While China’s retail market continues to expand, retailers are at risk of being squeezed in top tier cities by market saturation and e-commerce.
First- and second-tier cities are facing market saturation of luxury goods, say two researchers at Fitch Ratings via the Shanghai Times. Deceleration in same-store sales growth is being attributed to the government crackdown, weaker economic growth, and the rise of online shopping.
Some department stores in Beijing and Shanghai experienced contraction in same-store sales in 2012 and the first half of 2013, said Michelle Leong based in Hong Kong and Jeong Min Pak based in South Korea in a joint statement. Retailers have gone to extreme measures in some instances to protect their market shares. “Some retailers have set up new stores close to existing outlets to prevent new entrants into the area. While there is a certain amount of cannibalization, retailers would rather that happen than lose market share to a competitor over the longer term,” they said.
Brands with mature retail networks have been renovating their stores to stay competitive. Adding lifestyle elements to shopping experiences – such as drinks, meals, and cinema – can help slow the encroachment of e-commerce.
Generic consumer products, such as consumer electronics goods, have suffered the most from the emergence of online shopping, and fashion and apparel are also vulnerable. As growth shifts to third- and fourth-tier cities, retailers’ capital expenditures for new stores are mainly channeled to these cities, they said.
“The retail markets in third-tier or lower ranked cities will grow quickly because the process of urbanization is still at an early stage and the majority of their populations are still experiencing increases in disposable incomes,” they said.
image credit: ivan walsh