The Year of the Snake might be the year new leadership in China’s national government boosts social reform. If your business is operating in China it needs to start preparing now – Vicky Ray, IGD’s Head of Asia, explains how your business could benefit...
Xi Jinping took the helm as head of the Chinese national government in November 2012, with Li Keqiang as the new Premier. Commentators noted a change in the Communist Party’s historical approach to favouring economic growth at the expense of social development.
While reform often goes hand-in-hand with a new government in the rest of the world, this subtle redirection in China appears to have brought with it some optimism about what the future may hold for consumers and therefore the consumer goods industry. The barriers within China’s institutional culture that may have been holding back societal change to some extent, could begin to erode if the following areas are reformed:
Urbanisation as a future engine of growth
There are 712 million city dwellers in China today, more than half the population, and there could be a billion people living in China’s cities by 2030. As families have moved east and south, in search of higher incomes and a better standard of living, a two-tier system has developed within China’s cities. The current ‘Hukuo’ or household registration system prevents rural dwellers moving to cities from becoming an official urban resident. This restricts their access to local benefits such as health care and public education, which are available but at extra cost. This has obviously served to dampen consumer confidence and spending.
Reform of the Hukuo system is anticipated as Li Keqiang has stressed the importance of urbanisation as a future engine of growth. This will however be an expensive reform – China spends about 6% of GDP on social welfare currently, about half the level of countries at a similar level of development. Encouraging more people to move to cities could also cause an imbalance the other way, leaving a shortage of labour in rural areas, with far reaching global effects.
What does this mean for your business in China?
- Enabling ‘migrants’ greater access to social welfare will undoubtedly improve consumer wealth and drive domestic demand
- However we could see this demand change on a regional or city basis depending on how the reform is implemented. There is likely to be significant variation by geography with relatively smaller ‘lower tier’ cities potentially changing more rapidly that the much larger and costlier operations in municipalities
- Respond to new and growing consumer demands by ensuring the right ranges are in place to enable shoppers to ‘trade up’ and expand their product and category repertoire
Privatising state-owned enterprises
To support urbanisation reform and create a level playing field in which companies can borrow money, the government may look to privatise state-owned enterprises (SOE) in China. This could mean partially or wholly selling off businesses in particular industries - it is more likely that corporations would be encouraged to sell off more peripheral businesses, rather than wholly privatising.
There are a number of large state-owned players in consumer goods retail in China, including Hong Kong-based China Resources Enterprise (CRE) and retail behemoth Balian Group, which comprises Lianhua and Hualian who were nominally merged several years ago but continue to operate as distinct (and competitive) chains. Interestingly, although successful retail store operators in China, CRE’s core business is food manufacture - in fact it also supplies a number of its grocery ‘competitors’ in China – perhaps exactly the kind of situation that SOE reform will aim to overcome?
What does this mean for your business in China?
- SOE reform could impact the consumer goods retail industry, as it does contain a number of leading state-owned businesses
- Some market restructuring may occur, but this is likely to affect parts of businesses rather than SOEs in their entirety
- Nevertheless, this restructuring could benefit smaller players in the market, offering opportunities for acquisition and for building strategic partnerships
Demographic imbalance
China’s fertility rate is one of the lowest in the world, in part because of the one-child policy which restricts urban couples to having only one child, unless both partners are themselves only children. Beijing revealed recently that the country’s working population has already begun to shrink, sooner than expected. The ‘dependency ratio’ which is the proportion of the population that are relying on a salary earner, is forecast to rise from the current level of 19%, low by global standards, to 68% by 2050. Empty nest families will also make up 50% of households by 2050, a significant departure from the social structure of Chinese families today where, even in major cities, it is not uncommon for three generations to live together.
China’s one child policy has also resulted in a significant male-female imbalance – estimates are that 24 million single men with be left without potential partners.
What does this mean for your business in China?
- The shifting demographic will change the way the Chinese live and shop. Most families currently very traditional with shopping and childcare still the domain of housewives or grandparents
- A rapid move to more convenient solutions such as convenience store and online shopping has already begun. Shoppers will continue to seek time-saving solutions with direct implications for store format development as well as the integration of the on and offline worlds
- Smaller formats will increase in importance, not only to meet the needs of busy, young shoppers but to provide a easy shopping, close to home for elderly shoppers
- Food-to-go and ready-to-eat are already growing categories in the convenience channel and will be further driven by the large number of ‘singles’ looking for quick and easy meal solutions
A reformed picture?
The priority and timescale by which reform will be implemented is unclear, but what is becoming apparent is that China will become more people-orientated. Through a balanced approach to economic and social development and emphasis on social progress, the impact on consumers will be felt across the industry.
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