Looking back 30 years, China was only just emerging from a planned economy. Its retail sector was strictly regulated, commodities were scarce, and a ration system was still in place.

Coupons were issued not only for food and fuel, but also for bikes and televisions. Each coupon specified an item, quantity and sometimes a retail outlet as well. Meat in particular was in short supply, rationed at 0.25 kilogram per person per month, and many Chinese had to eat vegetarian diets. Regardless of financial wealth, without coupons Chinese people simply couldn’t purchase goods.

Retail was dominated by state and collectively owned stores, and while a few free markets continued to exist in the countryside, they were considered ‘the tail of capitalism’ to be cut off sooner or later. The level of protection afforded to retailers, and lack of competition between them, resulted in poor performance and consumer service. No new retail formats or service innovations had been introduced for decades.

Due to the scarcity of products and the planned price system, it was the suppliers that really had the upper hand. Although they could not raise prices, they could choose whether or not to supply, and specify the volumes they would supply. It was not uncommon for retail buyers to use back door relationships to get hold of much wanted goods.

Reform and Opening

With policy relaxation over the past 30 years, the transformation of the retail sector has been dramatic. It began in the 1980s with the breaking of the stranglehold of the state and collectively owned stores, leading to an influx of individual retailers and reopening of free markets. Meanwhile, the government took steps to abolish the procurement and sales system, and reduce the number of consumer goods subject to planned prices.

Moving into the early 1990s, international retail chains began to enter China, bringing new concepts and management know-how. Carrefour was one of the first, entering during the year international participation in China’s retail sector was granted. Since then, the number of foreign-owned retail stores has grown steadily.

China’s WTO commitments, which gradually lifted the remaining restrictions on international retailers, attracted further newcomers from the mid-2000s onwards.

As the retail sector has grown, China has flipped from a seller’s to a buyer’s market. From having next to no choice, consumers are now spoiled by many choices, both in terms of what and where to buy.

Retail Innovation

China’s retail transformation still has a long way to go. It will no longer be driven by deregulation as in the past, but by growth of consumption and competition between retailers, especially organized retail chains.

Retailers now have to strive to better understand and satisfy consumer’s needs. In turn, we are starting to see many of the world’s best practices being adopted in China.

Nevertheless, the Chinese retail sector has not lost its distinct characteristics. In fact, in the near future, we expect to see cases of China leading the world in retail innovation.

This article appeared in Impact Analysis, September-October 2011.

James Sinclair
About The Author James Sinclair
Based in China, James Sinclair advises international companies on market development and penetration strategies. He is Managing Partner at InterChina Consulting, a strategy and M&A advisory firm in China.

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