11 March 2015
Shanghai Businesses Take Pioneering Approach to China's New Normal
- Photo: Shanghai: Can its commercial districts adjust to the New Normal? (Xinhua News Agency)
- Photo: Up: Gold jewellery sales. (Xinhua News Agency)
- Photo: Up: Mass market catering. (Xinhua News Agency)
- Photo: Down: Traditional retail models. (Xinhua News Agency)
- Photo: Up: Widespread adoption of innovation. (Xinhua News Agency)
With the mainland adjusting to the economic realities of a New Normal, one characterised by slower economic growth, the Shanghai business community is taking a lead in adjusting to the approaches now required for commercial success.
The year 2014 has been designated as marking the beginning of China's New Normal. This has been characterised by a slowdown economic growth in both the domestic and international arenas, total exports expanding at a slower rate, investment growth slackening and collective consumption tailing off. Despite this, the commercial sector in Shanghai managed to maintain steady growth. During the course of the year, total retail sales of consumer goods in the city reached Rmb871.9 billion, up 8.7% over 2013.
I. Review of 2014
1. Growth in Clothing Sales, Drop in Gold Jewellery
Against a backdrop where the overall retail market grew by 8.7%, the performance of clothing-related products in 2014 was satisfactory, with sales up 14.4% year-on-year. As for communication products, thanks to the rise of domestically-manufactured smartphones and the launch of Apple's iPhone 6, sales rose 21.5% over the preceding year. Other products with a relatively fast growth included: furniture (up 14.5%); cosmetics (up 25.7%); books, magazines and journals, (up 103.8%); electronic publications and audio-visual products (up 46%); automobiles (up 11.2%) and household appliances (up 10.4%).
Sales of precious jewellery reached Rmb26.6 billion, representing a considerable spend. The unusually high level of sales in 2013, however, was not maintained and sales actually dropped 11.3% year-on-year. Fluctuating gold prices also affected demand. Despite the rise in gold prices, however, sales in this sector actually went up.
2. Catering Sector Rallies
Since the central government announced its eight-point regulations curtailing public sector spending, high-class catering revenues have plunged, with sales growth in the sector dropping significantly. In 2014, retail sales in Shanghai's catering sector only grew by 5.7% when compared to 2013.
In the face of market changes, the Ministry of Commerce (MOFCOM) has issued a set of guidelines aimed at expediting the development of the mass catering sector. These actively encourage high-end restaurants to develop mass catering outlets, advise catering enterprises as to how to set up outlets in the community, schools, hospitals and office sectors, while urging catering businesses to adopt more innovative service modes. The intention here is raise the share of mass catering to above 85% of the market within five years.
Last year was a critical one for the transformation of Shanghai's catering sector. Throughout 2014, the restructuring of the sector gathered speed. This saw a number of high-end catering enterprises enter the mass-market sector, while others abandoned the industry altogether. Mass market catering is understandably popular with consumers and it is hoped that increased spend by individuals and families will help make up the public sector shortfall.
Year-on-year sales growth in the Shanghai catering sector have been declining for several years. It fell from 13.6% in 2010 to 5.14% in 2011, to 6.36% in 2012, and then to only 1% in 2013. In 2014, however, sales growth rebounded and it is expected that it will continue to climb on a double-digit basis in 2015.
II. New Normal Shanghai
1. Growth Drops from Double-digits to Single-digits
Since 2012, the growth of the consumer market in Shanghai has been declining, dropping from double-digits to single-digits. It is estimated that in the years to come, the rate of market growth will hover in the region of 8-10%.
2. Diversification of Commercial Distribution
New commercial districts, including the Middle Ring Road (Zhenbei) and Daning, as well as several areas in the new suburban towns, have been emerging over recent years, with the development of new towns and townships in Shanghai's suburbs gaining momentum. Driven by faster and more convenient transport, growth in the number of residents and a higher concentration of modern commercial outlets, retail sales in suburban areas have been expanding at a much faster rate than in the downtown areas. In 2014, the total retail sales of consumer goods in the Jiading, Qingpu, Fengxian, Jinshan and Chongming districts all maintained double-digit growth. The growth in retail sales has been led by the Songjiang New Town southern commercial district, the Songshan New Town northern commercial district, the Zhaoxiang commercial district, the Xinzhuang commercial district and the Nanqiao commercial district.
By comparison, the sales growth of the established commercial districts in downtown areas has slowed down, with sales in a number of commercial districts declining. In 2014, the total sales in the downtown commercial districts of Shanghai dropped by 1.2%.
Planning for the distribution of the municipality's commercial outlets is carried out at three levels - municipal, district and community. Commercial development in community and suburban areas has been the focus, with the distribution of commercial centres in the suburbs designed to form an integral part of the overall planning of new towns. It has been seen as a priority that these centres complement the overall distribution, function, positioning, industrial structure and cultural landscape of the new towns. It is hoped that development of these suburban commercial centres will align with the socio-economic development level, population distribution and purchasing power of the new towns. Ideally, they should also complement the city centres and adopt individual development modes and their own specialties.
III. Challenges and Opportunities
With the world economy is still adjusting to the aftermath of the financial crisis, the recovery is likely to remain weak for some time. As China's share in the total volume of global trade continues to rise (China's exports and imports accounted for 11.76% and 10.33%, respectively, of the global total in 2013), the impact of global economic issues on the mainland has increased. Most obviously, a decline in the demand in some countries adversely affects China's exports.
In 2014, China's national economy grew 7.4% over the previous year, down by 0.3 percentage points. Growth of total import-export trade only rose by 2.3% over the preceding year. Against the backdrop of the New Normal, with China's economy entering a phase of moderate growth, the commercial sector in Shanghai also faces a number of challenges. Most notably, these include a slower sales growth, declining gross profit margins, lower net profit margins, and rising sales costs.
1. Slower Sales Growth
Among all the major cities in China, the commercial sector in Shanghai has taken the lead in adjusting to the New Normal. Shanghai's year-on-year growth rates in the total retail sales of consumer goods were 8.8% in 2012, 8.6% in 2013, and 8.7% in 2014. By contrast, average growth in total retail sales of consumer goods across the country, albeit slowing down, still managed to maintain a double-digit score (the national total retail sales in 2014 grew 12% over the preceding year).
2. Rising Costs and Declining Profits
Operating costs in the commercial sector are rising fast, while gross profit margins and net profit margins are declining. Nationwide surveys show that, in 2013, wages in the retail sector climbed 11% over the preceding year, while rents rose 12.6%. In 2014, the rent paid by businesses that had newly signed tenancy agreements went up by 24.3%. In 2013, the gross profit margin of retail enterprises was 14.2%, down 0.9 percentage points over the preceding year. Overall, the net profit margin was 2.3%, down 0.2 percentage points over the preceding year.
3. Weakening Advantages of Traditional Retail
The biggest advantage of traditional retailers used to be location, but that factor is no longer as significant. There are a number of reasons for this. Firstly, the development of transport, in particular the extension of the rail network, has created favourable conditions for the establishment of new residential areas in the suburbs, resulting in an outflow of residents from the downtown areas and a divergence of commerce from downtown areas to the new cities and towns. Secondly, the suburbanisation of business districts and the development of suburban tourism and culture have diluted the purchasing power of the downtown areas. Thirdly, as commercial distribution in Shanghai spins off to form several centres, it has posed challenges to traditional urban commerce. Finally, the rapid rise of online shopping has dramatically weakened the locational advantage of traditional retailers.
Under the New Normal, while the commercial sector – especially traditional commerce – faces many challenges, there are also a number of opportunities emerging.
The establishment of the Shanghai Pilot Free Trade Zone has attracted many foreign firms as well as businesses from other provinces and cities. At the same time, MOFCOM and the Shanghai Municipality have joined forces to build a national-class convention and exhibition centre in the Hongqiao business district. This move is expected to generate more business activities, conventions, exhibitions and visitor flow, in turn stimulating greater consumption. It is also estimated that the opening of Shanghai Disneyland will attract 3-5 million new visitors. The scale and level of consumption in the city will rise as the growth of Shanghai's resident population accelerates and the number of visitors increases.
Shanghai's commercial sector stands to do well out of Shanghai Disneyland, with not only the areas surrounding the international tourism and resort zone and Pudong set to benefit. It is envisaged that that the arrival of Disneyland has potential benefits for all of the commercial districts in Shanghai, in line with the individual appeal.
The State Council is also looking to stimulate shopping spend by tourists. This will see action taken to improve the tax refund policy on purchased goods by foreign visitors, with the scope of implementation set be extended to all qualified locations across the mainland. In another move, more duty-free shops will also be set up at entry ports. As the opening of the Disneyland project looms, Shanghai is looking to become the first mainland city to offer a departure tax refund, a move seen as likely to boost its tourism and retail sectors.
MOFCOM is also planning to issue a series of guidelines related to the transformation and upgrade of the traditional commerce sector. This will encourage businesses to embrace new technology, and innovative development modes, while raising competitiveness, and developing smart commerce.
The Ministry will also support the development of chain operations by introducing consolidated taxation of the head office and branches of cross-regional chain-operated enterprises, as well as by looking to support central purchasing initiatives. Commercial enterprises will also be encouraged to develop smart chain operations, while enhancing their logistics development through the use of embedded technology and integrated supply chain capability. Such moves will be extended to production and sales, while also increasing investment in the development of outlets and vehicle fleets. The China Banking Regulatory Commission (CBRC) will also issue guidelines on the financing of small and micro commercial enterprises, while promoting the development of guarantee companies engaged in circulation, supply chain financing, commercial district financing, and collateral financing using the operation rights of business operators.
IV. Development Plans for Commerce Under the New Normal
1. Managing the Growth rate of Commercial Real Estate
After 20 years of rapid growth, supply and demand in Shanghai's commercial sector has evolved from being a "seller's market" to becoming wholly a "buyer's market". At the same time, the serious shortage of commercial facilities in the early 1990s has been reversed, with the market now approaching saturation point, with surplus facilities now to be found in some districts. By the end of 1990, the total business floor area of shops in shopping malls across Shanghai was only 4.03 million square metres. By early 2014, however, it had increased to 61.65 million square metres. The average annual growth rate over this 20-plus year period was 12.6%.
With regard to this, the Shanghai municipal commerce commission and planning and land resources bureau jointly issued the Shanghai Commercial Network Layout Plan in 2014. This proposed that the total number of commercial facilities in Shanghai should be restricted, with the total business floor area of commercial operations in Shanghai capped at 70-75 million square metres by 2020. It also aimed to maintain the average annual growth rate of the business floor area of commercial facilities at around 2.6-3.6% per annum.
2. Optimising Commercial Distribution
Community commerce and suburban new town commerce have been identified as growth priorities. It is envisaged that the pace of commercial development will be faster in certain areas, notably the Hongqiao commercial district, the Shanghai international tourism and resorts zone, the Expo district, Qiantan, the Lingang Area, and the Suhewan district, as well as along the banks of the Huangpu River.
3. New Business Types and New Operational Modes
In the face of the changes in the macro environment, many commercial enterprises will be obliged to adopt new business concepts and change their marketing approach.
The phenomenon of the clustering of retailers, notably supermarkets, is bound to change, with some seeking transformation and others embracing new business formats. It is expected that cross-sectoral operation (such as O2O) and other co-operation will increase.
Changes in consumer demand show that the "me-too" consumption of the past has basically run its course. Personalised and diversified consumption is emerging as a mainstream norm. It is thought that previous operational modes, such as "from factory to shop" or "joint operation", will not meet these new requirements. In this regard, it is thought that commercial enterprises will have to look to offer niche or experiential services in to satisfy demands for more personalised and diversified consumption.
Qi Xiaozhai, Special Correspondent, Shanghai