China Retail Weekly Updates 26 August – 1 September 2016

Retail in general p2 Asia Distribution & Retail

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Fung Business Intelligence: Domestic consumption rising; mobile, social, rural, cross-border e-commerce “transforming” China’s economy Nielsen: Convenience store and online shopping put pressure on hyper/super markets; discount sales and mobile shopping channels are keys for online shoppers Interim Measures for the Administration of Internet Advertising comes into effect on 1 September 2016

E-commerce p2          Teresa Lam Vice President E: [email protected] T: (852)2300 2466

Fung Business Intelligence

Department stores and shopping malls p4 

Kowloon, Hong Kong T: (852) 2300 2470 F: (852) 2635 1598

Wangfujing’s net profit for 1H16 drops 21.39% yoy

Supermarkets and hypermarkets p4  

10/F LiFung Tower 888 Cheung Sha Wan Road

eMarketer: China is the world’s largest e-commerce market with transaction value reaching US$899.09 billion in 2016 Micro-store business in China records a transaction value of 181.95 billion yuan in 2015 Alibaba signs MOU with Russian exporter to help Russian goods enter China market Alibaba’s Xianyu introduces new service that will reward active platform users Taobao allows shop owners to advertise their stores through live webcast of overseas merchandizing activities Taobao to launch VR shopping service Buy+ in September 2016 Suning Commerce Group revenue in 1H16 amounts to 68.7 billion yuan; net loss amounts to 121 million yuan Xiaomi and China UnionPay jointly release Mi Pay service on 1 September Huawei becomes the first Chinese handset company to have its own mobile payment as Huawei Pay launches

Report summarizes the characteristics of online grocery consumers in China Yonghui Superstore’s sales up by 17.68% yoy in 1H16; plans to introduce app in collaboration with JD Daojia

Convenience stores p5 

CCFA: China’s convenience store sector maintains stable growth in 1H16

Apparel and shoes p5 

Adidas expands in China by opening specialized store for segmented market

E: [email protected]

Cosmetics p5  

Estee Lauder’s men’s skincare brand Lab Series opens store on Tmall Innisfree adds VR experience in Shanghai Disneyland store

Consumer electronics p6 

Gome Electrical Appliances’ net profit for 1H16 drops 81.95% yoy to 124 million yuan

Fung Business Intelligence: Domestic consumption rising; mobile, social, rural, cross-border e-commerce “transforming” China’s economy Fung Business Intelligence and the National Academy of Economic Strategy at the Chinese Academy of Social Sciences jointly published the Blue Book of China’s Commercial Sector (2016-17). According to the Blue Book, growth in China’s “new normal” economy is being driven increasingly by rising domestic consumption and private entrepreneurship focused on mobile ecommerce, social e-commerce, rural ecommerce, and cross-border e-commerce. The Blue Book also confirms that current trends signal more than just a “new normal” for China; they mark the start of more sustainable growth that provides fertile ground for “new economy” innovations with farreaching possibilities, such as the transformation of rural consumption and cross-border trade through e-commerce1.

Nielsen: Convenience store and online shopping put pressure on hyper/supermarkets; discount sales and mobile shopping channels are keys for online shoppers According to Nielsen’s “2016 China Hyper/Supermarket Shopper Trends Report”, the penetration rate of convenience stores and online shopping jumped to 32% and 38% respectively from last year’s 19% and 35%. Such growth in the new retail formats are pressing traditional hyper/supermarkets to transform their business. Besides, the report shows that

China Retail Weekly Updates

average consumer spending offline fell from 172.4 yuan in 2015 to 162.7 yuan. Offline shoppers also pay more attention to the overall shopping experience. For online shoppers, price becomes increasingly important. 68% of respondents do online shopping when there are sales promotions; the penetration of shopping festivals is up to 95%. 59% of consumers use desktops for shopping, 57% use laptops while 81% of online shoppers use smartphones2.

Interim Measures for the Administration of Internet Advertising comes into effect on 1 September 2016 On 1 September 2016, the Interim Measures for the Administration of Internet Advertising announced by the State Administration for Industry and Commerce takes effect. The Interim Measures stated clearly the scope of Internet Advertising and made compulsory that all such advertisement to include indicative sign of “Advertisement” in an easilyidentifiable position. Commercial advertising information from cewebrities and celebrities on social media such as Weibo and Weixin, as well as the reposting of such on social platforms are all bound by the same rule. Paid and ordinary search results need to be clearly distinguished. Pop-up browser advertisements online are required to be closable in one click3.

eMarketer: China is the world’s largest ecommerce market with transaction value reaching US$899.09 billion in 2016 According to a report by market research company eMarketer, the transaction value of e-commerce (exclude the sales of travel

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products, event tickets and restaurants) in the Asia-Pacific region is expected to top US$1 trillion, up by 31.5% yoy. China’s transaction value of e-commerce is expected to reach US$899.09 billion in 2016 (accounting for 47% of the world’s total), making it the largest ecommerce market in the world. North America comes second with expected transaction value of US$423.34 billion4.

Micro-store business in China records a transaction value of 181.95 billion yuan in 2015 According to a market report, micro-store business recorded a transaction value of 181.95 billion yuan in 2015, up by 91.5%. Per estimation, the amount will be over 360 billion yuan in 2016. In 2015, business operators in the micro-store industry reached 15.352 million, up by 22.8% yoy. Currently, 32.4% and 29.2% of micro-stores operate through service platforms and WeChat public accounts respectively. The report added that product quality issues remain the biggest hurdle for the development of micro-stores5.

Alibaba signs MOU with Russian exporter to help Russian goods enter China market Alibaba signed a memorandum of understanding (MOU) with the Russian Export Center. According to the partnership, Tmall will open a Russian merchandize channel on its e-commerce platform selling Russian food, toys and other consumer goods. The MOU also stated that the Russian Export Center will leverage Alibaba’s channel resources to introduce cultural goods such as movies and animations from Russia into the China market6.

Alibaba’s Xianyu introduces new service that will reward active platform users

China Retail Weekly Updates

Alibaba’s online flea market and auction business Xianyu introduced a new service which rewards users for posting goods for auction. No matter the goods are sold or not, users will be rewarded with credits that can only be used on the platform. The reward needs to be claimed within a stated period and will be transferred to user’s Xianyu account. The company estimated that this service will help raise the usage and interaction rate of the online platform7.

Taobao allows shop owners to advertise their stores through live webcast of overseas merchandizing activities Taobao Global jointly introduced with Taobao Live the “24 hours Global Live” event, in which over 500 global merchandizers broadcasted their overseas buying activities for thousands of online audience. It provided an advertising opportunity for global merchandizers who operate their own stores on Taobao8.

Taobao to launch VR shopping service Buy+ in September 2016 Taobao will openly test its Buy+ VR shopping service in September 2016. Through VR and AR technology, the service provides consumers with a virtual shopping environment that allows for more interactive shopping experience. For example, consumers can better learn about the details and quality of the clothing items. Before now, Alibaba Group has tested the VR technology in its GnomeMagic VR lab9.

Suning Commerce Group revenue in 1H16 amounts to 68.7 billion yuan; net loss amounts to 121 million yuan Suning Commerce Group’s total operating revenue in 1H16 amounted to 68.7 billion yuan, up by 9.01% yoy. Revenue of e-

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commerce business was up by 80.31% yoy. Merchandize sales for the period amounted to 85.6 billion yuan, up by 14.1% yoy. In 1H16, net loss for the company and the net loss attributable to company shareholders amounted to 216 million and 121 million yuan respectively10.

Xiaomi and China UnionPay jointly release Mi Pay service on 1 September Xiaomi Technology partnered with China UnionPay to introduce Mi Pay, making Xiaomi the third mobile handset company to work with China UnionPay to provide mobile payment services. Xiaomi will officially launch Mi Pay on 1 September and support public transportation payment. The service will startoff to support credit and debit cards from over ten banks, while the public transportation payment service will first be available in Shenzhen and Shanghai. The launch of its own mobile payment services suggests that Xiaomi is trying to explore new business opportunities amid slower growth of handset sales11.

Wangfujing’s net profit for 1H16 drops 21.39% yoy Beijing Wangfujing Department Store Group recorded sales of 8.69 billion yuan in 1H16, down by 4.07% yoy. Income from merchandize sales was down by 5.1% yoy. By product category, only sportswear had a positive sales growth rate for the period. Total net profit amounted to 486.13 million yuan, down up 21.39%. Net profit attributed to shareholders of the listed company amounted to 339.68 million yuan, down by 26.74%. Gross profit margin of department store business dropped 0.25 percentage point yoy to 18.35%, while rental income was up by 36.51% yoy13.

Huawei becomes the first Chinese handset company to have its own mobile payment as Huawei Pay launches China UnionPay’s QuickPass announced that Huawei Pay is now supported by its payment service, making Huawei Pay the first mobile payment service to simultaneously support bank and public transport cards’ payment services. As of 31 August 2016, Huawei Pay already reached partnership agreements with 25 banks. According to market survey, the size of the mobile payment market in China in 2016 increased by 30% yoy to reach 12.5 trillion yuan12.

China Retail Weekly Updates

Report summarizes the characteristics of online grocery consumers in China JD.com and Analysys.cn jointly published a report on the behaviors of online grocery consumer in China in 2016. The report shows that over 70% of the online superstore consumers belong to the post-80s and post90s demographics, and over 70% of these consumers are well-educated. By gender, over 70% of them are female. Post-80s consumers like to buy mother and infant products, while post-90s like to buy personal care and cosmetics products and the favourite of post-70s consumers are food and beverages. Healthy and imported food

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continued to increase in sales. In tier 5 and tier 6 cities, market penetration rates of online grocery purchases made on mobile channel are high and could reach 90% in some cities14.

convenience store sector maintains a stable growth16.

Yonghui Superstore’s sales up by 17.68% yoy in 1H16; plans to introduce app in collaboration with JD Daojia Yonghui Superstore has a sales income of 24.517 billion yuan in 1H16, up by 17.68% yoy. Net profit was 670 million yuan, up by 27.19%. In 1H16, Yonghui opened 24 new stores and entered license agreements for the opening of 40 stores. In terms of product categories, fresh produce and groceries items had increases in sales, while apparel sales dropped. In 2H16, Yonghui planned to open 26 new Bravo stores and 12 new membership stores. It will also expand online distribution channels for various businesses and explore new business models. Also, a new app of the store will be launched and it will partner with JD Daojia to promote the O2O business15.

Adidas expands in China by opening specialized store for segmented market Adidas estimated that the group’s sales in the Greater China region will go up by 16%-19% in 2016. The brand has already established a retail network of around 9,000 stores in over a thousand cities in China. In tier 1 and tier 2 cities, Adidas opened a number of specialized stores for segmented product markets, including five female stores and the brand’s first football specialized store in the world. In the coming five years, the brand will continue to focus on five key product markets, which include football, running, female, kids and classic sportswear17.

CCFA: China’s convenience store sector maintains stable growth in 1H16

Estee Lauder’s men’s skincare brand Lab Series opens store on Tmall

China Chain Store & Franchise Association (CCFA) conducted a survey on the operation of convenience stores in China in 1H16. The study collected responses from 45 corporate members of CCFA’s convenience store committee. The survey results show that over 70% and 60% of responding convenience store operators recorded a yoy sales growth and a yoy same-store-sales growth respectively in 1H16. In terms of the number of new stores, 83.3% of respondents either recorded a yoy increase or maintained a flat growth rate. The survey shows that the

Estee Lauder’s high-end men’s skincare brand Lab Series opened its official flagship store on Tmall. New seasonal products of Lab series will be exclusively available on the Tmall store. The store is the sixth Tmall flagship store by Estee Lauder Group, following Clinique, Estee Lauder, Origins, La Mer and Bobbi Brown. It is also the only store for high-end men’s skincare18.

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Innisfree adds VR experience in Shanghai Disneyland store South Korean beauty brand Innisfree incorporates experiential shopping elements in its Shanghai Disneyland store through VR games. Customers can mount a bike and put on a VR google in the VR experience area in the store to go on a virtual visit to Innisfree’s home base of Jeju Island in South Korea. Thousands of visitors have already taken the virtual ride, and the concept will be rolled out this year to flagship stores in Hong Kong, Indonesia, Singapore and Vietnam as well as the U.S19.

Gome Electrical Appliances’ net profit for 1H16 drops 81.95% yoy to 124 million yuan Gome Electrical Appliances recorded sales revenue of 35.3 billion yuan in 1H16, up 11.42% yoy. Of the total sales reveune, Gome’s online sales accounted for 4.6 billion yuan, up by 63.01% yoy. Offline comparable store sales revenue was down by 9.93%. The GMV of both online and offline sales was up by 21.67% yoy. Profit attributable to owners of the parent was down by 81.95% yoy to 124 million yuan. Gome Electrical Appliances said the drop in profit was mainly due to investment for offline store upgrades20.

Endnote please change to white21

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References 1

“Mobile, Social, Rural, Cross-border E-Commerce “Transforming” China’s Economy”, 30 August, 2016, Fung Business Intelligence 2

“Convenience stores and online shopping become major consumption options”, 24 August 2016, Nielsen

3

“Interim Measures for the Administration of Internet Advertising comes into effect on 1 September 2016”, 31 August 2016, people.cn (in Chinese) 4

“eMarketer: China is the world’s largest e-commerce market with transaction value reaching US$899.09 billion in 2016”, 26 August 2016, Linkshop (in Chinese) 5

“Micro-store business in China records a transaction value of 181.95 billion yuan in 2015”, 26 August 2016, eBrun (in Chinese); “Micro-store business in China records a transaction value of 181.95 billion yuan in 2015”, 24 August 2016, China.com.cn (in Chinese) 6

“Alibaba signs MOU with Russian exporter to help Russian goods enter China market”, 31 August 2016, ebrun (in Chinese) 7

“Alibaba’s Xianyu introduces new service that will reward active platform users”, 1 September 2016, ebrun (in Chinese)

8

“Taobao allows shop owners to advertise their stores through live webcast of overseas merchandizing activities”, 28 August 2016, ebrun (in Chinese) 9

“Taobao to launch VR shopping service Buy+ in September 2016”, 30 August 2016, ebrun (in Chinese)

10

“Suning Commerce Group revenue in 1H16 amounts to 68.7 billion yuan; net loss amounts to 121 million yuan”, 30 August 2016, China Chain Store & Franchise Association (in Chinese) 11

“Xiaomi and China UnionPay jointly release Mi Pay service on 1 September”, 30 August 2016, China Chain Store & Franchise Association (in Chinese) 12

“Huawei becomes the first Chinese handset company to have its own mobile payment as Huawei Pay launches”, 31 August 2016, Tech.qq.com (in Chinese) 13

“Wangfujing’s net profit for 1H16 drops 21.39% yoy”, 29 August 2016, China Chain Store & Franchise Association (in Chinese) 14

“Report summarizes the characteristics of online grocery consumers in China”, 1 September 2016, ebrun (in Chinese)

15

“Yonghui Superstore’s sales up by 17.68% yoy in 1H16; plans to introduce app in collaboration with JD Daojia” 29 August 2016, ebrun (in Chinese) 16

“CCFA: China’s convenience store sector maintains stable growth in 1H16”, 31 August 2016, China Chain Store & Franchise Association (in Chinese) 17

“Adidas expands in China by opening specialized store for segmented market”, 29 August 2016, ebrun (in Chinese)

18

“Estee Lauder’s men’s skincare brand Lab Series opens store on Tmall”, 29 August 2016, ebrun (in Chinese)

19

““Flying start for Innisfree China at Disneyland” 28 August 2016, Retail News Asia

20

“Gome Electrical Appliances’ net profit for 1H16 drops 81.95% yoy to 124 million yuan”, 30 August 2016, ebrun (in Chinese)

21

Fung Business Intelligence Fung Business Intelligence collects, analyses and interprets market data on global sourcing, supply chains, distribution, retail and technology. Headquartered in Hong Kong, it leverages unique relationships and information networks to track and report on these issues with a particular focus on business trends and developments in China and other Asian countries. Fung Business Intelligence makes its data, impartial analysis and specialist knowledge available to businesses, scholars and governments around the world through regular research reports and business publications. As the knowledge bank and think tank for the Fung Group, a Hong Kong-based multinational, Fung Business Intelligence also provides expertise, advice and consultancy services to the Group and its business partners on issues related to doing business in China, ranging from market entry and company structure, to tax, licensing and other regulatory matters. Fung Business Intelligence was established in the year 2000. The Fung Group is a privately held multinational group of companies headquartered in Hong Kong whose core businesses are trading, logistics, distribution and retailing. The Fung Group employs over 45,100 people across 40 economies worldwide, generating total revenue of over US$24.8 billion in 2015. Fung Holdings (1937) Limited, a privately held business entity headquartered in Hong Kong, is the major shareholder of the Fung group of companies. Please visit www.funggroup.com for more about the Fung Group.

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