As China strives to build a more consumption-driven economy, the country’s distribution sector is gaining increasing attention these days, both from businesses and the government.

Eyeing the huge potential of the burgeoning consumer market, many manufacturers and retailers have been keen to expand distribution network as well as to improve supply chain efficiency over the past years; urbanization and fast development of transportation infrastructure are also rapidly changing China’s distribution sector. China’s wholesale distribution landscape has witnessed significant transformation. Exciting changes are taking place.

Hoping to shed light on the latest development in China’s distribution sector, the China Chain Store and Franchise Association (CCFA) and the Li & Fung Research Centre had jointly conducted a study on China’s distribution landscape in 2009 to interview 30 prominent Chinese retailers - including convenience stores, supermarket and hypermarket operators - on their distribution practices.  

Indeed, businesses home and abroad today are casting their eyes on China.  Building demand-driven supply chains is crucial for business success.

I. Background - several observations on China’s distribution sector

1. Growing pressure of disintermediation

In the past years, we have witnessed much streamlined and shortened retail supply chains in China, thanks to more centralized sourcing and distribution strategies of retail chain operators and the emergence of retail formats such as manufacturer direct-sale. The bargaining power and survival of distributors, especially those traditional players serving solely as a middleman between manufacturers and retailers without much value-added services, are under a lot of pressure. Discussion of disintermediation, which refers to the removal of intermediaries in supply chains or “cutting out of the middlemen”, is catching attention.

In fact, China’s distribution sector is highly fragmented. Competition is particularly intense in the lower spectrum of the market and many who cannot offer higher value-added services to clients often have to resort to price-cuttings, eroding these players’ profitability. Besides, business costs such as labor, energy, raw materials, and logistics have been rising. Many players just manage to earn razor-thin margins.

2. Retail chain operators have gained power over their suppliers

Owing to market liberalization, retail chain operators have been rapidly expanding their influence in China in the past decade. The total sales revenue of China’s Top 100 retail chain operators (hereafter “the Top 100s”) reached RMB 1,360 billion in 2009, up by 13.5% year-on-year (yoy). The market share of the Top 100s in the country’s total retail sales of consumer goods has climbed from 3.8% in 2001 to 10.9% in 2009. Their total number of stores was 137,000, rising by 18.9% yoy.

Unlike in the early days of reform, product distribution today is no longer supply-driven. We witness a significant shift in power in China’s retail supply chains. Retail chain operators in China have gained power over their suppliers because of huge purchase volume. Indeed, many retailers have taken advantage of their strong market power – many introduce cumbersome charges such as entrance fees, promotion and marketing charges, listing fees for new products and launch different rebate and commission schemes to suppliers. Many wholesale players have reflected huge cost of entry into modern trade retailers and called for more stringent regulations on retailers’ behavior - retailers introducing heavy fees does not only eat into the profits of wholesale players, but also makes lesser-known brands harder to compete for shelf space, limiting consumers’ choices and may lead to fraudulent activities as well.

Some retailers in China frequently extend payment of payables to suppliers, using it as a major source of funding for working capitals. Many suppliers are wary of payment defaults. Tension between retailers and suppliers in China has been a top industry concern.

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