well as retailers play a key role in building a caring community for the
elders.
Propertydevelopers,whenplanninganddesigningtheresidentialcommunities,shouldintegrate
thestrategiesfordevelopinganallembracingelderlycommunityintotheirmasterplans.
Retailersandproviders,ontheotherhand,couldconsiderexpandingthefunctionsandservices
for elders, such as helping the elders to buy daily necessities, providing delivery services,
conductingregularhomevisits,etc.
Theultimateaimistoofferafriendly,localmixofproductsandservicesthatcouldsatisfytheneedsof
thesilvergeneration,andtoenablethemtoleadahealthyandrespectfullife.
Bringing signicant economic benets to the country
The vast Chinese silver market not only provides huge opportunities for retailers and providers of
goods and services, but is also set to bring signifcant economic benefts to the country. One of the
most noticeable benefts is new employment opportunities.
In China, the onechild policy has given rise to a unique 421 family structure (a typical family
consists of 4 grandparents, 2 parents and a child), which makes the country facing the future of
having a smaller young generation to support a rapidly aging population. Moreover, eldercare in
Chinaisincreasinglyoutsourced,whichcallsforrisingdemandforelderlycaregivers.InChina,some
100millionofpeoplewereaged65orabovein2009.Ifonecaregiverisabletolookafter10elders,
around 10 million caregivers are needed to provide adequate eldercare support yet, currently there
are only around 220,000 elderly caregivers in the country. Hence, the expanding aging population,
coupledwithincreasingneedsforhealthcareservices,willcreateabundantemploymentopportunities
forthecountry.
Our experts think that developing the silver market - particularly providing specifc products and
servicesthatareabletomeetthediverseneedsoftheelderscanhelpboostconsumption,contribute
signifcantly to overall economic development, as well as uphold the traditional Chinese virtue of
respectandlovetotheelders.
WhatdoExpertsSay?
23
5. Goinggreeniscatchingretailersrealattentioneffortsbegintobearfruits
Going green has caught retailers real attention in recent years. Foreign retailers in China have long
beenmoreproactiveinlaunchinggreeninitiatives,anddomesticretailersaresteppingupefforts.We
arehappytoseethatretailersgreeninitiativesarebeginningtobearfruitsandwebelievethetrendto
gogreenwillcontinueinthenextfewyears.
RetaiIers Iaunching energy-efcient stores in China
ForeignretailersaregenerallymoreproactiveinenvironmentalfriendlyinitiativesinChina.Anumber
of foreign retailers have launched energy-effcient stores in China; these stores have helped retailers
achievedsubstantialsavingintheirutilitiesbills.Forinstance,Tesco,whichoperatesaround80stores
in China by the frst half of 2010, has planned to reduce the carbon emission of its operations in China
by 10% in the 2010 fscal year. Tesco operates 25 energy-effcient stores in China, which can help
save 25% of its annual energy consumption; it has also retroftted its stores that were built before 2008
to save energy consumption by 15%, with the introduction of energy-effcient lighting, new refrigeration
andconditioningsystems.Carrefour,ontheotherhand,hasremodeledoverahundredofitsstoresin
order to enhance energy effciency by 20%. Wal-Mart China has also substantially reduced the use of
electricity in its energy-effcient stores; besides, the company aims to cut water use in all of its stores
by50%by2010.
Retailerspushingforwardgreenretailsupplychains
Retailers efforts to go green do not stop at the level of store operations. Some foreign retailers take
a holistic approach to sustainability and strive to push forward green retail supply chains.Tesco and
WalMart are among the biggest retailers requiring their suppliers to go green, by asking them to
provide greener products or reduce packaging, etc. Tesco has collaborated with over 250 suppliers
on more than 3,600 packaging reduction initiatives in 2009. And WalMart announced the carbon
exposureprogramearlyin2007tobuildagreenretailsupplychain30ofitssuppliersparticipated
in a pilot program in September 2007 to keep track of their carbon emission WalMart hoped that
eventuallymorethan68,000supplierswouldtakepartintheprogramanddiscloseinformationabout
theirgreenhousegasemissions.
Retailersgreeninitiativesbegintobearfruits
Retailers efforts to go green have yielded initial success. The Ministry of Commerce (MOFCOM)
launched a 3year Energy Conservation Campaign in Retail Industry
4
in 2007 to encourage large
retailers in 10 pilot cities to take the lead in energy conservation. According to the survey results
released by the MOFCOM in its Green Paper on Energy Effciency in September 2010, of the 86
retailersthatjoinedtheprojectcampaign,participationindifferentgreeninitiativesis:
20102011
24
Green sourcing (45.3%)
Launching initiatives to encourage consumers to reduce the use of plastic bags (60.5%)
Promoting recycling of plastic bottles, batteries, paper, home electrical appliances (60.5%)
Waste sorting (32.6%)
nstalling kitchen emission control and sewage treatment system (58.1%)
Using green construction materials and using natural lighting design (47.7%)
AndaccordingtoChinaChainStoreandFranchiseAssociation,electricityconsumptionofChinasTop
100 retailers dropped by 16% yoy in 2009, equivalent to a reduction of 1.63 million tones of carbon
dioxideemission.
Butthereisstillroomforimprovement
Despite the encouraging news, there is still room for improvement. According to the survey results
released by the MOFCOM in its Green Paper on Energy Effciency, the majority of retailers' energy
effciency projects (84.9%) is fnanced by company capital; this poses limits to retailers' investment in
thegreenprojects.45.3%ofretailersinvestedlessthan0.5millionyuan26.7%oftheminvested0.5
1 million yuan and only 14% invested more than 1 million yuan in energy effciency projects.
Domestic retailers in China are behind their foreign counterparts to go green. They tend to adopt a
waitandsee attitude towards going green, due to poorer environmental awareness as well as being
shortofcapital.
Gogreeninitiativeswillwinstrongergovernmentsupport
Going forward, we believe that retailers gogreen efforts will receive stronger government support.
Indeed, the Chinese government has paid increasing attention to sustainable developments in
recent years. The promulgation of the Administrative Measures for the Paid Use of Plastic Bags
at Merchandise Retailing Places ( #ATU6) by the MOFCOM,
the State Development and Reform Commission, and the State Administration for Industry and
Commercein2008toreducetheuseofplasticbagsisacaseinpoint.Itisexpectedthegovernment
departments will join hands together to launch similar environmental measures and policies in the
future. Meanwhile, the Chinese government will spend more resources on green initiatives, such as
settingstandardsonenergyconservationforretailoperatorsofdifferentformatsandofferingtraining
toretailers.
4 The Ministry of Commerce has issued a circular to promote energy saving in the retail industry in 2007. It encouraged
supermarkets,departmentstoresandprofessionalstoresin10pilotcitieswithoperatingareaofover10,000sq.m,totake
the lead in energy conservation and emission reduction. It is hoped that retailers can reduce energy use per 10,000 yuan
salesrevenueby20%in2010.Thepilotcitiesinclude:Beijing,Tianjin,Shanghai,Chongqing,Taiyuan,Shengyang,Qingdao,
Wuhan,GuangzhouandXian.
WhatdoExpertsSay?
25
6. Meat and vegetable traceability system to be in full swing amid increasing food
safetyawareness
There are growing concerns for food safety and product quality in China, especially after a series of
food scandals such as the melamineinmilk and gutter oil problems. In an attempt to address the
food safety issues, the Chinese government has speeded up its efforts to build a better regulatory
environment.
ThenewFoodSafetyLawwasapprovedinFebruary2009,providingalegalbasisforthegovernment
to strengthen food safety control and supervision. Moreover, a Food Safety Commission was also
established to guide and coordinate the splitting food safety responsibilities of various government
departments and agencies. Besides, a food traceability system has also been introduced to allow
consumers to trace and follow the food path through all stages of production, processing and
distribution.
Pilotschemeforfoodtraceabilitysystem
In September 2010, the Ministry of Commerce and the Ministry of Finance colaunched a pilot
schemeonatraceabilitysystemformeatandvegetables.Thesystemhasadoptedvariousadvanced
information technologies including barcode, Integrated Circuit (IC), Central Processing Unit (CPU)
card, Radio-frequency identifcation (RFD), etc. to allow reliable information of food products to be
shared along the whole supply chain. Information of all the food products, at various stages of the
supplychain,canbeaccessedviatheInternet.Thesystemalsofacilitatesinventorycontrolandhelps
improve the identifcation and recalls of defective or unsafe food products.
Atpresent,thesystemhasbeenrolledoutin10pilotcitiesincludingShanghai,Ningbo,Qingdaoand
Kunming.Itwillgraduallybepushedforwardto36citiesnationwideinthecomingthreeyears.
Majorhighlightsofthepilotscheme
Listedbelowaresomemajorhighlightsofthetraceabilitysystemformeatandvegetables.
1. Product identication - choosing the most important food items for incIusion in
thetraceabilitysystem
Under this pilot scheme, meat and vegetables are included in the traceability system as they
are the most popular food items consumed by Chinese households. In China, it is estimated
that meat and vegetables account for 5070% of the total expense of nonstaple foodstuffs of a
typical household. Moreover, many food safety and quality problems are associated with meat
and vegetables.Therefore, it is of prime importance to include these two food categories in the
traceabilitysystem.
20102011
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2. Identifying and mitigating the root causes of food quaIity and safety probIem
The quality of meat and vegetables products in China has long been a great concern.
Rudimentary food production and distribution is regarded as the core problem of the food
industrysmallscaleofproductionandnonmechanizedproductionarecommonplaceinChina.
Despite increasing efforts to modernize farming practices, the production methods of many
farms and abattoirs remain fairly backward. For example, around 9095% of vegetables in
Chinaareproducedbyindividualhouseholdsofwhich,morethan87%areunbrandedandsold
to wholesale markets without any packaging. The situation is similar in the meat processing
industry.Over60%ofhogsareraisedbyindividualsand90%areunpackagedwithnobrands.As
such, the sources of fresh produce are diffcult to trace back to the source of origin. Through the
traceabilitysystem,themovementoffoodatdifferentstagescanbetraced.Productionproblems
can be easily identifed and corrected; third-party liability, if any, can be determined to facilitate
indemnifcation.
3. Unifyingstandardsacrossthecountry
The food tracing systems in different cities follow uniform standards i.e. with same indicators
for collecting information, labeling and transmission format. This enables synchronization of
data across China. Besides, the system also allows the verifcation of labeling and packaging
compliance, making it an important criterion for suppliers in obtaining the trust of buyers and
consumers.
Moreover, the system plays a crucial role in upgrading the agricultural produce sector in China.
It is also complementary to projects such as the Agricultural Produce Wholesale Market and
DistributionCompanyDevelopmentProject( *)
5
andretailerdirectfarmsourcing(
).
4. An important step to ensure an efcient food suppIy chain.
The introduction of the food traceability system is a vital step to promote safe, efficient and
orderlydistributionofmeatandvegetables.Thesystemprovideseasyaccesstoinformationon
movementoffoodwithinthesupplychain.Intheeventofafoodsafetyincident,thesourceofthe
problem can be identifed more quickly and prompt action can be taken, reducing both the danger
toconsumersandeconomicdamagetothefoodindustry.
Today, traceability has become a key word in the global food industry. In many countries,
food products can be sold in the market only if all information on production, processing and
distribution can be easily traced. China has taken a vital step by launching the pilot food
traceabilitysystem.Surely,wecannotexpectChinasfoodsafetyissuestoberesolvedovernight
yet,itisabigleapforward.
5 This project aims to facilitate the distribution of agricultural produce to markets through restructuring largescale modern
agricultural produce wholesale markets as well as nurturing largescale agricultural produce distribution enterprises. The
Ministry of Commerce hopes to modernize their operation such as through developing cold chain logistics and improving
warehousemanagement.
WhatdoExpertsSay?
27
7. Retailers accelerate format revamps and innovation to cater to increasingly
diversecustomerneeds
CompetitioninChinasretailmarkethasbecomegrowinglyintenseinthepastfewyears.Eyeingthe
lucrative opportunities, foreign retailers have been rushing into China likes bees to honey domestic
retailers too have also accelerated their expansion. Facing headtohead competition, retailers are
seeking different ways to win the hearts of Chinese consumers. The focus of retailers is gradually
shifting from scale expansion to operational excellence in recent years, format revamps and
innovationhaveparticularlycapturedtheattentionofmany.
Chineseconsumersarehighlydiverse,moresophisticatedanddiscerning
China is a country with many markets vast regional differences, twotier rural and urban market
structure, and many different consumer segments retailers have to work hard to win the hearts
of consumers with different tastes and budgets. And consumer demand is everchanging. Fuelled
by rising affuence, enhanced exposure to western cultures and desire for better lifestyle, Chinese
consumersarenowadaysmoresophisticatedanddiscerningtheyarekeentotradeup.
To capture the lucrative potential, retailers are seeking ways to differentiate from the rest, such as
introducing new store brands and retail concepts, launching differentiated merchandise assortment
andacceleratingformatrevampsandinnovation,tobooststoreproductivity.
Retailersaccelerateformatrevampsandinnovation
In particular, retailers in China are accelerating format revamps and innovation to attract customer
footfalls.ManyretailersinChinaaredevelopingamultiformatapproachinordertocatertotheneeds
of different customer profles. For example, over the past few years, many larger department stores
have been converted into shopping malls to incorporate different elements of shopping experiences
under one roof and cross-fertilize foot traffc. Wangfujing Department Store ( -), one of
Chinasleadingdepartmentstoreoperators,haslaunchedrevampingprogramssinceMarch2010to
convert a number of its departments stores into shopping malls. Grocery retailers in China are also
introducing new operating formats such as compact hypermarket, and convenienceplusgrocery
stores, beyond the standard hypermarket, supermarket and convenience store formats. WalMart
China,forinstance,announcedinDecember2010thatitwouldexpanditspresenceinChinawiththe
launchofanewcompacthypermarkettargetinglowincomeandruralcustomers.Withsimplerdesigns
featuring cement foors and brick walls, it is cheaper to build the compact hypermarkets.
Indeed, retailers are working harder to cater to specific customer demographics. For instance,
more department store operators in China today have refned their market positioning strategies
department stores with distinct themes and positioning to cater to specifc market segments have
emerged, such as discount department stores, luxury department stores and department stores for
female,etc.NewWorldDepartmentStore,oneofChinaslargestforeigndepartmentstoreoperators,
20102011
28
has opened afewstoresespecially designed forwomen thedepartment storestargetfemale white
collarworkerswithgoodincomesandeducationalbackground.
Manyretailersaretappingintothepotentialofhighendandluxurymarket
To ride the wave of consumer tradingup, a lot of retailers in China are trying to move upmarket.
Variousretailformatoperatorsaretappingintothehighendandluxurymarketsegment.Forinstance,
in the grocery retail market, many players have launched the premium supermarket format, such as
OloftheChinaResourcesVanguard( ))andBHGMarketplaceoftheBeijingHualianGroup
( gh%). Ol targets highincome consumers such as expatriates and highincome overseas
returnees,andfeaturesimportedtopgradefreshfoodandshopinshopsincludingcoffeebar,concept
kitchenandwinecellar.
Undoubtedly, Chinas highend and luxury market is growing fast. But our experts offer a note of
caution. Not every retailer can win in the rush to go upmarket. Chinese consumers are today more
sophisticated and informed as more retailers crowd the market, players that fail to deliver its value
across are likely to meet growing challenges. Retailers should no longer expect quick and easy proft;
thoroughmarketresearchisamust.
Improvementinretailmanagement
As retailers strive to win the competition, we are happy to see that there is continuous improvement
in retail management. Many retailers in China have operated a variety of retail formats for years
however, store management, sales and marketing and merchandise assortment, etc. of different
operating formats are handled by the same management teams. But the picture has been slowly
changinginthepasttwoyears,apartfrompurchasingandlogistics,differentaspectsofoperationsare
increasinglyhandledbyspecializedbusinessunitsandteamstobestaddressthefastchangingneeds
ofdifferentcustomersegments.
WhatdoExpertsSay?
29
8. Expansionofrailwaynetworkssetstotransformthecommercialandretaillandscape
RailwaytransportationwitnessedrobustdevelopmentinChina
During the 11
th
FiveYear Plan period, we have witnessed significant development of Chinas
transportationsystem.RailwayisoneofthemostimportantmodesoftransportationinChina,givenits
effciency, larger capacity, convenience and relatively low carbon emission.
Huge efforts have been made by the Chinese government in recent years to speed up the
development of railway. For instance, China plans to construct a national passenger railway network
ofeighthighspeedrailway(HSR)
6
routes(seeexhibit1)by2012.The13,000kilometreHSRnetwork
willovertakethatofEuropeastheworldslargestbythen.Itisestimatedthatthelengthofthenetwork
willreach18,000kmby2020.
Exhibit1:HighspeedrailwaynetworktobebuiltinChinaby2012
FourrouteslinkingnorthernandsouthernChina(56789:(;)
BeijingShanghaipassengerline ThelineconnectstwomajoreconomiczonesinChina,theBohaiRim
andtheYangtzeRiverDelta.Itgoesthroughthreemunicipalitiesand
fourprovinces:Beijing,TianjinandShanghaiHebei,Shandong,Anhui
andJiangsu.
Beijing-Hong Kong passenger The line goes vertically from Beijing, through fve provinces (Hebei,
line Henan,Hubei,HunanandGuangdong)andendsinHongKongWest
Kowloon.
BeijingHarbinpassengerline The line connects northern and northeastern China. It runs from
Beijing, through Hebei, Liaoning and Jilin provinces and ends in
HarbinofHeilongjiangprovince.
HangzhouFuzhouShenzhen The line links together the Yangtze River Delta, the Pearl River
passengerline Delta and the southeast coastal areas of China. Major stops include
Hangzhou,Ningbo,Wenzhou,Fuzhou,XiamenandShenzhen.
FourrouteslinkingeasternandwesternChina(56<89:(;)
XuzhouLanzhoupassengerline ThislinestartsfromXuzhouofJiangsuprovinceandendsinLanzhou
ofGansuprovinces,passingthroughanumberofprovincessuchas
Anhui,Henan,andShaanxi.
ShanghaiKunmingpassenger It runs horizontally from Shanghai to Kunming, via Zhejiang,
line Jiangxi, Hunan and Guizhou. The line connects eastern, central and
westernChina.
QingdaoTaiyuanpassengerline The line starts from Qingdao, linking up Jinan, Dezhou, Hengshui,
Shijiazhuang and other cities. The line connects northwestern,
northernandeasternChina.
ShanghaiWuhanChengdu The line links up eastern, central and southwestern China.
passengerline MajorstopsincludeNanjing,Hefei,Wuhan,ChongqingandChengdu.
Source:MinistryofRailways,PRCLi&FungResearchCentre
6 Highspeedrailwayingeneralreferstorailwayoperatingataspeedofover200km/h.
20102011
30
Meanwhile, great strides have been made in other railway transportation such as subways, light
rail transit and intercity passenger lines in China. As of September 2010, subways in nine cities
includingBeijing,ShanghaiandGuangzhouarealreadyinplacewhilethoseinother16citiessuchas
Chongqing, Hangzhou and Wuhan have commenced construction.This rapid pace of expansion will
continue in the next fve years. t is expected that by the end of 12th Five-Year Plan period, China will
rank frst in the world in terms of total length of subways and total number of passengers carried by
subways.
LetstakeBeijingasanexample.AccordingtotheBeijinggovernment,atotalof30subwaysandlight
rails with a total length of 1,050 km and 450 railway stations will be built by 2020. By that time, the
railway network density will reach 1.4 km per square kilometer. It could greatly improve accessibility
andenhancemobilityasmostcitizenscouldreachanearbyrailwaystationwithina10to15minute
walk.
Railwaydevelopmentistransformingthecommercialandretaillandscape
More importantly, the development of railway transportation will transform the commercial and retail
landscape,givingrisetoanemergenceofanumberofmetropolises.Today,asmorepeoplechoose
to live and work near train stations, the development of commercial clusters in the vicinity of railway
stations is a common phenomenon in many cities. A typical example is Tokyo around 60% of
commercialclustersinthecityarelocatednearthesubwaysorlightrailstations.Andmorethan90%
ofmoderndepartmentstoresarelocatedwithin100metersfromrailwaystations.
Ourexpertsbelievethefollowingtrendsarelikelytoprevailincomingyears:
Development of railway transportation will transform the landscape of commercial and retail
sectors. Large daily passenger fows, particularly at inter-change railway stations, will create new
businessopportunitiesinthestationsorinnearbyareas.
With high accessibility, train stations will become popular places for social activities and
gatherings. Coffee shops, tea houses, restaurants, hostels, entertainment facilities, etc. will
cluster around railway stations. Indeed, we have already observed similar trends in some big
citiessuchasBeijingandShanghai.
Extensive railway networks will bring opportunities to commercial property developers. We
foresee that huge commercial complexes will be formed around train stations with commercial
activities taking place both on the ground and underground. Since customer flows can be
translated to business opportunities, shopping spaces in the subway will attract more attention
frominvestors.
WhatdoExpertsSay?
31
Nonetheless, a major challenge for train operators and commercial developers is to deal with the
security issues associated with railway operation. Our experts suggest relevant authorities to learn
from the successful experiences of other countries in operating and managing railway networks as
wellasotherrailwayrelatedcommercialactivities.
With all the potential economic benefts and business opportunities it offers to the society, the
development of railways and commercial businesses in the periphery areas is set to gain more
attentioninnearfuture.
20102011
32
9. Commercial property market sees strong investment the development of
AmidseriesoftighteningmeasuresbytheChinesegovernmenttocooldowntheresidentialproperty
market, many property developers in China have turned their eyes to the opportunities in the
commercialpropertymarketinthepastyear.Thistrendissettocontinuein2011.Strongdemandand
theRMBappreciationexpectationhas,andwillcontinueto,fuelinvestmentinthecommercialproperty
market.
Commercialpropertymarketoutperformedin2010
The sales performance of commercial properties was better than residential properties in the frst
three quarters of 2010. According to the National Bureau of Statistics (NBS), the total foor space of
real estates sold in the frst nine months of 2010 was 632 million sq.m, up 8.2% year on year (yoy); of
which, the total foor space sold for real estates for business and residential use grew by 33.2% and
5.8%yoyrespectively.Duringthesameperiod,thetotalsalesrevenueofChinasrealestatemarket
reached319millionyuan,up15.9%yoysalesgrowthofcommercialproperties(48.2%)wasstronger
thanthatofresidentialproperties(11.2%).
CapitaI ow into China's commerciaI property market sets to continue in 2011
Urbanization, government initiatives to stimulate domestic private consumption and rapid expansion
ofretailandcommercialenterprisesinChina,etc.havefuelledinvestmentincommercialpropertiesin
Chinaoverthepastyears.AndamidseriesoftighteningmeasuresbytheChinesegovernmenttocool
downthedomesticresidentialmarket,manytraditionalresidentialpropertydevelopersinChinahave
startedtodiversifytheirinvestmentsintothecommercialpropertysectortoachieveamorebalanced
asset portfolio. Our experts believe that capital fow into China's commercial property market will
continuein2011.
Indeed, the commercial property sector seems to be immune to Chinese governments tightening
measures. Many local governments in China have shown support towards investment in the
commercial property market, as a way to boost local economies as well as to increase fscal revenue.
Shanghai, for example, has substantially increased its commercial land supply in 2010.According to
Centaline Property Shanghai, the Shanghai government launched 85 commercial land sites with a
totalareaof3.8millionsq.mbetweenJanuaryandOctoberof2010thesupplyduringthisperiodhas
exceededthetotaloftheprevioustwoyears.
Infact,anumberofwellknowndomesticrealestatedeveloperssuchasChinaVanke( !")
havealreadyexpandedinvestmentinthecommercialpropertymarketoverthepastfewyears.China
PolyGroup( !".)targetstoliftitsinvestmentincommercialpropertytoashareof30%of
its portfolio by 2012 China Resources Land ( ) also hopes to see its commercial property
businesses to contribute to 40% or more of the company profts by 2016.
WhatdoExpertsSay?
33
On the other hand, in view of the climbing rental costs, retailers in China are increasingly eager to
invest in commercial properties as well. Indeed, Chinas consumer market has been the worlds
fastest-growing markets over the past few years; competition is extremely ferce for well-managed
retailspace,especiallythoseinprimelocations.
Thedevelopmentofcommercialstreetshasparticularlydrawnmuchattention
Chinas commercial property market enjoys robust investment. In particular, the development of
commercialstreetshascaughtmuchattention.AccordingtoapreliminarystudybyChinaCommercial
Street Committee, there were already over 3,000 commercial streets with a total length of 1,800 km
and a total area of 150 million sq.m in Chinas countylevelorabove cities by 2005. Over the past
few years, the investment boom in commercial streets has been spreading to lowertier cities and
townships. Today, a great number of commercial street development projects are still underway in
China, some of which are mega-sized projects. Our experts expect that the supply of foor space of
commercialstreetswillcontinuetoincreasein2011.
Intheeyesofmanylocalgovernments,commercialstreetsplayanintegralroleincitydevelopment.
Many city planners view commercial streets as a showcase of their cities. Not only do commercial
streets help improve city image, they also promote local consumption as shopping convenience is
enhanced.
Commercial street projects are developing fast in China. Nonetheless, our experts suggest that city
plannersshouldtakeintoaccountthecitysoveralldevelopment,populationdistribution,consumption
demandandtransportationinfrastructuretoavoidduplicativeinvestment.
20102011
34
10. Retail and distribution enterprises face everincreasing costs there are growing
callsfortheChinesegovernmenttohelplowerthecostsofdoingbusiness
In recent years, retail and distribution enterprises in China have faced rising business costs.
Undoubtedly, increasing market competition has driven up overhead costs such as rental and labor
but there are some structural issues behind the high transaction costs facing Chinas retail and
distributionsectorwhichareinherentinthecountryspolicyframework.Industryplayershopethatthe
governmentcantakestepstohelplowerthecostsofdoingbusiness.
Overheadcostsontherise
AsretailershomeandabroadcasttheireyesonChina,Chinasretailanddistributionenterpriseshave
faced increasing overhead costs. Labor and rentals, the two major cost components for retail and
distributionenterprises,havecontinuedtoclimbinthepastyears.Inrecentyears,theaveragelabor
cost in the wholesale, retail and catering sectors has reportedly been increased by more than 10%
andmostenterpriseshaveseentheirlaborcostjumpedby2030%.
Many retailers also refected that their rentals have been trending upward, and leasing requirements
are becoming more stringent. For instance, in the past decade, leasing arrangements would
typically last for 58 years, and landlords usually adjusted the rental upward by 5% annually today,
leasing agreements are reviewed much more frequently and often there are much stronger upward
adjustmentsforeachrenewal.Someretailershaveoptedforbuildingtheirownstorestoeaseupward
pressureonrentalsthis,however,wouldtieupworkingcapitalofretailers.
Risinglogisticscostsisanotherchallengeapartfromincreasingfuelcosts,cumbersometollfeesin
ChinahaveaddedtothecostsofChinasretailanddistributionenterprises.
Besides,astransactionsbycreditcardsbecomemorepopular,retailersinChinashoulderthegrowing
burdensofservicefeeschargedbybanks.Thisisespeciallytruetodepartmentstoreoperators.
Comparatively, Chinas retail and distribution enterprises face higher costs of doing
business
Still, there are some structural issues behind the high transaction costs facing Chinas retail and
distribution sector which are inherent in the countrys policy framework. To name just a few, many
industry players have pointed out that they enjoy much fewer, if not none, tax concessions, than
businesses in other industries such as export manufacturing. Not to mention that the problem of
doubletaxationisfairlycommoninretailanddistributionsector.
On the other hand, commercial enterprises in China also bear higher electricity tariffs than industrial
enterprises.
20102011
35
GrowingcallsfortheChinesegovernmenttohelplowerthecostsofdoingbusiness
ChinasretailanddistributionenterpriseshaveurgedtheChinesegovernmenttohelplowerthecosts
ofdoingbusiness.Policymakers,ontheotherhand,growinglyrecognizethatthehighcostsofdoing
business for retail and distribution enterprises in China are unfavorable for the country to nurture a
consumptiondriveneconomy.Theyaretakingstepstoalleviatetheproblems.
Therearesomeencouragingsigns.Thegovernmenthastakenseveralstepstoreducethetransaction
costs of Chinas retail and distribution sector. For example, trucks transporting agricultural produce
canbeexemptedfromtollfees,startinginDecember2010.AsChinaadoptsamoreproconsumption
developmentmodel,weexpectmoresupportiveinitiativestocomein2011.

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Commissioned by the Chinese Government, the CGCC consists of 14 committees, working on

3. Increase in agricultural prices food, in particular, contributed significantly to

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