Center

Retailing not a cinch in market

By Hubert Hsu, Vincent Lui, Jeff Walters and Joseph Wan (China Daily)
Updated: 2007-04-25 08:45

In fact, as their network of stores grows, these retailers will find it harder to improve productivity and respond to competitors and customers. Over time, if same-store productivity continues to weaken, these expanded networks will become a burden on the bottom line.

One solution is to develop local leadership. Retaileconomicswill favor players with strong, defendable positions in local markets over a national leader. But that will require a greater focus on same-store productivity.

Another problem associated with rapid growth is the reliance on suppliers' in-store reps. Historically, many retailers leverage suppliers' reps to drive sales and reduce overheads.

A big disadvantage, however, is that supplier reps are trained to put the interests of the supplier over those of the retailer. For example, supplier reps aren't motivated to cross-sell other brands. Furthermore, because retailers have fewer ways to differentiate themselves from competitors under the supplier rep model, they tend to compete on price or convenience of location which has led to price wars and exceedingly rapid footprint expansion.

Despite those disadvantages, some retailers have been reluctant to give up the supplier reps because that would require competencies retailers weren't able to develop. These include consumer insight, category management, promotions training, and visual merchandising. And it isn't easy to change business models.

Building strength

Many retailers are now trying to build the required capabilities and strengthen their organizations partly to break away from the dependence on suppliers' reps but also because of organizational issues resulting from rapid expansion.

Many fast-growing retailers in China, especially domestic ones, are accustomed to an entrepreneurial, decentralized management style. In the past, that has enabled fast decision-making; but as the volume of decisions grows, this approach becomes a burden and risk on the organization. Increasingly, more retailers see the importance of skilled managers at headquarters and efficient processes as their competitive, if not survival, advantages.

China's emerging retail markets do offer enticing opportunities but also some very real challenges. These challenges are largely the result of industry fragmentation, the popularity of the supplier rep model, the vastness of the country, and competition with lower-price channels.

Succeeding under these circumstances will depend on operating efficiency and scale, and on careful decision-making about growth and format. Of course, these are goals that retailers always strive for, but to win in China's challenging environment, all serious players will need to up their level of play.

Hubert Hsu and Joseph Wan are partners and directors at theHong Kongoffice of Boston Consulting Group. Vincent Lui is a principal in the firm's Hong Kong office. Jeff Walters is a project leader in the firm's Shanghai office

(China Daily 04/25/2007 page15)