McKinsey research

Inside China’s hypermarkets: Past and prospects

By Louise Herring, Daniel Hui, Paul Morgan, and Caroline Tufft

Chinese consumers love to shop. More than a third of Chinese (36%), according to McKinsey research, say that shopping with friends and family is one of their favorite activities. Retailers like the sound of that. But consider: Three years ago, that figure was 45 percent.

The gap indicates an important point: For retailers big and small, foreign or Chinese, the days of wine and roses are over. The future is going to be much more difficult.

Specifically, McKinsey has taken a close look at the hypermarket model. Hypermarkets are very big spaces that combine supermarkets and department stores—and they have been a big hit in China. By 2010, the country had almost 2,400 of them, concentrated in the big, prosperous Tier 1 and Tier 2 cities. Within established retail chains, hypermarkets are the dominant format. And all this happened in a blink of an eye, in economic terms. In 1997, hypermarkets barely existed.

Between then and 2003, revenues grew an average of 70 percent a year; since then, growth has averaged about 20 percent. But now things are about to get much tougher; the low-hanging fruit has been picked. Not only is the competition tightening, but retail dynamics are changing. To win, players need to understand the Chinese market, and then learn how to operate in a way to meet the market on its own terms.

As many retailers, particularly non-Chinese multinationals, have learned the hard way, Chinese consumers use hypermarkets distinctively, in several ways:

  1. Food versus non-food: What Chinese consumers buy
  2. A really big convenience store: How they use hypermarkets
  3. How the retail model is different: Big stores, not-so-big sales

And there are three operational priorities:

  1. Optimize category management
  2. Reduce purchasing costs.
  3. Improve in-store operations, particularly inventory.

To read the rest of this report, including explanations of the above, download “Inside China's hypermarkets.”