What can we learn from China about retail in the Benelux ?

 

by Nils van Dam, global head Food and Food Retail, Duval Union Consulting

Is China unique or is China first ?  

China is an intriguing country. The scale of China combined with its fast pace of change has transformed China into the second largest economy of the world.

In the past it was only considered as the factory of the world  based on low labor costs and high work ethics. Today China is thought leader in many sectors, amongst which e-commerce.

During last month’s retail trip in China we tried to discover what retail in the Benelux can learn from China. While  European retailers and food manufacturers are still doubting if e-commerce will become important in the food market, China is already selling 18% of groceries nation-wide through e-commerce portals and the pace of growth is only picking up. 50% of these sales are fresh foods. The projections for the e-commerce share in 2022 is 35%. More than 95% of e-commerce is delivered at home, mostly free, sometimes at a small fee.  In my previous blog, I discussed the devastating impact that home-delivery growth has on the store profitability. In this article, I will elaborate on this based on the Chinese reality.

The Chinese megatrends

The 5 megatrends in China are: urbanization, a growing but time-stretched middle-class, digital ubiquity, an increasing interest in health & wellbeing (especially food safety is a big concern) and finally the search for ultra-convenience.

The impact for retail is in line with the global consensus that food retail should evolve towards more convenience and more in-shop experience.

Benelux retailers focus on in-store experience and encourage grocery pick-up in order to use their existing retail infrastructure, while collection costs are paid for by the consumer. Chinese retailers are fully surfing on the consumer’s desire for ultra-convenience by building a strong home-delivery ecosystem. Alibaba and Tencent have rapidly grown and consolidated the e-commerce space, holding together more than 80% market share. All other existing players have to choose sides. Wallmart, for instance, has taken a 10% share in Tencent and is now  fully integrated in Tencent’s WeChat app.

Free home-delivery within 24 hours is current practice throughout China, also in rural areas. In the big cities, 30 minutes or 1-hour delivery has become the norm. Millions of drivers, using normal bikes or electrical motor bikes, are speeding through the streets to pick-up or deliver the orders. Tencent crowdsources more than 5 million drivers. It uses a dynamic pricing tool to balance supply and demand of drivers and has a strict rating system based on % delivery on time.  E-commerce is growing at a blasting pace and is projected to grow to 32% in 2022, almost doubling in 4 years. In some areas, these levels have already been reached (in the big cities).

O2O

O2O (on-line to off-line and off-line to on-line) has become a major strategic challenge for all retailers. Some even call it OMO or online merged with offline.  Tencent and Alibaba try to exploit the opportunities of full integration. Everybody experiments with shops as picking centers. In some bigger stores Walmart has separated a picking zone used for the 1000 fastest movers in order to stimulate picking efficiency. Hema offers home delivery as an extra service to its offline shoppers. All retailers try to obtain a maximum amount of data of the off-line shopping behavior by using visual recognition, in-store tracking and electronic payment through Alipay and WeChat. Digital messages and coupons are sent to the shopper during their shopping trip. The Chinese shopper really feels pampered.     

The convenience store is no longer convenient

The strong presence of fast and cheap home-delivery has a surprising consequence. Convenience store are less and less seen as convenient. A Chinese shopper in the city can get his or her products faster through home-delivery compared to actually going to a neighborhood store. On top of that, e-commerce prices are often 5 to 10% cheaper. Chinese convenience stores are quickly adapting and are becoming “food for now” stores expanding their prepared meals offer, including home-delivered meals.

The flagship store, the key remaining role for stores in China ?

Shifting business to e-commerce in big cities becomes margin enhancing!

China uses a classification of its cities in tiers. There are 4 tier-1 cities (Beijing, Shanghai, Guangzhou, Shenzhen), 9 tier-2 and 13 tier-3 cities. These 23 cities cover 85% of the buying power of China. Real estate prices, especially in good locations, are rising fast. High street locations can drive rental costs easily above a ratio of 10% of turnover, impacting store profitability heavily. The store needs to become a flagship , a marketing investment to build the brand through experience and to build consumer trust. The alternative is to relocate to a cheaper area and risking lower traffic. Shifting business to e-commerce in big cities becomes margin enhancing!

What can we learn from China about the future retail architecture in the Benelux  ?

Physical stores remain important. But their number and their role will need to change. A limited amount of experience-based flagships stores are important. Other stores need to focus on convenience and/or combine with a picking hub.    

Ultra-convenience is also a big trend in Belgium and the Netherlands. E-commerce has already started to grow in foods and beverages, also in fresh. An e-commerce share of 15% to 20% by 2025 is a scenario to take into account. China reached 18% from almost zero in less than 10 years. Today in the Benelux, home-delivery is only a small part of e-commerce (<10%). In China, 95% of e-commerce is home-delivery, much more in line with consumer needs.

In China, home delivery is already affordable for retailers, because the delivery cost has descended below € 1 per order. In big cities e-commerce is even margin accretive versus shops. Salaries are higher in the Benelux but also the average basket sizes are much higher. Efficient routings should further reduce the delivery cost to affordable levels. Population density on the axes Brussel-Antwerp and Rotterdam-Amsterdam-Utrecht are comparable to China and therefore an enabler.

Already a small shift of turnover towards home-delivery  impact store profitability enormously. Profitability in retail is rather low. The net operating margin in the Benelux is around 3% on average. Colruyt and Ahold have the highest margins, while other players have lower or even negative margins.

The shift towards home delivery is providing troubling times for  the retail sector. Due to the high fixed cost model of the sector, a small loss of, for example, 3% revenue to home delivery represents an average of 2% less underlying profit. The net margin in the sector would drop to 1% on average. This means that about 30% of the stores would become loss-making. Very few retailers would have the financial clout to sustain this situation for a long time.

Furthermore,  we learn from China that more e-commerce is a strong driver of consolidation. In China only 2 platforms, Alibaba and Tencent, are able to thrive. It is highly improbable that in the Benelux more than 2 platforms would be sustainable. The question is even if local or Benelux platforms would have the strength to withstand Amazon or Alibaba.

Physical stores remain important. But their number and their role will need to change. A limited amount of experience-based flagships stores are important. Other stores need to focus on convenience and/or combine with a picking hub.    

Focus on the opportunity of O2O

The most important learning for me is that wholeheartedly embracing the integration of on-line and on-line offers numerous growth opportunities. The glass might be half-full instead of half-empty.

We are on the verge of a revolution in the retail sector. The stakes are rising, the risks are getting bigger. Whoever will ultimately be the winner depends on the vision, flexibility and speed of the players within the sector. We can learn a lot from China and should be proudly copying relevant approaches. To summarise : China is unique, because it is first !

About the author  

Nils van Dam is a seasoned manager, with more than 30 years of experience in the FMCG sector. He had a career at international, European and local level at Unilever, AB InBev and Censydiam in marketing, sales and general management. In his last role as CEO of Unilever Belgium & Luxembourg he led the digital transformation trajectory aiming to prepare the company for the future. Nils is fascinated by marketing, change management and company transformations.

In 2018 Nils became Global Head Food, Beverage & Food Retail at Duval Union Consulting. He is also a partner and director at Jacoti, a new technology company in hearing aids. He is a director at the Westmalle brewery and at Spaas candles.

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