Spotlight on China Retail 2018

Contents

Executive Summary 01

Issue 1| General Retail 10

Issue 2| E-commerce 37

Issue 3| Department stores 59

Issue 4| Shopping Malls 74

Issue 5| Hypermarkets/ Supermarkets 91

Issue 6| Convenience Stores 105

Issue 7| Luxury Market 118

Issue 8| Cross-border E-commerce (Import) 135

Issue 9| Retail and E-commerce Logistics 160 Spotlight on China Retail

1 1 Spotlight on China Retail | Spotlight on China Retail |

Issue 1| General Retail Issue 1| General Retail

Executive Summary Executive Summary

China’s retail sector sees modest growth in 2017; yet China-U.S. trade war is set to dampen consumerChina’s retail sentiment sector sees and modestdrive down growth retail in sales2017; growth yet China. China-U.S. has trade been thewar world’s is set second to dampen-largest retail andconsumer consumer sentiment market after and the U.S.drive since down 2014. retail Total retailsales sales growth of consumer. China has goods been reached the world’s 36.6 trillion second yuan-largest in 2017, retail upand nominal consumerly by market 10.2% after yoy. Inthe 1H18, U.S. sincetotal 2014.retail salesTotal ofretail consumer sales of goods consumer increased goods nominally reached 36.6by 9.4% trillion yoy yuan to reach in 2017, 18.0 trillionup nominal yuan.ly However,by 10.2% yoythe .escalating In 1H18, total China retail-U.S. sales trade of war consumer is set to goods hinder increased economic nominally growth, whichby 9.4% in yoyturn to will reach affect 18.0 consumertrillion yuan. sentiment However, and the consumer escalating spending. China-U.S. China’s trade retailwar is sector set to as hinder a whole economic will be growth,adversely which affected in turn and will is expected affect toconsumer see single sentiment-digit sales and growth consumer in the spending. coming year. China’s retail sector as a whole will be adversely affected and is expected to see single-digit sales growth in the coming year. Millennials and generation Z reshape the retail landscape. Middle class consumers in China, particularly theMillennials millennials and and pgenerationost-millennials Z (orreshape generation the Z) retail, are becoming landscape increasingly. Middle influentialclass consumers in the inretail China, sector particularly. China will havethe millennials the world’s and largest post- middlemillennials class (or population generation by Z) 2027, are, becominga segment increasingly whose strong influential spending in power the retail will sectorreshape. China will consumptionhave the world’s domestically largest middle and internationa class populationlly over by the2027 next, a segment decade. Lwhoseocal and strong international spending retailerspower will are reshape ramping up effortsconsumption to engage domestically more effectively and internationa with theselly influential over the next consumers. decade. ToLocal lure and young international shoppers, retailers brands are are increasingly ramping up turningefforts to to engage young celebritiesmore effectively and influencers with these to influential market their consumers. products To, and lure are young launching shoppers, new brandsproduct are lines increasingly with younger tastesturning. to young celebrities and influencers to market their products, and are launching new product lines with younger tastes. Retailers strive to diversify their product and service offerings and deliver enriched lifestyle shoppingRetailers striveexperience to diversifys. To entice their shoppers, product many and retailers service have offerings expanded and into deliver new sectors enriched and collaborated lifestyle with shoppingother market experience players to expands. To enticeservice shoppers, offerings manyand generate retailers new have revenue expanded stream into s.new Meanwhile, sectors and to meetcollaborated the higher with expectationsother market ofplayers today’s to consumers,expand service more offerings and more and retailers generate -- especiallynew revenue department streams. storesMeanwhile, and shopping to meet mallthe higher operatorsexpectations -- hav of today’se upgraded consumers, by introduc moreing and new more and retailersinnovative -- especiallyconcept stores department and more stores lifestyle and shoppingservices. mall operators -- have upgraded by introducing new and innovative concept stores and more lifestyle services. O2O continues to dominate the retail scene. Pursuit of online-to-offline (O2O) strategies has become a preoccupationO2O continue fors mostto dominate brands and the retailers. retail Many scene traditional. Pursui tre oftailers online in-to China-offline have (O2O actively) strategies pursued has digital become expansion a andpreoccupation deployed O2O for most strategies brands to and ensure retailers. seamless Many integration traditional of re alltailers channels in China -- physical, have actively online, pursued mobile anddigital social. expansion At the sameand deployed time, some O2O leading strategies e-commerce to ensure companies seamless integration and “pure- clicksof all ”channels enterprises -- physical, have tiptoed online, into mobile bricks and-and social.-mortar At thein thesame hope time, of someproviding leading a better e-commerce shopping companies experience. and “pure-clicks” enterprises have tiptoed into bricks-and-mortar in the hope of providing a better shopping experience. Use of smart technologies gains steam. China’s retail sector is being redefined by a new wave of technologies toUse facilitate of smart O2O technologiesintegration while gains significantly steam enhancing. China’s retail customer sector experience. is being redefined A multitude by a ofnew technology wave of technologies-driven businessto facilitate models O2O andintegration business while formats significantly has emerged enhancing recently customer. Digitized experience. experiential A multitude stores and of AI technology-driven pop-driven-up stores, unmannedbusiness models stores and are business example formatss. has emerged recently. Digitized experiential stores and AI-driven pop-up stores, unmanned stores are examples. Pop-up retailing comes on the scene. Pop-up retailing has gained popularity in recent years, with brands and retailersPop-up opening retailing pop comes-up stores on backed the scene by innovative. Pop-up marketing retailing has content gained to popularity promote products in recent and years, raise with awareness. brands and Sretailersome also opening use the pop pop-up-up stores format backed to test by new innovative technologies, marketing concepts content and to collections promote ,products and to gain and market raise awareness. insights. One of Stheome major also advantagesuse the pop of-up pop format-up retailing to test newis that technologies, the set-up costs concepts are far and lower collections than for, and permanent to gain market stores insightswith long. One-term of leases.the major advantages of pop-up retailing is that the set-up costs are far lower than for permanent stores with long-term leases.

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Executive Summary Executive Summary Spotlight on China Retail

Spotlight on China Retail | Spotlight on China Retail | ss r ss r i ar i ar

China’s online retail market nins ri ni rh China’s online retail market, the world’s largesChina’st, has online shown r reetailsilien markett growth ninsdespite a slowing ri econo my.ni The transaction rh val China’sue of China’s online orenlinetail market, retail marke the wt orld’s increasedlargest, has shown yo rey tosilien reacht growth trillion despite yu aan slowing in econo hismy. rap idThe growth transaction is attr ibutablevalue of China’smainly toonline China’s retail large marke populationt increasedof nterne t users yoanyd tothe re earlachy adoption trillion o yuf mobilean in shopping his byrap Chineseid growth consumers is attributable obile main commercely to China’s accounted large population for of nterne of totalt users online and sthoppinghe early atrdansactionsoption of mobile in shopping by Chinese consumers obile commerce accounted for of total online shopping transactions in r ians sri inras in rsn an an hir sss With the rise of omnichannelr retailing, ians e scommerceri i gnrasiants are acintively penetrating rsn offlinean retailingan withhir th e ideasss of perfecting With their the ri se of omnichannelphysical retail retailing, networks e ancommerced further expandinggiants are actheitivelyr business penetrating ecosystems offline. retailingAlibaba andwith J D.com,the idea in of p articulaperfectingr, have their acceleratedphysical retail the networks pace of theiand rfur offlinether expandingexpansion theiby mergingr business with ecosystems or acquiring. Alibaba physical and retailers. JD.com, They in particula hope tor, bhuildave an all encompassingaccelerated the business pace of etheicosystemr offline that expansion fully blends by merging online anwithd o offliner acquiring channels physical so as retailers.to become They ubiquitous hope to anbuildd an all indispensableencompassing inbusiness the daily ecosystem life of all thatChinese fully c onsumersblends online. and offline channels so as to become ubiquitous and indispensable in the daily life of all Chinese consumers. ia r s inrasin ar shr i ars aiia iia arin iaying th re high level o f consumers penetrationinrasin by social ar media s platformshr i such a as rseChat, aeibo,iia induoduo, iia arinand live streamingying the high and levelshort o vidf consumereo platforms, penetration such as bouyin,y social brands media anplatformsd retailers such are as increasingly eChat, eibo, trying toinduoduo, sell and mare and livet their streamingproducts via and these short channels video platforms, such as ouyin, brands and retailers are increasingly trying to sell and maret their products via these channels r ars an nrn ians anh hir n ria as ome ecommerce companies haver taen bold initiativesars an to launch nrn their ownians private anh labels hir to offer n consumers ria uality, as premium ome ecommerce and personalied companies haveproducts taen and bold services initiatives etas to launche, libaba, their com, own private encent, labels iaomi to offer and consumers iacom are uality, cases premium in point omeand personalied ecommerce productscompanies and have services even s etaset up pehysical, libaba, stores com, to sell encent, their own iaomi private and lab iacomels are cases in point ome ecommerce companies have even set up physical stores to sell their own private labels ra r nins hri he rural online retail maret has become a new growth engine for e racommerce r in China with nins the near saturation hri of the he urban rural o onlinenline m retailaret mare he gt overnmenthas become has a new been growth very supportive engine for of e this developmentcommerce in Ch ecogniingina with the th neare ample saturation growth o pfotential the urban of theonline rural m aretecommerce he government maret, leading has been retailers very supportive and ecommerce of this developmentcompanies have ecogniing adopted “going the ample rural” g rowthstrategies. potential of the rural ecommerce maret, leading retailers and ecommerce companies have adopted “going rural” strategies. China’s first Er a anhs he commerce aw, which is to tae effect on anuary , is China’sdesigned tofirs safeguardt Er the legitimate a rianhsghts and in terestshe commerce of all parties aw, in volvedwhich isin toecommerce tae effect onto regulate anuary ecommerce , is practicesdesigned to maintain safeguard the th sounde legitimate order of ri ghtsthe maret, and interests and fo osterf all the parties furthe involvedr development in ecommerce of ecommerce to regulate in a ecommercemanner that is sustainablepractices maintain and healthy the s ound order of the maret, and foster the further development of ecommerce in a manner that is sustainable and healthy

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Executive Summary Executive Summary Spotlight on China Retail

Spotlight on China Retail | Spotlight on China Retail |

ssue Department tores ssue Department tores ecutie ummar ecutie ummar

Department store sector maintains stable sales growth; new store openings continue. China’s Departmentdepartment store store sector sector witnessed maintains positive andstable stable sales growth growth in the ;past new year store. According openings to the continue NBS, retail. salesChina of’s department storestores sector above witnessed a designated positive size ( andenterprises stable growth with annual in the sales past ofyear 5 .million According yuan to or the above NBS, and retail with sales employee of strengthdepartment of 60 stores or more above) increased a designated by 4.6% size yoy (enterprises in 1H18. MOFCOMwith annual statistics sales of also 5 million show yuanthat the or aboveyoy growth and with of 5,000 employee key rstrengthetailers reachedof 60 or more4.6% )in increased 1H18, with by department4.6% yoy in 1H18stores. MOFCOMaccounting statistics for 4.5% also yoy show. In terms that of the new yoy store growth openings, of 5,000 over key the pastretailers two reachedyears, the 4.6% number in 1H18, of newly with departmentopened department stores accounting stores was for still 4.5% slightly yoy. moreIn terms than of that new of store department openings, stores over the whichpast two were years, closed the ornumber revamped of newly, resulting opened in a department net rise. stores was still slightly more than that of department stores which were closed or revamped, resulting in a net rise. ransormation eorts hae starte to pa o. ecently, the department store sector has made every effort to ransormationtransform and adust eorts to keep haepace with starte changing to pa consumer o. ecently, needs, whether the department through thestore upgrade sector ofhas hardware made every and effort stores, to thetransform refinement and adust of merchandise to keep pace and with service changings, supply consumer chain integration, needs, whether or the through restructuring the upgrade of business of hardware models and stores, operatithe refinementng systems. of merchandise The sector as and a whole service hass, supplystarted chain to reap integration, the benefits. or the According restructuring to a survey of business by the models China Commerce and Associationoperating systems. for eneral The sectorerchandise, as a whole nearly has started of to department reap the benefits. stores Accordingsurveyed enoyed to a survey positive by the yoy China sales Commerce growth in .Association for eneral erchandise, nearly of department stores surveyed enoyed positive yoy sales growth in . eeraging technologies to pursue integration; orming partnerships with nternet companies aneeraging ecommerce technologies plaers tois commonpursue practice. integration; any department orming partnershipsstore operators havewith adopted nternet advanced companies antechnologies ecommerce such as mobileplaers nternet, is common big data, practice. the oT nternet any department of Things and store even operators A to achieve have adopted integration advanced namely,technologies a seamless such as integration mobile nternet, across bigphysical data, stores,the oT onlinenternet platforms of Things and and mobile even termi A tonals achieve along with integration digital transformation.namely, a seamless eanwhile, integration increasing across physical numbers stores, of department online platforms store operators and mobile have termi formednals strategicalong with alliances digital with nternettransformation. or large eanwhile,scale ecommerce increasing companies numbers to of roll department out O2O initiatives store operators that leverage have formed the latter’s strategic huge alliances traffic reso withurces, bignternet data asor welllarge asscale logistics ecommerce capabilities. companies to roll out O2O initiatives that leverage the latter’s huge traffic resources, big data as well as logistics capabilities. Diersiing retail ormats an tapping into other business sectors. To adapt to the changing needs of Diersiingconsumers, more retail and moreormats department an tapping stores have into sought other to business expand their sectors scope .of To business adapt to and the engage changing in multi needsformat of , multiconsumerssector, m operationsore and more. or departmentexample, in recentstores haveyears sought olden to agle expand etail their roup scope has of launched business boutiqueand engage supermarkets, in multiformat , bookstoremultisectors, petoperations stores and. or beauty example store, ins, recent to meet years the olden discerning agle needs etail of roup middle has class launched consumers. boutique ecogniing supermarkets, the fast growthbookstore potentials, pet store of conveniences and beauty stores, store s,players to meet such the as discerning Wangfuing needs roup, of middle ainbow class Department consumers. tore ecogniing and ew the World fast Departmentgrowth potential tore of have convenience tapped into stores, the convenienceplayers such storeas Wangfuing segment, roup, launching ainbow their ownDepartment convenience tore store and ewbrands. World Department tore have tapped into the convenience store segment, launching their own convenience store brands. ering aitional sales channels to enhance prouct uniueness an gross proit margins. To eringenhance product aitional and service sales uniqueness channels and to provideenhance customers prouct with uniueness a differentiated an shopping gross proitexperience, margin manys. To enhancedepartment product store and operators service have uniqueness expedited and the provide expansion customers of direct with sales a di fferentiatedbusiness. ome shopping operators experience, such as tmheany ailian departmentroup, Wangfuing store operators roup, Wanda have expedited Department the tore expansion and ew of direct World sales Department business .tore ome have operators taken evensuch asbolder the ailian steps by developingroup, Wangfuing their own roup, private Wanda labels Department and set up buyer tore multiand ewbrand World shops Department to sell exclusive tore have brands taken and even private bolder labels. steps by developing their own private labels and set up buyer multibrand shops to sell exclusive brands and private labels.

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Executive Summary Executive Summary Spotlight on China Retail

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ssue Shopping malls

Executive Summar

Shopping malls sector maintains robust development. In 2017, most largescale shopping malls in China Shopping malls sector maintains robust development. In 2017, most largescale shopping malls in China delivered a positive sales performance. According to iziRetail, the total sales of 190 such centers across 51 cities in China delivered a positive sales performance. According to iziRetail, the total sales of 190 such centers across 51 cities in China reached 441.3 billion yuan in 2017, up 11.3% yoy. A study by Linkshop also shows that the top 20 shopping malls in China reached 441.3 billion yuan in 2017, up 11.3% yoy. A study by Linkshop also shows that the top 20 shopping malls in China all achieved positive yoy sales growth in 2017. all achieved positive yoy sales growth in 2017.

Shopping mall operators shift to more consumercentric business models. In recent years, increasing Shopping mall operators shift to more consumercentric business models. In recent years, increasing numbers of mall operators have changed their mindset and transformed their operations and business models by adopting numbers of mall operators have changed their mindset and transformed their operations and business models by adopting a more consumercentric approach. Many shopping malls have endeavored to strengthen their physical assets in all aspects a more consumercentric approach. Many shopping malls have endeavored to strengthen their physical assets in all aspects including upgrading hardware and facilities, reconfiguring unit layouts, refining tenant mixes, as well as enhancing inmall including upgrading hardware and facilities, reconfiguring unit layouts, refining tenant mixes, as well as enhancing inmall service facilities. They are also responding swiftly to consumers’ needs by providing more interactive features in the mall, service facilities. They are also responding swiftly to consumers’ needs by providing more interactive features in the mall, including entertainment, leisure activities, a variety of food options and uniue concepts that differentiate their offerings. including entertainment, leisure activities, a variety of food options and uniue concepts that differentiate their offerings. Exploring new development concepts. Shopping mall operators in China have actively been eploring new Exploring new development concepts. Shopping mall operators in China have actively been eploring new development concepts. A trend is emerging of “shopping mall + shopping precinct” (or “streetscaped”) malls with Sanlitun development concepts. A trend is emerging of “shopping mall + shopping precinct” (or “streetscaped”) malls with Sanlitun aikoo i as a successful forerunner, followed by Chengdu aikoo i, and the recently opened MIc orld and pperHills in aikoo i as a successful forerunner, followed by Chengdu aikoo i, and the recently opened MIc orld and pperHills in Shenzhen. he new concept features a combination of indoor and outdoor elements, with a shopping center plus a Shenzhen. he new concept features a combination of indoor and outdoor elements, with a shopping center plus a pedestrian area that has shops and restaurants – all within a landscaped environment. It can create a uniue ambiance for pedestrian area that has shops and restaurants – all within a landscaped environment. It can create a uniue ambiance for shopping and bring consumers a special eperience. shopping and bring consumers a special eperience. everaging technologies and multichannel strategies to transform the mall experience. Many everaging technologies and multichannel strategies to transform the mall experience. Many shopping mall operators realize that the best way to deal with rapid technological change is to embrace it. hey are shopping mall operators realize that the best way to deal with rapid technological change is to embrace it. hey are utilizing digital capabilities to take the shopping eperience to the net level. Beyond providing basic services such as free utilizing digital capabilities to take the shopping eperience to the net level. Beyond providing basic services such as free iFi accepting mobile payments, and running different promotions to encourage social media engagement, mall iFi accepting mobile payments, and running different promotions to encourage social media engagement, mall operators are adopting inmall technologies such as AIpowered services to improve the omnichannel eperience and operators are adopting inmall technologies such as AIpowered services to improve the omnichannel eperience and strengthen relationships with consumers. strengthen relationships with consumers. Ecommerce giants mae foras into shopping mall sector. ecently, the shopping mall sector in China has Ecommerce giants mae foras into shopping mall sector. ecently, the shopping mall sector in China has seen the emergence of a new competitive landscape with the entrance of ecommerce giants. he opening in April 2018 of seen the emergence of a new competitive landscape with the entrance of ecommerce giants. he opening in April 2018 of the Alibaba roups first bricksandmortar shopping mall, in Hangzhou, is a maor step by the roup towards achieving its the Alibaba roups first bricksandmortar shopping mall, in Hangzhou, is a maor step by the roup towards achieving its goal of blending digital prowess with a footprint in the physical world. goal of blending digital prowess with a footprint in the physical world.

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Executive Summary Spotlight on China Retail 5

Spotlight on China Retail |

ssue permarets Supermarets Executive Summar

permaret and supermaret operators see improvement in sales growth. In recent years, the hypermarket and supermarket sector has faced fierce competition from the ecommerce sector as well as from smaller scale retail formats such as convenience stores, community stores and specialty stores. That being said, many hypermarket and supermarket operators have stepped up efforts to revamp their operations to cater the changing needs of Chinese consumers. Their efforts have paid off with solid improvements in sales performance. The sales growth of supermarkets above a designated size enterprises with annual sales of 5 million yuan or above and with employee strength of 0 or more) was 7.4% yoy in 11, up from .3% yoy in 117. Most of the top hypermarket and supermarket chain operators in China achieved a better performance in 2017 than in 201, thanks both to new store openings and format expansion.

laers are adapting to “ew onsumption” era. ver the past year, many traditional hypermarket and supermarket operators have proactively adapted themselves to the “ew Consumption” era. Many have used data analytics to increase store traffic and offer more targeted promotions to shoppers. ome have integrated their inventory and supply chain management systems with ecommerce or solutions platforms to improve warehouse management, inventory planning and lastmile delivery. thers have invested in technologies and launched “smart stores” to create a better instore experience and higher level of interaction with shoppers. Meanwhile, many hypermarket and supermarket chain operators have partnered with thirdparty 2 local lifestyle service platforms, such as aoia and mall, to provide 2 shopping and speedy delivery services.

ormat revamp is gaining traction. Many hypermarket and supermarket chain operators have revamped their stores or launched new store formats e.g. smallersized format and freshfood supermarkets) to better suit the changing needs of customers. They have also created more spaces for occasion or experiencebased activities e.g., instore dining) to improve customer stickiness.

utting strong effort into developing private labels. A number of hypermarket and supermarket chains have launched their own private labels in recent years. The profit margin for those who have done so is 15% higher. eveloping private labels is thus winning strategy for hypermarkets and supermarkets that wish to differentiate themselves from their peers and earn higher profit margins

orming strategic alliances with nternet giants is one commonlyused tactic for driving synergies between online and offline retailing. To achieve better 2 integration, some traditional grocery retailers have formed partnerships with Internet companies to gain access to payment tools, social media, big data analytics, etc. In turn, Internet companies can leverage the extensive physical store networks of hypermarkets and supermarkets to reach more customers.

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Executive Summary Spotlight on China Retail Spotlight on China Retail | Spotlight on China Retail |

ssue oneniene tores eutie ummar eutie ummar

oneniene stores ae een te astestroin retai ormat in reent ears. otal sales revenueoneniene or the store sectors includin ae orecourt een te stores astest reachedroin . trillion retai yuan ormat in in reentup yoyears. and theotal roth sales momentumrevenue or theis epected sector to continueincludin as orecourt the small stores retail or reachedmat continues . trillion to ain yuan in popularityin up in hina. yoy ccordin and the roth to the momentumMM the is epectedyoy roth to ocontinue ey as the retailers small reachedretail or .mat continues yoy in to ainith in popularity recordin in thehina. astest ccordin roth to amon the all MMretail ormats the .yoy roth yoy compared o eyith retailers . yoy reached or supermarets . yoy in and . ith yo y or recordindepartment the stores. astest n roth theamon total all retailnumer ormats o . in hina yoy topped compared ith. . yoy or supermarets and . yoy or department stores. n the total numer o in hina topped . initiaties remain ruia. o stay competitive many operators have dran up seamless strateies to attract initiaties and retain customers. remain ruia rovidin. o pic stayup competitive services and m panyartnerin operators ith have local dran liestyle up serviceseamless platorms strateies are amon to attractcommon and practices. retain customers. rovidin picup services and partnerin ith local liestyle service platorms are amon common practices. paers mae reater eorts to aun priate aes. oadays hinese consumers loo or products that are paers personalied mae or reater even uniue. eorts o caterto aun to this demanpriated aes operators. oadays such as hinese amilyMart consumers leven loo and or productsnda thatonvenience are personalied tore have or evenstepped uniue. up eorts o cater to launchto this theirdeman ond private operators laels suchand to as oer amilyMart such products. leven hat and ein nda said onvenienceprivate lael developmenttore have stepped in China’s up eorts CVS sector to launch still lags their far on behind private that laels o euivalent and to oer chains such in developedproducts. hat countries ein suchsaid as privateapan. ver lael development o sampled in China’s operators CVS sector in hina still saidlags farthat behind sales o that their o privateeuivalent laels chains account in developeded or less countries than such o as apan.total sales. ver o sampled operators in hina said that sales o their private laels accounted or less than o total sales. merene o tenoorien usiness moes. echnoloy advancement is a siniicant actor drivin the rothmerene o the o tenoo sector. ince therien second usiness hal o moes. there ha echnoloyve een siniicant advancement initiatives is a siniicant involvin actor the drivin adoption the rotho technoloies o the that sector. can transorm ince the retailsecond operations. hal o his there had led ha veto eenthe emerence siniicant o te chnoloyinitiatives driveninvolvin usiness the adoption models oincludin technoloies those eaturinthat can transorm unmannedcashierless retail operations. his smart had shelves led to andthe emerencesmart vendin o te machines.chnoloy driven usiness models includin those eaturin unmannedcashierless smart shelves and smart vendin machines. aunin res oo ommunit stores is a roin tren. is one o the most relevant ormats or auninservin local communities.res oo ommunitecently some stores chains is a haveroin upraded tren. and transormed is one o theirthe most stores relevant into resh ormats ood or servincommunity local stores communities. caterin ecently to the roin some appetite chains o havehinese upraded consumers and transormedor resh healthy their storesuality into products. resh ood community stores caterin to the roin appetite o hinese consumers or resh healthy uality products. an momanpop stores connect with Alibaba’s LST and JD Coneniene tore. commerce iants liaaan momand .coman havepop souht stores to connect etend their with oline Alibaba’s ootprints LST y andconnectin JD Co ithneniene tens o thousands tore. ocommerce momand iantspop storesliaa to and help .com them havediitalie souht their to operations etend their and oline increase ootprints their ross y connectin merchandise ith volume. tens o nderthousands its e o mom etailand initiativepop andstores to toad helpvance them its diitalie stratey their liaa operations has launched and increase the their “in ross hou merchandise on” system volume. to help nder mom itsand epop etail stores initiative emarand to ad onvance diital its transormation. stratey liaa .com has has launched rolled out the the “onveniencein hou on tore” system initiative to help partnerin momand ithpop oners stores o acrossemar the on country diital transormation. particularly in rural.com areas has torolled help out them the revamp onvenience their stores. tore initiative partnerin ith oners o across the country particularly in rural areas to help them revamp their stores.

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Executive Summary Executive Summary Spotlight on China Retail

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sse Lr aret ectie Sar

China’s personal luxury goods aret enos robst rowth in Sales of personal lr goods in China rose significantl to billion eros in representing a o groth at crrent echange rates and a o groth at constant echange rates his notable rebond sggests that the domestic personal lr goods maret has retrned to robst groth

Chinese illennial consers contine to drie lobal lr rowth he groth of Chinese lr spending in as driven b several factors the maor one being millennials accelerating their spending on lr illennials in China especiall those from the fastgroing middle class have stronger spending poer and are more illing to spend than conterparts in other contries t is epected that b millennials ill accont for of China’s personal luxury market

Lr retailers tea p with on Chinese celebrities to aret their prodcts ncreasing nmbers of lr retailers are ramping p efforts to better engage ith millennials the most poerfl consmer grop in China’s lr maret toda o oo ong shoppers brands and retailers are trning to ong celebrities and inflencers to maret their prodcts he are also lanching ne prodct lines catering to onger tastes

coerce plaers crac the lr aret et Chinese lr shoppers still preer oline ing the increasing demand for lr goods online ecommerce plaers sch as libaba and com have set p lr e commerce platforms targeting this segment espite the enthsiasm of Chinese consmers for online shopping man still prefer prchasing lr prodcts at bricsandmortar stores hese enable them to see toch feel and tr ot prodcts as ell as to eno highend cstomer eperiences sch as refreshments invitations to private longes here goods can be previeed and other cstomied services

Lr plaers scrable to strenthen social coerce presence eChat ini rora is ainin poplarit Considering that social media and ordofmoth are maor sorces of information for Chinese consmers increasing nmbers of international lr plaers are striving to boost their social commerce presence as a a to maret their prodcts in China ring the ii festival (China’s equivalent to Valentine’s Day hich in fell on gst man lr brands sed the eChat ini rogram to offer prodcts eclsivel for the festival

nternational brands lower prices in China in response to tari cts b the Chinese oernent o encorage domestic consmption hile promoting imports the State Concil annonced in a that the contr old redce import tariffs on a range of consmer goods ith effect from l n response some international brands have mared don their prodct prices in China b an average to

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Executive Summary Spotlight on China Retail

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ssue Crossorder oere por

xeuie uary

Crossorder eoere CC ainains sale deelopen u a sloer pae China’s CC (import market has maintaine stale evelopment in reent years uele mainly y iniviuals uprain their level o onsumption orin to iesearh the transation value o the CC import retail market inrease y yoy to illion yuan in an is expete to alloon to over illion yuan y eti thouh roth has een or China’s CC (import market the pae has in at sloe over the past three years his is ue in part to the launh in late arh an early pril o ne CC tax poliies an a positive list or permitte importe oos hih miht pose unertainties or the uture evelopment o rossorer trae

ease aola all loal and orldide oninue o op he lis aong CC ipor players NetEase’s CBEC arm Kaola ranke irst in the CC market y transation value ith market share in olloe y mall loal ith market share an D orlie ith market share

ood eauy and personal are produs and apparel ooear and ags are he esselling aegories or CC ipor CC shoppers uy these prouts mostly rom apan the an outh orea

he Chinese goernen esalishes ore pilo ones or CC s o uust China has CC Comprehensive ilot ones o hih ere approve y the tate Counil on uust he tate Counil has also ure relevant overnment epartments to support innovation an evelopment in CC Comprehensive ilot ones inluin streamlinin loistis proesses an ustom learane proeures enhanin inormation sharin promotin eetive reulatory innovation an pushin orar ith international trae lieraliation ailitation an usiness innovation

ergene o ne CC operaion odels n reent years some CC operators have triale various ays to make shoppin via CC (import platorms more onvenient an to provie ustomers ith etter shoppin experienes o ne operation moels have emere – the irst is an exension o he dire ail odel using oerseas arehouses (the “direct mail + overseas warehouse” model) the seon is the odiiaion o he onded area ipor odel ih the setting up of offline stores for transaction (the “bonded area import + offline store” model)

layers pu ore ephasis on produ raing syse lokhain tehnoloy is eomin inreasinly popular amon CC operators as a metho or trakin prouts ith this tehnoloy leain CC platorms an ollet interate an isplay prout inormation to onsumers in a more transparent ay thus ainin ustomer trust an loyalty

Executive Summary | 8

Executive Summary Spotlight on China Retail Spotlight on China Retail |

Spotlight on China Retail | ssue etail and commerce ssue etail and commerce ogistics ogistics ecutive ummar ecutive ummar

trong growth of online retail sales fuels demand for logistics services. The fast growth of online retailing introng China hasgrowth given theof onlinelogistics retailindustry sales a boost fuel ins line demand with soaring for logistics demand for services transport. The and fast delivery growth services. of online The retailing total invalue China of logisticshas given activity the logistics reached industry a record a boost 252.8 in trillion line with yuan soaring in 2017, demand up by 0.6%for transport yoy in real and terms. delivery services. The total value of logistics activity reached a record 252.8 trillion yuan in 2017, up by 0.6% yoy in real terms. press deliver maret scales up growing demand for intracit courier services s a ritial art o epressommere deliver loistis maret the eress scal elieres up setorgrowing has rondemand rail for he intra totalcit olme courier o omlete services elier s a iesritial amonte art o toeommere illion loistis iees in the eress elier o setor, making has China’s ron express rail delivery he total market olme the o largest omlete in the elier worldies in amonteterms of elierto illion olme iees otal in sales reene or o the, makingsetor amonte China’s express to delivery illion market an in the largest in the oworld here in terms has eenof eliera sre in olme eman otal or intrasales itreene orier or ith the setorthe emeren amontee o to ne retail illio ratiesn an insh as an the o reation here has o lare een anmers sre in o eman online hannelsor intra itsellin orier resh ith roe the emeren an healtharee o ne rots retail raties ole sh ith asinreasin an stomer the reation eman o lare or nmersast elier o online hannels sellin resh roe an healthare rots ole ith inreasin stomer eman or ast elier “Smart logistics” dominates the agenda otion o aane tehnoloies sh as aio reen entiiation“Smart logistics” loaldominates ositionin the stemagenda otion the nternet o aane o hins tehnoloies o lo sh omtin as aio rones reen an rootis entiiationin aition to atomation loal o ositionin loistis roess stemes to imroe the nternet eiien o hins has eome o loimeratie omtin or the rones retail anan erootis inommere aition loististo atomation setor o eentl loistis loistisroess esan to e imroeommere eiien oerators has hae eome ineste imeratie heail or in thesmart retail loistis an e hoin to ommereenhane lilment loistis aailitsetor eentl an eiien loistis to an streamline eommere oeration oeratorss an hae ree ineste loistis heail osts in smart loistis hoin to enhane lilment aailit an eiien to streamline oerations an ree loistis osts nnovations to strengthen lastmile deliver o ater to consumers’ heihtene eetations or ast elier rnnovationsetailers such as to Uniqlo, strengthen Walmart last (China),mile Yonghui, deliver YH Super o ater Species to consumers’ and Watsons heihtene have introduced eetation “clicks or& collect” ast elier rseriesetailers suchan as retailers Uniqlo, haeWalmart artnere (China), ith Yonghui, latorms YH Super orSpecies loistis and omanies Watsons haveto roll introduced ot sh series “click & collect”eanhile seriessome retailers an anretailers loistis hae oerators artnere hae ith introe latorms innoatie or loistis as toomanies see to elier roll ot an sh enhane series onsmer eanhile someonenien retailerse throh an loistis or eamle oerators the hae se introeo rones an innoatie atonomos as ehileto see an smartelier i an enhane toers inonsmer e loations oneniene throh or eamle the se o rones an atonomos ehile an smart i toers in e loations commerce and logistics plaers put more emphasis on global logistics networ epansion n reentcommerce ears omanies and logistics enae plaers in eommere put more an loistisemphasis hae on stee global logistics loal eansion networ o their epansion loistis netor n s reentto etter ears ailitate omanies ross orerenae elier in eommere eteen anChina loistis an oerseas hae stee ontries loal or eamle eansion Cainiao o their lans loistis to il netor orls tolass etter loistis ailitate hs rossin seeralorer loations elier aron eteen the China orl an an oerseas oistis ontries has rae or eamle its oerseas Cainiao arehosin lans to il series orl lass loistis hs in seeral loations aron the orl an oistis has rae its oerseas arehosin series ural logistics is the net growth engine he romisin otloo or rral eommere has romte man uralleain logisticseommere is thean nternetnet growth omanies engine to sh he rther romisin ahea otloo ith “going or rral rural” eommere initiatives. has romte man leain eommere an nternet omanies to sh rther ahea ith “going rural” initiatives.

Executive Summary | 9

Executive Summary

Executive Summary

Spotlight on China Retail – Issue 1

Spotlight on China Retail – Issue 1 General Retail

Asia Distribution and Retail

October 2018

2018 is a year of change and challenge for businesses. In particular, the escalating China-U.S. trade war will negatively impact both economies, particularly the Chinese economy in view of its massive trade surplus with the U.S. China’s retail sector is expected to be impacted by the trade war with dampened consumer sentiment and softening retail sales growth. Meanwhile, in the “New Consumption” era, the retail sector is undergoing rapid transformation and profound changes. Brands and retailers are ramping up efforts to transform and reinvent their businesses to cater the new needs of Chinese customers. The Chinese government is also striving to encourage consumption by issuing policies and major guidelines to facilitate the growth and development of the retail and e-commerce sector.

I. Market overview

1. Retail sales see modest growth

China has been the world’s second-largest retail and consumer market after the U.S. since 2014. According to the National Bureau of Statistics of the PRC (NBS), total retail sales of consumer goods reached 36.6 trillion yuan in 2017, up nominally by 10.2% year-on year (yoy) (Exhibit 1). In 1H18, total retail sales of consumer goods increased nominally by 9.4% yoy to reach 18.0 trillion yuan. By month, nominal retail sales growth stayed at around 8.5-10.1% yoy throughout 1H18 (Exhibit 2).

1 General Retail | 10 General Retail | Spotlight on China Retail – Issue 1

Spotlight on China Retail – Issue 1

ExhibitExhibit 1: 1: Total Total retail retail sales sales of consumer of consumer goods*, goods 2011, 201–20162 – 2017

. . . . . . . .

.

.

. . . . . . . 2012 2013 2014 2015 2016 2017

otal retail sales trillion uan o rowth

Source: National Bureau of Statistics of the PRC; compiled by Fung Business Intelligence

Exhibit 2: Nominal growth of total retail sales of consumer goods by month, June 2017 – June 2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.98 2.96 3.03 3.09 3.42 3.41 3.47 6.11 2.92 2.85 3.04 3.08 . Jun 17 Jul Aug Sep Oct Nov Dec Jan-Feb Mar Apr May Jun 2018

otal retail sales trillion uan Nominal o rowth eal o rowth

Source: National Bureau of Statistics of the PRC; compiled by Fung Business Intelligence

General Retail | 11 General Retail | Spotlight on China Retail – Issue 1

Spotlight on China Retail – Issue 1 Retail sales of consumer goods: Mode of sales

etail sales o commodities o enterprises reached . trillion uan in , up . o o which, retail sales o commodities or enterprises aoe a desinated sie rose . o to . trillion uan. n , retail sales o commodities o enterprises reached . trillion uan, up . o.

Statistics rom the China National Commercial normation Centre CNCC show that the perormance o larescale enterprises improed siniicantl in . etail sales o e larescale retail enterprises increased . o in , up rom . o in . n , retail sales rowth o e retailers increased . o xhiit .

–

. . . . . . .. . . . .

. . . . . . . . .

.

China National Commercial Information Centre; compiled by Fung Business Intelligence

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General Retail | Spotlight on China Retail – Issue 1

Spotlight on China Retail – Issue 1 otal caterin sales rose . o to reach . trillion uan in and up . o to reach . trillion uan in . which, retail sales or enterprises aoe a desinated sie in the caterin industr increased . o in and . in , showin that lare caterin enterprises enerall perormed less well than small and mediumsied caterin enterprises xhiit .

: China’s total retail sales by mode, 201 –

By mode

Commodities . . .

o which, enterprises aoe a . . . desinated sie

Caterin . . .

o which, enterprises aoe a desinated sie . . .

National Bureau of Statistics of the PRC; compiled by Fung Business Intelligence

* “Enterprises above a designated size” refers to enterprises with annual sales of five million yuan or more and with employee strength of 60 or more.

General Retail | 13

General Retail | Spotlight on China Retail – Issue 1

Spotlight on China Retail – Issue 1 etail sales of onsuer goods oodities

n , retail sales o cosmetics saw a . o rowth, the hihest amon all cateories, ollowed retail sales o urniture with . o rowth, and Chinese and western medicine with . o rowth xhiit . he trend continued into , while sales o cosmetics saw a . o rowth.

Exhibit : China’s nominal retail sales growth of enterprises above a designated size, by product, 201Exhibit – 114: China’s yoy nominal change, retail sales growth of enterprises above a designated size, by product, 201–201 yoy change,

produt 201 201 11

rain, oil, ood . . .

eeraes . . .

oacco and liuor . . .

Clothin, shoes, hats, and textiles . . .

Cosmetics . . .

old, siler, and ewelr . . .

ail use products . . .

ome appliances and ideo euipment . . .

Chinese and western medicines . . .

Stationer and oice accessories . . .

urniture . . .

elecommunications euipment . . .

etroleum and related products . . .

utomoiles . . .

uildin and decoration materials . . .

ource: ational ureau of tatistis of the opiled b ung usiness ntelligene

General Retail | 14

General Retail | Spotlight on China Retail – Issue 1

Spotlight on China Retail – Issue 1 etail sales of onsuer goods rban vs rural

ural retail sales hae een rowin at a aster pace than uran retail sales oer recent ears, ut the ap narrowed in recent ears. ural retail sales increased nominall . o to . trillion uan in , while uran retail sales rose . o to . trillion uan xhiit . n , uran retail sales increased nominall . o to . trillion uan, while rural retail sales rose . o to . trillion uan.

ExhibitExhibit 0 :: otal otal retail retail sales sales of ofconsumer consumer goods, goods, urban urban vs rural vs areas,rural areas, anuary une – ecember 201 – une 201 201

. . . . ..... .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

. 2 2 22 22 2 24 2 20 21 24 21 24 . un 1 ul ug ep ct ov ec aneb ar pr ay un 201 otal retail sales rural areas otal retail sales uran areas

Nominal o rowth uran areas Nominal o rowth rural areas

ource: ational ureau of tatistis of the opiled b ung usiness ntelligene

he ast rowth o rural retail sales was partl attriutale to the stead increase in rural household income. er capita disposale income o uran and rural households reached , uan and , uan in , up . and . o respectiel. n , per capita disposale income o uran and rural households reached , uan and , uan, up . o and . o in nominal terms respectiel. ural household income rew aster than that o uran households, ut the per capita disposale income o uran households was almost triple than that o their rural counterparts.

General Retail | 15

General Retail | Spotlight on China Retail – Issue 1

Spotlight on China Retail – Issue 1 nline retail arket ale in ai lower rowt

After years of explosive growth, China has become the world’s largest online retail market. In , the transaction value of China’s online market increased by . o to reach . trillion uan. which, the online retail sales o oods amounted to . trillion uan, up . o and accounted or . o the total retail sales o consumer oods xhiit . n , total online retail sales o oods and serices amounted to ,. illion uan up . o. which, online sales o oods amounted to ,. illion uan, up . o and accounted or . o the total retail sales o consumer oods.

:hina’s China’s online online retail retail market, market, 2011 201– –

ational ureau of tatistis of the inistr of oere opiled b ung usiness ntelligene

he phenomenal rowth o the online retail maret has een drien in part the hue nternet and moile nternet population and rapid uptae o online shoppin Chinese consumers. China has the world’s largest number of Internet users and online shoppers. s o une , there were million nternet users in China, and the nternet penetration rate was .. which, a total o million people used moile deices to access the nternet. million people were online shoppers and million people shop ia moile deices.

General Retail | 16

General Retail | Spotlight on China Retail – Issue 1

Spotlight on China Retail – Issue 1 oere taes the lead

ver the years, mobile commerce mcommerce has been gaining share at the expense of C based transactions. he penetration rate of mobile shopping reached . in une . . of the online shopping transactions were made on mobile devices in and total transaction value of mobile shopping reached ,. billion yuan. ore retailers have been actively investing in mcommerce. It is expected that mcommerce will play a more important role in driving ecommerce development in coming years.

ural eoere beoes the new growth engine of online sales

China’s rural ecommerce has become a new growth engine with the near saturation of urban e commerce. In une , the number of Internet users in the rural area rose to million, accounting for . of the total Internet population, down from . in ecember , according to China Internet etwork Information Centre CIC. he decrease in rural Internet population was due to the continual urbaniation process in China. According to the China e usiness esearch Center, the transaction value of rural online market is estimated to reach , billion yuan in , up . yoy.

he development of rural logistics and infrastructure has driven the growth of the rural e commerce market. In recent years, some leading ecommerce players and Internet companies have increased efforts to expand their distribution network in rural areas. or instance, Alibaba launched its ural aobao initiative in ctober to create a network of ecommerce service centers in rural areas to provide services that enable villagers to purchase goods online, as well as sell their goods. Alibaba announced in une that it aims to expand the coverage of ural aobao to , counties and , villages across China in the next three years. .com, on the other hand, announced in une that in the next five years, it targets to open million Convenience tores, of which half of them will be in rural areas.

General Retail | 17

General Retail | Spotlight on China Retail – Issue 1

Spotlight on China Retail – Issue 1 inee oner are ore eat a ontion environent irove oner oniene re in

Cnsuer niene ine ninue rise rauall in an reaine airl sale in suesin ha he nsuin ashere in China has reaine siie hii

hiit : Consmer Coniene ne, anar 201 – ne 201

an e ar r a n l e t o e

ore: ational ureau of tatistis of the opiled b ung usiness ntelligene

General Retail | 18 General Retail | Spotlight on China Retail – Issue 1

Spotlight on China Retail – Issue 1 Growin ile la tranor te retail lanae

ile lass nsuers in China are ein inreasinl inluenial in he reail an nsuer market. McKinsey & Co. predicts that by 2022, more than 75% of China’s urban consumers will earn eeen uan an uan er ear his ile lass seen eseiall he uer ile lass hse earn eeen an uan er ear is a ar nsuer ru in China s shn in hii he uer ile lass is esiae aun r er uran riae nsuin in u r nl in

luen er ile lass er ile lass r

eutshe an inse o opiled b ung usiness ntelligene

noe segent defined b annual disposable inoe per urban household in real ters affluent uan euivalent to upper iddle lass to uan euivalent to to ass iddle lass to uan euivalent to to poor uan euivalent to

rer issue he rl ni ru in anuar reis ha China ill hae he world’s largest ile lass ulain a seen hse srn senin er ill reshae nsuin esiall an inernainall er he ne eae r nsuin is eee r an aerae annuall reah rillin uan rillin in rien he ile lass ha ill rise an esiae husehls

Definition of middle class by the World Economic Forum includes lower middle class, i.e. households earning 66,000-198,000 yuan (US$10,000-30,000); and upper middle class, i.e households earning 198,000-363,000 yuan (US$30,000-55,000).

GeneralGeneral Retail Retail | | 19 Spotlight on China Retail – Issue 1

Spotlight on China Retail – Issue 1 r arket i trivin aain in ina

n 2017, Chinese luury spending accounted for 32% of global luury purchases, up from 30% in 2016. he rebound of luury spending by Chinese consumers made the country the third largest luury goods market in 2017, sharing the same rank with apan, ust behind Europe and the U.S. It is projected that China’s personal luxury goods market will expand by 6% annually through 202, by then Chinese shoppers will contribute 0% of global luury sales and drie 70% of global luury growth, according to oston Consulting roup.

he growth of Chinese luury spending is drien by seeral factors, with the maor one being millennials accelerating their spending on luury. Millennials in China, especially those from the rising middle class, hae ery strong spending power and are more willing to spend their income on premium products than their foreign counterparts. hey start purchasing luury goods at an earlier age – around 10 years younger than those in Europe and 20 years younger than those in the U.S., and buy more freuently compared with the older generation, making millennials among the maor contributors to luxury growth. It is also expected that by 2024, 50% of China’s personal luury market will be made by millennials.

General Retail | 20 11

General Retail | Spotlight on China Retail – Issue 1

Spotlight on China Retail – Issue 1 Competitive landscape erorane o te o retail ain oerator te o

rowth pae of the op s pis up in

otal sales of the op 00s in 20 amounted to 2.2 trillion yuan, up .0% yoy. he growth rate of the op 00s was slower than that of the national total retail sales of consumer goods. oweer, it has picked up from .5% yoy in 206, showing that the performance of large retail enterprises has improed oer the past year.

s shown in xhibit 0, the op 00s made up only 6.0% of total retail sales of consumer goods, down from .% in 200, indicating the increasingly fragmented nature of China’s retail market.

The: The Top Top 100s’ 100s’ share share in innational national retail retail sales, sales, 2008 2008 –

6.0% 6.4% 6.% .0% .6% .0% .% .0% 0.% .%

otal retail sales of consumer goods billion yuan op 00s billion yuan

hina hain tore and ranhise ssoiation opiled b ung usiness ntelligene

General Retail2 | 21

General Retail | Spotlight on China Retail – Issue 1

Spotlight on China Retail – Issue 1 hiit shs the retail hain eratrs retail sales in nin r C t rane the t ith ttal sales illin an lle e etail lins t an China esres anar C t he ranins r the t enterrises are the sae as the reis ear

hiit 2: Top 10 hain retailers, 201 ane retail sales hiit 11: Top 10 hain retailers, 201 ane retail sales

ales, preta an er o stores illion an ae o opan n asolte yoy change n asolte yoy change 201 201 ters (%) ters (%)

nin r C t

e etail lins t

China esres anar C t ①

n rt etail r t ②

alart China nestent C t

nhi erstres C t

Chnin eneral rain r C t

ianha eraret lins C t ③

ine r

Carrer China n ④ oure hina hain tore and ranhise ssoiation opiled b ung usiness ntelligene

① ales of hina esoures anguard o td inluded sales of uguo uperaret he preta sales for uguo uperaret were illion uan in . ② ales of un rt etail roup td eluded sales of its eoere platfor feiniuo ③ ales of ianhua uperaret oldings o td inluded sales of arrefour in hanghai ④ ales and store nuber of arrefour hina n inluded stores in the reater hina region

General Retail | 22 General Retail | Spotlight on China Retail – Issue 1

Spotlight on China Retail – Issue 1 enterrises t the s rere neatie sales rth in are ith enterrises in erall seain the s sa etter errane in rss rit arin as in r in

hat sai risin lar an rental sts ntine t eert ressre n the s ar sts inrease hile rental sts an eletriit sts inrease an

allersized stores ontinue to see the fastest sales growth

allersie stre rat artilarl neniene stres ntine t ain tratin n all the traitinal retail rats in neniene stres rere the hihest sales rth at hile the rth in ner stres as eiiia Cneniene tre an ntine t e the aret leaer in the neniene stre seent ele rert neniene stre laers ith sales reene antin t illin an in an its stre ner reahin

art r neniene stres ther sallrat stres als sa rai rth n the s tether ene a ttal ne stres hih er the ere sall rat stres hile nl ere herarets an ere serarets

eanhile in ters saestre sales neniene stres als sa the hihest rth at lle nit serarets eartent stres an shin alls erarets rere neatie saestre sales rth at

op s see robust online sales growth provides huge opportunities but hallenges reain

nline sales rth the s inrease r in t in h hiher than the natinal nline retail sales rth at an line sales rth at esite the ast rth nline sales the s ante r a sall rrtin ttal sales the ttal transatin ale ere enerate r ile aent tls

rain nlinetline interatin is a e s the s heer se real hallenes reain in this ress isin sts eere artilarl elier sts an sts airin ne sters liite nins insiient eere eertise ineiient sl hain t srt siness are se the ar hallenes ite the s

General Retail | 23 General Retail | Spotlight on China Retail – Issue 1

Spotlight on China Retail – Issue 1 toe closes ae ee to sta

China’s retail sector has witnessed a trend of store closures ai the th aret enirnent ereansin in the reis ears tether ith risin rental an lar sts hae se he hallenes t an hsial retailers rin the t lse stres that are nt ain a rit an rea r ssen eansin lans rin t insh in there ere er stre lsres inlin liste heraret seraret hain eratrs an stre lsres inlin eartent stres in China eanhile se rein laers eite the China aret reentl ne siniiant eale is th reas tte r n ril it aree t sell tte art t ei lins n r at illin an n a it further announced to sell Lotte Mart’s 72 stores in Eastern China, including Shanghai and ians t in r at illin an

nalsis mao etail omats

epartent stores

China’s department store sector witnessed a positive and stable growth in the ast ear rin t the the retail sales eartent stres retail nits ae esinate sie inrease in tatistis r the inistr Cere C als sh that the rth e retailers reahe in hih the rth eartent stres reahe n ters ne stre enins according to Linkshop’s statistis n the stre enin hain stres in China er the ast t ears the ner nel ene eartent stres as still slihtl hiher than that lse r transre eartent stres resltin in a net rise in the ner eartent stres

perarets and superarets

he rth herarets an serarets in China has sle n er reent ears eanhile the hae een ain iere etitin r the astrin eere setr as ell as the sallersale retail rats sh as neniene stres nit stres an seialt stres ine an heraret an seraret eratrs hae starte t rea their eratins t erae the hanes in the nser aret rin t the the retail sales rth serarets ae esinate sie as in r in rin t the CC the C hain eratrs in the s ahiee ttal sales reene illin an in an inrease siniiantl r an in an resetiel

General Retail | 24

General Retail | Spotlight on China Retail – Issue 1

Spotlight on China Retail – Issue 1 hopping alls

China’s shopping malls sector has enoed robust and health development over the past ear n 27, most largescale shopping malls in China delivered positive sales performance ccording to iietail, the total sales of largescale shopping centers across cities in China reached billion uan in 27, up o f all the surveed shopping centers, of them recorded positive sales growth, 27 registered a decline in sales and eight remained flat in sales performance s of 2, there were more than , shopping centers operating nationwide 2 largescale proects with commercial area larger than , sm were opened in 27

onveniene stores

CS is the fastestgrowing retail format in China otal sales revenue for the CS sector including forecourt stores reached trillion uan in 27, up 2 o according to the CC he growth momentum of CS is epected to continue, as small retail format continues to gain in popularity in China’s retail market. n 27, the total number of CS in China increased b o to reach over ,, up from , in 27, indicating that the store opening speed is ver fast in the sector Statistics from the MCM show that the o growth of , ke retailers reached o in , of which, the growth of CS was the fastest among all retail formats, reaching 7 o

opup stores

ver the past few ears, popup retailing has seen rapid growth in China ccording to Chinese commercial propert research agenc E, popup stores have proliferated in China with a compound annual growth rate of over since 2 and the number of popup stores is proected to eceed , b 22 opup stores are becoming increasingl popular as the can serve different purposes — selling products, enhancing brand awareness, and gaining market insights ne of the maor advantages of popup retailing is that the setup costs are far lower than for permanent stores with longterm leases

General Retail | 25

General Retail | Spotlight on China Retail – Issue 1

Spotlight on China Retail – Issue 1 Key trends and developments

illennials and eneation esape te etail landscape

Consiering the strong spening poer o millennials posts generation an generation posts generation or postmillennials oth local an international retailers are ramping up eorts to etter engage ith the most inluential groups o consumers. o lure young shoppers rans are increasingly turning to young celerities an inluencers to market their proucts an are launching ne prouct lines ith younger tastes hiit . or eample in anuary ritish luury ashion house urerry collaorate ith ris u one o the most popular millennial idols in China, to launch a new collection dubbed the “urerry ris u it ”. The new collection, featuring five specially curated looks of the brand’s classic nglishoen cotton gaarine trench coat an sports stripe knitear has gien a ne an resh interpretation o urerry classic items an rought a youthul touch to the heritage ran making the ran more appealing to young uyers. nother eample is . he Chinese ast ashion ran has rolle out a subrand named “HLA Jeans”, reaching out to young people with stylish enim eans an leisure ear. eanhile has also reampe their store layout an esign to gie their storeront a crisp an treny look catering to the tastes o young customers.

n aition some shopping malls in China hae also unergone transormation an upgraing to attract young shoppers. hanghai himao estial City is a case in point. n une the mall as close or more than one year or a ace lit an ran upgrae. o etter cater to the nees o the younger generation the nely reurishe himao estial City has introuce a sle o concept stores an chic ashion rans popular among young shoppers incluing ike gloal lagship store ior eauty concept store anora concept store ephora sia lagship store China’s first indoor Hello Kitty theme park ego lagship store an tarucks esere store.

General Retail | 26

General Retail | Spotlight on China Retail – Issue 1

Spotlight on China Retail – Issue 1

hiit 12: elete aretin apains to lre on stoers

ran etails

n April , uropean luury goods company ior appointed Chinese actress ior Angelababy Angela eung ing as the new brand ambassador for China region. Angelababy is wellknown in China and popular amongst the eneration .

To cater to the Generation Z, Adidas has cooperated with many of China’s underground musicians, Js, artists, bloggers and collaborate with other streetwear labels. or eample, it invited ass ang erlin to the hanghai adidas store for the “adidas Adidas original hite ountaineering” collection launch party. Adidas also selected a number of Chinese celebrities such as Andy Lau and an ingbing to wear the s before the shoe was formally released.

n ovember , .. fashion company ichael Kors hosted an event at the hanghai po avilion and invited many famous guests including actress ang i, who has ichael become the brand’s new ambassador. The brand created a hashtag #korsshanghai and Kors encouraged guests to livestream via the Chinese app ihio. ichael Kors also collaborated with local videostreaming app ouyin to reach out to the eneration .

n ecember , ritish luury fashion house urberry collaborated with Kris u, one of the most popular millennial idols in China, to launch a new collection dubbed the urberry “Burberry x Kris Wu Edit 2017”. The new collection has given a new and fresh interpretation of urberry classic items and brought a youthful touch to the heritage brand, making the brand more appealing to young buyers.

.. premium beauty brand ste Lauder appointed famous Chinese actress ang i as its brand ambassador in early . The brand also hosted consumer and KL events in ste its stores around festivals such as Chinese New Year and Women’s Day to provide Launder memorable eperiences based on skincare or makeup services and thus better engage with customers.

n April , .K. fashion company ulberry invited famous actress ang i to attend the ribboncutting ceremony for the opening of its new store in hanghai. The brand is ulberry also interacting with the eneration consumers by asking eChat followers to leave a comment on which handbag they liked the best from its latest collection. Two lucky winners would receive an instore gift card worth around ,. oure arious nternet soures opiled b ung usiness ntelligene

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General Retail | Spotlight on China Retail – Issue 1

Spotlight on China Retail – Issue 1

Who are the Chinese post-millennials?

An emerging demographic cohort generally known as the postmillennials or the Generation Z – who were born after 1 – are now reshaping the Chinese economy. aking up

nearly 250 million of China’s total population, these young people – ranging from college age to new entrants into the workforce – represent the mostpromising consumer segment and a modern mindset with great sense of individuality. These young consumers are set to power the growth of China’s consumer sector as they have huge consumption intention with wealth accumulated and inherited from previous generations. According to a report ointly released by Deloitte and Tencent ocial edia Ads, the new generation of consumers, which include the Generation Z, will own half of the total income and become

major consumers of China’s luxury market in 10 years. A modern mindset

As native users of the nternet, postmillennials are exposed to massive online resources to learn about what is happening around the world. They are informative and resourceful. They have high aspirations for a better life and strong desires to live far beyond the basics of living. They have become sophisticated consumers as they know very well their preferences and can make decisions independently. The postmillennials are also open minded to express themselves on social media. A survey conducted by Tencent ocial edia

Ads and Customer esearch ser Experience Design Center CDC revealed that the Generation Z consumers believe that wealth is not the key to success. nstead, they hold to

values such as selfunderstanding, independence, euality, compassion, and care for society. aised during the digital revolution, the Generation Z is using smart devices more than any

other generations. This young segment believes that technologies will enhance their happiness and convenience significantly. They spend more time interacting and connecting with friends online than they do offline. ocial media has also become a way for the post millennials to shape their own identity through their posts, comments and interactions.

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General Retail | General Retail | 28 Spotlight on China Retail – Issue 1

Spotlight on China Retail – Issue 1

Who are the Chinese post-millennials? (Cont’d)

New consumer demands ew brand pereption he origin of rans is not a huge concern for the eneration an oes not etermine their shopping ecisions. ore an more young segment support Chinese local rans as a

way to show support to their country. oreoer the postmillennials lean towars rans that are eicate faithful an that show uniue insights. hen they make consumption ecisions they also take into consieration whether a ran is sustainale an conscious of the enironment.

ersonalization and ustoization he postmillennials look for uniue an personalie proucts which allow them to express

their iniiuality as well as innoatie proucts an serices which coney their personal tastes. iche rans local esigner rans limite eition proucts an customie proucts are highly soughtafter among the eneration .

onvenienedriven shopping eperiene – sealess hannels and fast deliver servie

he postmillennials hae high expectations on shopping conenience. hey are omni channel shoppers who use whateer channel that est suits their nees e it online or offline. hen they o online shopping the majority of them use moile for their entire shopping journey – from prouct research to purchase payment eliery an aftersales serices. hile at physical stores they look for conenient payment methos such as lipay

or enpay as well as instant an hasslefree eliery serice.

versyn prodt and serve oerns rossovers eome a norm

In response to consumers’ increasing eman for newness an uniueness many retailers hae eneaore to iersify their prouct an serice offerings through expaning into new sectors an forming collaoration with other market players.

or instance to expan serice offerings an generate new reenue streams apanese lifestyle retailer uji has iersifie into the hospitality sector in China y launching uji otel in henhen in anuary 201 an in eijing in arch 201. ore than offering accommoation serices the uji hotels in China has also incorporate uji retail store uji Caf an uji ooks increasing the ariety of serices an proucts offere to Chinese customers. n December 2017, China’s major electronics appliance chain Suning extended its reach to local

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General Retail | General Retail | 29 Spotlight on China Retail – Issue 1

Spotlight on China Retail – Issue 1 sporting goods maret b launching its irst sporting goods store in anjing in December 2017 he expansion enables Suning to ramp up its product oerings to coer a ide range o sporting goods including sports shoes, itness euipment, and ranchised products

Crossoers, a combination o to or more elements brands to create ne products serices, hae become popular in the retail space, particularl the luxur and ashion industr Dierent rom traditional brand extension, crossoer collection creates mareting snerg through joint eorts and satisfies customers’ aspiration for newness and uniqueness. It appeals to customers, especiall the millennials ho are lessconorming and looing or a uniue a to express their ashion stle o capitalie on the crossoer ae, a number o ashion plaers hae initiated collaboration ith popular brands and designers to codeelop ne product collections In ul 2017, rench luxur ashion brand ouis uitton opened a popup store at a galler in 7 rt one, eijing to sell its crossover collection “Supreme ouis uitton” cocreated ith e orbased streetear brand Supreme he crossoer collection, hich include hoodies, e pouches and the classic eepall emblaoned ith logos o both brands, hipped Chinese ans into a ren, ith hundreds and thousands o Chinese customers locing to the store or the coeted collection In ebruar 201, erman ootear brand irenstoc launched a limited footwear collection “irenstoc x s in” in collaboration ith Chinese omensear designer brand s in he crossoer collection, in celebration o Chinese e ear, eatures irenstoc’s classic amses decorated ith Chinese classic embroider patterns – dragon and loral designed b s in

elvern enred lestyle soppn eperenes to ente soppers

s shopping experience becomes increasingl important to consumers, retailers noadas are striing to create uniue and un instore experience Increasing numbers o department stores and shopping mall operators hae upgraded b introducing ne and innoatie concept stores and more liestle serices or instance, opson ne shopping mall, hich as opened in eijing in ctober 2017, has introduced a number o retail and liestleocused tenants ith shop ormats and trade categories that are ne to the maret It has dran in an indoor si center, e Si hich houses largescale si training euipment ith electronics simulator to simulate the sno eect in realit an indoor roller sating center or children a largescale indoor plaroom or children a ung u learning center, etc hese tpes o tenants can help dierentiate the mall rom other plaers in the maret

Some orardthining mall operators hae incorporated alueadded elements that attempt to recast the malls as communit and cultural hub as ell as proide customers a enue or art exhibition, concerts, social eents, etc or example, during pril and a 201, a number o shopping malls in Shanghai’s Jing An district, including Jing An Kerry Centre, Crystal Galleria and I aioo ui, respectiel held a series o lie music concerts eaturing merican ja team

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General Retail | 30 General Retail | Spotlight on China Retail – Issue 1

Spotlight on China Retail – Issue 1 ave ecl and in celeration of International Ja ay, with a hope to ring entertaining and memorale eperience for shoppers.

In addition, in June 2018, with the approaching of Children’s Day, some shopping malls in Shanghai also launched a series of familyfriendly events in an effort to woo parents and their children to their stores. or instance, uihong iandis all of the oon hosted the first oocar oli ehiition in China in ay to August . he sqm ehiition was set against the acground of South Korea’s popular preschool animation series oocar oli, which was designed to educate children on the importance of traffic safety. o provide an immersive family eperience with fun for oth children and parents, the ehiition offered various rood safety games including road loc clearing, firefighting, road rescue and simulated driving, allowing parents to interact with their children and teach them more aout traffic safety through playing the games.

ontnes to domnate te retal sene

has and will continue to revolutionie the retail landscape. ursuit of onlinetooffline strategies has ecome a preoccupation for most rands and retailers. any traditional retailers in China have actively pursued digital epansion and deployed strategies to ensure seamless integration of all channels – physical, online, moile and social. At the same time, some leading ecommerce companies and “pureclics” enterprises have tiptoed into rics andmortar retailing in the hope of providing etter shopping eperience.

Alibaba’s supermarket chain Hema Xiansheng is a prime example of the O2O model. It’s unique usiness model seamlessly integrates its supermarets, online stores via moile app, distriution centers, and restaurants. In April , Aliaa opened its first ricsandmortar shopping mall near its corporate headquarters in anghou. his is another maor effort y Aliaa to lend its digital prowess with physical retail. he mall sells many of aoao e commerce brands and features a number of “black technologies” such as virtual labs and virtual maeup mirrors.

ecently, some leading ecommerce players such as Aliaa and J.com have sought to perfect their retail networs and further epand their ecosystems y merging with or acquiring their online and offline counterparts. or more information, please see Issue 2: E-commerce of our Spotlight on China Retail.

GeneralGeneral Retail Retail | | 31 Spotlight on China Retail – Issue 1

Spotlight on China Retail – Issue 1

Alibaba’s first brisartar si all t sr is

se o smart tenoloes ans steam

In today’s highly digitized world, China’s retail sector is being redefined by a new wave of technologies to facilitate O2O integration, while significantly enhancing customer experience. any retailers, especially those in the CS and supermarket hypermarket sectors have adopted various types of smart technologies such as scan and go payment service, selfcheckout counters, and electronic tags in their stores to create a more unique and enoyable shopping experience. Selected examples of technologydriven supermarkets include Carrefour’s smart supermarket “La Marche”, Alibaba’s supermarket chain Hema Xiansheng and Yonghui Superstores’ YH Super Species.

eanwhile, some apparel retailers have also used smart technologies in their operations to enhance customers shopping experience. ast fashion brand niqlo is a case in point. It opened a digitied experiential store in Shenhen in arch 2018 which integrates online and offline experience by connecting real world and virtual experience via smart mirrors and smart screens as well as A posters on the wall. In ay 2018, the brand launched a new AIdriven shopping guide “Xiaoyou” on its WeChat official account. Users can interact with “Xiaoyou” by conducting voice search and text search. Another fast fashion brand, ara introduced a Aenabled marketing campaign globally in April 2018 – customers can view the models wearing the latest collections, walking and posting in an Asetting when they point their phone at designated spots in the store.

In the same vein, advanced technologies have accelerated the growth of unmanned stores in the country. any retail operators as well as Internet giants such as awson, ainbow, ingo ox, Alibaba and JD.com have built different types of unmanned stores in the past year. he use of facial recognition technology at the store entrance, IDenabled racks and mobile facial

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General Retail | General Retail | 32 Spotlight on China Retail – Issue 1

Spotlight on China Retail – Issue 1 payment are commonly seen in these unmanned stores. ecently, apparel retailers such as USS have also set up staffless stores. In uly , USS partnered with Alibaba to launch an AIeuipped apparel concept popup) store in Hong Kong for a short period. The “FashionAI concept store” showcased GUESS’ latest collections together with some latest retail technologies such as smart mirrors, Ienabled clothing racks, and smart fitting rooms with realtime notifications. Customers could tryon the clothes physically instore in the smart fitting rooms or virtually via the smart mirrors. hey could purchase the clothes online via the mall app.

he use of retail technologies not only enables retailers to provide better shopping eperience for customers, but also enhance operation efficiency with better forecasting ability and inventory management. In particular, technologies such as AI, cloud technology and big data analytics allow retailers to better estimate consumers’ preferences based on their previous shopping history, purchase records and shopping routes in the store, and also help them to better manage inventory, improve the efficiency of supply chain operation and reduce costs.

opp retaln omes on te sene

ver the past few years, popup retailing has seen rapid growth in China. According to Chinese commercial property research agency , popup stores have proliferated in China with a compound annual growth rate of over since and the number of popup store are proected to eceed , by . opup stores are becoming increasingly popular as they can serve different purposes — selling products, enhancing brand awareness, and gaining market insights. ne of the maor advantages of popup retailing is that the setup costs are far lower than for permanent stores with longterm leases.

ecently, some brands have opened popup stores backed by innovative marketing content to promote products and raise awareness. Chanel, for instance, launched a popup store in the format of game center at Shanghai in April , following its previous debut in okyo, Seoul and aipei. he CC ame Center offered mainly cosmetics products and perfumes, and featured racing games, game machines, game booths and claw machines. he gamified popup store successfully attracted huge traffics to Shanghai. Some customers had to wait for two hours to get inside the popup store.

opup stores are also becoming increasingly a popular channel for ecommerce operators and online retailers without bricksandmortar presence to connect with customers in a more direct and dynamic way. Some also use the popup format to test new technologies, concepts and collections, and to gain market insights. oth Alibaba and .com have opened technology powered popup stores to showcase their online products. hese stores adopt numerous “black technologies” which can help them better engage with customers and draw offline traffics to online. Alibaba, for instance, set up smart mall popup stores in collaboration with different brands inside different shopping malls nationwide in recent months. In these popup stores, interactive technologies such as digital shopping wall, magic mirror, facial recognition, cashless

General Retail | General Retail | 33 Spotlight on China Retail – Issue 1

Spotlight on China Retail – Issue 1 payment method gamified discounts etc. are commonly seen. Similarly during arch to ay .com launched several types of popup stores under the name of “Joy Space” – for eample a oy Space popup supermarket was launched in Guanghou a oy Space store selling only cosmetics products of L’Oreal was opened in Shanghai, and a Joy Space popup store featuring products of various fashion brands was set up in eiing. All of these oy Space stores were euipped with interactive devices including A mirrors smart speakers facial recognition systems smart screens and smart shelves as well as an automated checkout aisle.

In ay apparel etailer Handu launched a popup store outside Intime Shopping all in est ake Hanghou in collaboration with Keyring Studio which created the popular Korean cartoon “Spookiz”. The store only opened for four days; it is the first time Handu launched a physical touchpoint to interact directly with customers. rossover products of Handu and Spooki were displayed in the popup store and customers could order online. The popup store also added some technologydriven entertainment elements such as motionsensing games and games with an aim to enrich consumer shopping eperience.

nese overnment pses orard t poles to oost onsmpton

ecogniing consumption will continue to be a maor growth driver in hina in the years ahead the hinese government has striven to establish an effective mechanism for epanding domestic consumption. In the past year it has issued a number of policies to promote consumption and facilitate the development of domestic trade. In September the General ffice of the entral ommittee of the ommunist arty of hina and the State ouncil issued t ral iis ri t ais fr rti sti a rtr tilati sitial sti. The pinions stress that improving the mechanism for promoting consumption and enhancing the basic role of consumption in economic development is conducive to optimiing the ratio between production and consumption and is beneficial to the mutual promotion of demandled and supplyside structural reforms. The pinions also state the need to create mature segmented markets to stimulate consumption growth to establish uality standards and credit mechanism and to create a trustworthy environment for consumers.

Earlier in uly the F promulgated the iis rti t ais fr sti a rtr rai t sti ttial f sits. The pinions highlight some maor tasks to boost consumption including the construction of the “15minute community service circle” to promote urban and rural consumption epanding imports and making full use of platforms such as hina International Import Epo and enriching domestic supply of goods and services and creating a safe and secure consumer environment through promoting the construction of traceability systems for important products such as edible agricultural products and food and actively promoting the construction of a business credit system.

General Retail | 34 General Retail | Spotlight on China Retail – Issue 1

Spotlight on China Retail – Issue 1 eanwhile, to encourage domestic consumption while promoting imports, the State ouncil announced in ay 1 that the country will slash import tariffs on a range of consumer goods including apparel, cosmetics, cleaning products, home appliances, fitness products, and some healthcare products. The tariff cuts went into effect on 1 July, 1. Later in Septemer 1, the State ouncil unveiled plans to cut tariffs for products including machinery, electrical euipment and tetile products eginning on 1 ovemer, 1. The overall tariff level reportedly will e reduced to .5 in 1 from ..

Major challenges

na trade ar nders overall eonom rot

n 1 and into 1, the world attention remains fied on the titfortat trade war etween hina and the U.S. The trade war will inevitably hinder China’s economic growth, which in turn will affect consumer sentiment and consumer spending. The retail sector as a whole will e adversely affected and is epected to see singledigit sales growth.

operatn osts ontne to rt protalty

Over recent years, operating costs in hina have elevated significantly, largely driven y surging rental and laor costs, as well as higher ependiture on sustainaility initiatives. t the same time, adopting new technologies and new usiness models is a critical part of a successful retail operation. This has forced rand and retailers to increase investments in technologies and data analytics to keep pace with the needs of the rapidly changing environment. ll these may further increase the financial urden of usinesses and affect their profitaility.

Changing consumer demand brings new challenges to retailers’ spply an

hile consumers ecome more discerning and demanding, they are also more conservative in their spending. They look for products with affordale pricing, and at the same time, value for money. oreover, they increasingly demand for personalized products and services, and have a strong desire for convenience and immediacy. To cope with these new demands, a mature supply chain that can react uickly is crucial. However, many operators are still in the early stage of reuilding their supply chains. esides, the rise of new delivery and fulfillment options such as “click & collect” and ondemand delivery is also putting a strain on the supply chains of retail operators.

General Retail | 35 General Retail | Spotlight on China Retail – Issue 1

Spotlight on China Retail – Issue 1 uccess o business transormation is obscure

esite the huge investments made in transormation and ugrading o business oerations, not many retail oerators have obtained satisactory results some new business models are unroitable and unsustainable. ndeed, many retailers have ut overwhelming emhasis on hardware ugrading and ecessive investment in instore retail technologies, but have neglected the needs to imrove merchandise mi, rovide ersonalied services and uniue brands and roducts to attract customers.

Concluding remarks

2018 is a transformative and challenging year for China’s retail sector. Internally, the retail landscae has evolved drastically in accordance with changes in consumer new buying reerences. Chinese consumers today are more knowledgeable, inuisitive and techsavvy, and demand convenience and seamless shoing eerience with multile shoing channels – bricksandmortar stores, online, mobile, and social media. gainst the new retail backdro, brands and retailers need to be innovative and bold to embrace change they have to come u with new business models that can satisy the new needs o customers and enrich their buying eerience. ternally, the escalating ChinaU.S. trade war inevitably will affect China’s economy and aect consumer sending. e eect the negative imact o trade war will drive demand for many commodities and services down in the coming year. China’s retail sector is eected to see singledigit retail sales growth in the coming years. usinesses are advised to urther broaden their business scoes and income streams, while looking or oortunities in other countries.

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General Retail | Spotlight on China Retail – Issue 2

Spotlight on China Retail – Issue 2 E-commerce

Asia Distribution and Retail

October 2018

China’s e-commerce sector has and will continue to attract the world’s attention with its explosive growth and transformative effect on the retail landscape. Changes in consumer preferences and the emergence of innovative technologies and new business models have provided a strong impetus for the growth of the sector. In recent years, e-commerce is increasingly intertwined with physical retailing. Many retailers and brands have ventured into omnichannel retailing or online-to-offline (O2O) integration. Physical retailers have ramped up efforts to improve their digital platforms, while growing numbers of online retailers and e-commerce players have opened offline stores or partnered with offline retailers to provide better shopping experience. At the same time, new e-commerce business models are quickly evolving to cater the new consumer demand.

I. Market overview

1. China’s e-commerce market scales up

The e-commerce market in China has continued to grow rapidly and became a major growth driver of China’s economy. According to the Ministry of Commerce (MOFCOM), the total transaction value of China’s e-commerce market reached 29.2 trillion yuan in 2017, up 11.7% year-on-year (yoy) (Exhibit 1).

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E-commerce | Spotlight on China Retail – Issue 2

Spotlight on China Retail – Issue 2

Exhibit 1: Transaction value of China’s e-commerce market, 2012 – 2017 . . . . . . . . . . . . . . . . . 2012 2013 2014 2015 2016 2017

ransaction value trillion yuan yoy growth

Source: MOFCOM; compiled by Fung Business Intelligence

SME’s B2B represents the lion’s share of total transaction value of China’s eee ae Alibaba remains the most popular SME’s a mall and mediumsied enterprise ’s B2B platform plays an important role in connecting manufacturers and industrial uyers and sellers online. t offers a more convenient and time saving way of conducting usiness for many s. According to ec among the SME’s B2B platform players the most popular ones include Aliaa C and loal ources accounting for . . and . of the total maret share respectively in xhiit .

Exhibit 2: Market share of China’s major SME’s B2B operators by revenue, 2017

Aliaa .

C .

loal ources .

hanghai anglian .

ocus echnology .

oocle . thers . loal aret .

Source: 100ec; compiled by Fung Business Intelligence

E-commerce | 38 E-commerce | Spotlight on China Retail – Issue 2

Spotlight on China Retail – Issue 2 With the competition among SME’s B2B platforms getting togher it is inreasingly iffilt to stanot from the ompetition y solely proiing mathing series for yers an sellers Hence, many SME’s B2B platforms are actively moving from purely matching businesses to proiing aleae series sh as logistis payment an finanial series Some SMEs are also ollaorating ith searhing engines soial meia platforms thirparty payment proiers et to reate a onestop soltion along the spply hain rsing moile strategies has een one of their foses in reent years

B2C an C2C marets continue roth momentum

Transaction value of online retail market enjoys resilient growth

China’s online retail market, which comprises the B2C and C2C segments, is the largest in the orl it has shon resilient groth espite the sloing eonomy oring to the ational Brea of Statistis of the BS, the transaction value of China’s online retail maret inrease 22 yoy to reah trillion yan in 2 Ehiit f this transation ale the online retail sales of goos amonte to trillion yan p y 2 yoy aonting for of the total retail sales of onsmer goos

ExhibitExhibit 4: :Transaction Transaction value of of China’s China’ sonline online retailing retailing market, market, 201 20112 – 21–2016

2 2 22 2 2 22 2 212 21 21 21 21 21

nline retailing transation ale trillion yan yoy groth

Source: National Bureau of Statistics of the PRC, Ministry of Commerce; compiled by Fung Business Intelligence

E-commerce | 39 E-commerce | Spotlight on China Retail – Issue 2

Spotlight on China Retail – Issue 2 China’s huge Internet population drives online sales growth

he fast growth of the online retail market is attributable mainly to China’s large population of nternet users and the early adoption of online shopping by Chinese consumers China has the world’s largest number of Internet users and online shoppers, contributing significantly to the phenomenal growth of the sector s of ecember 2, there were 2 million nternet users in China, of which million were online shoppers nternet penetration rate in China was as of ecember 2, while ermany, S, , apan, rance and taly have nternet penetration rates of over Ehibit China still lags behind many countries in terms of nternet penetration, reflecting the high growth potential of the market he number of nternet users in China further increased to 2 million as of une 2, with million online shoppers while million people use mobile phones to access the nternet of these, million are mobile online shoppers

ExhibitExhibit 5: : InternetInternet penetrationpenetration rates rates of of selected selected countries, countries, eceber June 2016 201

2

2 2 2 2 2

2 World average

Iran Ital rail hina Japan ussia rance ure exico ietna hailand eran hilippines nited States

nited indo nited Source: Internet World Stats; China Internet Network Information Center; compiled by Fung Business Intelligence

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E-commerce | Spotlight on China Retail – Issue 2

Spotlight on China Retail – Issue 2 oere taes the lead

Chinese consumers hae been oerwhelmingly using mobile deices to access the Internet ccording to the China Internet etwor Information Center CIC, million people use mobile phones to access the Internet as of une of these, million are mobile online shoppers enetration rate of mobile shopping increased to in une obile commerce mcommerce has gained maret share at the epense of Cbased transactions oer recent years he rise of budget smartphones, such as uawei, ppo, and io, has brought mobile connectiity to most parts of China ith the aid of mobile deices, consumers can hae realtime interactions with retailers, and enoy conenient shopping eperience anytime and anywhere he mobile platform is now a highly significant sales and maret channel of the online shopping transactions were made on mobile deices in and total transaction alue of mobile shopping reached trillion yuan hibit he total transaction alue of mobile shopping is estimated to eceed trillion yuan in

Exhibit 5: ransaction alue of obile shoppin, 2012 – 2020 estiates

2012 201 201 2015 2016 201 201 201 2020

ransaction alue trillion yuan yoy growth

Source: iResearch; compiled by Fung Business Intelligence * Estimated figures

E-commerce | 41

E-commerce | Spotlight on China Retail – Issue 2

Spotlight on China Retail – Issue 2 hare o C segent inreases steadil all reains the aret leader

ccording to iesearch, the C segment has eceeded the CC segment in terms of maret share In , C and CC segments accounted for and , respectiely, of the total transaction alue of online retailing in China hibit

: re rucure o oe re : – : re rucure o oe re : – ee

C CC

Source: iesearh opiled ung usiness Intelligene stiated igures

In , mall remained the leader in the C maret accounting for of the total maret, followed by com with maret share hibit

: re re o o er

angdang, thers, maon China, , uningcom, Icom,

com, mall,

Source: MOFCOM, iResearch; compiled by Fung Business Intelligence

E-commerce | 42

E-commerce | Spotlight on China Retail – Issue 2

Spotlight on China Retail – Issue 2 pparel and dail neessities are the ost reuentl ategories ought online

ccording to iesearch, apparel and daily necessities were the two most freuently bought categories online in , accounting for and of the maret share respectiely, followed by food and beerages and home products hibit

Source: iResearch; compiled by Fung Business Intelligence

astern China doinates in ters o online transations ade

ccording to the C, astern China accounted for of the total online retail sales, much higher than Central China , estern China and ortheast China mong the proinces in astern China, online transactions made in uangdong, heiang, hanghai, eiing and iangsu accounted for of the total hibit

astern region Central region estern ortheasten region region

roportion to total online retail sales yoy growth

MOFCOM; compiled by Fung Business Intelligence

E-commerce | 43

E-commerce | Spotlight on China Retail – Issue 2

Spotlight on China Retail – Issue 2 oung onsuers are the aor driving ore or the eoere aret

nline shopper aged between and accounted for oer of the total in China hibit hey grew up with the Internet and embraced the Internet more wholeheartedly than the older generations

: e: e e oer er oe rou e rou

eo or oe

Source: iResearch; compiled by Fung Business Intelligence

E-commerce | 44

E-commerce | Spotlight on China Retail – Issue 2

Spotlight on China Retail – Issue 2 iesprea use of thirpart online pament an mobile pament rives the roth of ecommerce maret

he widespread use of thirdparty online payment and mobile payment has drien the growth of China’s ecommerce maret In , thirdparty online payment serices in China achieed a total transaction alue of trillion yuan, soaring yoy from according to iesearch here are three maor categories of thirdparty payment companies, including Internet companies’ online payment channel (e.g., Alipay, Tenpay); (2) companies from traditional financial institutions eg, nionay nline and pure thirdparty online payment companies eg, eepay Currently, the thirdparty payment maret in China is dominated by lipay, followed by enpay and nionay nline hibit ccording to a research by encent and Ipsos esearch in ugust , more than of Chinese use cash for only or less of their monthly consumption

ExhibitExhibit 113:1: Market Market share share of of third thirdpartyparty online online payment payment services, services, 3Q1 2Q16

asy ay, thers, ee pay, ay, aofu ,

China ayment Clearing etwor , lipay, uifu, enpay, ill ,

nion ay,

Source: iResearch; compiled by Fung Business Intelligence * Note: includes WeChat Pay and QQ Wallet

Alipay is a thirdparty online payment platform launched by Ant Financial Services Group, an affiliate of Alibaba Group. Tenpay is a onestop online payment platform launched by Tencent. It offers payment services including WeChat Pay and QQ Wallet via WeChat panel and QQ panel, respectively. China Union Pay is the only domestic bank card organization in China.

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E-commerce | Spotlight on China Retail – Issue 2

Spotlight on China Retail – Issue 2 e trens an evelopments

Ecommerce iants strive to increase offline presence an epan their ecosstems

With the rise of omnichannel retailing, on the one hand, bricksandmortar retailers are pursuing digital epansion to provide seamless shopping eperience for customers; on the other hand, ecommerce giants are actively penetrating offline retailing ith the idea of perfecting their physical netorks and further epanding their business ecosystems.

ecently, Alibaba and .com, in particular, have accelerated the pace of their offline epansion by merging ith or acuiring physical retailers. oth Alibaba and .com hope to build an all encompassing business ecosystem that fully blends online and offline channels so as to become ubiuitous and indispensable in the daily life of all Chinese consumers.

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Alibaba Group is the largest online and mobile commerce company in the orld in terms of gross merchandise volume (G), reaching , billion yuan in 2. Alibaba has started to make sizable investments in China’s physical retail sector in 2, hen it took a . stake in electronics retailer Suning.com. Thereafter, the company unveiled the “New Retail” concept that calls for the seamless integration of online and offline retail to better serve customers through digital and mobile technology. Since then, Alibaba has invested billions in companies around the orld – home appliances chains, grocery chains, shopping malls and home products industry, covering almost every retail formats. oadays, Alibaba Group is composed of dozens of business entities, including online payments, cloud services, mobile apps, mobile operating systems, maps, retail outlets, group buying, cloud storage, mobile messaging, car service, music streaming and much more (hibit 2).

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Taking a similar approach as Alibaba, its biggest rival .com is also pursuing a similar strategy under the banner of “Unbounded Retail”. .com has also been aggressively epanding its scope of business and ecosystem through forming partnerships ith companies in various sectors. For instance, through indepth cooperation ith different media platforms such as Tencent, aidu and etase, .com hopes to capture more customers and obtains big data of consumers from the ne access points of the popular media channels. esides, .com has launched FS, Unmanned Supermarket, Convenience Store, etc. as part of its bricksandmortar and smart retail strategy. Through its collaboration ith Tencent, .com has also tapped into the social e commerce arena. esides, it has partnered ith IPshop and ihaodian for resources integration, and formed alliances ith apparel brands such as A and odo Group to build an apparel ecosystem (hibit ).

E-commerce | E-commerce | 46 Spotlight on China Retail – Issue 2

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arms and units business selected selected key

Alibaba’s ecosystem ( ecosystem Alibaba’s

12: Exhibit Exhibit Fung Business Intelligence

Source:

Exhibit 12: Alibaba’s ecosystem (key selected business arms and units) and arms business selected (key ecosystem Alibaba’s 12: Exhibit

E-commerce | 47 Spotlight on China Retail – Issue 2

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retail entities under com under entities retail selected

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1: Fung Business Intelligence

JD’s ecosystem (key selected retail entities under JD.com) under entities retail selected (key ecosystem JD’s Exhibit Exhibit ource: Exhibit 1: 1: Exhibit

E-commerce | 48 Spotlight on China Retail – Issue 2

Spotlight on China Retail – Issue 2 2 Socialcommerce becomes increasinl popular especiall in loer tier cities

ocial commerce has come into China’s ecommerce scene in recent years yin the hih level of consumer penetration by social media platforms such as eChat eibo various live streamin and short video platforms brands and retailers are tryin to sell via these social media channels and transform shoppin into a much more entertainin and recreational eperience n recent years many brands have set up stores on eChat ini roram to promote and sell their products Carrefour China revealed that the number of Carrefour eChat ini roram users has eceeded million in uust and is set to continue to row rapidly

eanwhile the online roupbuyin maret – which mainly leveraes on spendin via social media platforms – has ained increasin attention in recent years induoduo a popular social commerce roupbuyin platform is a case in point ounded in eptember induoduo reaches out to customers via its own app and eChat ini roram t provides roup buyin offers at reduced prices through its unique “team purchase” model; shoppers can join or initiate a team purchase and invite their friends on eChat to oin to enoy lower prices and further discounts Pinduoduo’s unique social approach to ecommerce has underpinned its rowth especially in lowertier cities and rural areas ccordin to eareter as of pril it has risen to become the third larest ecommerce player in China with maret share followin libaba and com induoduo was listed on N toc aret on uly raisin U billion he deal is one of the larest Chinese tech s of the year in the U

com also set up a roup buyin platform “JD Pingou” in une allowin individual merchants to set up stores to sell their products t present the cateories that have been opened to individual merchants include apparel and underwear sportswear footwear ewelry watches home tetiles and home furnishins inou aims to leverae roupbuyin and socialsellin amon merchants on com to drive more foot traffic and enerate sales lipay also launched a roupbuyin function on lipay’s homepage in uust t offers roup buyin deals within limited time and the deals will be chaned reularly he oods from the roupbuyin offers come from different aobao merchants coverin more than ten cateories includin daily necessities food and apparel rices for the roupbuyin offers are enerally lower than the prices on aobao some of the offers may have discounts as low as Consumers can either initiate a roupbuyin deal and as their friends to oin or they can simply oin the deals that are set up by others aobao will also recommend deals to users accordin to their purchasin behavior on the platform

E-commerceE-commerce | | 49 Spotlight on China Retail – Issue 2

Spotlight on China Retail – Issue 2 Short vieo platforms facilitate iital maretin

hort ideo streaming platforms hae ecome an increasingl popular channel for mareting or instance uning launched its short ideo streaming platform “Touhao Maijia” in ugust he ne channel is an eclusie channel for customied products ith different themes for uers periodicall integrating resources of rands and retailers media and eterans into one single platform nternet s and indiidual sellers can recommend products through ideo streaming hile ieers can share easil among their friends he channel ill coer arious product categories including eaut home products a and maternit products C and home appliances aoao also launched its short video app “Luke” in eptemer . Luke is a short video app focusing on customers’ sharing of their shopping experience, hich in turn ill inspire others to discoer ne and innoatie products people and things t offers shopping guidance for users and supports realtime interaction eteen users and their ieers sers can post questions in their short ideos ieers can anser the questions or the can share the questions to other ieers he short ideos on the platform are usuall seconds long; some of them ma direct the ieers to the aoao shopping esites

t the same time some rands are leeraging popular thirdpart short ideo platforms such as Douin to maret their products Douin is no aailale in oer countries and regions; it has ecome one of the most popular short ideo apps among the oungsters gloall especiall in sian countries such as hailand Japan ndonesia ndia and ietnam o reach out to more oung consumers rands are collaorating ith Douin to promote and maret their products an renoned gloal rands such as ichael ors didas neo and Dior hae launched mareting campaigns on Douin or eample in November 2017, Michael Kors initiated a “City catwalk” hashtag challenge sharing ideos of its rand amassadors ang i and ar Chao as ell as three Douin inhouse s doing a catal ith ichael ors products t is estimated that more than users had posted their on seconds catal ideos using the hashtag, generating more than 200 million views and 85 million “likes” from the viewers.

Michael Kors launches “Hashtag challenge” campaign (Photo source: digitaling.com)

E-commerce | 50 E-commerce | Spotlight on China Retail – Issue 2

Spotlight on China Retail – Issue 2 Ecommerce plaers an nternet iants launch their on private labels

long with the trend of consumption upgrading, more and more ecommerce companies and nternet giants have taken bold initiatives to launch their own private labels in order to offer consumers uality, premium and personalied products and services. Key players such as Netase, libaba, .com, Tencent, iaomi, Mia.com and uning.com have launched their private labels one after another, while some of them have even set up physical stores to sell their own private labels. Many of these private labels focus on lifestyle products, targeting mainly young consumers who look for high uality products with good design and value. They often market their private label products as made by manufacturers of big brands via the M riginal esign Manufacture model.

Netase anxuan is a prime example. t is an ecommerce private label launched by nternet company NetEase in 2016. With a slogan of “a better life doesn’t have to be costly”, NetEase anxuan is dedicated to help build a more affordable yet uality life to young consumers. ts portfolio now covers over 10,000 products across ten categories, ranging from home products, home textiles, kitchen ware and household appliances to daily life consumption products such as body hair care, basic items of apparel, among others. Netase adopts the M model through which it partners with big manufactures to design and produce the products.

imilarly, libaba launched its own private label retail site Taobao inxuan in 2017 and opened its first offline concept store in anghou in pril 2018,the second store in hanghai in une and the third one in enhou in ugust. The stores sell mainly lifestyle and functional daily necessity goods and travel accessories. .com also rolled out its own private label platform under the ingao brand in anuary 2018. ut neither company has come close to anxuan in terms of scale of the private labels. nother example is leading smartphone company iaomi. t launched an e commerce marketplace oupin by iaomi in pril 2017 to offer Mibranded products as well as other highuality products curated and sourced by the company. xhibit 1 shows selected examples of private labels launched by ecommerce players and nternet giants and xhibit 15 summaries their business models and key features.

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E-commerceE-commerce | | 51 Spotlight on China Retail – Issue 2

Spotlight on China Retail – Issue 2

iit elected eamles o riate laels launced y ecommerce layers and nternet iants

NetEase Yanxuan

Taobao Xinxuan

Jingzao

Youpin by Xiaomi

Yinxuan Suning Jiwu

ource Fung Business Intelligence

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E-commerce | 52 E-commerce | Spotlight on China Retail – Issue 2

Spotlight on China Retail – Issue 2

iit ey usiness models and eatures o riate lael usinesses o selected ecommerce oerators (s o etemer )

anuan aoao inuan Jinao ouin y iaomi aunced y NetEase ibaba Jom Xiaomi aunced date pi ay Januay pi umer o oline eiate saes aeas insie stores J ome an J ome ppiane stoes tore locations angzou angzou Sangai Nationwie Naning enzou usiness models Seopeate patom Tipaty patom business moe nestment ompanies witin Xiaomi’s ecosystem) roduct sources anuatues seing top Soue by ibaba Tuste manuatues om ibane pouts bans ieent setos pouts om ompanies in Xiaomi’s ecosystem; third paty bans rand oner Yanxuan Taobao Xinxuan Jingzao Enouage inepenent eeopment o tipaty bans wit ban names eay mae on pouts roduct eatures iguaity aue o money ow pie iestye pouts iguaity an goo aue aue o money te iestye pouts pouts an mass pouts ouse styis pouts wit goo uaity roduct e Ss oeing e Ss oeing ategoies inuing ome Ss oeing cateories ategoies eg ome ategoies eg ome pouts appae ome ategoies eg smatpones pouts iten pouts pouts iten pouts eetonis iten pouts ome pouts iten appae eetoni appianes pesona ae pouts pesona ae pouts oo pouts smat pouts pesona ae pouts an beeage pesona ae pouts oistics S Expess J ogistis ainiao J ogistis S Expess J ogistis ource 100ec; modified and compiled by Fung Business Intelligence

E-commerce |

E-commerce | 53 Spotlight on China Retail – Issue 2

Spotlight on China Retail – Issue 2 Ecommerce plaers on epansion spree overseas

a moe to ead their oa resece some arescae hiese ecommerce ayers are actiey iesti i oerseas marets ecety etra httsdcoth) a oit venture between JD.com and Thailand’s Central Group, was launched on June 2018, marking the orma etrace o com ito the hai maret t is reorted that com i soo cooerate ith other cotries haiad aos ietam amodia ad yamar) to oerate e commerce atorms he ie cotries are ocated i the ceter o sother sia ad ossess adat aor resorces ad hihaity seciaty rodcts com said that it as to share its oede i ri oie atorms oistics ad iacia serices to a cotries oer the et to years

esides seri oerseas cosmers com has aso ee ori o the sorci side to imort more hihaity oerseas rodcts ito hia etemer ordide estaished oices i oyo ad eo he oices are resosie to maitai cooeratio ith oerseas rad oers ad ordide; it i aso id more oerseas rads hich od like to sell in the China market. JD Worldwide’s sourcing capacity in aa ad oth orea is eected to icrease ater the estaishmet o the oerseas oices

imiary iaa has aso steed oerseas iestmet ay iaa acired the aista ecommerce esite oed y the roea teret icator comay ocet teret he acisitio aos iaa to ai a oothod i the raidy roi oth sia cosmer maret ad rther its easio oerseas iaa said that ater the cometio o the acisitio ara i cotie to maitai the oeratio ith its oriia rad ame ara as estaished i ad has o ecome aistas most oar oie shoi atorm arier i arch iaa iected a rther iio ito aada as part of the group’s ongoing effort to accelerate Southeast Asia’s ecommerce deeomet ad to deepen Lazada’s integration into the Alibaba ecosystem. This brings Alibaba’s total iestmet i aada to iio i tota iaa acired cotro o aada ith a iestmet o iio; it rther oosted its stae to i ith aother iestmet o iio aada is a otheast sia oie shoi iat hich oerates i doesia aaysia the hiiies iaore haiad ad ietam In terms of logistics, Alibaba’s oistics arm aiiao is coected to ear arehoses i cotries ad reios ad is ae to deier acaes to ssia race ai the etherads ad may othast sia cotries ithi hors

E-commerce | 54

E-commerce | Spotlight on China Retail – Issue 2

Spotlight on China Retail – Issue 2 ural ecommerce continues to thrive

China’s rural ecommerce has become a new growth engine for ecommerce in China with the near saturation of urban ecommerce. In June 2018, the number of Internet users in the rural area rose to 211 million, accounting for 2. of the total Internet population, down from 2.0 in December 201, according to CIC. The decrease in rural Internet population was due to the continual urbanization process in China. According to the China eusiness esearch Center, the transaction value of rural online market is estimated to reach 1,2 billion yuan in 201, up .1 yoy. f which, online sales of physical goods accounted for 2. of the total, reaching 82. billion yuan, up .1 yoy online sales of services accounted for .1 of the total, reaching 2.2 billion yuan, up . yoy. There are over .8 million rural online shop by end201, up 20. yoy.

The growth potential of the rural ecommerce market relies critically on the development of rural logistics and infrastructure. In recent years, some leading ecommerce players and Internet companies have increased efforts to epand their distribution network in rural areas. or instance, Alibaba launched its ural Taobao initiative in ctober 201 to create a network of e commerce service centers in rural areas to provide services that enable villagers to purchase goods online, as well as sell their goods. As of July 201, ural Taobao already covered over 00 counties. Alibaba announced in June 2018 that it aims to epand the coverage of ural Taobao to 1,000 counties and 10,000 villages across China in the net three years. JD.com, on the other hand, announced in June 2018 that in the net five years, it targets to open 1 million JD Convenience Stores, of which half of them will be in rural areas.

The government has been very supportive of the development of rural ecommerce. In ay 2018, the inistry of inance issued the Notice on launching comprehensive demonstration work of e-commerce in rural areas in 2018. The otice states that the government will continue to support the development of rural ecommerce by inecting more capital, as well as nurturing various leading counties as demonstration base to lead the development of rural ecommerce nationally. It is epected that rural ecommerce will continue to be a focus of the government in the coming years.

E-commerce |1 55

E-commerce | Spotlight on China Retail – Issue 2

Spotlight on China Retail – Issue 2 nternet an ecommerce plaers resort to to raise capital

eeral leain eere laers hae suh usie China raise un r eansin an ru eelen hii shs se rinen eales her s in he ieline inlue liaaae arenin nline ral aree n an leain ashin e ere lar eili n he rer has ile r an in n n in une an he laer eili n has als suie nienial ilins he euriies an hane Cissin in he sae nh r an ha ul raise u illin

iit elected s o inese nternet and ecommerce layers

aital omany Date Details raised location iai ul n iai ill use he rees ines in is illin n esse in erain ru areas sur lal eansin an re researh an hane eelen Currenl iai is the world’s urhlares sarhne an ahiein er illin uan in annual reenue in inuu ul he eal is ne he lares Chinese eh s illin he ear in he he uns raise ill e use ainl ean he ans usiness erain re researh an eelen an enhane is ehnl inrasruure eiuan e run n eiuanianin ill use arun he ianin n uns raise r he urae is illin ehnl arun eel ne hane rus an series ae auisiins an inesens an r eneral erain ource Internet resources, compiled by Fung Business Intelligence

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E-commerce | Spotlight on China Retail – Issue 2

Spotlight on China Retail – Issue 2 China’s first Ecommerce a launches

st the tol eoles oress td ottee ssed the oere w whh s to te eet o r he oere w s orlted to serd the lette rhts d terests o ll rtes oled eoere relte e oere rtes t the sod order o the ret d oster the rther deeloet o eoere er tht s sstle d helth he oere w ldes see hters wth totl o rtles whh sees reltos oer e oere oertors otrts dste resolto d lel resosltes oled e oere oerto

he lw ts ore ehss o the dtes d oltos o eoere oertors whle strethe roteto or osers rtlr eoere ltor oertors re rered to ssst wth rele restrtos o trltor oertors to esre ersert to rd the set o the erso d roert o osers d to rotet telletl roert o other resosltes he lw s eoere oertors wth dot ret ostos ro eld or restrt oetto ltor oertors who resol restrt trstos o ther ltors e elt o or to llo seros ses elt o the se re lso e led to ltor oertors the l to te eessr stes st reet erhts o ther ltors tht the re wre o or shold e wre o

ters o oser roteto the lw stltes tht eoere oertors st ollow relted lws d reltos whe ollet d s osers ersol orto or ste whe sed dertseets to osers eoere oertors shll de relet rosos the derts w o the eoles el o h oere oertors re rohted ro rt reews to deee or sled osers he st lerl ot ot te sles to osers

o sort the sod d sstle deeloet o the eoere setor the lw sttes tht oertors e rossorder eoere shold de lws d dstrte reltos rerd ort d eort e the rs ers o olts relted to trstos he lw lso tohes o ree osto t ss tht the tte ol lol oerets t or oe otleel s well s relted dertets shold te esres to sort d roote eroetll redl store d trsortto eoere

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E-commerce | Spotlight on China Retail – Issue 2

Spotlight on China Retail – Issue 2 Cnin rars

China’s eoere setor s row er st ored to ost o the rest o the world he elose deeloet s dre lrel ts olerst oser se st doto o ew teholoes d ew sess odels d relee o ole et the otr hs wll ote to rode treedos oorttes or lers the setor

oere h s tertwed retl wth hsl retl s terto s t the hert o eoere oertors d teret ts res ers o lers re est hel er the ole d ole world whle reletlessl ld ther eosstes o the re tel ed ther ole reh rter wth hsl retlers he tred s set to ote d she the deeloet o the setor o orwrd ewhle the oo osto rd o rrl osers wll rode le oorttes or rrl eoere sesses e eet eoere oertors to rther rese ther resee the strow rrl ret

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E-commerce | Spotlight on China Retail – Issue 3

Spotlight on China Retail – Issue 3 Department stores

Asia Distribution and Retail

October 2018

Against the backdrop of China’s supply-side structural reforms coupled with the unprecedented growth of e-commerce over the past years, the department store sector has made relentless efforts to transform and adjust to keep pace with China’s economic and social changes, be it hardware and stores upgrade, merchandise and service refinement, supply chain integration, business models and operation system restructuring. In the past year, the sector as a whole has started to reap the benefits of business upgrading and transformation. Sales of some leading players have improved, while the emergence of new retail formats have been welcomed by customers.

I. Market overview

1. Stable sales of department store operators China’s department store sector witnessed a positive and stable growth in the past year. According to the National Bureau of Statistics of the PRC (NBS), the retail sales of department stores of retail units above a designated size (enterprises with annual sales of 5 million yuan or above and with employee strength of 60 or more) increased by 4.6% yoy in 1H18. Statistics from the Ministry of Commerce (MOFCOM) also show that the yoy growth of 5,000 key retailers reached 4.6% in 1H18, with department stores accounting for 4.5% yoy.

A report by Linkshop shows that the department store sector as a whole has started to reap the benefits of business upgrading and transformation. Sales of some leading players improved significantly in 2017, while the emergence of new retail formats have been welcomed by customers. Linkshop’s study, based on the 2017 financial statements of 56 listed department store operators in China, shows that the listed department store operators

1

Department stores | Department stores | 59 Spotlight on China Retail – Issue 3

Spotlight on China Retail – Issue 3 achieved an operating income of 484.655 billion yuan in 2017, and the total net profit attributable to shareholders of the listed companies was 15.838 billion yuan. Overall, 36 out of the 56 listed companies saw rising revenue; 33 companies recorded an increase in net profit, of which 24 companies recorded increase in both revenue and net profit, and 10 companies recorded decline in both revenue and net profit. As shown in Exhibit 1, eight out of the top 10 best performing department store operators experienced different degrees of positive operating income growth (Exhibit 1).

Exhibit 1. Top 10 best performing department store operators in terms of operating income in 2017

Operating income in yoy change Rank Department store operators 2017 (billion (%) yuan)

1 47.18 0.22 Shanghai Bailian Group Co.

2 Chongqing Department Store Co., Ltd. 32.92 -2.75

3 CCOOP Group Co., Ltd. 27.79 91.52

4 Dashang Group Co., Ltd. 26.74 -4.79

5 Wangfujing Department Store (roup) Co., Ltd. 26.09 11.09

6 Rainbow Department Store Co., Ltd. 18.54 7.31

7 Wuhan Department Store Group Co., Ltd. 18.12 2.44

8 Nanjing Xinjiekou Department Store Co., Ltd. 17.96 5.68

9 Golden Eagle Retail Group Ltd. 17.23 5.10

10 Shanghai Yuyuan (Group) Co., Ltd. 17.11 9.39

Source: Linkshop; compiled by Fung Business Intelligence

2 Department stores | 60 Department stores | Spotlight on China Retail – Issue 3

Spotlight on China Retail – Issue 3 Spotlight on China Retail – Issue 3 achieved an operating income of 484.655 billion yuan in 2017, and the total net profit According to the survey conducted by the China Commerce Association for General attributable to shareholders of the listed companies was 15.838 billion yuan. Overall, 36 out Merchandise (CCAGM), 64.71% of the 85 surveyed department stores enjoyed positive yoy of the 56 listed companies saw rising revenue; 33 companies recorded an increase in net sales growth in 2017, while 35.29% witnessed a drop in sales revenue. Among those who profit, of which 24 companies recorded increase in both revenue and net profit, and 10 have registered positive sales growth, 4.71% of the operators enjoyed exceptional sales companies recorded decline in both revenue and net profit. As shown in Exhibit 1, eight out growth of more than 20% yoy in 2017 (Exhibit 2). of the top 10 best performing department store operators experienced different degrees of positive operating income growth (Exhibit 1). Exhibit 2. Yoy changes in sales revenue of 85 surveyed department store operators, 2017

Exhibit 1. Top 10 best performing department store operators in terms of operating income in Yoy changes in Accumulated number of department Cumulative 2017 sales revenue store operators percentage (i) >0% 55 64.71% Operating >20% 4 4.71% income in yoy change >10% 9 10.59% Rank Department store operators 2017 (billion (%) >5% 28 32.94% yuan) (ii) <0% 30 35.29% <-10% 24 28.23% 1 47.18 0.22 >-10% 6 7.06% Shanghai Bailian Group Co. TOTAL (i) + (ii) 85 100.00%

Source: CCAGM; compiled by Fung Business Intelligence

2 Chongqing Department Store Co., Ltd. 32.92 -2.75

2. New store openings continue 3 CCOOP Group Co., Ltd. 27.79 91.52 According to Linkshop’s statistics on the store opening and closing patterns of 80 chain stores in China over the past two years, the number of newly opened department stores was 4 Dashang Group Co., Ltd. 26.74 -4.79 still slightly more than that of department stores which were closed or revamped. In 2017, 46 department stores were closed down. These store closures happened mostly in the 5 Wangfujing Department Store (roup) Co., Ltd. 26.09 11.09 eastern region (15 stores), southwest region (11 stores) and northern region (seven stores). 55 department stores (including 2 non-chain department stores) were newly opened. Of 6 Rainbow Department Store Co., Ltd. 18.54 7.31 which, 42 were located in the parent company's self-built shopping mall.

From a regional perspective, the new department stores opened in 2017 were mainly 7 Wuhan Department Store Group Co., Ltd. 18.12 2.44 concentrated in the northern region and tier-4 and 5 cities. Tier-1 cities, on the other hand, due to matured economies and versatile consumption patterns, saw many department 8 Nanjing Xinjiekou Department Store Co., Ltd. 17.96 5.68 stores undergoing upgrading and transformation. Many key department stores operators such as Intime Retail (Group) Co. Ltd., Golden Eagle Retail Group Ltd., Liaoning Xinglong Big Family Business Group, Wangfujing Department Store (Group) Co., Ltd., Shanghai Bailian 9 Golden Eagle Retail Group Ltd. 17.23 5.10 Group Co., and Parkson Retail Group Ltd. have put more focus on the development of shopping centers and outlets, and less on department stores. For example, Intime added 10 Shanghai Yuyuan (Group) Co., Ltd. 17.11 9.39 seven shopping centers but only one new department store last year.

Source: Linkshop; compiled by Fung Business Intelligence

2 3 Department stores | 61 Department stores | Department stores | Spotlight on China Retail – Issue 3

Spotlight on China Retail – Issue 3 3. Transformation efforts have started to pay off Against the backdrop of China's supply-side structural reforms coupled with the unprecedented growth of e-commerce, over the past year, the department store sector has made every effort to transform and adjust to keep pace with China’s economic and social changes, whether through the upgrade of hardware and stores, the refinement of merchandise and services, supply chain integration, or the restructuring of business models and operating systems. The sector as a whole has started to reap the benefits. Some leading players such as Wangfujing Group and Rainbow Department Store recorded double digit growth in revenue and profit margins; while premium and high-end department store Beijing SKP achieved record-breaking sales proceeds in 2017, reaching 12.5 billion yuan, ranked second among the department store sector in the world. Despite facing keen market competition and rapidly changing consumer behaviors and spending mindsets, the department store sector has achieved remarkable progress in carrying out upgrading and transformation.

Beijing SKP Department Store (Photo source: Fung Business Intelligence)

4 Department stores | 62 Department stores | Spotlight on China Retail – Issue 3

Spotlight on China Retail – Issue 3 4. Domestic players lead the department store sector China’s department store sector is dominated by domestic players. As shown in Exhibit 3, the top 10 department store operators in terms of total sales revenue are all domestic department store operators.

Exhibit 3: Top 10 department store operators among the Top 100s, 2017 (Ranked by retail sales)

an ame of company ales, pretax umber of stores (million yuan) In yoy change In yoy absolute absolute chang (%) terms terms e (%) 1 Changchun urasia Group 42,446 . 1 2. Co., td.

2 Wuhan Department Store 37,513 5.5 -1.1 Group Co., td

Better ife Co., td. 37,094 15. 5 .

Wangfujing Department 33,720 21.7 5 5.7 Store Group Co., td.

5 hongbai oldings Group 33,194 5. 110 10.1 Co., td.

Dashang Group Co., td. 31,289* -. 1 -11.

7 Shijiahuang Beiguo Renbai 30,008 5. . Group Co. td.

Rainbow Department Store 26,481 5. 7 7.0 Co., td.

iun Commercial Group 24,917 .2 55 0.7 Co., td.

10 iajiayue Group Co., td. 24,900 .5 1 5.7

ource

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Department stores | Spotlight on China Retail – Issue 3

Spotlight on China Retail – Issue 3

II. Key trends and developments

1. Pursuing omni-channel retailing

Omni-channel digitalization becomes mainstream

Nowadays in China’s retail market, pursuing full online-to-offline (O2O) integration has become a leading trend for sector players. Many department store operators have been leveraging advanced technologies such as mobile Internet, big data, the Internet of Things (IoT) and even artificial intelligence (AI) to achieve omni-channel integration, namely seamless integration across physical stores, online platforms and mobile terminals, along with digital transformation.

Rainbow Department Store is the forerunner in business innovation and O2O model transformation. Since 2013, Rainbow has started to carry out business model innovation and put forward three strategic directions – "full O2O integration", "experiential consumption" and "vertical integration of value chain". Rainbow's O2O strategies emphasize on the seamless integration of the online and offline channels, and data sharing across marketing, payment and logistics systems. Rainbow has strategically implemented digitalization across all physical stores, while upgrading and remodeling its supply chain. Its inventory system, CRM system and merchandise system are managed on a centralized digital platform that is led by big data analytics. Since last year, Rainbow Department Store has put further emphasis on digitalization of their business model. In April 2017, the e-commerce division of Rainbow Department Store changed its name to Digital Business Center. According to Rainbow, by 1H18, it had more than 13.93 million online members; sales of “Rainbow Daojia” (Rainbow Home Delivery), a platform that provides express delivery service for products offered by Rainbow, increased by 280% yoy.

More customer-focused – master accurate customer data to achieve targeted marketing

Today, Chinese consumers are becoming increasingly sophisticated and highly connected. They demand increasingly convenient shopping options both on their smartphones and in physical stores. In order to offer customers a more efficient and flexible retail experience, many department store operators use data and technologies to accurately predict consumer needs and provide relevant products and services accordingly. They consider big data analytics and digitalization of operation management as crucial elements for success.

In recent years, Intime Retail Group has put considerable efforts in strengthening its membership system, aiming to master more accurate consumer data for better satisfying the needs of customers. In August 2017, Intime launched a paid membership program aiming to establish an interactive membership system, which collects customer data on both online and offline channels. Members enjoy discounts when shopping at Intime Department Stores. Based on

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Department stores | Department stores | 64 Spotlight on China Retail – Issue 3

Spotlight on China Retail – Issue 3 customers’ purchasing history in-store, on Intime’s mobile app and or its online store on Tmall, Intime could identify customers’ needs and preferences, thus providing more personalized product recommendations and services. Meanwhile, Intime also rolled out promotional activities which are exclusive to members, discount offerings, customization service for members, etc.; all these initiatives allow the company to easily collect consumer data and carry out targeted marketing.

Leveraging technologies to enhance customer experience

The rising middle class and the growingly influential Chinese millennials have high aspirations for a better life. They have strong desire for premium products and services, as well as convenience- driven shopping experience. With China entering a “New Consumption” era, many department store operators have shifted their focus towards customers, and regarded satisfying consumers’ demand for unique and engaging experiences as one of the most important factors to succeed. Meanwhile, more department store operators have leveraged advanced technologies to enhance consumer experience.

Intime Retail Group is a case in point. In May 2017, Intime’s Ningbo Dongmen branch was closed for renovation. The store has been upgraded and transformed in all aspects, including the exterior design, interior decoration, floor layout, etc. Apart from placing strong emphasis on upgrading the hardware and software of the store with better shopping facilities and lifestyle offerings, Intime has also increased the proportion of experiential elements substantially. For instance, it had added a 3D fitting room with the support of "black technologies" such as augmented reality (AR) and virtual reality (VR), as well as an “unmanned supermarket”.

Partnering with leading Internet companies and e-commerce players to deepen O2O integration

Increasing numbers of department store operators have realized the importance of forming strategic alliances with Internet or large-scale e-commerce companies in order to stay competitive. As such, department store operators can leverage the huge traffic resources, big data as well as logistics capabilities of the Internet or e-commerce companies, so as to roll out O2O initiatives more easily and effectively.

Selected examples of strategic partnerships between department store operators and Internet companies or e-commerce players are shown in Exhibit 4.

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Department stores | Spotlight on China Retail – Issue 3

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Department stores | 66 Spotlight on China Retail – Issue 3

Spotlight on China Retail – Issue 3 2. Diversifying retail formats and tapping into other business sectors to achieve synergy

Actively engaging in multiple retail formats, particularly shopping malls, supermarkets and convenience stores

Competition in China's department store market is fierce, and the single format model has gradually faded out as it lost its competitiveness in the rapidly changing marketplace. To adapt to the changing needs of consumers, more and more department stores have sought to expand their scope of business and engage in multi-format, multi-sector operations (Exhibit 5). For example, in recent years Golden Eagle Retail Group has launched a new G · LIFE series and developed six business units in 2017 including G · MART (boutique supermarket), G · TAKAYA (bookstore), G · QUTE (pet store), G · BEAUTY (beauty store), G · HEALTH (healthcare products), G · BABY (mother-and-baby products) to meet the discerning needs of middle class consumers.

Meanwhile, a number of department store operators changed their company name to show their eagerness to transform into multi-format and integrated retail enterprises. In January 2018, Liqun changed its name from “Qingdao Liqun Department Store Group Co., Ltd.” to "Liqun Commercial Group Co., Ltd." to better reflect its evolving business nature as the company continued to expand and strengthen their core retail competencies in the operation of shopping centers, supermarkets, home appliances, convenience stores and fresh community shops. During the same period, Xinhua Department Store under Wumart Group also changed its name to "Wumart Xinjiekou Plaza" to highlight its positioning. In March 2017, Rainbow Department Store Co., Ltd. decided to change its tracking stock name on the Shenzhen Stock Exchange to “Rainbow Shares”, hoping to better align with the company's omni-channel and multi-format strategies.

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Spotlight on China Retail – Issue 3 Exhibit 5. Selected department store operators that have tapped into shopping malls, convenience stores, supermarkets and other business sectors (as of September 2018)

Department stores Shopping mall Convenience store Supermarket Other formats format format format • Wangfujing • Wangfujing I Believe • Wangfujing Sofly • Wangfujing Factory Shopping Center (community-based Outlet fresh food-focused Wangfujing supermarket) Department Store • Guan Park (an (Group) Co., Ltd. independent supermarket brand by Wangfujing) • Wangfujing Jixuan Supermarket (a supermarket brand jointly established with third-party supermarkets) • Wangfujing self- owned supermarkets • Rainbow Shopping • Rainbow O2O Store • Sp@ce (lifestyle • Rain & Co (multi- Center • Well Go (unmanned supermarket) brand stores) Rainbow Department • Dreams-On CVS) • Self-owned • Rainbow app (e- Store Co., Ltd. supermarkets commerce platform) • Rainbow Finance (consumption finance) • Ba Li Chun Tian • N+ Convenience • N+Baby (children’s • Xinshuo (multi-brand Shopping Mall Store themed-supermarket) store)

New World • Self-owned • LOL Lifestyle Concept Department Store supermarkets Store (China) • N+ Natural Taste Plus (bakery) • Peter’s Meadow (F&B) • Aza Aza! (F&B) • Intime City / • Self-owned • Onmine snack store • In Series supermarkets (partnered with Intime Retail (Group) Alibaba) Co., Ltd. / • • Parkson Parkson Beauty Parkson Retail Group Supermarket (beauty & skincare Ltd. specialty store) • Liqun Shopping • Liqun Supermarket • Liqun Home Center • “Liqun ·Fuji Farm” Appliance Liqun Commercial (fresh community Group Co., Ltd. store) / • Self-owned • Chongqing Alliance supermarkets Trading Company • Chongqing Car Chongqing Trading Company Department Store • Mashang Consumer Co., Ltd. Finance Co. Ltd. Source: Various Internet sources; compiled by Fung Business Intelligence

10 Department stores | 68 Department stores | Spotlight on China Retail – Issue 3

Spotlight on China Retail – Issue 3 In China, small-format stores represented by convenience stores is gaining popularity. According to the MOFCOM, the yoy growth of 5,000 key retailers reached 4.6% yoy in 1H18, of which, the growth of the convenience store (CVS) sector was the fastest among all retail formats, reaching 7.6% yoy. More and more department store operators have extended their footprint into the CVS sector in order to expand revenue streams and business ecosystems.

Wangfujing Group is a case in point. It tapped into the CVS business since 2017. In March 2017, Wangfujing Group and Henan convenience store chain “I Believe” formed a chain convenience store franchise under a joint venture arrangement. The joint venture company announced the opening of 106 stores in Beijing in June 2017. The two companies will jointly transform and upgrade all existing stores of I Believe, invite the mom-and-pop stores in Beijing to be franchisees, and provide O2O services to consumers in Beijing.

Another example is Rainbow Department Store. It launched the unmanned convenience store “Well Go” in 2017. The first Well Go was opened in Nanshan District, Shenzhen in August 2017. The store uses RFID radio frequency identification technology, intelligent equipment control system, remote monitoring system and other IoT technologies. To enter the store, consumers can simply scan the QR code by WeChat app. According to the company’s plan, the total number of Rainbow convenience stores will exceed 800 shops by 2020.

New World Department Store also tapped into the convenience store sector last year. It opened the first “N+ Convenience Store” in the Chongwenmen branch, Beijing in November 2017. N+ Convenience Store’s target customers are working people aged 18-40 and surrounding office crowds. In terms of merchandise, N+ Convenience Store provides mainly fresh food, as well as beverages, daily necessities sourced from New World Department Store. In addition, N+ Convenience Store also provides other value-added services for consumers such as express delivery, free mobile phone charging, free toolbox, free medicine, free water, etc. According to the company’s plan, more N+ Convenience Stores will be opened nationwide in the future.

Going “fresh and experiential”; self-operated boutique supermarkets and fresh food become new growth points

In the past year, "fresh" and "experience" became the new focuses of the fast-moving goods and grocery markets. Increasing numbers of department store operators have transformed and upgraded their existing supermarkets, and stepped up efforts to provide more fresh food, catering service, and select premium and unique products from all over the world in response to the ever-growing consumer demands for higher quality of life.

For example, in January 2017, Rainbow Department Store opened the first Sp@ce supermarket in Shenzhen. The new store was previously an ordinary Rainbow Supermarket and has been transformed and upgraded into the first store of the new brand. Consumers can make online

Department stores | 69 Department stores | Spotlight on China Retail – Issue 3

Spotlight on China Retail – Issue 3 purchase with Rainbow's official app "Rainbow Scarf"; their products will be delivered directly to their home within 2 hours through the "Rainbow Daojia" service. Sp@ce also supports the "self- check-out" function; customers can pay by WeChat Pay, Alipay and also by credit cards. Rainbow aims to open 100-150 Sp@ce supermarkets in the coming three years.

Exploring new models, new formats and new concepts

Over the past few years, China’s retail market has seen an unprecedented evolution with rapid emergence of various new retail models and formats. Many department store operators are actively exploring new business models, developing new retail concepts and targeting more specific groups of customers.

In August 2017, Rainbow Department Store debuted a new retail format named “Global In Select” at its Houhai Branch in Shenzhen. With an operating area of 1,500 sqm, Global In Select houses six sections with a mix of merchandise from different categories, including beauty and cosmetic, maternity and baby, products from Australia and New Zealand, food products, specialty products from Europe and the U.S., and wine. By leveraging RFID technologies, Global In Select supports self-checkout service. The system can recognize the product categories, volume, total price, discounts, etc. all by itself without human touch. Customers can use Rainbow’s app to scan the QR code displayed on the screen to complete the payment process.

Another example is RISO – a new fresh food-focused supermarket launched by Bailian Group in Shanghai in June 2017. Located in Pudong New District, RISO occupies two floors and has a total floor space of 4,500 sqm. RISO sells mainly grocery and fresh products and features a large catering area, restaurants and café, book section, as well as art exhibition. RISO exemplifies the concept of “future store”, one of Bailian’s recent focuses, by integrating catering into the selling of fresh products, together with books, arts and music. It aims to offer a one-stop relaxing shopping experience to consumers, and promote a unique and natural lifestyle. Moreover, RISO also introduces a great variety of imported premium products, as well as exclusive items to enhance attractiveness of the store. As part of its O2O initiatives, RISO has also launched a mobile app and provide 1-hour delivery service for consumers who live within a 3-km distance from the store.

Last year, Intime Retail launched a new snack food store “Onmine” together with Alibaba Group in order to test the "New Retail" concepts and innovation in format integration. The first store was opened in Hangzhou Zhongda Intime City in June 2017. The store has a snack display area and a leisure experience area, covering an area of 300 sqm. It sells about 800 types of products, of which imported snacks accounted for around 80%. The new Onmine retail concept snack store indeed symbolizes the officially entry of Intime Retail into the concession food industry.

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Spotlight on China Retail – Issue 3 3. Offering additional sales channels to enhance product uniqueness and gross profit margins

Enriching and expanding direct-merchandise sales business for products and services differentiation

Having experienced the drawbacks of the concessionary model such as homogenization of merchandise and concessionaire brands, thin profit margin, and bringing less foot traffics, etc. many department store operators have expedited the expansion of direct sales business, taken even bolder steps by developing their own private labels, and operating buyer (multi-brand) shops with unique and exclusive brands from overseas in order to enhance product and services uniqueness, provide customers with a differentiated shopping experience and satisfy the increasingly sophisticated consumer demand under the trend of consumption upgrading.

Wanda Department Store is a case in point. In September 2017, Wanda Department Store made its first attempt to set up buyer (multi-brand) store by launching the first "Wanda Select" shop in Wanda Department Store, Tongzhou branch in Beijing. As a buyer shop, “Wanda Select” operates in "shop-in-shop" and "pop-up shop" models. All products are sourced from overseas by Wanda’s buyer’s team, with categories covering fashion, jewelry, footwear, skin care products, food, etc. “Wanda Select” can leverage Wanda Department Store’s massive product categories and sourcing capability to reduce operating cost and enhance supply chain efficiency, thereby providing a better shopping experience for consumers.

In the same month, Bailian Group launched a multi-brand shop “the bálancing” inside Bailian’s Orient Shopping Center in Xujiahui, Shanghai. All of the products sold in the store are purchased from overseas, from brands buy-out or via in-depth cooperation with local and foreign designer brands. The bálancing's buyer team tends to choose some "exclusive" designer and lifestyle brands to enhance the uniqueness and strengthen the competitiveness of Bailian’s merchandise portfolio. Currently, it houses more than 150 international fashion and lifestyle brands, including Jil Sander, Masion Margiela, Nina Ricci, Victoria Beckham, Brunello Cucinelli, Paul Smith, and 3.1 Philip Lim.

Stronger efforts in developing private labels

Today's new generation of consumers long for more unique and personalized products. As such, some leading department store operators actively develop their own private labels, which cover a large array of categories from cosmetics, apparel, home products, to food, etc. By launching private labels, department store operators can impose control and oversee the manufacturing and supply chain of their merchandise, and hence enjoy long-term competitive advantages and ensure better profit margin.

Developing private labels is one of the key strategies of New World Department Store China in

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Spotlight on China Retail – Issue 3 recent years. Following the launch of its own private labels "LOL" (Love • Original • Life) Concept Shop, "n+ Natural Taste Plus", a high-end bakery brand of the group and "Luis Home Bake”, a DIY baking studio for children, in June 2017, it launched another new private label apparel brand “Xin Shuo” in its Shanghai Wujiaochang Branch. “Xin Shuo” targets mainly the younger generation; its products have unique styles, similar to those created from a mix of designer brands and niche brands. In 2017, sales of goods for merchandise direct sales accounted for 31.8% of total revenue of New World Department Store China. This reflected that great importance of merchandise direct sales to the company.

Another example is Wangfujing Group. In April 2017, Wangfujing Group opened the "Wangfujing Dream Factory" store, which sells creative traditional Chinese cultural and ethnic products. Most of the products are designed by Wangfujing Group’s own design team and manufactured by their own partner manufacturers or sourced from local craftsmen for further processing.

4. Improving supply chain management and focusing on the basics of retailing

In response to the consumption upgrading phenomenon and consumers’ aspirations for quality products and services, many department store operators have devoted tremendous efforts on revitalizing and restructuring the supply chain, and accelerating the digital transformation process in order to promote product and services upgrades. Increasing numbers of traditional department store operators now realize the weak relationship with upstream suppliers and brands have led to supply chain inefficiency; some operators have sought to harness resources in the best way possible, and improve the supply chain management with digitalization approach, which largely simplified procedures and supply chain system, optimized resources and reduced costs.

Bailian Group is one of the department store operators who put huge emphasis on supply chain expansion. With "i-Bailian" O2O shopping platform as the backbone, on the one hand, Bailian Group has actively built and controlled resources in the supply chain by extending towards the upstream. On the other hand, Bailian has promoted the expansion of sales channels horizontally. For offline channel, Bailian has actively rolled out new convenience stores, shopping malls and factory outlets nationwide, and strengthened its global supply chain organizational capabilities.

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Spotlight on China Retail – Issue 3 III. Concluding remarks

To capitalize on the opportunities arising from consumption upgrading and the trend of younger generations becoming the mainstream of consumption, the department store sector should keep abreast of the latest market trends, optimize operations models and strive to create a stronger merchandise portfolio which aligns with the new lifestyles and spending habits of the dominating consumer group. Emphasis should be placed on strengthening and covering a wider scope of in-demand spending categories related to consumption upgrading, such as children and education, healthcare, tourism, cultural and creative products, etc. Department store operators should gear their business reform direction towards offering high quality products and services with better shopping experience to meet the increasingly sophisticated consumer demand.

Regardless of how the retail formats change and how the business models evolve; ultimately, the essence of retail business lies in the ability to provide desirable goods and services to a specific target market. Going forward, department store operators should strive to optimize the composition of “customers, merchandise, and physical settings” elements in their businesses. They should also focus on the basics of retailing by redefining an operational framework that integrates online and offline businesses, engaging in multiple businesses, enriching product offerings, and enhancing shopping ambience.

Last but not least, department store operators should take proactive initiatives to optimize operational efficiency in order to be well-prepared for the uncertainties that may arise in the “new consumption” era. Some companies have started to change organizational structure and create new departments to serve growing markets, streamline administrative processes.

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Department stores |

Spotlight on China Retail – Issue 4

Spotlight on China Retail – Issue 4 Shopping Malls

Asia Distribution and Retail

October 2018

China’s shopping malls sector has enjoyed robust development over recent years. Key shopping mall operators have shown improving occupancy rates with satisfactory retail sales growth. In the “New Consumption era”, shopping malls have increasingly become places for consumers to look for lifestyle experience and bond with family and friends. Mall developers and operators have strived to reconstruct the value of their malls and offer differentiated shopping experience to customers powered by Internet technology and data. Increasing numbers of mall operators have already begun to evolve and optimize the composition of the core business elements namely properties, tenants and customers.

I. Market overview

1. Shopping mall sector maintains robust development

China’s shopping mall sector has enjoyed robust and healthy development over the past year. This can be reflected in the “China Shopping Center Development Index”i released by the China Store & France Association (CCFA). The overall shopping mall index was 68.5 in 2017, up 1.3 yoy, 18.5 ppts above the 50-point threshold that separates the expansion and contraction status, indicating that the shopping mall sector was in a healthy state of development. The “prospective index” was 73.5, which was 8.4 ppts higher than the “current index”, reflecting that most shopping mall owners were optimistic about the market development (Exhibit 1).

i Commissioned by the Ministry of Commerce (MOFCOM) to the CCFA since 2017, the China's Shopping Mall Development index mainly evaluates the performance of shopping malls in China from the four dimensions – macro market, leasing activity, operational performance, and cost control. The index is measured on a sale of 0 to 100, 50 being the threshold which separates contraction from expansion; a higher number indicates stronger confidence in the market, and vice versa. 1

Shopping Malls | Shopping Malls | 74 Spotlight on China Retail – Issue 4

Spotlight on China Retail – Issue 4

Exhibit 1. The China Shopping Center Development Index, 2016 – 2017

73.5 7.7

.5 7. 5. .

Composite Index Current Index rospective Index

7

Source: MOFCOM; compiled by Fung Business Intelligence

2. Sales of major large-scale shopping malls in China register positive growth In 7, most largescale shopping malls in China delivered positive sales perormance. ccording to iietail, the total sales o largescale shopping centers across 5 cities in China reached .3 illion yuan in 7, up .3 yoy xhiit . all the surveyed shopping centers, o them recorded positive sales growth, 7 registered a decline in sales and eight remained lat in sales perormance. 33 shopping malls have a yoy growth o over , o which are luxuryoriented shopping malls.

Exhibit 2. Total sales of 190 large-scale shopping centers, 2016 – 2017

Source: iziRetail, compiled by Fung Business Intelligence

Shopping Malls | Shopping Malls | 75 Spotlight on China Retail – Issue 4

Spotlight on China Retail – Issue 4 ccording to inshop, the top shopping malls in China all achieved positive yoy sales growth in 7 xhiit 3. mong them, shopping malls achieved douledigit sales growth.

Nanjing Deji laa Deji roup . 7.5 uhan uhan International ushang roup .7 35. laa eijing China orld all CTC 7. . Shenhen Ic orld China esources 7.7 . and td. Shanghai Shanghai ic Sun ung ai 7. . roperties uanghou Teemall T roup . . Xi’an Saga all Xi’an Saga Group 5. 3. uanghou randview all hengjia roup 5. 5. uanghou Taioo ui Swire roperties 5. 7. Chengdu Chengdu IS har roup . . Shanghai laa ang ung . 5. roperties Chengdu Sinocean Taioo i Swire roperties .3 . Chengdu and Sinocean roup eijing oy City Chaoyang oy City roperty . . oldings eijing oy City idan oy City roperty . .7 oldings Shenyang Ic all China esources . 33.3 and td. Nanning Ic all China esources 3.7 . and td. anghou Intime in77 Intime etail 3.7 . eijing Taioo i Saniltun Swire roperties 3.5 . Shenhen Coastal City Coastal roup 3. . henghou David laa Dennis roup 3.3 . Linkshop; compiled by Fung Business Intelligence

3

Shopping Malls | Shopping Malls | 76 Spotlight on China Retail – Issue 4

Spotlight on China Retail – Issue 4 3. Number of shopping malls in China continues to grow

o r r or an opping nr opraing naioni arga pro i oria ara argr an r opn in a on aa ro oria propri onuan on ang aSa oa nur o a i gro oor ara or and not operating on a strata titled basis) in China’s top 30 ii i p o inra a a opoun annua gro ra G o o in ii

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Jones Lang LaSalle IP, Inc; DBS Vickers

II. Key trends and developments

1. Shopping mall operators shift to more consumer-centric business models

n rpon o rapi oing rai anap ra ipo or an ang in onur aior a opraor in ina ar aing o iniiai o rinn nraing nur o a opraor a ang ir in an ranor ir opraion an uin o aoping a or onurnri approa rgar uor a oa poin o ir uin ir ragi goa o ngag onur an onn i rai nan an a ioria raionip n opping a an nan a a ip raigorar anornan raion a nan rprn a ir our o ino o a u noaa rai nan a urn ino iporan uin parnr o opping a or an a opraor au ri ro nan ar no u ino ro o rna urnor an a urnor u ao ran au o nan an or poii ipa

Shopping Malls | Shopping Malls | 77 Spotlight on China Retail – Issue 4

Spotlight on China Retail – Issue 4 ro their areting eorts alls and tenants no share the oon goal to attrat patronage and enhane stoer shopping eperiene andlordtenant ooperation and sharing o inoration partilarl analtis o stoer data hae beoe a hot topi or the indstr hibit )

Exhibit 1: Shopping mall operators shift to more consumer-centric business models

MallMall operators operators have have changed changed their mindset their mindset to become to morebecome customer more-centric customer-centric and place customers and place at the heart of acustomers centres strategic at the dire heartction of a centers strategic direction

In the past... At present... Asset-centric Consumer-centric

Developers, landlords and multifaceted Role of landlord Developers, landlords lifestyle service providers, incubators of retail brands or startups

Traditional retailers, department Anchor tenants Retail, service or entertainment stores, supermarkets

Role of retail shops Tenants Business partners

Connecting the shops, consumers and the mall to improve customers Role of technology Powering the system experience, to empower big data analytics through digitalization

Source: Fung Business Intelligence Fung Business Intelligence

2. Shopping centers’ strategies to adapt to evolving consumer behavior

Asset enhancement and physical upgrading o eet the rrent and tre aret needs an eisting shopping alls hae endeaored to strengthen their phsial assets in all aspets inlding pgrading hardare and ailities reonigring nit laots reining tenant ies as ell as enhaning inall serie ailities or soe ellestablished traditional shopping enters at the e shopping distrits in China ater an ears o operation their phsial enironent and shopping all laot hae either beoe otdated or la o stoer serie ailities n order to oer an allenopassing liestle eperiene or shoppers inreasing nbers o traditional shopping enters hae oened largesale renoation and asset enhaneent progras to optiie the shopping enironent n hanghai or instane large nbers o shopping alls hae ndergone a series o renoation and pgrading proets in reent ears hibit )

Shopping Malls | Shopping Malls | 78 Spotlight on China Retail – Issue 4

Spotlight on China Retail – Issue 4

Exhibit 2: Selected retail malls in Shanghai that have undergone renovations in recent

years

Shopping Mall Opening Year Re-opening Year

Plaza 66 2001 2017

Wanda Plaza Wujiaochang Store 2006 2017

Changfeng Joy City 2011 2017

No.1 Department Store Old Building 1949 2018

No. Department Store New Building 2007 2018

Oriental Nanjing East Road Department Store 2005 2018

Oriental Yangpu Department Store 2007 2018

Shanghai Shimao Plaza 2004 2018

Changning Cloud Nine Shopping CenterCentre 2005 2018

Shui On Plaza 1997 2018

Shanghai Central Plaza 1999 2018

Mall 818 2009 2018

Citic Square 2000 2018

Grand Gateway 66 1999 2019

Source: Knight Frank Research1; compiled by Fung Business Intelligence Knight Frank Research; compiled by Fung Business Intelligence

iaohang anda laa in hanghai is a ase in point n 0 anda roperties eeted a aor asset enhaneent progra at the hanghai iaohang anda laa hih has been in operation or abot ears n this transoration eerise anda has alloated ore than 0000 s o oerial rental spae to pbli spae in order to reate a good shopping atosphere or onsers he aade and interior o the shopping all hae been pgraded anhor tenants hae been readsted and the baseent area has been transored into a theed atering area ith a olletion o poplar eateries and restarants Refining and reshuffling tenant mixes to optimize mall portfolio oadas China’s shopping mall operators are responding swiftly to consumers’ needs by proiding ore interatie eatres in the all inlding entertainent leisre atiities a ariet o ood options and nie onepts that dierentiate their oerings he set to reposition theseles as onser destinations and soial plaes rather than erel big boes ith a olletion o retail stores oe orardthining all operators are inorporating ale added eleents that attept to reast the alls as onit and ltral hbs as ell as

Shopping Malls | Shopping Malls | 79 Spotlight on China Retail – Issue 4

Spotlight on China Retail – Issue 4 proiding customers a enue for art ehibition concerts social eents etc Shanghai K11’s strategy of “art museum retail” is one of the earliest successful eamples of eperiencebased retail ac in its Claude onet art ehibition attracted more than isitors hereafter many shopping centers such as oy City Chaoyang aioo i anlitun and Chengdu etc also held largescale art ehibitions to draw traffics to the mall and enhance the oerall mall image n the tenant mi front innoatie malls are strategically reshuffling tenants to enhance mall positioning and optimie rental yield hey are increasingly welcoming retailers who can bring fresh elements to their properties any shopping malls are introducing uniue flagship stores as their anchor tenants with a hope to differentiate themseles from their competitors n some cases these flagship stores are the first and largest of its ind in the city or the nation Central in eiing which was opened in oember proides a good illustration ositioned as a worldclass retail fine dining and hospitality hub in angfuing the mall introduced many brands which debuted in Beijing for the first time, including a Victoria’s Secret flagship store set oer three floors a global flagship store for andora and a China flagship store for ritish contemporary fashion brand uperdry he mall also welcomed Links of London’s debut store to eiing as well as a number of renowned restaurants such as he Cheesecae actory the ichelinstarred anpai Classic Caf andmar etc aioo i anlitun in Beijing is another case in point. For example, it houses the world’s largest adidas store the first pple store in ainland China and a seat egabo cinema n 2017, Kiehl’s Coffee Shop and Popcorn General Store opened their first Mainland China stores in aioo i anlitun outh amples of selected new brands introduced by aioo i anlitun during are shown in hibit

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Spotlight on China Retail – Issue 4

–

Swire Properties; compiled by Fung Business Intelligence

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Spotlight on China Retail – Issue 4 he mix of retail tenants is hence changing – historicall, supermarkets, fashion and accessories tenants tended to occup the largest retail space in a shopping mall the started to lose store space to other tenants, particularl eateries, leisure facilities, entertainment, kidsrelated categories and serices tenants. For instance, Printemps Paris uaihai branch in Shanghai completed its renoation in 201, with nearl 0 of its floor space allocated to FB tenants. ata from Saills esearch shows that in 201, space occupied b kidsrelated tenants increased b 11 leisure tenants increased b and home lifestle tenants increased b 7 in Shanghai. B the same measure, FB increased b while apparel decreased b . Shopping malls breed the explosive growth of pop-up retailing er the past few ears, popup retailing has experienced explosie growth in China. ccording to Chinese commercial propert research agenc , popup stores hae proliferated in China with a CG of oer 100 since 201 and the number of popup stores are projected to exceed ,000 b 2020. Popup stores hae become popular as the interesting designs and new concepts can attract customer attention and proide a uniue retail space for retailers to engage and interact with customers. Popup stores can sere different purposes— selling products, enhancing brand awareness, and gaining market insights. For shopping mall landlords, popup stores of soughtafter retail brands, luxur brands or online brands with uniue concepts and exclusie products proide new attractions to the mall. For brands and retailers, especiall those who are new to the market and want to test the waters, launching popup stores is an ideal option as the do not need to commit to an expensie longterm lease but can enjo the marketing serices proided b shopping mall operators. ecentl, some luxur brands hae set up popup stores that coupled with innoatie marketing contents inside shopping malls to promote their products this is an effectie strateg for branding, promotions and marketing. Chanel, for instance, launched a popup store in the format of game center at K11 Shanghai in pril 201, following its preious debut in oko, Seoul and aipei. he CC Game Center offered mainl cosmetics products and perfumes, and featured racing games, game machines, game booths and claw machines. he gamified popup store successfull attracted huge traffics to K11 Shanghai. Some customers had to wait for two hours to get inside the popup store. t is obsered that increasing numbers of popup stores now adopt technologies to enhance in store experience. Some online plaers such as libaba and .com hae opened technolog powered popup stores to showcase their online products. hese stores feature a number of “black technologies” which can help them better engage with customers and draw offline traffics to online. libaba, for instance, has set up smart mall popup stores in collaboration with different brands inside different shopping malls nationwide. n these popup stores, interactie technologies such as digital shopping wall, magic mirror, facial recognition, cashless pament method and gamified discounts are usuall found.

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Spotlight on China Retail – Issue 4 Introducing new types and formats of shops hoing all oeatos seek to oie secial eeience to shoes b intocing ne an innoatie concet stoes n an cases ancho tenants that ie taic ae still ke bt a ne ehasis has been lace on a cate i o nie stoes that a a sense o noelt to the all oeing e categoies ith eeiential eleents sch as agente ealit ital ealit gaing centes inoo escae gaing centes hante hoses inoo boling an at sical theates hae becoe ne tes o tenants in soe shoing alls in ecent eas o eale in etebe egean hoing all in ning lanche the ist ee alloeate eestian taining school at the ooto o the shoing cente oson ne eiing hich as oene in en o has intoce a nbe o etail an liestleocse tenants ith sho oats an tae categoies that ae ne to the aket sch as an inoo ski cente e ki hich hoses lagescale ski taining eient ith electonics silato to silate the sno eect in ealit an inoo olle skating cente o chilen a lagescale inoo laoo o chilen an a kng leaning cente hese ne tes o tenants can hel ieentiate the all o othe laes in the aket n the othe han soe shoing all oeatos hae stategicall boght in ne tes o tenants sch as ola chaacte thee shos hoing to leeage the olait o these chaactes to attact cstoes o instance ine an otstaning online social netoking brand opened its “Line Friends” retail shops and café in different cities in China, including henhen angho eiing an hanghai eating the cte oiginal chaactes o ine iens each o the gan oenings has eceie oeheling esonses b shoes an ans ith long ees aiting to ente the shoca

3. Exploring new development concepts

hoing all oeatos in hina hae actiel been eloing ne eeloent concets ten is eeging of “shopping mall + shopping precinct” o “steetscae”) alls ith anlitn aikoo i as a sccessl oenne olloe b heng aikoo i an the ecentl oene c ol an eills in henhen he ne concet eates a cobination o inoo an otoo eleents ith a shoing cente ls a eestian aea that has shos an estaants – all ithin a lanscae enionent t can ceate a nie abiance o shoing an bing conses a secial eeience hibit lists selecte eales o shoing alls which adopt the “shopping mall + shopping precinct” concept.

ShoppingShopping Malls Malls | | 83 Spotlight on China Retail – Issue 4

Spotlight on China Retail – Issue 4 elected examples of shopping malls which adopt the “shopping mall + shopping precinct”

Exhibit 4. Selected new brands introduced by Taikoo Li Sanlitun to Beijing or to China for the first time during 2016-2017

City Shopping Opening Developer Size Description mall year Beijing Sanlitun 2008 Swire The total project area is Sanlitun Taikoo Li splits into southern Taikoo Li Properties 54,000 sqm and the total and northern zones and altogether floor area is 172,000 sqm comprises 19 buildings. It features youthful and fast-fashion international and local brands, covering fashion, sports, home furnishings and lifestyle brands as well as around 30 restaurants and bars. Chengdu Sino-Ocean 2012 Swire Gross floor area of over Sino-Ocean Taikoo Li Chengdu is a Taikoo Li Properties and 269,000 sqm retail-led mixed-use development Chengdu Sino-Ocean surrounding the Daci Temple, and consists of an open-plan, lane-driven mall, a boutique hotel with serviced apartments and a Grade-A office tower. Shenzhen MIXc World 2017 China Gross floor area of over MIXc World has nearly 300 stores, Resources 230,000 sqm housing over 1,000 brands and 12 Land Limited standalone flagship stores. There is also a 2,000 sqm indoor kids’ playground and a food court that opens 24 hours a day. Shenzhen UpperHills 2017 Shum Yip Gross floor area of over UpperHills is a mixed-use Group 1.2 million sqm development project that comprises shopping mall, hotel with serviced apartments and a Grade-A office tower. There are around 80 stores and a first-ever Muji Hotel.

Source: Various Internet sources; compiled by Fung Business Intelligence Various Internet sources; compiled by Fung Business Intelligence

Shopping Malls |

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Spotlight on China Retail – Issue 4

Example 1: MIXc World, Shenzhen

c orld is located at hennan ouleard, anshan istrict in henhen. pened in

September 2017, it is China Resources Land’s second commercial propert in henhen under the c brand following the opening of c henhen in . c orld is positioned as a midtohighend streetscaped commercial proect with an area of around , sm it has nearl stores, housing oer , brands and standalone flagship stores – including ara, ara ome, nder mour, nilo, C, rban eio, ., assimo utti, iaomi, tarbucs, etc. mong all tenants, are brands made their fora into henhen maret for the first time. nlie traditional largescale shopping centers which

hae an enclosed format, c orld taes a hbrid approach with both indoor and outdoor components, and integrates elements such as humanities, art, and socialism into such a largescale commercial proect. sing the one street, one lane and fie suares laout plan, the whole proect is connected through two core pedestrian streets, namel igh treet Fashion treet) and n treet

estaurant treet), fie maor suares ime laa, ater laa, Flagship laa, rchitecture laa, rt pace) and other public spaces and facilities hibit ).

Shopping precinct, MIXc World, Shenzhen Alfresco dining, MIXc World, Shenzhen

High Street (Fashion Street), MIXc World, Shenzhen In Street (Restaurant Street), MIXc World, Shenzhen

(Photos source: Fung Business Intelligence)

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Spotlight on China Retail – Issue 4

(Example 1 Cont’d)

Exhibit 5. Layout plan of MIXc World, Shenzhen

In street (restaurant street)

Hight street (restaurant street)

Mall Water plaza

WS Art space

Time plaza

Flagship plaza

orce MIXc World, modified by Fung Business Intelligence

1

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Spotlight on China Retail – Issue 4

Example 2: UpperHills, Shenzhen

pperills has a ross loor area o oer 12 million sm t is a mieduse deelopment proect ith 170,000 sm o hihend luur apartments, 0,000 sm o oice toers, 100,000 sm o L oice spaces or Ss, a shoppin mall and a hotel he proect is desined and positioned as top tier cit comple ierent rom that o a traditional

shoppin center, pperills adopts a “Luxury Street + Shopping Mall+Town” concept. These three components are divided but closely linked. UpperHills also houses Muji Hotel, MUJI’s irst hotel in the orld, laship store and iner restaurant

“The Luxury Street” spans across to loors and houses a number o international brands t

is connected to the shopping mall at L2. “The Shopping Mall” spans across five floors. 42% of brands are ne to Southern China amples include Southern China’s first Nike Beacon Store, Chinas larest ne concept laship store o urcotton, and the onl Son laship store in Shenzhen. “The Town”, which is named as “Loft Town”, is located on L3. It comprises

about 10 lorise and colorul blocs and is positioned as a commercial and cultural hub t eatures a number o creatie brands, desiner shops and uniue restaurants ith oriins rom urope, apan, on on, China and aian ith an innoatie retail deelopment concept, pperills has successull created a uniue shoppin ambiance hich set a ne benchmar to the shoppin mall sector in China

Shopping Mall, UpperHills Shenzhen Town, UpperHills Shenzhen

Luxury Street, UpperHills Shenzhen

(Photos source: Fung Business Intelligence)

1

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Spotlight on China Retail – Issue 4

Spotlight on China Retail – Issue 4 4. Leveraging technologies and multichannel strategies to transform the mall experience

Use of in-mall technologies and O2O platforms to enhance shopping experience Many shopping mall operators realize that the best way to deal with rapid technological changes is to embrace it. They are utilizing digital capabilities to take the shopping experience to the next level. Beyond providing basic services such as free ii, accepting mobile payments and running different promotions to encourage social media engagement, mall operators are adopting in mall technologies such as Ipowered services to improve the omnichannel experience and strengthen relationships with consumers. or example, increasing numbers of shopping centers have introduced Ipowered services and digitalized operation initiatives. egean Shopping Mall, for instance, has collaborated with Microsoft to gauge the satisfaction level of customers in the mall as well as recommend relevant products to respective customers with the help of facial recognition technology. egean has also formed partnerships with Meituanianping and oubei for indepth cooperation to drive online customers to the mall. nother example is CapitaLand’s “Smart Mall model”. CapitaLand opened the group’s first smart mall, CapitaMall induxin, in ingdao in 2. The mall offers integrated 2 experiences through CapitaStar, the company’s digital platform. CapitaLand’s Smart Mall aims to optimize customer experience in their entire shopping journey from eight perspectives. lease see xhibit for details.

iit CapitaLand’s “Smart Mall” model

Exhibit 6. CapitaLand’s “Smart Mall” model

Push marketing and Registration of Identify available Provide free WiFi, promotional messages memberships, rewards parking lot and reserve Beacon technologies to customers and redemption, gaming parking lot service for indoor navigation members through promotions, etc. with with GPS and indoor WeChat as well as CapitalStar App navigation technologies CapitalStar App

1 2 3 4

8 7 6 5

Shops finding service, Online reward “Find Your Car” Restaurants finding shopping route redemption, online function, car parking service, reservation suggestion, indoor payment, online coupons, reward points service, e-queuing navigation, e-coupons, payment with reward redemption, etc. service, e-payment e-payment, reward points, delivery, etc. points accumulation, QR code scanning

Source: CapitaLand; modified and compiled by Fung Business Intelligence Sore CapitaLand; modified and compiled by Fung Business Intelligence

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Spotlight on China Retail – Issue 4 Big data analytics echnology can help shopping mall operators gather realtime data and immediate feedac to enhance customer experience. he use of ig data can help operators figure out maret trends and tailor features that suit the needs of shoppers. etting deeper insight into consumer needs and ehaior is the first step to reinforcing shopping centers and maing them truly customer led. o precisely capture maret and consumer trends, existing shopping malls in China hae different tools – such as lie customer feedac, social mediaig data analytics, mystery shoppers, exit polls, sureys in catchment areas and retail analytics proided y a numer of solutions. ll these ould proide useful insights for mall operators to proide elldesigned facilities, improed customer care and serices tailored to the customers’ lifestyles and preferences. Some forardthining maret leaders such as egean Shopping Mall hae een uilt a complex and highly interconnected ig data ecosystem that connects and integrates its entire usiness operation. he ig data ecosystem has a poerful multidimensional dataase hich is aced y ig data analytics. ith this ig data ecosystem, the mall can perform targeted mareting and proide precise and accurate serices to customers.

5. E-commerce giants make forays into shopping mall sector ecently, the shopping mall sector in China has seen the emergence of a ne competitie landscape ith the entrance of ecommerce giants. he opening in pril of the liaa roups first ricsandmortar shopping mallin angzhou, is a maor step y the roup toards achieing its goal of lending digital proess ith a footprint in the physical orld. ith a floor area of , sm, the storey shopping center houses many libaba’s new retail concepts, such as Hema Xiansheng supermarket, Tmall Global Experiential Store, “Tmall Fairy Pavilion” hich focuses on products and technology products, etc. and the first ricsandmortar store of aoao – “Taobao Xinxuan”. As of April 2018, the shopping center has retail and rands oer of the floor space are allocated to and around of floor space are allocated to shops ith e etail concepts. s part of the ecommerce giant’s push into real orld retail, the entire mall is connected ith liaa’s online channels, big data system and logistics netor. he mall also features a numer of lac technologies, including facial recognition technologies for memership registration, unmanned registration counters that accept lipay moile payment serice, magic mirrors for maeuptrial and irtual fitting rooms.

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Spotlight on China Retail – Issue 4 III. Concluding remarks In our view, under the “New onsumption” era, the combination of omnichannel shopping and consumer experience is an inevitable trend for future retail development. Shopping mall operators will need to be consumercentric and evolve with both consumers and brands in order to stay relevant and competitive. eveloping new concepts, introducing new store formats and ensuring a dynamic mix of tenants will certainly provide shoppers with new and innovative retail experience. onstant reinvention of retail space, effective promotions, highuality customer service and wellexecuted customer loyalty programs will altogether provide a wayout for shopping mall operators to sustain and standout. n the other hand, technology will continue to be a significant disruptor in the sector. e believe that shopping malls must embrace technology as an integral part of the mall operation, be ready to compete in the digital era by incorporating technologies such as big data and machine learning to drive growth and boost efficiency. Forwardthinking shopping mall operators who keep exploring ways to collect and leverage data in their sales, marketing, customer service, and operations will continue to thrive. n fact, many researches indicate that people still love to see and touch the real products they intend to buy. ricksandmortar stores are irreplaceable and instore shopping experience remains dominant in the retail sector. e believe that the shopping mall sector will continue to maintain a high level of development in the coming years, and no longer be a place purely for shopping but a onestop destination for shopping, lifestyle and social experience. onetheless, to maximie rental turnovers while shifting the leasing focus to lifestyle, entertainment and F tenants mix has always been a dilemma for mall owners. esides, how to keep abreast of changing consumer habits and translate consumer data into useful information, sustain foot traffics, maintain high occupation rate, control costs spending and ensure positive return on investments are some of the key issues that mall owners need to work hard to solve.

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Spotlight on China Retail – Issue 5 Hypermarkets/ Supermarkets

Asia Distribution and Retail

October 2018

In recent years, the hypermarket and supermarket sector has faced fierce competition from the fast- growing e-commerce sector as well as from smaller-scale retail formats such as convenience stores, community stores and specialty stores. To better compete in the marketplace, many hypermarket and supermarket operators have revamped their operations by tapping the online market, offering fast delivery, adding on-site catering services, as well as providing more value-added services.

I. Market overview

1. Hypermarket and supermarket operators see improvement in sales growth

Over recent years, hypermarket and supermarket operators in China have been facing fierce competition and witnessing slower growth compared to online retailing and professional stores. That being said, many hypermarket and supermarket operators have stepped up efforts to revamp their operation to cater the changing needs of Chinese consumers. Their efforts have paid off with solid improvements in sales performance. According to the National Bureau of Statistics of the PRC (NBS), the retail sales growth of supermarkets above designated size (enterprises with annual sales of 5 million yuan or above and with employee strength of 60 or more) was 7.4% year-on-year (yoy) in 1H18, up from 6.3% yoy in 1H17 (Exhibit 1).

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Spotlight on China Retail – Issue 5

Exhibit 1: Yoy sales growth by retail formats, 1H17 – 1H18

12.0% 10.0% .5% 10.0% .1% .0% .0% 7.3% 7.4% 7.4% 6.7% 6.3% 6.2% 5.% 6.0% 4.6% 4.0%

2.0%

0.0% Supermarkets epartment stores rofessional stores Specialty stores

117 F17 11

Source: National Bureau of Statistics of the PRC; compiled by Fung Business Intelligence

Most of the top hypermarket and supermarket chain operators in China achieved a better performance in 2017 than in 2016, thanks both to new store openings and format expansion. The FMCG chain operators in the Top 100s achieved total sales revenue of 1,062 billion yuan in 2017, an increase of 7.3% yoy, up significantly from 4.1% yoy and 4.2% yoy in 2015 and 2016 respectively (Exhibit 2).

Exhibit 2: Yoy sales growth of FMCG chain operators among the Top 100s in China, 2012–2017

12.0% .% 10.0% .5% 7.3% .0% 6.5% 6.0% 4.1% 4.2% 4.0%

2.0%

0.0% 2012 2013 2014 2015 2016 2017

Source: China Chain Store and Franchise Association; compiled by Fung Business Intelligence

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Spotlight on China Retail – Issue 5 Spotlight on China Retail – Issue 5

Exhibit 3 shows the performance and major developments of selected major hypermarket and supermarket chains in China in 2017.

Exhibit 3: Performance and developments of selected hypermarket/ supermarket chains in China, 2017 Exhibit 1: Yoy sales growth by retail formats, 1H17 – 1H18

12.0% Name of company Performance 10.0% .5% 10.0% .1% .0% • Walmart China reported the best financial sales performance in China in .0% 7.3% 7.4% 7.4% 6.7% 2017. 6.3% 6.2% 5.% • In 2017, Walmart China opened 31 new stores. 6.0% 4.6% • Walmart China invested 300 million yuan to upgrade 62 stores, enlarging the 4.0% fresh food section to attract more customers. Walmart China • More than 160 Walmart stores are already connected to JD Daojia. 2.0% Investment Co., Ltd • In 2018, Walmart China will put more focus on rolling out omnichannel strategy, digitalization and smart retail, building new retail format, 0.0% enhancing its competitiveness in fresh food, private labels and direct import Supermarkets epartment stores rofessional stores Specialty stores products; it targets to open 30-40 new stores and upgrade 50 current stores.

117 F17 11

• Revenue amounted to 102,320 million yuan in 2017, up 1.9% yoy. Profit for Source: National Bureau of Statistics of the PRC; compiled by Fung Business Intelligence the year grew 14.9% yoy to 3,020 million yuan. Net profit margin increased 0.4 ppt to 3.0%. • As of 31 December 2017, Sun Art Retail has 461 hypermarket complexes across China. Most of the top hypermarket and supermarket chain operators in China achieved a better • On 20 November 2017, Auchan Retail International S.A., together with performance in 2017 than in 2016, thanks both to new store openings and format expansion. Ruentex Group, a stakeholder of Sun Art Retail, and Alibaba Group established a strategic alliance. Auchan Retail, Alibaba Group and Ruentex The FMCG chain operators in the Top 100s achieved total sales revenue of 1,062 billion yuan Sun Art Retail Group now have approximately 36.18%, 36.17% and 4.67% interest in Sun Art in 2017, an increase of 7.3% yoy, up significantly from 4.1% yoy and 4.2% yoy in 2015 and Ltd. Retail, respectively. • Sun Art Retail commenced a new venture “Auchan Minute”, an unmanned 2016 respectively (Exhibit 2). convenience box with 18 sqm and 500 SKUs. It has rolled out 67 boxes as of December 2017. Exhibit 2: Yoy sales growth of FMCG chain operators among the Top 100s in China, 2012–2017 • Its “RT Mart Fresh” app was made available to all RT Mart stores. Customers can make orders via the app and the nearest stores can provide one-hour

delivery service to designated address for the consumers. 12.0% .% 10.0% .5% • Total sales revenue reached 58.59 billion yuan in 2017, up by 19.01% yoy, while net profit was 1.81 billion yuan, up by 46.28% yoy. 7.3% .0% 6.5% • As of December 2017, Yonghui Superstores has 806 branches in 21 provinces. 6.0% • In January 2017, Yonghui launched a new retail format “YH Super Species”,

4.1% 4.2% which focuses more on catering and experiential elements while offering 4.0% Yonghui Superstores fresh produce. It already opened 46 YH Super Species as of June 2018. Co., Ltd. • Its “Yonghui Life” app was made available to all of Yonghui’s retail 2.0% businesses; the app has 2.89 million registered uses as of December 2017. • Yonghui Superstores has actively transformed and upgraded its Yonghui 0.0% Superstores (Red Label store) to Bravo YH (Green Label store). 2012 2013 2014 2015 2016 2017

Source: China Chain Store and Franchise Association; compiled by Fung Business Intelligence

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• In 2017, total revenue reached 6.97 billion yuan, up 3.92% yoy. Net loss was 52.44 million yuan. • New Huadu opened a new retail format "Hai Wu Hui" in May 2017 which focuses on fresh food and on-site catering to embrace "new retail". It opened another new retail format with focus on sports goods in December New Huadu 2017. Supercenter Co., Ltd. • As of December 2017, New Huadu operated 125 supermarkets, 7 department stores, and 11 sports stores.

• Revenue amounted to 25,225 million yuan in 2017, down 5.4% yoy. The annual loss attributable to the shareholders of the company was 283 million yuan. • Lianhua Supermarket operates in three main retail segments including hypermarkets, supermarkets and convenience stores under the “Century Mart”, “Lianhua Supermarket”, “Hualian Supermarket” and “Lianhua Quik” Lianhua Supermarket banner. Lianhua Supermarket operated 3,421 stores in 17 provinces as of December 2017. Holdings Co., Ltd. • Lianhua Supermarket launched a new retail format named "Century Lianhua Whale-Choice Store" in Hangzhou in 2017 which focuses on offering on-site catering services in supermarkets. • It also proactively optimized its fresh procurement supply chain in 2017.

• Total revenue was 9,655.2 million yuan in 2017. Profit attributable to equity shareholders of the company was 179 million yuan. • CP Lotus operated 69 stores in China in 2017, 56% of the stores are located C.P. Lotus Corporation in Southern China.

• Total revenue was 17.25 billion yuan in 2017, up 11.51% yoy. • Better Life launched a new retail format “Fresh Idea” in June 2017 which Better Life features an on-site catering area in the supermarket; it has 13 stores as of December 2017. Commercial Chain • Better Life operated 267 supermarkets and 51 department stores in China in Share Co., Ltd. 2017; more than 50% of the stores are located in Hunan.

• Renrenle Commercial Total revenue was 8.86 billion yuan in 2017, down 12.81% yoy. Group Co., Ltd.

Source: Company annual reports; compiled by Fung Business Intelligence

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Spotlight on China Retail – Issue 5 Spotlight on China Retail – Issue 5

China Resources Vanguard, RT Mart, Walmart China, Yonghui • In 2017, total revenue reached 6.97 billion yuan, up 3.92% yoy. Net loss was 52.44 million yuan. Superstores, and Lianhua Supermarket rank the top among the • New Huadu opened a new retail format "Hai Wu Hui" in May 2017 which hypermarket and supermarket chain operators focuses on fresh food and on-site catering to embrace "new retail". It opened another new retail format with focus on sports goods in December According to the annual list of “Top 100 fast-moving consumer goods (FMCG) chain operators New Huadu 2017. in China” released by the China Chain Store and Franchise Association (CCFA), most key chain Supercenter Co., Ltd. • As of December 2017, New Huadu operated 125 supermarkets, 7 department stores, and 11 sports stores. operators are engaged in hypermarket and supermarket businesses. Topping the list in this category is China Resources Vanguard, followed by RT Mart, Walmart China, Yonghui • Revenue amounted to 25,225 million yuan in 2017, down 5.4% yoy. The Superstores, and Lianhua Supermarket. Of which Yonghui Superstores achieved significant annual loss attributable to the shareholders of the company was 283 million yoy sales growth of around 20%, much higher than the average sales growth of FMCG of yuan. • Lianhua Supermarket operates in three main retail segments including 7.3% yoy. hypermarkets, supermarkets and convenience stores under the “Century Mart”, “Lianhua Supermarket”, “Hualian Supermarket” and “Lianhua Quik” Exhibit 4 shows the key FMCG operators by sales revenue among the Top 100s in 2017. Lianhua Supermarket banner. Lianhua Supermarket operated 3,421 stores in 17 provinces as of December 2017. In the past, most large-scale key players in the hypermarket and supermarket sector were Holdings Co., Ltd. • Lianhua Supermarket launched a new retail format named "Century Lianhua nationally focused while many smaller-sized domestic supermarkets and hypermarkets Whale-Choice Store" in Hangzhou in 2017 which focuses on offering on-site catering services in supermarkets. operated regionally. Nowadays, more and more domestic operators are expanding nationally. • It also proactively optimized its fresh procurement supply chain in 2017. For example, Yonghui Supermarket has 806 stores nationally as of December 2017 covering 21 provinces. Lianhua Supermarket operated 3,421 stores in 17 provinces in China as of • Total revenue was 9,655.2 million yuan in 2017. Profit attributable to equity December 2017. Sun Art Retail (which operates hypermarkets and supermarkets under RT shareholders of the company was 179 million yuan. • CP Lotus operated 69 stores in China in 2017, 56% of the stores are located Mart and Auchan banner) has 461 stores in 29 provinces as of December 2017. C.P. Lotus Corporation in Southern China.

• Total revenue was 17.25 billion yuan in 2017, up 11.51% yoy. • Better Life launched a new retail format “Fresh Idea” in June 2017 which Better Life features an on-site catering area in the supermarket; it has 13 stores as of December 2017. Commercial Chain • Better Life operated 267 supermarkets and 51 department stores in China in Share Co., Ltd. 2017; more than 50% of the stores are located in Hunan.

• Renrenle Commercial Total revenue was 8.86 billion yuan in 2017, down 12.81% yoy. Group Co., Ltd.

Source: Company annual reports; compiled by Fung Business Intelligence

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Exhibit 4: Top 10 FMCG players among the Top 100s, 2017 (Ranked by retail sales)

Sales, preta Numer of stores Rank Name of compan million uan In absolute yoy change In absolute yoy change terms (%) terms (%)

1 103,646 0.1 3,162 -1.9 China Resources anguard Co. Ltd.1

2 95,400 2.3 383 4.6 RT Mart2

3 80,278 4.7 441 0.5 almart China nestment Co., Ltd.

4 65,400 20.2 806 65.5 onghui Superstores Co., Ltd.

5 Lianhua Supermarket Holdings Co., 56,460 -5.6 3,451 -5.4 Ltd.3

6 51,950 48.0 25,775 0.7 as o Conenience Store Sinopec Group

7 49,796 -1.3 321 0.6 Carrefour China nc. 4

8 37,041 5.8 752 32.9 umart Holdings5

9 24,542 114.2 266 7.7 Ccoop Group Co., Ltd.

10 22,030 4.4 174 -5.4 hongai Chain Storage Supermarket Co., Ltd.

Source China Chain Store and Franchise Association; modified by Fung Business Intelligence

1Sales of China Resources Vanguard Co. Ltd. included sales of Suguo Supermarket. 2Sales of RT Mart excluded sales of Feiniu.com. 3Sales of Lianhua Supermarket Holdings Co., Ltd. included sales of Carrefour in Shanghai. 4Sales of Carrefour included sales in the Greater China Region. 5Sales of Wumart included sales of B&Q China Co. Ltd. and Yinchuan Xinhua Commercial Group Co., Ltd..

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Exhibit 4: Top 10 FMCG players among the Top 100s, 2017 (Ranked by retail sales) Pace of new store openings picks up; store closures remain significant Sales, preta Numer of stores In 2017, the pace of hypermarket and supermarket store openings picked up gradually. The Rank Name of compan million uan In absolute yoy change In absolute yoy change number of new stores of the Top 100 FMCG players increased 8.1% yoy in 2017, up from terms (%) terms (%) 6.9% yoy in the previous year. Many undertook store revamps and closed unprofitable stores. For example, Lianhua Supermarket closed 492 stores in 2017, but opened only 295 1 103,646 0.1 3,162 -1.9 China Resources anguard Co. Ltd.1 stores. Zhongbai also closed over 100 stores in 2017. Exhibit 5 shows the store closures of selected hypermarket and supermarket players in 2017. 2 95,400 2.3 383 4.6 RT Mart2 Exhibit 5: Store openings and closures of selected hypermarkets and supermarkets, 2017 3 80,278 4.7 441 0.5 almart China nestment Co., Ltd. Hypermarket/Supermarket Store openings Store closures Total number of stores

4 65,400 20.2 806 65.5 Lianhua Supermarket 295 492 ,421 onghui Superstores Co., Ltd. ongi 119 9 2,70 Zhongbai 200 107 1,10 5 Lianhua Supermarket Holdings Co., 56,460 -5.6 3,451 -5.4 Ltd.3 onghui Superstores 2 806 iaiayue 68 24 675 6 51,950 48.0 25,775 0.7 as o Conenience Store Sinopec Sun rt Retail 18 461 Group etter Life 4 10 18 ingkelong 1 41 220 7 49,796 -1.3 321 0.6 Saniang 18 7 169 Carrefour China nc. 4 ualian Supermarket 11 9 156

8 37,041 5.8 752 32.9 ew uadu 6 10 14 umart Holdings5 Renrenle 15 11 125 C Lotus 8 0 72 Linkshop compiled Fung Business ntelligence 9 24,542 114.2 266 7.7 oure: Ccoop Group Co., Ltd. Meanwhile, some foreign players exited the China market recently. ne significant example is that South oreas Lotte Group. In pril 2018, it agreed to sell 21 Lotte Mart to umei oldings Inc. for about 1.5 billion yuan. In May 2018, it further announced to sell Lotte 10 22,030 4.4 174 -5.4 hongai Chain Storage Supermarket Mart’s 72 stores in Eastern China, including Shanghai and iangsu to Liun Group at 1.67 Co., Ltd. billion yuan. Source China Chain Store and Franchise Association; modified by Fung Business Intelligence

1Sales of China Resources Vanguard Co. Ltd. included sales of Suguo Supermarket. 2Sales of RT Mart excluded sales of Feiniu.com. 3Sales of Lianhua Supermarket Holdings Co., Ltd. included sales of Carrefour in Shanghai. 4Sales of Carrefour included sales in the Greater China Region. 5Sales of Wumart included sales of B&Q China Co. Ltd. and Yinchuan Xinhua Commercial Group Co., Ltd..

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e trens an eelopments

Adapting to “New Consumption” era

Over the past year, many traditional hypermarket and supermarket operators have proactively adapted themselves to the “New Consumption” era. Many have used data analytics to link shopper profiles with shopping behaviors as a way to increase store traffic and offer more targeted promotions to shoppers. Some have integrated their inventory and supply chain management system with e-commerce or solutions platforms to improve warehouse management, inventory planning and last-mile delivery. Others have invested in technologies and digitalization to create a better in-store experience.

Embracing retail technologies

“Smart retailing” is the major theme in the retail market in 2018. Hypermarket and supermarket chain operators are embracing technologies in-store to offer consumer better shopping experience. For instance, Carrefour China launched its first Carrefour Le Marché smart store in Shanghai in May 2018. This is Carrefour’s first global initiative in smart retail. Partnering with Tencent, Carrefour Le Marché is equipped with a number of “black technologies” such as “Scan and Go” payment service, facial recognition payment system, self-checkout counters, electronic tags and other interactive entertainment facilities. For any item in the store, customers can scan the price label or product barcode with Carrefour’s Mini Program on WeChat, and add it to the E-trolley. When the customers finish shopping, they can choose to pay online via WeChat Pay and go through a designated passageway to “scan and go”. Customers can also pay with their faces. Customers have to scan their face and register through WeChat Pay before using the facial recognition payment system. When customers finish shopping, they can just smile to the camera to complete the payment process.

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e trens an eelopments

Adapting to “New Consumption” era

Over the past year, many traditional hypermarket and supermarket operators have proactively adapted themselves to the “New Consumption” era. Many have used data analytics to link shopper profiles with shopping behaviors as a way to increase store traffic and offer more targeted promotions to shoppers. Some have integrated their inventory and supply chain management system with e-commerce or solutions platforms to improve warehouse management, inventory planning and last-mile delivery. Others have invested in technologies and digitalization to create a better in-store experience.

Embracing retail technologies Designated passageway to “scan and go” (Photo source: WeChat facial recognition payment system” (Photo source: “Smart retailing” is the major theme in the retail market in 2018. Hypermarket and Fung Business Intelligence) Fung Business Intelligence) supermarket chain operators are embracing technologies in-store to offer consumer better shopping experience. For instance, Carrefour China launched its first Carrefour Le Marché Meanwhile, JD.com’s fresh food supermarket 7FRESH has also put great emphasis on technologies. 7FRESH was launched in Beijing in December 2017. With a store size of around smart store in Shanghai in May 2018. This is Carrefour’s first global initiative in smart retail. 4,000 sqm, 7FRESH focuses mainly on fresh food, ready-to-cook packaged food and cooked Partnering with Tencent, Carrefour Le Marché is equipped with a number of “black food. The store also features some advanced technologies, including interactive projector technologies” such as “Scan and Go” payment service, facial recognition payment system, which can display product information, smart shopping cart, and conveyor belt. Of which, self-checkout counters, electronic tags and other interactive entertainment facilities. For any the smart shopping cart can automatically follow customers and guide them to the right item in the store, customers can scan the price label or product barcode with Carrefour’s product shelves to get the products they want. It is reported that 7FRESH plans to open over Mini Program on WeChat, and add it to the E-trolley. When the customers finish shopping, 1,000 stores in the next three to five years. they can choose to pay online via WeChat Pay and go through a designated passageway to “scan and go”. Customers can also pay with their faces. Customers have to scan their face and register through WeChat Pay before using the facial recognition payment system. When customers finish shopping, they can just smile to the camera to complete the payment process.

7FRESH’s smart shopping cart (Photo source: 7FRESH) 8

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Spotlight on China Retail – Issue 5

Digitalization of hypermarkets and supermarkets is well underway

Digitalization is one of the major moves of hypermarket and supermarket players. An example is Wumart Group. It has installed electronic shelf labels to replace traditional paper labels in 48 of its hypermarkets in the eastern China region in April 2017. Product information will be displayed electronically to allow for integrated online and offline inventory management. Other benefits of using electronic shelf labels include: saving manpower and increasing efficiency of store operation; improving the accuracy of pricing; and allowing for real-time price adjustment so that online and offline price and discount information can be synchronized.

In June 2018, RT Mart announced that it has completed the digital transformation of 100 stores using Alibaba’s new retail technologies. RT Mart and Alibaba aim to upgrade the remaining 300 stores by the end of 2018. The upgraded RT Mart stores offer 1-hour delivery for customers living within a 3-km radius. Orders placed via the mobile app are fulfilled in the closest physical store.

Connecting with third-party O2O local lifestyle service platforms to provide quick delivery

Consumers now want their products as fast as possible. Some hypermarket and supermarket chain operators have partnered with third-party online-to-offline (O2O) local lifestyle service platforms such as JD Daojia and Dmall to provide O2O shopping and speedy delivery services.

Launched in April 2015, JD Daojia is JD.com's grocery delivery platform which provides 1- hour delivery services to customers in most of the tier-1 and tier-2 cities. It merged with a crowdsourcing delivery platform Dada in April 2016. JD Daojia currently works with leading hypermarket and supermarket chain operators such as Walmart China, Sam’s Club, Yonghui Superstores Lianhua Supermarket, Better Life Group, CR Vanguard as well as other chains across 370 cities nationwide.

Dmall is a third-party O2O local lifestyle service platform launched in 2015, mainly focusing on FMCG. It partners with various supermarkets to provide 2-hour delivery service to customers who live within a 3-km distance from the store. Wumart is the first partner of Dmall. Recently, Dmall has proactively strengthened cooperation with other supermarket chains including Zhongbai Holdings, Better Life Group, Shenzhen Jiahua Stores, Renrenle and Zhongyanghong Group.

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Continues to carry out format revamp

In recent years, more and more hypermarket and supermarket chain operators have revamped their stores or launched new store formats to better suit the changing needs of customers. They have also created more spaces for occasion- or experience-based activities (e.g., in-store dining) to improve customer stickiness.

Hypermarket and supermarket operators move to smaller-sized format

Small-sized format has been favored by many hypermarket and supermarket chain operators as small-sized store can better address consumes’ increasing demand for convenience, personalization and fast services. For instance, Walmart China re-launched its small-format store “Smart Choice” in Shenzhen in April 2018. With a store size of around 1,200 sqm, less than a tenth of the 15,000 sqm average size of a Walmart hypermarket in China, the store mainly offers fresh food, cooked food, half-cooked food and packaged food. It is connected with JD Daojia, where customers can make their orders on JD Daojia and have the orders delivered to home directly. Walmart hopes the small-format store can satisfy the increasing demand from small households and the singles. It plans to open five more “Smart Choice” stores in Shenzhen, Guangzhou and Dongguan by the end of 2018.

Earlier in August 2017, Wumart launched its first small-format community store in Hangzhou. The store has an operating area of 1,500 sqm, much smaller than other regular hypermarkets. The store features an in-store catering section, where consumers can purchase fresh foods in the store and the chef will prepare the dish real-time, ranging from Chinese style dishes, to French steak, and even sashimi and salad.

Fresh-food supermarkets see rapid growth

The “fresh-food supermarket” phenomenon in China is fast evolving. To meet the constantly changing consumer preferences, many grocery retailers have put more emphasis on fresh food business. Major initiatives include enlarging the proportion of fresh food in their supermarkets and hypermarkets, sourcing directly from farms to offer better price for customers, and importing more unique fresh products overseas. Some players have incorporated various experiential elements to better engage with customers along their shopping journey. According to Chinese information platform Winshang, 12 “fresh-food supermarket” chains have announced plans to open over 200 stores in 2018, and expand rapidly over the next three years. Of which, Alibaba’s Hema Xiansheng will open over 100 stores mainly in tier-1 and tier-2 cities; Yonghui Superstore’s YH Super Species will launch 100 new stores in 2018, while JD.com’s 7Fresh will open over 1,000 stores in the next three to five years; Suning’s SU Fresh will open 50 new stores by end-2018 (Exhibit 6).

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Exhibit 6: Store opening plans of selected fresh-food supermarkets Exhibit XX: Store opening plans of selected fresh-food supermarkets, as of XX 2018

Number of Retailer Launched by Launched date Opening plans stores

Hema Alibaba January 2016 67 (August 2018) 100 stores by end-2018 Xiansheng

YH Super Yonghui January 2017 46 (June 2018) 100 stores by end-2018 Species Superstores

SU FRESH Suning.com December 2017 7 (May 2018) 50 stores by end-2018

7FRESH JD.com January 2018 2 (Feb 2018) 1,000 stores in 3-5 years

Source: Winshang, compiled by Fung Business Intelligence

Stronger effort into developing private labels

A number of hypermarket and supermarket chains have launched their own private labels in recent years. According to a survey by the CCFA, the total SKUs of private label products increased from 435 in 2016 to 633 in 2017 for the Top 100s. However, sales of private labels accounted for only 6.4% of the total sales in 2017.

CP Lotus reported in its financial report 2017 that it has 42 SKUs of private label products and plans to increase the SKUs to 200 in 2018. In August 2018, Yonghui Supermarket also announced plans to revamp its private label strategy – instead of putting all the fresh produce under the private label “Caishixian”, Yonghui will develop various private labels based on product categories and source of origins.

In April 2018, Walmart China also reorganized its private label business. The company integrated its 13 private labels under three brand names "Great value" (daily necessities), "Marketside" (bakery products) and "George" (apparel). Walmart hopes its sales of private label products will account for around 20% of the total sales in the future.

Indeed, developing private labels is one of the winning strategy for hypermarkets and supermarkets that wish differentiate themselves from their peers and earn higher profit margins. The aforementioned CCFA survey showed that profit margin for hypermarket and supermarket chains with their own private labels was 15% higher than those without their private brands.

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Forming strategic alliances with Internet giants to drive synergies Exhibit 6: Store opening plans of selected fresh-food supermarkets Exhibit XX: Store opening plans of selected fresh-food supermarkets, as of XX 2018 To achieve better O2O integration, some traditional grocery retailers have formed partnerships with Internet companies to gain access to payment tools, social media, big data Number of Retailer Launched by Launched date Opening plans analytics, etc. In turn, Internet companies can leverage the extensive physical store networks stores of hypermarkets or supermarkets to reach more customers. Selected partnerships between Hema Alibaba January 2016 67 (August 2018) 100 stores by end-2018 hypermarket and supermarket operators and leading Internet players include: Xiansheng Alibaba acquires stake in Sun Art Retail Group to explore new retail opportunities YH Super Yonghui January 2017 46 (June 2018) 100 stores by end-2018 Species Superstores In November 2017, Alibaba Group announced that it has acquired a 36.16% stake in Sun Art Retail Group for HKD$22.4 billion (US$2.88 billion) to expand further in the offline retail SU FRESH Suning.com December 2017 7 (May 2018) 50 stores by end-2018 market. For Alibaba, the deal enables the company to gain access to Sun Art Retail’s offline 7FRESH JD.com January 2018 2 (Feb 2018) 1,000 stores in 3-5 years customers via the latter’s over 440 hypermarkets and supermarkets in China. Sun Art Retail’s Source: Winshang, compiled by Fung Business Intelligence store network is unique among its peers in the grocery sector – it spreads across 29 provinces, while others are mostly regional operators; this provides Alibaba a fast route to

gain access to the offline grocery market. For Sun Art Retail, it can leverage Alibaba’s digital Stronger effort into developing private labels ecosystem and undergo digital transformation in O2O retailing, logistics infrastructure, etc. to provide better shopping experience for its customers. A number of hypermarket and supermarket chains have launched their own private labels in recent years. According to a survey by the CCFA, the total SKUs of private label products Tencent and China Resources Group sign strategic cooperation agreement increased from 435 in 2016 to 633 in 2017 for the Top 100s. However, sales of private labels In April 2018, Tencent and China Resources Group signed a strategic cooperation agreement accounted for only 6.4% of the total sales in 2017. to jointly work on areas of common interest including smart cities and real estate

CP Lotus reported in its financial report 2017 that it has 42 SKUs of private label products management, medical and health, cloud computing and big data, as well as smart retail. For and plans to increase the SKUs to 200 in 2018. In August 2018, Yonghui Supermarket also smart retail cooperation, China Resources’ retail stores will equip with Tencent’s Internet announced plans to revamp its private label strategy – instead of putting all the fresh tools, big data analytics, cloud platforms, etc. The two companies hope to better connect produce under the private label “Caishixian”, Yonghui will develop various private labels Tencent’s social media traffic with China Resources’ physical networks including based on product categories and source of origins. hypermarkets, supermarkets and coffee shops. In the future, they will consider combining Tencent’s cutting-edge technologies such as artificial intelligence and blockchain with related In April 2018, Walmart China also reorganized its private label business. The company businesses of China Resources. integrated its 13 private labels under three brand names "Great value" (daily necessities), "Marketside" (bakery products) and "George" (apparel). Walmart hopes its sales of private Walmart China and Tencent reach in-depth strategic cooperation label products will account for around 20% of the total sales in the future. In June 2018, Walmart China and Tencent jointly announced that they formally entered an

Indeed, developing private labels is one of the winning strategy for hypermarkets and in-depth strategic partnership. To upgrade the various consumption scenes, the two supermarkets that wish differentiate themselves from their peers and earn higher profit companies will have in-depth cooperation on smart retail and digitalization process such as margins. The aforementioned CCFA survey showed that profit margin for hypermarket and shopping experience enhancement, precision marketing, comprehensive payment services, supermarket chains with their own private labels was 15% higher than those without their and membership system enhancement, by fully utilizing their strengths in their respective private brands. fields. Earlier in March 2018, Walmart China partnered with Tencent to launch an in-store self-service payment service “Scan and Go” through WeChat Mini Program; customers could

complete their payment by scanning the product barcodes and paying with their mobile phone. As of June 2018, Walmart has launched this service in its stores in 28 cities and plans 12 13

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to extend this service to 400 plus stores in the country during this year.

JD.com and Walmart to integrate inventory management

In July 2018, JD.com and Walmart announced that both parties will accelerate the integration of their stores and platforms, inventory and customers. The two companies plan to achieve full inventory integration and roll out a pilot 1-hour delivery service before the end of this year. JD.com said that the company will make sell-out forecast in Walmart stores, adjust inventory according to consumer behavior and needs, reduce invalid inventory, improve the efficiency of supply chain operation, and ultimately achieve cost reduction

III onclding remars

China’s hypermarket and supermarket sector has entered a “New Consumption” era of unprecedented changes. To cope with the changes and new developments, many operators are launching new formats, adopting new technologies in their supply chain as well as in their storefronts, trialing new delivery models, developing private labels and forming partnerships with leading Internet players to roll out their O2O strategy.

After all the trial and error in 2016 and 2017, the performance of the hypermarket and supermarket sector is set to further improve in the coming years. We expect to see more new developments as players will continue to come up with new strategies and new ways to operate their business. That said, despite the positive outlook, there remain some challenges facing the hypermarket and supermarket players such as securing investment capital, developing sustainable business model and maintaining profitability while embracing the changes.

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Hypermarkets/ Supermarkets | Spotlight on China Retail – Issue 6 Spotlight on China Retail – Issue 5 to extend this service to 400 plus stores in the country during this year. Spotlight on China Retail – Issue 6 JD.com and Walmart to integrate inventory management Convenience In July 2018, JD.com and Walmart announced that both parties will accelerate the integration of their stores and platforms, inventory and customers. The two companies plan Stores to achieve full inventory integration and roll out a pilot 1-hour delivery service before the end of this year. JD.com said that the company will make sell-out forecast in Walmart stores, sia istriution an etail adjust inventory according to consumer behavior and needs, reduce invalid inventory, improve the efficiency of supply chain operation, and ultimately achieve cost reduction ctoer

mall format shops especially conenience stores C an community stores hae gaine popularity oer the years as consumers are getting more mature an emaning more conenient shopping III onclding remars eperience. s smallscale retailer C has the aantage of eing more accessile to customers hile offering uicker serices an etter eperience. s ith other retail formats the C sector has China’s hypermarket and supermarket sector has entered a “New Consumption” era of unergone rapi transformation an reinention in the rapily eoling retail enironment. C is the pioneer of retail transformation an reinention as ell as an actie participant in onlinetooffline unprecedented changes. To cope with the changes and new developments, many operators integration. are launching new formats, adopting new technologies in their supply chain as well as in their storefronts, trialing new delivery models, developing private labels and forming partnerships with leading Internet players to roll out their O2O strategy. I. Market overview After all the trial and error in 2016 and 2017, the performance of the hypermarket and supermarket sector is set to further improve in the coming years. We expect to see more 1. China’s CVS sector sees rapid sales growth new developments as players will continue to come up with new strategies and new ways to C has een the fastestgroing retail format in China in recent years. ccoring to a report y operate their business. That said, despite the positive outlook, there remain some the China Chain tore an ranchise ssociation CC an the oston Consulting roup (C challenges facing the hypermarket and supermarket players such as securing investment total sales reenue for the C sector incluing forecourt stores reache . trillion yuan in capital, developing sustainable business model and maintaining profitability while embracing up yearonyear yoy hiit . he groth momentum of C is epecte to the changes. continue as small retail format continues to gain in popularity in China’s retail market. ata from the inistry of Commerce C sho that the yoy groth of key retailers

reache . yoy in ith C recoring the fastest groth among all retail formats . yoy compare to . yoy for supermarkets an . yoy for epartment stores.

ConvenienceConvenience Stores Stores | 105 |

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Hypermarkets/ Supermarkets | Spotlight on China Retail – Issue 6

Spotlight on China Retail – Issue 6

Exhibit 1: Total sales revenue for CVSs, 2015 – 2017

. . . . . . . . . . . . . . . . . 2015 2016 2017

arket sie rillion yuan yoy groth

Source: China Chain Store and Franchise Association, BCG; compiled by Fung Business Intelligence

n the total numer of C in China increase y yoy to reach oer up from in inicating that the store opening spee is ery fast in the sector hiit .

Exhibit 2: Number of stores, 2015 – 2017

. . 2015 2016 2017

umer of stores yoy groth

Source: China Chain Store and Franchise Association; BCG; compiled by Fung Business Intelligence

Convenience Stores |

Convenience Stores | 106 Spotlight on China Retail – Issue 6

Spotlight on China Retail – Issue 6

vera roserit ine reains stae in

ccoring to the “Report on the Prosperity Index of China's Convenience Stores” release y the C the eelopment of the C sector has remaine stale an healthy throughout an . The overall prosperity index of China’s convenience stores was aroun . in the preious uarters much higher than the point threshol hiit .

. Exhibit 3: Prosperity index of China’s convenience stores, 1Q17 –

. . . . . .

.

Prosperity index of China’s convenience stores

Ministry of Commerce; compiled by Fung Business Intelligence

oestic CS aers take the ea

Currently most leaing C players in China are regionally ase. s shon in hiit asy oy an umile hae the most numer of stores in China folloe y regional players eiyiia ianfu an ongi. t is noteorthy that asy oy an umile operate mainly forecourt stores thus they hae more stores than others. eiyiia ith stores in China in greatly outnumere that of local peers ianfu an ongi. oreign player amilyart only came sith on the list in terms of store numers.

ecently it is notale that oth foreign an omestics C operators are epaning fast aroun the country. his is ifferent from the past here foreign C operators sought to epan nationally hile omestic players focuse mostly on regional epansion. s of uly leen has ranches across China of hich oer half of them ere opene in the past three years. ason has ranches in China as of une of hich of them ere

asy oy an umile operate mainly forecourt stores in China.

Convenience Stores |

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Spotlight on China Retail – Issue 6

opened in the past three years. eanwhile doestic player eiyiia has een actively expandin otside of Sothern China into other provinces sch as Shanhai heian iho and nan.

Exhibit : op convenience store operators by nber of stores, 17

o of an C brand Parent copany stores Easy oy Sinopec rop

ie PetroChina Co. td.

onan Sar ior rop eiyiia

eiyiia Convenience Store Co. td. andon Tianf Convenience ianf

Chain iited

oni Chend oni Chainstore Co. td.

aiyart Shanhai ailyart Co. td. hi C rop hishan 3 eei International

7Eeven Sevenleven eiin Co. td.

Shanhai ianha i Convenience Qi Stores Co td. Shanxi Taiyan Tani Speraret ani Co. td. ason awson China oldins Inc. edi days ononshan rop

oo iaen oo Chain anaeent Co. Convenience td. tore Sichan donfen Speraret donfen Chain Co. td. orce: China Chain Store and Franchise Association; modified by Fung Business Intelligence Note: Forecourt retailers *Note: Estimated value

Convenience Stores | Convenience Stores | 108 Spotlight on China Retail – Issue 6

Spotlight on China Retail – Issue 6

erorance o inivia store iroves ore aers ta the onine arket

The perforance of individal store iproved sinificantly in with daily sales revene increased yoy to yan in accordin to the report y the CC and the C xhiit . s shown in xhiit of the srveyed copanies recorded ross arin of over in copared to of the srveyed copanies in .

Exhibit :: aiy ae saesstore revene, saes roth, 1 – 1 117

. . 1 1 17

aily sales revene yan yoy rowth

orce: China Chain Store and Franchise Association; BCG; compiled by Fung Business Intelligence

Exhibit : ross arin of the srveyed respondents of C, 1 – 17

elow and aove

orce: China Chain Store and Franchise Association, BCG; compiled by Fung Business Intelligence

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Spotlight on China Retail – Issue 6

The report also shows that of the srveyed copanies have set p online siness xhiit t online sales acconted for only arond of the total sales in slihtly hiher than in and in xhiit .

–

ffline only nline and offline

China Chain Store and Franchise Association, BCG; compiled by Fung Business Intelligence

–

ffline nline

China Chain Store and Franchise Association, BCG; compiled by Fung Business Intelligence

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Key trends and developments

initiatives reain crcia

Providing pick-up services

To stay copetitive in the fastchanin retail aret any CS operators have drawn p sealess strateies to attract and retain cstoers. Providin picp services instore is a coon stratey adopted y CS players. Since the einnin of increasin ners of CS chains incldin ailyart eiyiia Tani and i have partnered with ecoerce players to provide instore picp services for online cstoers. CS chains can enefit fro the potential increase in cstoer flow while ecoerce players can offer additional picp options for cstoers and enoy lower loistics costs.

Partnering with O2O local lifestyle service platforms

ocal lifestyle service aret in China has developed rapidly over recent years driven y consumers’ increasing pursuit of better quality of life as well as growing demand for convenience. In the past year any CS operators partnered with thirdparty local lifestyle service delivery platfors sch as aoia aid aiai eitan aiai to offer services. CS players can leverae the app of these platfors to reach ot to ore cstoers while providin other services sch as delivery. ccordin to aoia as of ly it has cooperated with over CS ranches incldin leadin CS operators sch as ailyart awson and leven as well as reional CS chains sch as rors ddies Today donfen eiyiia and oe to offer services.

In st eiin leven annonced that all of its stores in eiin have connected with eitan aiai platfor. ost of the Ss in leven are availale on eitan aiai platfor cstoers can order prodcts via eitan aiai app and eitan will provide the delivery services. It is reported that leven will frther cooperate with other delivery platfors in the ftre.

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erentated prodts are te eys to sess players mae reater eorts to lan prvate laels

owadays inese consumers loo for products tat are personalied or een unique o cater to tis demand some operators ae stepped up efforts to launc teir own priate labels and to offer suc products or instance amilyart as launced its own snac food brand “YUMMY” in China; 7Eleven has introduced its own private label series “Seven Select”; and CP res art as launced a number of priate labels for fres produce wine tea etc egional cain nda onenience tore as started to sell priate label products sourced from etase anuan an ecommerce platform under etase e products are mainly daily necessities suc as batteries data cables bandages wet wipes rags and clots bat sponges and slippers

FamilyMart’s snack food private label “YUMMY” (Photo source: Fung Business Intelligence)

t is noteworty tat priate label development in China’s CVS sector still lags far behind tat of equialent cains in deeloped countries suc as apan ccording to a surey by te and oer of sampled operators in ina reported tat sales of teir priate labels accounted for less tan of total sales y contrast for many stores in apan priate label sales account for around of total sales us tere is still uge room for priate label development in China’s CVS sector.

merene o tenoloydrven sness models

ecnology adancement is a significant factor driing te growt of te sector ince te second alf of tere ae been significant initiaties inoling te adoption of

Convenience Stores | Convenience Stores | 112 Spotlight on China Retail – Issue 6

Spotlight on China Retail – Issue 6

technologies that can transform retail operations. his had led to the emergence of technolog driven business models including those featuring unmanned cashierless CVS smart shelves and smart vending machines.

Unmanned cashierless convenience stores

ncreasing numbers of plaers are tapping the unmanned cashierless CVS maret b launching staffless CVS including nternet giants libaba and .com as well as several largescale retailers such as Sun rt Eashome ainbow epartment Store Sinopec and enovo Ehibit . Most of these stores use advanced technologies such as artificial intelligence to replace manpower in their operations to improve efficiencies and reduce costs. recent case is Sinopec’s Eas o membership unmanned store. Sinopec opened its first C card membership based Eas o unmanned store in iangtan cit unan province in ul . he store reportedl has adopted more than technologies such as facial recognition smart access control electronic tags smart lighting and scan to pa technolog. n the same month enovo announced that its first unmanned store has entered trial operation. ocated at its own headuarters the store provides “linefree cashfree and waitfree” shopping experience. t has installed devices which can detect customers’ expressions and body languages when they pic up the products instore. t can also trace consumers’ paths and their length of stay in front of different shelves. his provides insights for adusting product assortment and instore displa for a more convenient shopping eperience.

Fung Business Intelligence

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Spotlight on China Retail – Issue 6

mart shelves and smart vending machines

ollowing the opening of unmanned stores unmanned shelves and smart vending machines are the next wave of innovations in the S sector. or instance aoia has launched its unmanned shelf “Daojia Go” in tier and tier cities including eiing Shanghai uanghou and Shenhen since ctober . “Daojia Go” shelves are mostly located in office areas. ach “Daojia Go” is a refrigeratorlie box which is euipped with facial recognition technology. fter scanning their faces customers need to scan the code on the “Daojia Go” app to open the shelf door they can then tae the products close the door and settle payment instantly as the “Daojia Go” app is connected with ehat ay or ay.

nother example is ome. t launched its first hour unmanned shelves in ebruary . onsumers need to register with the palm scanners on the unmanned shelves. egistered users can scan their palm to open the shelf door and choose the products. he system will detect the products taen out and show the product information and prices on screen. ayments will be completed via lipay once the door of the shelf is closed. Similarly Suning also launched its first unmanned shelve in anuary . t is reported that Suning targets to install unmanned shelves nationwide in . he first phase will include ey cities in hina and follow by cities in the next phase.

mart vending machine comes on the scene

Some S players have installed smart vending machines as a way to enhance consumer experience. n ay onvenience Store launched a new type of vending machine in its stores across the country. ll onvenience Store owners can put the vending machine somewhere near their stores such as outdoor sports ground and on the street. he vending machine sells mainly beverages and snacs as well as other daily necessities and mobile phone accessories such as power bans and screen protectors. ustomers can scan the code on the product to complete payment. aunching smart vending machine is indeed a maor attempt for JD Convenience Store to implement its “Borderless Retail” strategy – extending the retail scenes and improving user experience.

n a similar attempt to entice shoppers domestic S operator coop launched its first smart vending machine in ay in eiing. he vending machine adopts activity recognition technology and visual tracing technology to identify and detect which products have been taen out and also being put bac on the rac. t is reported that the vending machine’s product identification accuracy rate is as high as .

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etalers tap te astron res ood ommnty store maret

aunching community stores is a groing trend in the CS sector CS is one o the most relevant ormats or serving local communities nstead o oering standardied products and services CS can etter accommodate the diverse needs o dierent communities and provide tailormade services or them Speciically CS can provide goods and services suitale or the elderly amilies or university students in neary areas

Recently some CS chains have upgraded and transormed their stores into resh ood community stores catering to the groing appetite o Chinese consumers or resh healthy uality products n ctoer com launched its irst oline resh ood community store “Pinjun Life” in Guangzhou. The store is operated y injun oldings td the hollyoned logistics company under com injun ie store oers resh ood seaood meat and eggs groceries hot meals aery products ast ood roen ood etc he store also serves as the picup point or online orders placed on app or injun ie app ccording to com it targets to open injun ie stores in and stores in three years

nother eample is domestic supermaret and CS chain operator Chengdu ongi he CS chain has urther cooperated ith onghui Superstores to upgrade and transorm some o its stores into resh ood convenience stores Supported by Yonghui’s expertise in fresh food supply chain the stores oer more resh ood including ruits vegetales meat and seaood compared to other Chengdu ongi stores Chengdu ongi plans to open more similar stores in the uture

any momandpop stores onnet t Alibaba’s LST and JD onvenene tore

commerce giants liaa and JDcom have sought to etend their oline ootprints y connecting ith tens o thousands o momandpop stores to help them digitalie their operations and increase their gross merchandise volume nder its e Retail initiative and to advance its strategy liaa has launched the S “ing Shou ong” system to help mom andpop stores emar on digital transormation he S system provides digitaliation and other usiness services or momandpop stores in areas such as product procurement logistics mareting and other valueadded services eanhile the system also enales astmoving consumer goods CG rands to connect directly ith momandpop stores across China that could previously only e reached through multiple layers o sudistriutors n Septemer liaa announced that it has recruited one million momandpop stores or unchained CS in China around onesith o the total maret to connect ith its S system to provide

Chengdu ongi signed strategic cooperation rameor agreement ith onghui Superstores in Decemer the companies ill or together in areas including supply chain management ne usiness epansion logistics technology ig data analysis and poverty alleviation

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“onestop solution for digital transformation” and offer better series to their loal neighborhoods.

.om has also rolled out the oneniene Store initiatie partnering ith oners of S aross the ountry partiularly in rural areas to help them reamp their stores. .om proides training branding and produts as part of a largesale franhise model. The store oners need to pay a deposit to join the program and ill retain full onership of the stores. The store oners an soure different types of produts from .om inluding G digital produts home applianes apparel and home furnishings. They an also soure produts from other retailers. .om intends to hae million oneniene Stores oer the next fie years.

momandpop store connected with Alibaba’s LST system (Photo source: alibabanews.com)

onvenience tore (Photo source: inkshop)

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Spotlight on China Retail – Issue 6

Concluding remarks

China’s CVS sector has

’ demand for great service. “Gogo Small” “Gogo Small”

ConvenienceConvenience Stores | 117| Spotlight on China Retail – Issue 7

Spotlight on China Retail – Issue 7 Luxury Market

Asia Distribution and Retail

October 2018

China’s luxury market enjoyed robust growth in 2017. Accelerating luxury purchases by millennials, especially those from the fast-growing middle class, coupled with revived consumer sentiment backed by the buoyant domestic stock and property markets have driven the resurgence of luxury purchases by Chinese customers at both home and abroad. Considering the strong spending power of Chinese shoppers, luxury players have also stepped up their digital efforts, widened their product offerings and re-adjusted their pricing strategies in China so as to better suit local tastes and preferences.

I. Market overview

1. China’s personal luxury goods market experiences resurgence

Personal luxury goods sales worldwide came in at 262 billion euros in 2017, representing a 5% growth at current exchange rates and a 6% growth at constant exchange rates, according to Bain & Company (Exhibit 1). The remarkable growth was mainly driven by strong luxury consumption across key regions, especially the resurgence of luxury purchases by Chinese customers both at home and abroad.

1 Luxury Market | 118 Luxury Market | Spotlight on China Retail – Issue 7

Spotlight on China Retail – Issue 7

ExhibitExhibit 1: 1: GlobalGlobal personalpersonal luxury luxury goods goods sales, sales, 201 20145 – 201-20167

2015 2016 2017*

ales reenue illin eurs yy rth at C exhane rate yy rth at C exhane rate

Source: Bain & Co; compiled by Fung Business Intelligence * Note: Estimated value

n China sales ersnal luxury s rse siniiantly t illin eurs in reresentin a yearnyear yy rth at urrent exhane rates an a yy rth at nstant exhane rates xhiit his ntale reun suests that the mesti ersnal luxury s market has returne t sli rth

Exhibit 2: Mainland China personal luxury goods sales, 2015 – 2017 Exhibit 2: Mainland China personal luxury goods sales, 2014-2016

2015 2016 2017*

sales illin eurs yy rth at C exhane rate yy rth at C exhane rate

Source: Bain & Co; compiled by Fung Business Intelligence * Note: Estimated value

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2. Chinese millennial consumers continue to drive global luxury growth

n the ast year Chinese nsumers inrease their luxury urhases ara Chinese luxury senin aunte r lal luxury urhases in xhiit u rm in China’s personal luxury goods market is rete t exan y annually thruh y then Chinese shers ill ntriute lal luxury sales an rie lal luxury rth arin t stn Cnsultin ru

urean urean merian merian est est rl rl aanese aanese

Chinese Chinese

Boston Consulting Group; Altagamma; compiled by Fung Business Intelligence * Note: Estimated value

he rth Chinese luxury senin in as rien y seeral atrs the mar ne ein millennials aeleratin their senin n luxury illennials in China eseially thse rm the ast rin mile lass hae strner senin er an are mre illin t sen than unterarts in ther untries hey start urhasin luxury s at an earlier ae – arun years yuner than thse in ure an years yuner than thse in the an uy mre reuently an reely mare ith the ler eneratin makin them amn the mar ntriutrs t luxury rth t is als exete that y millennials ill aunt r China’s personal luxury market. xhiit shs sme key traits Chinese millennial luxury shers

Luxury Market |

Luxury Market | 120 Spotlight on China Retail – Issue 7

Spotlight on China Retail – Issue 7

re up during ore sophistiated trong purhasing orn during the one China’s economic look or highuaity poer more illing hild poliy period reorms and opening produts and series to splurge on luxuries oten onsidered as a eneited signiiantly strong desire or and spend more priileged generation rom rapid eonomi oneniene and reuently and reely groth immediay

elleduated trael igitalnatie atie more ith more ore indiidualisti on soial media and exposure and lessonorming ond o online experiene o outside looking or a uniue shopping explore orld and more ay to express rands online and knoledge aout themseles oline rands and their ulture

Fung Business Intelligence

In addition, China’s roust eonomi groth aked y stellar perormane in the stok market and real estate market in has also led to the reial o the luxury market in the ountry. eanhile the reound o luxury spending y Chinese onsumers also made the ountry the third largest luxury goods market in sharing the same rank ith apan ust ehind urope and the .. xhiit .

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Spotlight on China Retail – Issue 7

Bain & Co; Fondazione Altagamma; compiled by Fung Business Intelligence

* Note: Estimated value

3. Rapid growth in household disposable income and number of wealthy individuals fuel the demand for luxury goods

osehod disosae income in China has on ada oe the eas ccodin to the ationa ea o tatistics o the C , e midde income, midde income and hihest income sements a eisteed ston oth at anna oth ates o o, o and o esectie in hiit hese os o indiidas oten hae a oacios aetite o oods and ae the iest sendes on odcts

, , , , , , , , ,

e caita disosae income o an hosehods o oth

National Bureau of Statistics of China of the PRC; compiled by Fung Business Intelligence * Note: Estimated value

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Spotlight on China Retail – Issue 7

eanhie, thee has een a contina incease in the nme o eath indiidas in China oe ecent eas ccodin to n eath eot , thee ee miion miionaies and , seich indiidas in China as o ana , o and o esectie hiit mon a the eions, andon had the hihest nme o miionaies in , ooed eiin, hanhai, heian, and ians hiit n eseach Institte aso ointed ot in its Consme e that oe o seed hih netoth indiidas in China ee conident aot the econom oin oad, ith the nme o respondents that were “extremely confident” accounting for 28% of the total. esides, aetite o odcts Chinese consmes in onced ac to etn to the ee in the eneed aetite o oods is eected to the die consmtion in the cont

–

,, ,, ,, ,, ,, ,, ,, ,, ,, , ,

, , , , , , , me o miionaies me o seich o oth o miionaies o oth o seich

Hurun; compiled by Fung Business Intelligence * Note: Millionaires are defined as individuals with personal wealth of 10 million yuan or more; super-rich are defined as individuals with personal wealth of 100 million yuan or more

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Spotlight on China Retail – Issue 7

yoy change yoy change (%) (%) uangdong 28 .% 2.% 2 eiing 2 .% .% hanghai 2 2.2% 8 .% heiang .% 2 .% iangsu .2% .% uian 2 .8% .% handong .% .% 8 ichuan .8% 2 .% iaoning 8 .% 2 2.% ianin 22 .8% 2 .% enan 2 8.2% 8 .% 2 uei 8.% .% unan 8.% .% eei 82 .% .% haanxi 8 .% 2 .2% hanxi .2% .% honging 8.% 2 .% 8 nner ongolia .8% 8 .2% eilongiang 2 .% 8 .% 2 iangxi 2 .% 2 8.% 2 nhui 2 8.% .% 22 ilin 8 .2% .% 2 unnan 8 .% 88 8.% 2 uangxi 8 8.% 2 8.8% 2 ainan .% 2 .% 2 uihou .% 8.% 2 iniang 2.% .% 28 ingxia 2 .% .% 2 ansu .% .% inghai .% 2.% iet .% 8 .% Total 1,469,500 9.7% 99,350 11.6%

Hurun; compiled by Fung Business Intelligence

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4. Female-related products continue to lead growth in the luxury market

China’s luxury market experienced remarale growth oerall in 2 following four years of lacluster performance and decline. ominated y female shoppers a numer of categories including women’s apparel, ewelry cosmetics perfume and personal care products which altogether contriuted almost % of total luxury spending in hina posted more than 2% growth respectiely in 2 fueling the growth in the domestic luxury maret. xhiit .

Market share of China’s luxury market and growth rates by category, 201 Market share of China’s luxury market and growth rates by category, 2015

osmetics perfume and personal care products % % % % 28%

atches 2% % % % %

eather goods % % % % 8%

ens apparel % % % 2% 8%

ewelry 8% % 2% % 2%

omens apparel % % % % 2%

hoes % 8% 8% 2% 2%

ccessories % 8% % % %

Total 100% 2% -1% -2% 20%

“2017 China Luxury Market Study.” January 2018. Bain & Co; compiled by Fung Business Intelligence * Note: Estimated value

8

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II. Key trends and developments

1. Luxury brands team up with young Chinese celebrities to market their products

ecently, increasing numers o luxury retailers are ramping up eorts to etter engage with millennials, the most powerul consumer group in China’s luxury market today o woo young shoppers, retailers are turning to young celerities and inluencers to market their products hey are also launching new product lines catering to younger tastes ritish luxury ashion house urerry, or instance, has appointed ris u, one o the most popular millennial idols in China, as its brand ambassador and launched a new collection dubbed the “Burberry x Kris Wu Edit 2017”. The new collection, featuring five specially curated looks of the brand’s classic nglishwoen cotton gaardine trench coat and sports striped knitwear, has gien a new and resh interpretation o urerry classic items and rought a youthul touch to the heritage rand, making the rand more appealing to young consumers in China n pril , rench luxury rand Christian ior also appointed Chinese actress ang ing, commonly known as ngelaay, as its irst rand amassador in China hanks to her million ollowers on eio, ang succeeded in raising the popularity o ior among the younger generation in China xhiit shows selected examples o international luxury rands appointing young Chinese celerities as their rand amassadors

BURBERRY X KRIS WU, a limitededition capsule collection Burberry created in collaboration with Kris Wu in 2017 (Source: Burberry.cn)

Luxury Market | Luxury Market | 126 Spotlight on China Retail – Issue 7

Spotlight on China Retail – Issue 7 xhibit 10 elected examles of international luxury brands aointing young Chinese celebrities as their brand ambassadors

umber of followers on nnouncement of rand Celebrity eibo as of etember brand ambassador 201

Kris Wu, born in 10, urberry a Chinese hip hop star, ovember 201 million actor and model

ang ing, ngelababy, born in 1, a Chinese ior pril 2017 7 million actress, model, and singer

Tang an, born in 1, ally une 2017 7 million a Chinese actress

u an, born in 10, a ouis uitton uly 2017 2 million Chinese actor, singer

ang i, born in 1, Michael ors a Chinese actress and eptember 2017 million singer

.Tao, born in 1, a eauty Chinese actor and eptember 2017 million singer

uli aha, born in endi 12, a Chinse actress eptember 2017 1 million and model

hang ixing, born in 11, a Chinese actor, singer and a former alentino ovember 2017 million member of outh KoreanChinese pop group E

ource Respectie companies’ official websites; FDKG; compiled by Fung Business Intelligence

10

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2. E-commerce players crack the luxury market; yet Chinese luxury shoppers still prefer offline

Chinese luxury shoppers have become more accustomed to purchasing luxury goods online. The big data of Alibaba’s Tmall shows that more than 100 million consumers have either browsed, bookmarked, or purchased luxury goods online over the past year – this huge potential customer pool is four to five times the number of the current luxury goods’ customers in China. Eying the increasing demand for luxury goods online, ecommerce players such as libaba and .com have set up their luxury ecommerce platforms targeting this segment.

In August 2017, Tmall launched the “Luxury Pavilion”, which is an inviteonly online platform for premium and luxury brands. The platform is exclusive to a selected number of ultrarich consumers. t features a wide range of luxury products, including apparel, watches, beauty and cosmetics, and luxury autos. ollowing the launch of the uxury avilion, Tmall also unveiled “Tmall Space” – an online popup luxury retail platform in ugust 2017. panish luxury brand oewe is reportedly the first luxury brand to use Tmall pace to hold a 2hous flash sale campaign it released a limitededition Barcelona bag tailored for ixi festival Chinese alentine’s ay exclusively on Tmall pace in ugust 2017.

imilarly, .com also launched its firstever luxury ecommerce platform “Toplife” in October 201. Toplife is JD.com’s independent shopping platform where foreign and domestic brands can set up their official flagship stores on the platform and sell directly to consumers. part from displaying and selling products, the platform also shares the brand’s design concepts with users. Product delivery will be handled by JD.com’s specialized logistics team for luxury products, and air freight shipment will be provided. With all the dedicated services including dedicated warehouse and aircraft, as well as dedicated personnel and vehicle, .com is able offer personalied onestop logistics services to customers.

espite the enthusiasm of Chinese consumers for online shopping, most still prefer purchasing luxury products at bricksandmortar stores. These enable them to see, touch, feel and try out products, as well as to enoy highend customer experiences such as refreshments, invitations to private lounges where goods can be previewed, and other customied services. ccording to a report by Tencent and Boston Consulting roup, in 2017, of luxury purchases were made offline versus merely of luxury purchases done online. evertheless, Chinese luxury shoppers tend to research luxury products online before making purchases offline, with over 0 of polled respondents started their luxury purchasing ourney through researching on mobile. They are more inclined to discover and learn more about luxury brands and items through various online channels, including celebrities’ and fashion influencers’ Weibo and WeChat accounts (12%), brand’s social media platforms (12%), luxury brands’ official websites, apps and miniprograms 11, luxury brands’ digital advertisements (8%) and thirdparty e commerce platforms 7.

11

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When it comes to online shopping, over half of the online luxury purchases in China were made through maor ecommerce platforms such as Tmall’s Luxury Pavilion and JD.com’s TopLife and almost a uarter of online orders were placed on brands’ official ecommerce websites. While social commerce shopping currently maes up merely 11% of online luxury sales volume in China, it is expected that shopping on social platforms will continue to grow considering that maor social commerce platforms, such as WeChat and iaohungshu, are developing and catching up swiftly.

3. More international fashion brands set up self-operated online stores in China

Apart from selling on maor ecommerce platforms, more and more international luxury brands have also ramped up their online presence in China by setting up selfoperated transactional websites, as a way to obtain a full control of its online consumer search data and higher profit margin.

A typical example of luxury brands setting up their own transactional website is ucci. In July 2017, the Italian luxury fashion house opened a selfmanaged online store in China. Consumers can order from the online store the full range of products from its current season’s collection, including bags, shoes, apparel and ewelry. According to media report, ucci.cn is currently the only official online store for the brand in China.

Louis uitton is also a case in point. In July 2018, the rench luxury brand announced the official opening of its selfoperated online flagship store in China after a year of trial operation. Contrary to catering to 12 of China’s largest cities in the past year, Louis Vuitton has rolled out its online services to all cities in the country, meaning that all Chinese consumers can enjoy the brand’s premium services including delivery service and 7day return policy. In addition, the luxury brand has also extended the product range available online, from leather goods and accessories to footwear, readytowear and fine ewelry. eanwhile, besides launching selfmanaged online stores, LVMH’s private equity arm L. Catterton has also partnered with JD.com to inject US$175 million in Secoo, one of largest and fastestgrowing luxury ecommerce platforms in China. The investment in Secco is expected to extend LVMH’s ecommerce reach in China, where the French luxury giant has already listed a number of its brands on Secoo’s website, including fashion labels Celine, Dior, endi, ivenchy, enzo and Loewe fine watch brands ublot, enith and Tag euer, and cosmetics brands uerlain and resh.

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4. Luxury players scramble to strengthen social commerce presence; WeChat Mini Program is gaining popularity

Considering that social media and wordofmouth are major sources of information for Chinese consumers, increasing numbers of international luxury players are striving to boost their social commerce presence as a way to maret their products in China. For example, in September 21, talian luxury menswear brand rmenegildo egna launched a Chinaonly capsule collection “Ermenegildo Zegna XXX”, which was available on the brand’s popup store on eChat Mini rogram, an embedded app within eChat.

During the ixi festival China’s equivalent to Valentine’s Day, which in 21 fell on 17 ugust, many luxury brands also used the eChat Mini rogram to offer products exclusively for the festival xhibit 11. For example, on ugust, urberry officially launched its store on eChat Mini rogram, through which the brand released its two new ixithemed bags – red “Belt Bag” and red “Pin Clutch” available only in China. t is also the first time that urberry introduced “Chinaonly” products. Michael ors, after setting up its store on eChat Mini rogram on 2 July, introduced a limitededition hitney purse codesigned with Chinese actress ang Mi on the eChat Mini rogram store in celebration of ixi festival.

Michael Kors launched a limitededition Whitney purse codesigned with Chinese actress Yang Mi on the WeChat Mini Program store to celebrate Qixi festival. (Source: Michael Kors.cn)

1

Luxury Market | 130 Luxury Market | Spotlight on China Retail – Issue 7

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Luxury Market | 131 Spotlight on China Retail – Issue 7

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tella McCartney tella urce

o Cont’d) 11 (Exhibit

Luxury Market | 132 Spotlight on China Retail – Issue 7

Spotlight on China Retail – Issue 7

5. Domestic luxury players buy out international players

o exert international influence and enrich their brand portfolios, some leading domestic luxury players and largescale Chinese companies are actively expanding overseas by investing in foreign luxury brands. or example, in ebruary , handong uyi Investment olding, the investment tool of handong uyi Group, dubbed as the VM of China, acuired a maority stae in wiss luxury brand Bally. Although the two sides have not disclosed any details of the deal, but insiders mentioned the transaction value was about million. Previously in November 2017, Shandong Ruyi Group’s subsidiary Ruyi Technology Group td. acuired a stae in Israeli menswear group Bagir Group td. for . million, becoming the latters controlling shareholder. Prior to the taeover of Bally and Bagir, hangdong uyi also acuired Parisian highend fashion labels andro, Mae, and Claudie Pierlot, as well as British luxury brand Auascutum.

Another example is Chinese investment company osun International. In ebruary , osun acuired a controlling stae in avin, one of the oldest luxury fashion houses in rance. ollowing the acuisition of avin, osun also bought a maority stae in Austrian luxury lingerie maer Wolford for million euros in March . In addition to avin and Wolford, osun also has purchased staes in Italian premium menswear brand Caruso and .. luxury fashion house t. John nits.

JD.com has also expedited its push into the luxury sector with a partnership with arfetch, a ondonbased luxury maretplace listed recently on the New Yor toc xchange in eptember . In June , JD.com bought a stae in arfetch for 3 million and became one of its largest shareholders. nder the partnership, JD.com would help arfetch build a digitied sales and marketing system in China with JD.com’s technology and big data. For Farfetch, the partnership allows it to have direct access to the China maret. arfetch consumers can also use JD.com’s recently launched premium delivery service, JD Luxury Express, as well as payment service JD Pay and microcredit service JD Baitiao.

6. Luxury retailers lower prices in China in response to tariff cuts by the Chinese government

o encourage domestic consumption while promoting imports, the tate Council announced in May that the country will reduce import tariffs on a range of consumer goods with effect from July . In response, some international brands have mared down their prices in China. or example, Burberry and ouis Vuitton have lowered the prices of some of their products sold in China. Burberry has trimmed the prices of selected apparel and luggage products by in China from July onward, while ouis Vuitton lowered prices of some of its products available on its China’s official website and physical stores in endJune, ranging from 3 yuan to , yuan, which is euivalent to a drop of between 3 and . Gucci also

Luxury Market | Luxury Market | 133 Spotlight on China Retail – Issue 7

Spotlight on China Retail – Issue 7

confirmed that it will adust retail prices of all merchandise with an average drop of about . This is applicable to all products including new and classic items sold in its directly operated stores in China. nother talian luxury fashion brand oncler has also followed suit and cut its product prices by an average of . in China starting July 201.

III. Concluding remarks

China’s luxury market is expected to maintain stable growth in the coming years. The China.S. trade war is set to raise economic uncertainty in China and weigh on domestic consumer confidence. Nevertheless, driven by a number of positive factors such as rising household disposable incomes, increasing numbers of millionaires and superrich individuals, as well as government’s latest tariffs cut to boost domestic consumption, China is set to remain as one of the most lucrative markets for global luxury retailers.

To keep pace with the rapidly evolving needs of Chinese luxury consumers, especially the millennials, global luxury retailers are advised to constantly evaluate their business strategies and marketing plans, keep on innovating and embrace technologies instore to better engage with customers. n the past year, a few luxury brands have set up popup stores that coupled with advanced technologies and innovative marketing contents to promote their products and gain awareness. Chanel, for instance, launched a popup store in the format of game center at 11 Shanghai in pril 201. The CC Game Center offered mainly cosmetics products and perfumes, and featured racing games, game machines, game booths and claw machines. iu iu also launched a iu iu disco popup store in Naning Dei laa in arch 201. The store was designed with a disco theme displayed and sold a selection of specially chosen iu iu handbags, shoes, ewellery and accessories. These popup stores successfully caught shoppers’ attention and drove customer traffic.

eanwhile, as the new generation of consumers are more sophisticated and digital savvy, global luxury retailers should come up with a comprehensive digital strategy to provide seamless shopping experience for customers. The use of social media to promote products and enhance brand awareness is a must in today’s digital world.

17 Luxury Market | 134 Luxury Market | Spotlight on China Retail– Issue 8

Spotlight on China Retail – Issue 8 Cross-border E-commerce (Import)

Asia Distribution and Retail

October 2018

Cross-border import e-commerce has been expanding rapidly over recent years. Cross-border e- commerce (CBEC) platforms are highly popular among Chinese consumers and have become one of the major channels to buy authentic foreign products. For many brands and retailers, the CBEC channel is a good starting point to test the China market. In the past year, increasing numbers of e- commerce operators and traditional retailers have set up their own CBEC businesses.

The government has been very supportive toward the development of CBEC. It has rolled out a number of favourable policies since 2012 to regularize CBEC, and set up comprehensive e-commerce pilot zones that are designated exclusively for the development of CBEC industry. As of August 2018, there are 35 CBEC comprehensive pilot zones across the country. In March 2016, the government introduced new policies for CBEC to facilitate further growth and development of the CBEC market and balance the impact of CBEC on traditional importers and existing sales channels. The new policies set forth new tax rules for CBEC businesses and new supervision regulations covering new operation procedures, a positive list of permitted imported goods, etc. CBEC operators have been given a transition period until the end of 2018 to adjust their operations and business strategies in relation to the new supervision regulations on CBEC imports.

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Spotlight on China Retail– Issue 8 I. Market overview

1. CBEC maintains stable development, while growth pace slowing down

China’s CBEC (import) market has maintained stable development in recent years, fueled mainly by individuals upgrading their level of consumption. Chinese consumers are increasingly buying higher quality and unique overseas products via approved CBEC platforms. According to iResearch, the transaction value of the CBEC (import) retail market increased by 49.6% year-on-year (yoy) to 111.3 billion yuan in 2017 and is expected to balloon to over 350 billion yuan by 2021 (Exhibit 1).

Hectic though growth has been for China’s CBEC (import) market, the pace has, in fact, slowed over the past three years. This might be attributable in part to the launch in late March and early April 2016 of new CBEC tax policies and a positive list for permitted imported goods, which might pose uncertainties for the future development of cross-border trade. Also, as the base becomes larger, growth rate would not be as rapid as in previous years.

Please refer to the Appendix for details of the changing states of development of the CBEC (import) market and key policies and regulations related to the market.

Exhibit 1: Transaction value of CBEC (import) retail market, 2014 – 2021 (estimates)

Source: iResearch; compiled by Fung Business Intelligence * Note: Estimated figures.

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Spotlight on China Retail– Issue 8

2. B2C m ode l accounts for the largest share of total CBEC (import) market

CBEC (import) business can be groupe into BC an CC moes ccoring to oa ata, BC has eceee CC to become the most significant CBEC import moe in China t is estimate that the BC moe accounte for of the tota CBEC import market in (Ehibit ) he BC moe enabes reguators to monitor the actiities an transactions on the patforms an take the appropriate actions imminent if reuire

–

Moda Data; compiled by Fung Business Intelligence

3. Two major types of CBEC (import) platforms: integrated and vertical platforms

Current, crossborer BC paers usua se on two maor tpes of patforms – integrate CBEC patforms in the form of marketpace patforms, sefoperate patforms an hbri patforms or ertica CBEC patforms which are often a combination of marketpace an sef operate patforms he former ses a arge ariet of categories of proucts, whie the atter focuses on a few speciaie categories eecte maor CBEC patforms an their maor operating moes are shown in Ehibit

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Spotlight on China Retail– Issue 8

iResearch; modified by Fung Business Intelligence

4. NetEase Kaola, Tmall Global and JD Worldwide continue to top the list among CBEC (import) players

NetEase’s CBEC arm Kaola ranked first

iiMedia Research; compiled by Fung Business Intelligence

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Spotlight on China Retail– Issue 8 5. Consumers aged 29–39 and those living in coastal regions are core CBEC shoppers

ordin to a sre released iesear in ar more tan alf of te sreed CBEC soers are aed eteen and of are aed eteen and and are aed and aoe Eiit s son in Eiit te maorit of CBEC soers lie in oastal areas of te sreed soers lie in Beiin lie in anai and in andon an CBEC soers are freent ers it make more tan one rase er mont

Exhibit 5: CBEC (import) shoppers by age, March 2018

Source: iResearch; compiled by Fung Business Intelligence

iResearch; compiled by Fung Business Intelligence

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Spotlight on China Retail– Issue 8

Chinese consumers’ concerns about product safety have driven the demand for imported rodts i are enerall ereied as ain etter alit tan domestiall roded oods Eiit sos te ateories of rodts rased CBEC soers on CBEC latforms drin ar to ar ood eat and ersonal are rodts and aarel footear and as ere mostl rased CBEC soers drin te sreed eriod

–

iResearch; compiled by Fung Business Intelligence

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Spotlight on China Retail– Issue 8 s shon in hibit CC shoppers bouht mosty from apan the and outh orea

Source: Ebrun; compiled by Fung Business Intelligence

ince the overnment has roed out a piot proram and estabished piot ones for CC import business hese piot ones tae the ead in settin ne standards for CC transactions payment oistics customs cearance echane settement inspection uarantine etc and faciitate the deveopment of the CC import business s of uust China has CC Comprehensive iot ones hibit of hich ere approved by the tate Counci on uust incudin piot ones in eiin othot henyan Chanchun arbin anin anchan uhan Chansha annin aiou uiyan unmin ian anhou iamen anshan ui eihai huhai onuan and iu he tate Counci has aso ured reevant overnment departments to support innovation and deveopment in the CC Comprehensive iot ones incudin streaminin oistics processes and custom cearance procedures enhancin information sharin promotin effective reuatory innovation and pushin forard ith internationa trade iberaiation faciitation and business innovation

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anhou inbo ianin hanhai Chonin efei henhou uanhou Chendu aian indao henhen uhou

eiin othot henyan Chanchun arbin anin anchan uhan Chansha annin aiou uiyan unmin ian anhou iamen anshan ui eihai huhai onuan and iu

The State Council; compiled by Fung Business Intelligence

n recent years some CC operators have set up offine eperientia stores to dispay overseas products sod on their ebsite and provide a physica touchpoint for customers to see and fee the products before pacin orders Customers sti need to buy products onine via authoried CC patforms and the imported products i be sent to their home by courier

ore recenty some CC payers after ainin approva from reevant authorities have opened a ne form of offine stores here customers can purchase and picup the bonded imported products directy in the stores (the “bonded area import + offline store” model) he bonded imported products o throuh customs cearance ony after the customers have paced the orders n ebruary aoacom opened its first offine store in anhou it then opened the second store in henhou in uust Customers can purchase bonded imported products directy in the store fter choosin the products they ant to purchase customers can o straiht to the cashier provide their card number and teephone number and sette payment the customs cearance process i then be processed immediatey he process reportedy i tae around minutes Customer i receive a notification if the customs cearance is successfu fter shoin the cashier the customers can picup the oods directy in the store ithout the need to ait for the products to be sent to their home

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Spotlight on China Retail– Issue 8 he offline store is de fato an etension of the bonded area import model hereb oerseas prodts in the bonded arehose in hina an be sold in the approed eperiential store and the ill o throh stoms learane onl after stomers hae plaed orders instore or ia the ebsite hibit ompares the flo of prodts ia the bonded area import model and the “bonded area import + offline store” model.

“ ”

Fung Business Intelligence

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Spotlight on China Retail– Issue 8

ome leadin plaers sh as .om .om etase aola and iaohonsh are rampin p efforts to bild oerseas arehoses to failitate rossborder shippin. or eample in a .om annoned that its arm nternational ill ooperate ith orldide in operatin sppl hain and oerseas arehoses. .om ill proide oerseas arehosin and loistis series to orldide inldin oerseas arehoses of hih eiht of them are selfoperated b .om. his allos .om to better tilie its oerseas arehoses as ell as its shippin series hile redin osts and improin loistis effiien.

ndeed the settin p of oerseas arehoses b operators an be rearded as a modifiation of the diret mail model hibit . fter stomers plae orders on a reistered platform oerseas retailers ill ship the prodts to the oerseas arehose instead of sendin them diretl to the arehose in hina. he operator ill ollet and store the parels in the oerseas arehose before shippin them in lots to arehoses in hina. or stomers a maor adantae of sin oerseas arehoses is that loistis osts ill be heaper than that of the diret mail model as more reipients stomers an share the loistis osts. oeer shippin time ill be loner than the diret mail model. or operators settin p oerseas arehoses inole sbstantial inestments. he also need to spend some time to nderstand and adapt to loal praties. hibit shos the adantaes and hallenes of sin oerseas arehoses.

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“direct mail + ” model

Fung Business Intelligence

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iit datae ad callee o i oerea areoe

datae o ildi oerea areoe allee o i oerea areoe a. oer loistis osts for onsmers – a. oal poliies – he settin p of and ropin parels from sea freiht and air operations of oerseas arehoses are freiht to oerseas arehoses first affeted b loal oernment poliies. before sendin to hina arehoses n hanes in loal poliies ill affet reportedl an sae loistis osts the operations of the arehoses. ompared ith the traditional diret mail model. b. ih inestment and operation osts – the osts of settin p oerseas b. etter aftersales serie – onsmers an arehose as ell as the datoda send ba the oods to the oerseas operation osts are hih. arehoses for repair and retrn hih an inrease their stiiness toards the . t taes time for oerseas arehoses platform. operators to fll nderstand loalie and adapt to loal praties.

d. s platforms bild and se their on oerseas arehoses brand oners retailers need to deal ith different arehoses hen sellin on different platforms. his is not onenient for brand oners retailers.

e. oner delier time – he delier time of oods is loner ompared to the diret mail model.

orce Fung Business Intelligence

o proide better ser eperiene some leadin platforms are applin arios as to tra and trae the moement of oods. lohain tehnolo is beomin inreasin poplar amon operators as a method for train prodts. ome plaers are also ooperatin ith releant indstr assoiations and oernment departments to mae the moement of oods more transparent to onsmers. or eample in st

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Spotlight on China Retail– Issue 8

— China’s economic growth negative impact on people’

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Spotlight on China Retail– Issue 8 CC operators in the meim to long term

n the past ear China has een een to increase imports ami the rising tension with the t has taen ol steps to increase imports recing import taris arlier in l China rece import taris on a range o consmer items incling apparel cosmetics home appliances an itness procts n eptemer the inistr o inance o the C annonce rther cts on import ties on nearl procts incling tetile procts starting ovemer he overall tari level will e rece to in rom in nee promoting imports has een a maor priorit o the Chinese government the price gap etween general imports an CC goos is set to rther narrow against this acrop

China’s CBEC business has been growing rapidly over recent ears while competition in the maret has ecome more intense Cstomers increasingl eman high alit an athentic procts t the also lie to compare prices across ierent CC platorms t is epecte that less competitive plaers who cannot srvive the competition will eventall leave the maret CC operators are avise to pt more ocs on streamlining crossorer sppl chains improving sorcing capailit an increasing the variet an alit o procts the oer

oing orwar espite the potential negative conseences o the China trae war we epect the CC maret to contine to thrive as Chinese consmers eman or goo alit oreign procts is set to remain strong an contine to rive the eman or CC procts ew CC operation moels will emerge as operators see to ierentiate themselves rom their peers he government is epecte to rther roll ot new policies to etter reglate the CC maret promote the growth o the sector an il snergies among ierent plaers Also, China’s first Ecommerce aw approve in eptemer an will come into eect on anar is set to improve reglator eicienc an optimie the spervision process or CC in cstoms eclaration ta pament inspection an arantine etc

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Spotlight on China Retail– Issue 8

Stage 1: The flourishing of “daigou” activities through “haitao”

Before the regulariation of the CBEC iport business, Chinese shoppers ainly purhased oerseas produts through buying agents or socalled “daigou” agents) or directly from oerseas online shopping platfors his atiity is oonly referred to as “haitao.” Exhibit opares these two traditional ways of carrying out “haitao.” Both methods have their own adantages and disadantages

iit : Comparison of traditional “haitao” methods

Purchased through “daigou” rcaed directl rom oerea aet oi eite • Consuers plae orders diretly • “Daigou” agents purchase ia oerseas shopping websites oerseas produts on behalf of • ayents hae to be settled in eratio onsuers they proide foreign urrenies assistane to onsuers espeially • roduts are reliable, authenti, on payent and deliery and legal • Coodity prie taes mort rice • Coodity prie taes “daigou” agents’ commissions + o commodit logistis fees logistis fees • “Daigou” agents help customers rder plae orders • aypal or a redit ard is needed lacemet ad • Custoers an pay in B and payent is settled in a foreign amet agenies an help settle the urreny ettlemet payent in foreign urrenies • “Daigou” agents are not reliable. • he purhasing proess taes a • Custos learane is needed if long tie to oplete parels are shipped by imitatio • “Daigou” agents may import international ouriers goods illegally suggling • nly soe foreign websites offer • nlear deliery liabilities deliery to China • iffiult for returns refunds orce Fung Business Intelligence; Deutsche Bank; Morgan Stanley; China Customs; compiled by Fung Business Intelligence * Note: Some “daigou” agents are reportedly not correctly declaring at China Customs when importing goods into China.

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Spotlight on China Retail– Issue 8 ccording to a survey conducted by mall lobal many consumers ere not fully satisfied with their traditional “haitao” experience. Dissatisfied shoppers cited long delivery lead times as their number one cause of annoyance when using the traditional “haitao” methods. ther maor causes of dissatisfaction included hidden costs language barrier uncertainty in product uality and difficulty in product returns.

Stage : The setting u of ilot ones for 1

o fight against the gray import maret and unauthoried “daigou” activities the hinese government announced several favorable policies to promote BE development. n the government rolled out a pilot program and established pilot ones for the BE import business. hese pilot ones tae the lead in setting ne standards for BE transactions payment logistics customs clearance exchange settlement inspection uarantine etc. and facilitate the development of the BE import business.

s of ugust hina has BE omprehensive ilot ones of hich ere approved to establish on ugust by the tate ouncil including pilot ones in Beiing othot henyang hangchun arbin aning anchang uhan hangsha anning aiou uiyang unming ian anhou iamen angshan uxi eihai huhai Dongguan and iu. he tate ouncil also urges relevant government departments to support the innovation and development in BE omprehensive ilot ones including streamlining the process regarding logistics arehousing and custom clearance enhancing information sharing promoting effective regulatory innovation pushing forard international trade liberaliation facilitation and business innovation.

Stage : The eergence of ne odels and alication of ersonal ostal articles ta on iorted roducts 1

As a result of the government’s efforts to promote the CBEC business, two new CBEC models emerged in 2014, namely, the “direct mail” model and the “bonded area import” model.

“Direct mail” model

fter customers place orders on a registered BE platform the platform ill submit particulars of the orders electronically for ustoms clearance. he products ill then be shipped by direct mail to customers.

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Spotlight on China Retail– Issue 8 “Bonded area import” model

roducts are shipped in bul and stored in ecommerce platform’s bonded warehouse in pilot cities before consumers place orders online. he CBEC platform maes a declaration in realtime to Customs after customers have placed their orders. he products are shipped to customers from the bonded warehouse after completion of customs clearance, inspection, and uarantine procedures.

mported goods are regarded as personal consumption items under the “direct mail” and “bonded area import” models. Instead of import duties, consumption taxes, and valueadded tax A, personal postal articles taxes are also levied. t is noteworthy that from April , 201, a new tax for CBEC has replaced the tax for personal postal articles on CBEC imported products. Details on the new tax will be discussed in later sections. At the same time, the tax rates for personal postal articles were being revised in April 201 the tax only applies to personal parcels, but no longer on CBEC imported products.

Exhibit 14 demonstrates the logistics flow of CBEC products in these two models.

hiit : Comparison of direct mail model and onded area import model as of pril

ource: ung usiness ntelligence 1

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Spotlight on China Retail– Issue 8 xhibit compares the imported model and the general import model for overseas products.

hiit : Comparison of different usiness models as of pril

CC model eneral import model

• efore pril , Personal • mport duties a leied postal articles ta consumption ta • fter pril , a for CC

• efore pril , Personal postal articles ta: • mport duties varies from , , , varies from products products a rates • • fter pril , • Consumption ta varies from a for CC: products e.g., for cosmetics Import duties of and consumption tax

ource: arious nternet sources compiled y ung usiness ntelligence

* Note: rom pril a new ta or CC has replaced the ta or personal postal articles ta

Stage a: The introduction of ne olicies on iort ril 1

In response to the booming maret in hina, the inistr of inance, hina ustoms, and the tate dministration of axation ointl announced ne policies on . he ne policies aim to better regulate the channels and reduce polic loopholes, ensure tax collection, and reduce the price gap beteen and general import, so as to provide a fair maret environment for all plaers. he ne polic is effective from pril , .

e adustments under the ne regulation are as follos

. e transaction limit per order via the platform is increased from , uan to 2,000 yuan. New upper limit per person each year (or the “annual cap”) will be set at , uan. . or single orders ith price tags larger than , uan, or total transaction value over , uan, taxes applicable for general import is levied. . or single orders ith price tags under or eual to , uan, or total transaction value under or eual to , uan, a ne tax ill replace the tax for personal postal

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Spotlight on China Retail– Issue 8 Spotlight on China Retail– Issue 8 xhibit compares the imported model and the general import model for overseas articles. he new ta inclues import tari consumption ta, where the products. actual ta payable to the ustom is 0 o the calculate taable amount. urrent import tari is temporarily set at 0. hiit : Comparison of different usiness models as of pril . eore the ta austment, the personal postal articles ta was eempt by the ustoms i the taable alue was 0 yuan or below. ner the new reulation, the eemption or is cancelle. CC model eneral import model . utypai alue (the actual transaction price) inclues retail price o oos, shippin

costs, an insurance costs. nconsumers are liable to pay the taes, but • efore pril , Personal • mport duties a leied postal articles ta platorms can pay the taes on behal o customers. consumption ta • fter pril , a for CC . ustomers can apply or ta reun or oos returne within 0 ays o purchase

• efore pril , rom channels. Personal postal articles ta: . positie list has replace the preious neatie list or (import) oos. • mport duties varies from , , , varies from products . he new reulation is eectie rom pril , 20. products a rates • • fter pril , • Consumption ta varies from a for CC: hibit compares the reulations beore an ater pril , 20. products e.g., for cosmetics Import duties of hiit : Comparison of the regulations and consumption tax eulation New reulation ource: arious nternet sources compiled y ung usiness ntelligence pril , 20 pril , 20

* Note: rom pril a new ta or CC has replaced the ta or personal postal articles ta alue cap per • ≤ 1,000 yuan • ≤ 2,000 yuan transaction Stage a: The introduction of ne olicies on iort ril 1 nnual cap No nationwie reuirement • 20,000 yuan • mport tari consumption a applie • ersonal postal articles ta In response to the booming maret in hina, the inistr of inance, hina ustoms, ta and the tate dministration of axation ointl announced ne policies on . he ne ersonal • 0, 20, 0, 0 aries rom postal proucts policies aim to better regulate the channels and reduce polic loopholes, ensure tax articles ta • Personal postal articles tax ≤ 0 collection, and reduce the price gap beteen and general import, so as to provide a fair • ransaction o sinle orers maret environment for all plaers. he ne polic is effective from pril , . ≤ 2,000 yuan: 0% mport tari • ransaction o sinle orers e adustments under the ne regulation are as follos 2,000 yuan import tari or eneral import applie • ransaction o sinle orers . e transaction limit per order via the platform is increased from , uan consumption ≤ 2,000 yuan: 70% of VAT and to 2,000 yuan. New upper limit per person each year (or the “annual cap”) will be set ta consumption ta at , uan. roucts can be importe • ositie list applicable to is • Neatie list is publishe . or single orders ith price tags larger than , uan, or total transaction value ia release over , uan, taxes applicable for general import is levied. channel

. or single orders ith price tags under or eual to , uan, or total transaction Source: inistry o inance compile by un usiness ntellience value under or eual to , uan, a ne tax ill replace the tax for personal postal

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eanwhile, or personal parcels, i.e., items or personal consumption, its, an items not or resellin purpose, the personal postal articles ta still applies but is bein auste. he our rates (0, 20, 0, an 0) hae been replace by the new rates, which are cateorie into , 0, an 0 leels. hibit compares the current an new personal postal articles ta rates.

hibithiit omparison: Comparison o the of current the current an new and personal ne personal postal articles postal ta articles ta

ersonal postal articles ta ersonal postal articles ta pril , 20 pril , 20 • oo beerae, leather clothes 0 accessories, bas shoes, urniture, toys • oo beerae, urniture, toys • roucts with a ero mostaore nation (N) tari rate • pparel tetile, eneral watches 20

• eather clothes accessories, bas 0 • uury watches (0,000 yuan) shoes, apparel tetile, eneral watches • osmetics, sin care proucts 0

• uury watches, cosmetics 0 • uury proucts applicable to consumption ta

Source: hina ustoms compile by un usiness ntellience

Stage : ositive list is released to relace the revious negative list ril 1

n pril , 20, oernment authorities, incluin the inistry o inance, National eelopment an eorm ommission, inistry o nustry an normation echnoloy, inistry o ommerce, eneral ministration o ustoms an tate ministration o aation, ointly release a positie list or importe oos. ectie rom pril , 20, the positie list will replace the preious neatie list or importe oos only oos 20

Cross-border E-commerce (Import) |

Cross-border E-commerce (Import) | 154 Spotlight on China Retail – Issue 8

Spotlight on China Retail– Issue 8 that are on the list are eliible to be sol ia channels. he positie list coers ,2 types o prouct cateories with an eihtiit . coe. hese proucts are mostly aily consumer oos with soli eman in hina. ccorin to the hina ustoms, these proucts can satisy superision reuirements o authorities concerne, an can enter hina ia epress eliery or irect mail. rouct cateories on the list inclue oo an beeraes, apparel and footwear, home appliances, cosmetics, paper diapers, and children’s toys. roucts on the list are eempt rom submittin relate import license to hina ustoms but shoul o throuh inspection an uarantine proceures in accorance with the laws an reulations o the . he submission o hina nspection an uarantine () learance Notice is reuire when importe proucts enter bone ones. irect maile proucts are eempt rom learance Notice.

n pril , 20, oernment authorities, incluin the inistry o inance, National eelopment an eorm ommission, inistry o nustry an normation echnoloy, inistry o ommerce, eneral ministration o ustoms, an tate ministration o aation, ointly announce the secon batch o proucts allowe on the positie list or importe oos. he list coers an aitional types o prouct cateories with an eihtiit . coe. Newly ae cateories inclue resh oo (incluin meat an ruits), seaoo, liui mil, rains, cooin oil, certain nutritional an health proucts (incluin itamin supplements), an reistere meical instruments. rouct cateories on the positie list are set to be reiewe on a reular basis.

n ay 2, 20, eneral ice o hina ustoms issue a notice rearin the transition perio or the implementation o new superision reulations on imports. he ocument state that the transition perio will last or one year until ay , 20, urin which importers will not be reuire to proie learance Notice beore importin oos into bone warehouses o pilot cities. lso, premaret approals or irsttime importe oos such as cosmetics, inant ormula, etc. ia the bone area import or irect mail moels will be put on hol urin the perio.

n Noember , 20, inistry o ommerce urther etene the transition perio or the implementation o new superision reulations on imports to the en o 20. n 20 eptember, 20, the tate ouncil urther etene the transition perio to the en o 20.

t is epecte that with the launch o these new superision reulations, some smaller players who cannot throuh inspection an uarantine proceures will be screene out. he (import) maret is epecte to become healthier an consoliate.

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Cross-borderCross-border E-commerce E-commerce (Import) (Import)| | 155 Spotlight on China Retail – Issue 8

Spotlight on China Retail– Issue 8 Stage c: The eergence of ne odels 1

n recent years, some operators hae trialled arios ways to mae shoppin ia import more conenient and proide cstomers with etter shoppin eperiences. wo new models hae emered – the first one is an etension of the direct mail model with the se of oerseas warehoses (the “direct mail + overseas warehouse” model), and the second one is the modification of the onded area import model with the settin p of offline stores for transaction (the “bonded area import + offline store” model).

In the “direct mail + overseas warehouse” model, after the cstomers place orders on a reistered platform, oerseas retailers will ship the prodcts to the oerseas warehose instead of sendin them directly to the warehose in hina. he operator will collect and store the parcels in the oerseas warehose efore shippin them in lots to warehoses in hina. or cstomers, a maor adantae of sin oerseas warehoses is that loistics costs will e cheaper than that of the direct mail model as more recipients cstomers can share the loistics costs. oweer, shippin time will e loner than the direct mail model.

In the “bonded area import + offline store” model, some players set p offline stores where cstomers can prchase and picp the onded imported prodcts directly in the stores. he offline store is de facto an etension of the onded area model wherey oerseas prodcts in the onded warehose in hina can e sold in the approed eperiential store, and they will o throh cstoms clearance only after cstomers hae placed orders instore or ia the wesite.

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Spotlight on China Retail– Issue 8 endi : e olicies relating to crossorder e coerce iort ugust 1 – Seteer 1

nnounced Polic etails date ugust pproval of ive ilot ities for • Issued b the business • It approves hanhai, honin, anhou, inbo, henhou to be the pilot cities for business eruar nnouncement o , (he • Issued b the ddition of a ustoms upervisor • It specifies that “9610” customs supervision ethod odec) code is applicable to individual customers or ecommerce companies who would lie to realie transactions throuh platforms It is also the first customs supervision, particularl for arch otice on Issues elated to • Issued b the epartment of rocessin ervice ilot nline onded Imports rade and onded ffairs ontrol and upervision of the • It reemphasies the restrictions on individual customers’ overseas shopping value and volume, ta levies and other details, which are mentioned in nnouncement o , ul nnouncement o , • Issued b the (nnouncement on atters relatin to • It states that customs supervision is the eulation of Imported and applicable to both companies and personal ported oods and rticles via ) crossborder transactions throuh an e commerce transaction platform commerce enterprises should process an e commerce business filin with ustoms for imported oods urther, enterprises or individuals enain in business should submit orders, paments, and loistics information to ustoms before declarin oods to enter or eit hina ugust nnouncement o , (he • Issued b the ddition of a ustoms upervisor • It specifies that “1210” customs supervision ethod odec) code is applicable to bonded business arch fficial epl of the tate ouncil on • Issued b the tate ouncil pprovin the stablishment of the • It approves anhou to be the first hina (anhou) comprehensive pilot one omprehensive ilot one eptemer etter on trenthenin onded • Issued b the epartment of rocessin upervision over nline Imports rade and onded ffairs ontrol and upervision of the • It clarifies that onl pilot cities that have special ones with bonded loistics centers and supervised b customs officials are allowed to enae in import business

Cross-border E-commerce (Import) | Cross-border E-commerce (Import) | 157 Spotlight on China Retail – Issue 8

Spotlight on China Retail– Issue 8 ther cities and ones including onded arehouses are not alloed to conduct usiness anuar fficial epl of the tate ouncil on • Issued the tate ouncil pproving the stalishment of • It approves the estalishment of ne omprehensive ilot reas in 12 ities comprehensive pilot ones in 12 cities including ianin hanghai honging efei henghou uanghou hengdu alian ingo ingdao henhen and uhou arch ircular on a olic for etail • Issued the the and the Imports • It states that effective from pril 2016 imported goods are no longer suect to personal postal articles ta e ta on is applicale hich includes import tariff and consumption ta here the actual ta paale is 0 of the calculated taale amount ransaction limit per order and ne upper limit per person each ear are also amended arch otice on dustment of ersonal • Issued the the and the ostal rticle a • It states that effective from pril 2016 personal postal articles ta is adusted e rates are categoried into 1 0 and 60 levels pril nnouncement o 2 2016 • Issued the nnouncement on the lassification • It maes adustment on the and omenclature ale of Imported nnouncement o 1 2012 ith details on rticles of the and the utpaid the classification as ell as the dutpaid rice ale of Imported rticles of the price of imported goods pril nnouncement o 26 2016 • Issued the nnouncement on atters relating to • It provides guidelines for the sumission of the egulation of etail Imports documents of usiness to the and ports ustoms clarifies the customs clearance management ta collection management logistics control and return management he polic is effective from pril 2016 • It also aolishes the nnouncement o 6 201 on trade supervision pril nnouncement on Issuing the ist of • Issued 11 government authorities etail Imports including and • It announces a positive list for imported goods he list covers 112 tpes of product categories ffective from pril 2016 the ne positive list ill replace the previous negative list for imported goods pril nnouncement on Issuing the ist of • Issued 1 government authorities Imports econd atch including and • It announces the second atch of positive list ith an additional 11 tpes of product categories he list is effective from pril 16 2016

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| Cross-border E-commerce (Import) | 158 Cross-border E-commerce (Import) Spotlight on China Retail – Issue 8

Spotlight on China Retail– Issue 8 Spotlight on China Retail– Issue 8 ther cities and ones including onded a otice on the Implementation of e • Issued the arehouses are not alloed to conduct upervision egulations on • It announces the transition period for the usiness Imports implementation of the ne supervision anuar fficial epl of the tate ouncil on • Issued the tate ouncil regulations on imports to last for one pproving the stalishment of • It approves the estalishment of ne ear until a 11 201 during hich omprehensive ilot reas in 12 ities comprehensive pilot ones in 12 cities importers ill not e reuired to provide including ianin hanghai honging I learance otice efore importing efei henghou uanghou hengdu goods into onded arehouses of pilot alian ingo ingdao henhen and cities lso premaret approvals for first uhou time imported goods such as cosmetics arch ircular on a olic for etail • Issued the the and the infant formula etc via the onded area import or direct mail models ill e put on Imports • It states that effective from pril 2016 hold during the period imported goods are no longer suect • to personal postal articles ta e ta on oemer ransition period for the Issued the is applicale hich includes import implementation of ne supervision • It announces the oneear transition period tariff and consumption ta here the regulations on imports to etend for the implementation of ne supervision to end201 actual ta paale is 0 of the calculated regulations on imports hich starts taale amount ransaction limit per order from a 11 2016 to etended further to and ne upper limit per person each ear the end of 201 are also amended eptemer ransition period for the • Issued the tate ouncil arch otice on dustment of ersonal • Issued the the and the implementation of ne supervision • It announces the oneear transition period regulations on imports to etend ostal rticle a • It states that effective from pril 2016 for the implementation of ne supervision personal postal articles ta is adusted e to end201 regulations on imports hich starts rates are categoried into 1 0 and from a 11 2016 to etended further to 60 levels the end of 201 pril nnouncement o 2 2016 • Issued the ource: arious goernment wesites compiled y ung usiness ntelligence nnouncement on the lassification • It maes adustment on the * Note: NC: National eelopment and eorm Commission C: eneral dministration o and omenclature ale of Imported nnouncement o 1 2012 ith details on rticles of the and the utpaid the classification as ell as the dutpaid Customs : inistry o inance S: State dministration o aation C: inistry o rice ale of Imported rticles of the price of imported goods Commerce pril nnouncement o 26 2016 • Issued the nnouncement on atters relating to • It provides guidelines for the sumission of the egulation of etail Imports documents of usiness to the and ports ustoms clarifies the customs clearance management ta collection management logistics control and return management he polic is effective from pril 2016 • It also aolishes the nnouncement o 6 201 on trade supervision pril nnouncement on Issuing the ist of • Issued 11 government authorities etail Imports including and • It announces a positive list for imported goods he list covers 112 tpes of product categories ffective from pril 2016 the ne positive list ill replace the previous negative list for imported goods pril nnouncement on Issuing the ist of • Issued 1 government authorities Imports econd atch including and • It announces the second atch of positive list ith an additional 11 tpes of product categories he list is effective from pril 16 2016

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| | Cross-border E-commerce (Import) Cross-borderCross-border E-commerce E-commerce (Import) (Import) | 159 Spotlight on China Retail – Issue 9

RetailSpotlight on China and Retail – Issue 9 E-commerce Logistics

Asia Distribution and Retail

October 2018

Technological advancement and the explosive growth of e-commerce in the country have rendered the retail and e-commerce logistics industry a fertile ground for development and growth. With half of the world's parcels now being delivered in China, logistics providers and e-commerce players alike are exploring new ways to better serve the customers and further expand their business, and making huge investments in logistics infrastructure home and abroad, with a hope to gain a larger pie of the fast-growing market. Many have come up with innovative ways to improve logistics services and provide quicker delivery for customers. Meanwhile, technologies have empowered logistics transformation; companies are becoming more digital, automatic and smart. “Smart logistics” is now dominating the retail and e-commerce logistics sector.

I. Market overview

1. Strong growth of online retail sales fuels demand for logistics services; total logistics value increases steadily

China’s online retail market, which is now the world’s largest, has experienced rapid growth over recent years. Total online retail sales increased by 32.2% year-on-year (yoy) to reach 7.18 trillion yuan in 2017 (Exhibit 1), while online sales of physical goods amounted to 5.48 trillion yuan, up by 28.0% yoy and accounted for 15.0% of total retail sales.

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Spotlight on China Retail – Issue 9 Spotlight on China Retail – Issue 9 Exhibit 1: Total online retail sales of goods and services, 2012 – 2017

7520.07540.0 5% 720.07280.07300.07320.07340.0730.07380.07400.07420.07440.0740.07480.07500.0 5.4% 7000.07020.07040.0700.07080.07100.07120.07140.0710.07180.07200.07220.07240.0 740.070.0780.0800.0820.0840.080.0880.000.020.040.00.080.0 0% 480.0500.0520.0540.050.0580.000.020.040.00.080.0700.0720.0 51.3% Spotlight on China Retail – Issue 9 220.0240.020.0280.0300.0320.0340.030.0380.0400.0420.0440.040.0 48.7% 55% 50.0580.0000.0020.0040.000.0080.0100.0120.0140.010.0180.0200.0 Retail and 5700.05720.05740.0570.05780.05800.05820.05840.0580.05880.0500.0520.0540.0 50% 5440.0540.05480.05500.05520.05540.0550.05580.0500.0520.0540.050.0580.0 5180.05200.05220.05240.0520.05280.05300.05320.05340.0530.05380.05400.05420.0 45% 420.0440.040.0480.05000.05020.05040.0500.05080.05100.05120.05140.0510.0 40.0480.04700.04720.04740.0470.04780.04800.04820.04840.0480.04880.0400.0 4400.04420.04440.0440.04480.04500.04520.04540.0450.04580.0400.0420.0440.0 33.3% 40% 4140.0410.04180.04200.04220.04240.0420.04280.04300.04320.04340.0430.04380.0 32.20% E-commerce 3880.0300.0320.0340.030.0380.04000.04020.04040.0400.04080.04100.04120.0 35% 320.0340.030.0380.03700.03720.03740.0370.03780.03800.03820.03840.0380.0 2.2% 330.03380.03400.03420.03440.0340.03480.03500.03520.03540.0350.03580.0300.0 30% 3100.03120.03140.0310.03180.03200.03220.03240.0320.03280.03300.03320.03340.0 2840.0280.02880.0200.0220.0240.020.0280.03000.03020.03040.0300.03080.0 25% 2580.0200.0220.0240.020.0280.02700.02720.02740.0270.02780.02800.02820.0 Logistics 2320.02340.0230.02380.02400.02420.02440.0240.02480.02500.02520.02540.0250.0 20% 200.02080.02100.02120.02140.0210.02180.02200.02220.02240.0220.02280.02300.0 1800.01820.01840.0180.01880.0100.0120.0140.010.0180.02000.02020.02040.0 1540.0150.01580.0100.0120.0140.010.0180.01700.01720.01740.0170.01780.0 15% 1280.01300.01320.01340.0130.01380.01400.01420.01440.0140.01480.01500.01520.0 Asia Distribution and Retail 1020.01040.0100.01080.01100.01120.01140.0110.01180.01200.01220.01240.0120.0 10% 1000.070.0780.0800.0820.0840.080.0880.000.020.040.00.080.0 500.0520.0540.050.0580.000.020.040.00.080.0700.0720.0740.0 1187.0 182.0 2815.0 3877.3 5155. 7175.0 5% 240.020.0280.0300.0320.0340.030.0380.0400.0420.0440.040.0480.0 140.010.0180.0200.0220.0100.0120.020.040.00.080.00.0 0% October 2018 2012 2013 2014 2015 2016 2017

Transaction value (trillion yuan) yoy growth

Technological advancement and the explosive growth of e-commerce in the country have rendered Source: China Federation of Logistics and Purchasing; compiled by Fung Business Intelligence the retail and e-commerce logistics industry a fertile ground for development and growth. With half of the world's parcels now being delivered in China, logistics providers and e-commerce players alike The fast growth of online retailing in China has given the logistics industry a boost in line with are exploring new ways to better serve the customers and further expand their business, and making soaring demand for transport and delivery services. Total logistics value reached a record huge investments in logistics infrastructure home and abroad, with a hope to gain a larger pie of the 252.8 trillion yuan in 2017 (Exhibit 2), up by 0.6% yoy in real terms. fast-growing market. Many have come up with innovative ways to improve logistics services and provide quicker delivery for customers. Meanwhile, technologies have empowered logistics transformation; companies are becoming more digital, automatic and smart. “Smart logistics” is now Exhibit 2: China’s total logistics value, 2012 – 2017 dominating the retail and e-commerce logistics sector. 280.0 252.8 20.0 22.7 240.0 213.5 21.2 220.0 17.8 200.0 177.3 180.0 I. Market overview 10.0 140.0 120.0 100.0 1. Strong growth of online retail sales fuels demand for logistics 80.0 0.0 services; total logistics value increases steadily 40.0 20.0 0.0 China’s online retail market, which is now the world’s largest, has experienced rapid growth 2012 2013 2014 2015 2016 2017 over recent years. Total online retail sales increased by 32.2% year-on-year (yoy) to reach 7.18 trillion yuan in 2017 (Exhibit 1), while online sales of physical goods amounted to 5.48 Total logistics value (trillion yuan) trillion yuan, up by 28.0% yoy and accounted for 15.0% of total retail sales. Source: China Federation of Logistics and Purchasing; compiled by Fung Business Intelligence

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Spotlight on China Retail – Issue 9 2. Logistics costs remain high; transportation costs account for the lion’s share of total costs

Total logistics costs remain high in China. According to the China Federation of Logistics and Purchasing, China’s total logistics costs amounted to 12.1 trillion yuan in 2017 (Exhibit 3), up by 9.2% yoy. The ratio of total logistics costs to GDP was 14.6% in 2017, down from 14.9% in 2016 and 16.0% in 2015.

Exhibit 3: China’s total logistics costs, 2012 – 2017 20.0

12.1 11.1 10.2 10.6 10.8 .

0.0 2012 2013 201 201 201 2017

Total logistics costs (trillion yuan)

Source: China Federation of Logistics and Purchasing; compiled by Fung Business Intelligence

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Retail and E-commerce Logistics | Spotlight on China Retail – Issue 9

Spotlight on China Retail – Issue 9

As shown in Exhibit 4, transportation costs accounted for the largest share of total logistics costs and comprised almost 55% of the total costs in 2017, while inventory and management costs accounted for 32% and 13% of the total logistics costs respectively.

Exhibit 4: Cost structure of logistics industry in China, 2017

13%

55% 32%

anagement Costs nentory Costs Transportation Costs

Source: China Federation of Logistics and Purchasing; compiled by Fung Business Intelligence

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Retail and E-commerce Logistics | Spotlight on China Retail – Issue 9

Spotlight on China Retail – Issue 9 3. Express delivery market scales up; growing demand for intra-city courier services (same-city delivery)

As a critical part of e-commerce logistics, the express delivery sector has grown rapidly. As shown in Exhibit 5, the total volume of completed deliveries amounted to 40.1 billion pieces in 2017, up 28.0% yoy, making China’s express delivery market the largest in the world in terms of delivery volume. Total sales revenue for the sector amounted to 495.7 billion yuan, up 24.7% yoy (Exhibit 6).

Exhibit 5: Total volume of China’s express delivery sector, 2012 – 2017

0.0 5% 55.0% 1.5% 51.3% 51.4% 0% 4.7% 55% 0.0 50% 45% 40% 2.0% 35% 40.0 30% 25% 20% 20.0 15% 5.7 10% .2 13. 20.7 31.3 40.1 5% 0.0 0% 2012 201 2014 201 201 2017 otal volume billion pieces oy growth

Source: State Post Bureau; compiled by Fung Business Intelligence

Exhibit 6: Total sales revenue of China’s express delivery sector, 2012 – 2017

540 50% 520 500 43.5% 43.5% 40 41.% 45% 40 440 420 35.4% 40% 400 32.% 30 35% 30 340 320 30% 300 24.7% 20 20 25% 240 220 200 20% 10 10 15% 140 120 100 10% 0 0 40 5% 20 100.5 144.2 204.5 277 37.4 45.7 0 0% 2012 201 2014 201 201 2017

otal sales revenue billion yuan yoy growth

Source: State Post Bureau; compiled by Fung Business Intelligence 5

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Spotlight on China Retail – Issue 9 Spotlight on China Retail – Issue 9 3. Express delivery market scales up; growing demand for intra-city China’s express delivery sector has three major market segments, namely, intra-city courier, courier services (same-city delivery) inter-city courier, and cross-border delivery. As shown in Exhibit 7, inter-city courier accounted for the largest share of the sector, contributing 74.8% of the total market volume As a critical part of e-commerce logistics, the express delivery sector has grown rapidly. As and over 50% of the total revenue. Intra-city business accounted for only 23.1% and 14.8% of shown in Exhibit 5, the total volume of completed deliveries amounted to 40.1 billion pieces the total market volume and total revenue in 2017 respectively. That said, the intra-city in 2017, up 28.0% yoy, making China’s express delivery market the largest in the world in terms business has been the fastest growing segment in recent years. In 2017, sales revenue of of delivery volume. Total sales revenue for the sector amounted to 495.7 billion yuan, up intra-city courier increased by 30.0% yoy to 73.23 billion yuan; by contrast, sales revenue of 24.7% yoy (Exhibit 6). inter-city courier rose by 19.7% to 251.28 billion yuan and sales revenue of international courier increased by 23.3% yoy to 52.89 billion yuan.

Exhibit 5: Total volume of China’s express delivery sector, 2012 – 2017 The surge in demand for intra-city courier is due in part to the emergence of new retail practices such as online-to-offline (O2O) e-commerce and an increasingly large number of 0.0 5% 55.0% 1.5% 51.3% 51.4% 0% online channels selling fresh produce. 4.7% 55% 0.0 50% 45% 40% Exhibit 7: Market share of the three segments of the express delivery sector, 2013 – 2017 2.0% 35% 40.0 30% 25% 20% Intra-city courier Inter-city courier International courier 20.0 15% % of % of Sales % of % of Sales % of % of Sales 5.7 10% .2 13. 20.7 31.3 40.1 5% Volume Revenue Volume Revenue Volume Revenue 0.0 0% 2013 24.9 11.5 72.2 57.5 2.9 18.8 2012 201 2014 201 201 2017 2014 25.4 13.0 72.3 55.3 2.3 15.4 2015 26.1 14.5 71.8 54.6 2.1 13.3 otal volume billion pieces oy growth 2016 23.7 14.2 74.3 52.8 2.0 10.8 Source: State Post Bureau; compiled by Fung Business Intelligence 2017 23.1 14.8 74.8 50.7 2.1 10.7

Source: State Post Bureau; compiled by Fung Business Intelligence

Exhibit 6: Total sales revenue of China’s express delivery sector, 2012 – 2017

540 50% 520 500 43.5% 43.5% 40 41.% 45% 40 440 420 35.4% 40% 400 32.% 30 35% II. Key trends and developments 30 340 320 30% 300 24.7% 20 20 25% 240 1. “Smart logistics” dominates the agenda 220 200 20% 10 10 15% 140 120 In today’s high competitive and rapidly evolving era, developing smart logistics has become 100 10% 0 0 one of the most important strategies for business to outperform competitors. The adoption 40 5% 20 100.5 144.2 204.5 277 37.4 45.7 0 0% of advanced technologies such as Radio Frequency Identification (RFID), Global Positioning 2012 201 2014 201 201 2017 System (GPS), the Internet of Things (IoT), cloud computing, drones, and robotics, in additional to automation of logistics processes to improve efficiency, has become imperative otal sales revenue billion yuan yoy growth for the retail and e-commerce logistics sector. Source: State Post Bureau; compiled by Fung Business Intelligence 5 6

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Spotlight on China Retail – Issue 9 Spotlight on China Retail – Issue 9 Recently, logistics and e-commerce operators have invested heavily in smart logistics, hoping designated pick-up area in a residential community nearby. YH Super Species has employed to enhance fulfilment capability and efficiency, to streamline operations and reduce logistics some couriers in the residential buildings to collect delivery orders from drones and costs. JD.com is a case in point. Over the past few years, the company has made substantial complete the last mile delivery to consumer’s designated address. It is reported that orders investments in smart warehouses and new delivery methods with an aim to improving can be delivered in 15-20 minutes within a 3-km distance from the store. JD.com has also fulfilment efficiency and increasing storage capacity. In June 2014, JD.com launched its first ramped up its efforts in drone delivery. The company has started tested drone delivery since "Asia No.1" warehouse in Shanghai. The warehouse incorporates a high degree of March 2017. It gained the formal approval from the Civil Aviation Administration of China automation; all operations in the warehouse are fully automatic, including receiving goods, (CAAC) in February 2017 to start sending packages by drone in certain rural areas. storage, packaging and sorting. As of 2017, JD.com operated 14 “Asia No. 1” warehouses across the country. Besides drone delivery, some companies have trialled autonomous vehicle to handle last- mile delivery. An example is Suning. In July 2018, Suning’s logistics arm Suning Logistics JD.com’s rival Cainiao is also continuing to invest in smart logistics. In April 2018, Cainiao signed a strategic partnership with Baidu Apollo to develop smart logistics. The two announced to launch its first smart delivery system globally in a community in Yuhang companies jointly unveiled a driverless delivery vehicle called the “MicroCar” which is District in Hangzhou. The smart delivery system features four major elements – facial equipped with Baidu’s L4-class intelligence system. According to Suning, the vehicle is recognition system, “smart pipes”, smart lockers, and an app to control the locker. designed to solve the last 5-km delivery problems. The autonomous vehicle will first be used Authorized courier staff can scan their face to verify their identity and deliver parcels to the in Suning Xiaodian (Suning’s convenience stores) to provide delivery services for online smart delivery system. After passing through the Cainiao Security System, parcels will be orders that are made within a 3-km distance of Suning Xiaodian’s surrounding communities. distributed to respective smart lockers inside each apartment. The smart delivery system also supports reverse logistics. Users can also adjust the temperature inside the smart locker Other innovations that facilitate last-mile delivery include smart pick-up tower in key for the storage of fresh food. locations. Prior to this year’s 6.18 shopping festival, Cainiao trialled and launched a number of smart pick-up towers in various communities and industrial parks in Hangzhou. With a 2. Innovations to strengthen last-mile delivery height of more than 5 meters and in an octahedron shape, the smart tower connects with drones and unmanned vehicles and provides pick-up services 24/7 all around the year. It can To cater to consumers’ heightened expectation for fast delivery, both retailers and logistics store approximately 600 – 800 parcels, and customers can pick up their parcels by facial players have launched and tested various types of fulfilment models. Retailers such as scanning. Uniqlo, Walmart (China), Yonghui Superstores, YH Super Species and Watsons have introduced “click & collect” services. Many retailers have partnered with O2O platforms or logistics companies to roll out such services. For example, on- demand logistics and omnichannel e-commerce platform Dada-JD Daojia (a JD.com joint venture) has partnered with over 200 Walmart stores and 500 Yonghui stores, among numerous other supermarkets and grocery stores, to provide premium online fresh grocery shopping experience with 1-hour home delivery service. Watsons, on the other hand, has leveraged Cainiao’s “ship-from-store” service to fulfil online orders and deliver goods as fast as two hours.

Meanwhile, some retailers and logistics operators have introduced innovative ways to speed up delivery and enhance consumer convenience. One such example is drone delivery; it has

been increasingly adopted by companies. In May 2018, YH Super Species trialled drone

delivery for physical products between YH Super Species store in Guangzhou M+Park and a Cainiao’s smart pick-up tower (Photo source: iwangshang)

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Spotlight on China Retail – Issue 9 designated pick-up area in a residential community nearby. YH Super Species has employed some couriers in the residential buildings to collect delivery orders from drones and complete the last mile delivery to consumer’s designated address. It is reported that orders can be delivered in 15-20 minutes within a 3-km distance from the store. JD.com has also ramped up its efforts in drone delivery. The company has started tested drone delivery since March 2017. It gained the formal approval from the Civil Aviation Administration of China (CAAC) in February 2017 to start sending packages by drone in certain rural areas.

Besides drone delivery, some companies have trialled autonomous vehicle to handle last- mile delivery. An example is Suning. In July 2018, Suning’s logistics arm Suning Logistics signed a strategic partnership with Baidu Apollo to develop smart logistics. The two companies jointly unveiled a driverless delivery vehicle called the “MicroCar” which is equipped with Baidu’s L4-class intelligence system. According to Suning, the vehicle is designed to solve the last 5-km delivery problems. The autonomous vehicle will first be used in Suning Xiaodian (Suning’s convenience stores) to provide delivery services for online orders that are made within a 3-km distance of Suning Xiaodian’s surrounding communities.

Other innovations that facilitate last-mile delivery include smart pick-up tower in key locations. Prior to this year’s 6.18 shopping festival, Cainiao trialled and launched a number of smart pick-up towers in various communities and industrial parks in Hangzhou. With a height of more than 5 meters and in an octahedron shape, the smart tower connects with drones and unmanned vehicles and provides pick-up services 24/7 all around the year. It can store approximately 600 – 800 parcels, and customers can pick up their parcels by facial scanning.

Cainiao’s smart pick-up tower (Photo source: iwangshang)

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Spotlight on China Retail – Issue 9 3. E-commerce and logistics players put more emphasis on global logistics network expansion

Considering the rapid development of cross-border e-commerce (CBEC) in recent years, companies engaged in e-commerce and logistics have stepped up global expansion of their logistics network to better facilitate cross-border delivery between China and overseas countries. Cainiao is a case in point. In May 2018, Cainiao unveiled its plans to build world- class logistics hubs in several locations around the world – including Hangzhou, Kuala Lumpur, Dubai, Moscow and Liege – as part of its global hub expansion plan. Cainiao hopes to create more efficient logistics operations and offer single-day delivery in China and 72- hour delivery across the globe for countries and regions involved in the Belt and Road Initiative.

JD.com’s logistics arm JD Logistics has upgraded its overseas warehousing services to cater the increasing demand for cross-border logistics services just before the 6.18 shopping festival. This has reportedly enabled the company to provide quick delivery for CBEC – an average of 3.9 days for products delivered via the “direct mail” model; customers living in major cities can even enjoy next-day delivery after placing their order. JD.com has over 110 overseas warehouses in five continents as of June 2018.

On the other hand, some local courier companies such as SF Holding Co, the parent company of delivery service provider SF Express have also speeded up global expansion in recent years. In May 2017, the company announced its plan to set up a joint venture with UPS Parcel Delivery Service Ltd. to collaborate on development and provision of international delivery services from, initially, China to the U.S. and, in the future, to other countries. The joint venture combines SF Holding Co’s 13,000 service points in 331 cities in China with UPS’ global network spanning 220 countries, allowing the two companies to leverage their complementary networks, service portfolios, technologies and logistics expertise to accelerate B2B and B2C cross-border trade. In the same month, Alibaba-backed YTO Express announced to purchase of 61.87% stake in Hong Kong-based On Time Logistics as part of its international expansion initiative. On Time Logistics is principally engaged in the air freight forwarding business and has established an extensive network overseas including Asia, Europe and North America; the acquisition will allow YTO to develop overseas business and further broaden its income stream.

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Spotlight on China Retail – Issue 9 4. Rural logistics is the next growth engine

China’s rural e-commerce has continued its robust growth momentum over recent years. According to the Ministry of Agriculture and Rural Affairs of the PRC, online retails sales in rural areas reached 1.25 trillion yuan in 2017, accounting for 17.35% of the country’s total online retail sales of goods and services, up from 6.45% in 2014.

The promising outlook for rural e-commerce has prompted many leading e-commerce and Internet companies to push ahead with “going rural” initiatives. For instance, in April 2018, Alibaba invested 4.5 billion yuan in Huitongda Network Co, a Chinese rural online services platform and a subsidiary of Jiangsu Five Star Appliances Co as part of its continued push to expand business in the country’s rural areas. The two companies will work together on supply chain logistics, warehousing and technology to improve e-commerce infrastructure in rural areas. Indeed, Alibaba first launched its Rural Taobao initiative in late 2014, providing an e-commerce platform and logistics infrastructure for rural residents to buy and sell items online via Taobao. Since then, it has set up thousands of service centers in the countryside to provide e-commerce delivery in rural areas. In 2016, Alibaba followed up with a three-year plan to invest 10 billion yuan in rural e-commerce, with a continued focus on boosting infrastructure and building more service centers.

Another example is JD.com. In January 2018, JD.com said it planned to assign drones to China’s northeastern “rust belt” region, comprising provinces such as Heilongjiang, Jilin and Liaoning, to help improve efficiency in farming and logistics. It also stated that it will invest more than 20 billion yuan in the three provinces over the next three years to help the region “upgrade its industries, create jobs, inject innovation and upgrade retail services”.

Earlier in October 2017, Suning Logistics announced that it will connect the towns and villages in Jiangsu and Zhejiang province by opening up a number of aviation routes for drones. Suning also revealed that it plans to build a smart logistics hub with 5,000 delivery drones, covering the country's unmanned aviation, research and development, production and after-sales ground service network.

5. Growing demand for cold chain logistics

Chinese consumers are more quality-driven and health-conscious nowadays, leading to an increasing demand for fresh produce. Temperature control is necessary in the handling of fresh products to retain their efficacy. This offers great development prospects for cold chain logistics. According to the China Federation of Logistics and Purchasing, the market size of the cold chain logistics industry in China is estimated to grow at a CAGR of 20% to reach 470 10

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Spotlight on China Retail – Issue 9 billion yuan by 2020, up from 250 billion yuan in 2017.

To tap this fast-growing market, some large-scale logistics companies have scaled up investments in cold chain logistics. In August 2018, SF Holding Co joined force with U.S. supply chain system provider HAVI Group LP to establish a cold-chain joint venture New HAVI in Shenzhen; the new company aims to provide customers throughout the cold chain market with comprehensive end-to-end solutions and services, while promoting the growth and development of the sector. Others express delivery companies such as STO Express and YTO Express also regard cold-chain business as a key business focus, and are setting up subsidiaries, new warehouses, etc. to facilitate the provision of cold chain logistics services.

Some e-commerce platforms have also put more emphasis on the cold-chain market. In July 2017, JD.com teamed up with Japanese logistics giant Yamato Transport Co Ltd. to strengthen its fresh produce cold-chain and cross-border logistics services, and jointly engage in logistics technology R&D development. Suning, on the other hand, has been expanding the scale of its cold chain warehouses. As of end-July, 2018, Suning Logistics operated 17 cold-chain warehouses across China.

6. Logistics players to go “green”

Nowadays, green logistics is at the heart of many logistics players. To attain sustainable development, they are exploring more environmentally sustainable ways to pack, transport, store, and distribute products. With the increase in the number of e-commerce parcels, particularly during the online shopping festivals, many logistics players have launched green initiatives to promote the use of sustainable, green packaging materials throughout the supply chain. For example, during the 11.11 Global Shopping Festival last year, Cainiao put in place a smart-packaging system in its warehouses to assess the category, volume, weight and delivered area of its orders, and match the goods to the most space-efficient form of packaging to reduce waste. The company has also set up 20 green warehouses across China where all parcels are packaged with renewable materials before shipping. In September 2018, Cainiao further announced that it has started to use recycling boxes for picking, loading and packing goods in some of its green warehouses.

Similarly, JD Logistics has also stepped up its green efforts with the establishment of “JD Logistics Green Fund” in December 2017. The fund is intended to be used for the transformation of green supply chain, R&D and innovations of green supply chain, and promotion of green consumption. Meanwhile, JD Logistics has also increased investments in new energy vehicles. It has launched over thousands of new energy vehicles across the

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Spotlight on China Retail – Issue 9 country to replace the traditional petroleum-based trucks.

In April 2018, Suning Logistics announced the setup of a green packaging laboratory to explore different forms of environmental friendly packaging products, develop new plans for packaging management in the industry and create a green packaging sharing platform.

Recognizing the importance of achieving sustainable logistics while enhancing efficiency, Alibaba’s new retail divisions including Tmall, Taobao, Xianyu, lst.1688.com, Hema Xiansheng and ele.me jointly announced the commencement of its “Green Logistics Plan 2020” in May 2018. Major initiatives set forth in the plan include upgrading the delivery bags to eco- friendly bags, encouraging merchants to use fewer delivery boxes, reducing plastic wastage during takeaway delivering and opening up its carton screening technology.

Parcel packaged with renewable materials (Photo source: Alizila)

7. Government commits support to retail logistics development

The government has been very supportive towards the development of the logistics industry. In particular, a number of specific policies and regulations have been promulgated to promote retail and e-commerce logistics development over the past few years.

In March 2018, the State Council executive meeting passed the Interim Regulations on Express Delivery, the first regulations governing and facilitating the development of the express delivery sector in the country. According to the regulations, after filing with administrative authorities, courier firms and their branches can set up terminal service outlets without applying for a business license. Delivery companies are also encouraged to operate cross-border shipping businesses and to build sorting centers for international 12

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Spotlight on China Retail – Issue 9 shipments at key ports and service and processing facilities in foreign countries. The regulations also laid out personal information protection requirements targeting illegal sales, leakage or provision of user information generated in shipping activities. The regulations became effective from 1 May, 2018.

In January 2018, the General Office of the State Council promulgated the Opinions on Promoting the Synergistic Development of E-commerce and Express Delivery Services. To accelerate the development of e-commerce and express delivery services, the Opinions set out policy guidelines in six areas including optimizing policies and regulations to accelerate the development of e-commerce and express delivery services; accelerating the development of logistics infrastructure for e-commerce; strengthening regulations and facilitating the management of delivery trucks for e-commerce orders; encouraging innovations in express delivery services; encouraging enterprises to go smart and improve operation efficiency; and encouraging the development of green ecosystem. Noticeably, this is the first time the government proposed the idea of green e-commerce and green express delivery. The government encouraged e-commerce players and express delivery operators to jointly promote green e-commerce and delivery by launching green packaging and green process reengineering in the supply chain, promoting green consumption, and exploring the establishment of a complete package recycling system.

Earlier in March 2016, six ministries including the Ministry of Commerce, the National Development and Reform Commission, the Ministry of Transport, the General Administration of Customs, the State Post Bureau, and the Standardization Administration jointly issued the Special National Plan for the Development of E-commerce Logistics (2016–20). The plan laid out important development tasks that will support the development of e-commerce logistics.

These government policies are set to provide a more regulated and transparent environment for the development of retail logistics.

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Spotlight on China Retail – Issue 9 Spotlight on China Retail – Issue 9 shipments at key ports and service and processing facilities in foreign countries. The III. Concluding remarks regulations also laid out personal information protection requirements targeting illegal sales, leakage or provision of user information generated in shipping activities. The regulations became effective from 1 May, 2018. The rapidly evolving retail and e-commerce market as well as the changing needs of consumers, particularly the requirement for immediacy and fast service, have continued to In January 2018, the General Office of the State Council promulgated the Opinions on create huge development opportunities for the logistics sector. Given the rapid development Promoting the Synergistic Development of E-commerce and Express Delivery Services. To of technology, new forms of technology-enabled logistics services models will appear to accelerate the development of e-commerce and express delivery services, the Opinions set provide fast delivery and personalized pick-up options for customers. We also expect to see out policy guidelines in six areas including optimizing policies and regulations to accelerate more strategic partnerships in the sector, especially in the express delivery segment as more the development of e-commerce and express delivery services; accelerating the express delivery companies strive to upgrade and expand their businesses and invest in development of logistics infrastructure for e-commerce; strengthening regulations and innovation. facilitating the management of delivery trucks for e-commerce orders; encouraging innovations in express delivery services; encouraging enterprises to go smart and improve The retail and e-commerce logistics sector is set to be more competitive in the coming years. operation efficiency; and encouraging the development of green ecosystem. Noticeably, this To succeed in the increasingly sophisticated and competitive environment, players need to is the first time the government proposed the idea of green e-commerce and green express be innovative and constantly come up with new services, while enhancing their logistics delivery. The government encouraged e-commerce players and express delivery operators to capabilities and expanding their logistics infrastructure and facilities. They should continue to jointly promote green e-commerce and delivery by launching green packaging and green go “smart” and adopt advanced technologies in the entire logistics process such as speeding process reengineering in the supply chain, promoting green consumption, and exploring the up the construction of automated warehousing and logistics facilities and accelerating the establishment of a complete package recycling system. logistics informatization process.

Earlier in March 2016, six ministries including the Ministry of Commerce, the National Development and Reform Commission, the Ministry of Transport, the General Administration of Customs, the State Post Bureau, and the Standardization Administration jointly issued the Special National Plan for the Development of E-commerce Logistics (2016–20). The plan laid out important development tasks that will support the development of e-commerce logistics.

These government policies are set to provide a more regulated and transparent environment for the development of retail logistics.

Retail and E-commerce Logistics | 173 1 1

Retail and E-commerce Logistics | Retail and E-commerce Logistics |

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