Retail industry has been under development in China for more than 10 years. As the international supermarket chains entered China in 1995, domestic supermarket retailers initiated learning from their international counterparts from that time and so far, their competence has already been very close to the international level. However, to date no international CE retailers has launched any stores in China. Therefore, domestic players can only scale their business without the international reference, and the competition is based on a low level. Comparing to domestic supermarket chains, domestic CE retailers have a lot of problems, not to say compete with international players. From my working experiences, there are ‘seven sins’—seven shortcomings for Chinese CE retailers. In another word, there are seven segments for these retailers to improve themselves. As far as I’m concerned, the solution to these shortcomings should return to the foundation of retail, and Chinese CE retailers must carve out the right track through the learning from the successful experiences of supermarket chains from both home and abroad.

I. Slight difference in business model among CE retailers

Currently, leading domestic CE retailers all adopt CE mall model, which sell A/C, audio and video, fridge and washer, home entertainment, kitchen utensils, cell phone and digital products, etc. These CE malls mainly locate in core business area, with more than 3,000 square meters, endcaps of different brands, vendor promoters and sales model which allows haggle. In this model, there is no real difference between different retailers.
As is known to all, electronic products can be divided into six segments: consumer electronics, home appliances, office appliances, medical appliances, military appliances and astronomical appliances. In view of the current trend, the sales proportion of traditional home appliances (including A/C, fridge and washer, kitchen utensil, low-end audio & video products, essential small appliances, etc.) in tier-1 and tier-2 cities is dropping sharply, and the major sales volume of these products is right now moving to tier-3 and tier-4 cities. On the mean time, consumer electronics such as computer, cell phone, digital products, high-end audio and video products and personal use small appliances will become mainstream in three years. Nonetheless, the assortment, organization structure and store location selection of domestic CE retailers have not really kept pace with this trend.
Domestic CE retailers prefer to locate their stores in central business area, and the locations are often adjacent to department stores or boutique stores. Also, the new stores are occupying bigger and bigger space, which need more inventory and other resources. In this model, if the target customer group is rural customers from tier-3 and tier-4 cities, or personal consumer electronics customers from downtown area, the site selection makes sense to some extent while the business area may be too big. However, if the target customer group is traditional CE customers from downtown
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area, then the site selection should be challenged. What’s more, for the first two customer segmentation aforementioned, a good assortment and store merchandise (to be elaborated in later part) are also important for the stores to hit success.
For a long time so far, although being impacted by the business model of supermarkets, CE retailers’ sales model of specialty hall or counter combing with promoters stayed firm. Some CE retailers have tried to use standard product shelves but proved to be failure at last. Others once tried using own employees to take place of promoters, but also turned out to be unsuccessful. However, in North America, Best Buy broke through the traditional sales model and finally achieved great success.
Solution:
The retail of FMCG and daily use necessities have already flourished in multi-channel business states, including convenience stores, supermarkets and hypermarkets. Different business states target different segmentation and unmet customer needs. Professional retailers like I Tell (cell phone) and Hisap (IT) have made some trial in launching multi-channel business states, but the once prosperous handset hypermarkets are gradually sloping down in the market because of its single business state. It is worthwhile and necessary for CE retailers to try some new business states from time to time, including the innovation on assortment, site selection, pricing, store merchandising and customer service. A good example will be Fortress, a CE retailer in Hong Kong. Fortress has three business states, namely, Fortress World, which features comprehensive assortments; Fortress Digital, a professional digital product retailer; and Fortress Vision, a professional audio and video product store. The three business states of Fortress meet the needs of three different segmentations.
II. Vendor-oriented instead of customer-oriented
There is always a saying in China’s CE retail circle: retailers build up the stage, vendors make shows. The connotation of the saying is to fix the vendors—make them supply products, decorate endcap, invest in promotions, etc. Or, in another word, to transfer all the risks to vendors, and retailers just sit there and wait for the money. Guided by this thinking, customers are only treated as promotion target and product acceptor, but are never truly respected. Looking at the resource allocation for sourcing and operation, it is easy to discover that the resource assigned to operation side is far from enough.
What is the role of CE retailers, sourcing agent for customers, or a product aqueduct for vendors? This is a question facing every CE retailer. Obviously, if their role is the latter one, problems occur such as long time for response, slow reaction and the suffering of a lot of unmarketable products. I such cases, both retailers and vendors will suffer. Right now CE retailers are dominant over customers, and their sourcing are not sales or customer-oriented. As a matter of fact, CE retailers are now just like a distribution channel for vendors and can not truly benefit customers.
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Another question is: whether the vendors can tolerate the current game rules. For one thing, CE retailers squeeze vendors by charging all kinds of fees and making promoters work too long. For another thing, in the current model, CE retailers also transfer a lot of operation responsibilities to vendors, such as stocking, pricing, promoting, promoter position and merchandising. The cooperation between vendors and retailers lies more in the maintenance of partnership and haggle negotiations. There is a big gray area for sourcing, and how to lower the cost of the whole supply chain has not been scheduled into retailers’ agenda yet.
Currently, government, industry associations and banks are all releasing policies and regulations to contain this dangerous supply-sourcing relationship. Many vendors are becoming vigilant and begin to correlate their investment with the store-level sales volume. The number of stores is no longer the sole criterion of whether a retailer is successful or not.
Solution:
How to deal with the two determining factors to retailers—customers and vendors, reflect retailers’ understanding and definition on the source of profit. If CE retailers do think their profit source is customers, they firstly need to understand customers through the analysis on unmarketable products, price and revenue per transaction, and secondly grab the consumption trend and educate the customers.
On the other hand, the right way of vendor management is to lower the total cost of distribution channel, instead of squeezing or relying on vendors. For instance, the logistics system of CE retail is far from mature, and the regional distribution channel segmentation of vendors has exacerbated the immaturity, leading to 3-4% more logistics cost for both vendors and retailers. However, if retailers and vendors can cooperate in establishing a collaborative logistics system, both of the parties can lower 1-2% cost in logistics, which will be a win-win deal.
III. Management ends in brand level, not SKU level
Just as their level of vendor management, the SKU management of domestic CE retailers is also rough, such as management in sourcing, inventory, sales and P&L check. For example, the current sourcing ends in brand level and often leads to mal-inventory—vendors always turn a lot of unmarketable products into retailers inventory.
How to separate product order from sourcing; what kind of SKUs will be allowed to enter stores, and what kind of SKUs should be given up; when the products will arrive and where the shipment should go to. All these issues need a professional sourcing system to manage. The two most important things of the management are inventory structure (to ensure that hot products are never out-of-stock and quickly deal with unmarketable products) and segmented promotion. Inventory structure is more important than inventory amount. A good inventory structure management must be a
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daily work for everyone. If the inventory structure is ill-managed, especially when some products are unmarketable for over 45 days, the risks of price drop and deficit will double. It is simple but also demanding to monitor the 10 most marketable SKUs and 10 most unmarketable SKUs in inventory management.
Solution:
First of all, CE retailers should add the functions of SKU management (including consignment) in the design and application of their information systems. Secondly, they should separate the management of sourcing, product order and product receiving. An important means of SKU management is segmentation. For example, retailers can segment delivery as direct pick up, store delivery and delivery center; or can segment vendor brands according to their popular rate. They can also segment inventory according to competition and margin contribution. SKU management need the joint efforts of merchant department and operation department. Operation department should review product popular rate and margin contribution at daily base, and merchant department should organize weekly base meeting with operation department to review the issues and impacts of SKU management.
IV. Coexistence of immature space management and luxurious decoration
As is aforementioned, currently CE retailers often adopt brand counter and brand endcap as store merchandising model. At first glance, this model can save the cost of retailers. However, it also generates a lot of problems. First of all, the retailers’ branding will be impacted; secondly, the different design of different brand counters often cause the promotion lacking emphasis; last but not least, the current model also makes store merchandising and display units adjustment difficult to adjust. On the other hand, the current model also causes the space waste of display units. If we inspect the current model in a further step, it will also increase the cost of vendors’ distribution channel and customers’ shopping choice. All these problems finally lie in retailers side.
Apart from the vertical space merchandise, the space management of CE retailers also concerns plane space management (e.g. while appliances). Right now supermarkets usually use vertical space management with on-site inventory.
The low management level of store area has already begun impacting vendor’s enthusiasm for decoration. Admittedly, luxurious decoration does build up a good shopping atmosphere, but sometimes the cost is too high. Maybe in the future we can refer to the store merchandise of some international furniture market, which is simpler in merchandise and highlight the promoted products as well.
Solution:
A comprehensive market research is the foundation of scientific space management. Here the market research includes external research (covers consumer market,
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vendors, etc.) and internal research (data of comparative stores). A well-done market research can ensure a retailer to position its stores in a right way from the NSO stage. The implementation of space management software (e.g. Spaceman) is a technical guarantee, which can allow a monthly update of store merchandise layout. Just imagine, currently a CE retailer store should display at least 2,000 units. Under such circumstance, without powerful management software to make adjustment in time, no one is able to deal with the serious fluctuation of sales season and the quick change rate of products. On the other hand, some international CE retailers often use sample room to test the effect of application and shorten the gap between software capability and actual implementation. Also, increase the number of standardized product shelves, or build up CE retailers’ own real estate for store lease will also maximize the efficiency of layout.
V. Poor retail branding and over-promotion
Based on a recent market research, to customers, the brands of CE retailers are far less important than product brands—customers will prioritize product brands than retail brands when making buying decisions.
The brand position of CE retailers is poor, and the services are often inconsistent with customer promises. In positioning a brand, many retailers just assign several planning employees to draft the plan, instead of conducting systematic research with sourcing, operation, logistics and aftersales department. The branding plans issued are often proved to be hard for operation.
As regards communication, domestic CE retailers focus on media coverage but often ignore customer segmentation, SKU selection and assortment. All there efforts are for short term and can not earn them long term reputation among customers.
The over-promotion has seriously damaged customers’ loyalty on CE retailers, which mainly lies in two respects:
1. The essence of pure investment (e.g. price-dropping, free giveaways) and the so called plan is to attract costumers but does nothing good for branding. Currently, CE retailers are second only to real estate developers in terms of the advertisements volume. It is no surprising that a promotion will cost hundreds of thousands, even several million RMB. However, the benefits finally arrives at customers is only half of the cost, sometimes even drops to 10 to 20 percent. It is not that CE retailers have not realized the problem, but the real situation is retailers feel high-cost promotions a must-do since competitors are doing so.
2. Over-promotion on special vacations. The daily sales volume of May1 and October 1 golden week may be 20 times of that in normal days. The total sales volume of May 1 and October 1 golden week account for 20 percent of the annual sales volume of CE retailers. The overwhelming concentration of sales in these two weeks impose a huge burden on retailers’ employees and impact the service quality, as well as causes a big
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inconvenience on customers.
Solution:
Consecutive advertising between mass media coverage, DM delivery and in-store promotion: the promotion model of CE retailers is: to increase the draw rate, making customers stay longer in the store and pay more attention to the products through choosing right SKUs and their prices for promotion, reasonable business area segmentation and efficient communication; to improve shopping experience and increasing close rate, revenue per transaction and units per transaction by providing personal shopping consultants. Successful CE retailers usually improve traffic through the cooperation of mass media advertising and DM, and increase close rate and revenue per transaction (equals ASP*UPT) through smart in-store promotion.
VI. Push work through meetings, plan distribution and KPI review
Usually CE retailers will lay great emphasis on both having meetings and the forms of meetings. The management will propose targets in the meetings, distribute relevant documents, set the target as a KPI standard (the result is many employees fail to receive enough salaries that they should receive), but doesn’t care the process at all. While many managers often complain that “strict management leads to stagnation, while flexible management causes chaos”, few of them ever make efforts in improving and controlling process, not to say the means needed to lessen unmarketable products, promotion segmentation and store merchandising improvement. No matter how they promote the importance of execution, there is no real inner-driver to push the execution, and thus, often makes the target set a pie in the air.
Solution:
Domestic CE retailers must seek for more efficient and more economical means of communication. A good example will be email communication. They can also print out some simple and concise manual for the employees on the sales front. CE retailers must lay emphasis on the improvement of retail technology and put it into practice through information system. Meanwhile, they also need to improve the human resource level, from planning, recruitment, training, assessment and career development. Right now some retailers just focus on training and ignore the practice, while the essence of retail is practice. Retailers have to be aware that practice after training is a key for retail practitioners to get improvement.
VII. Poor collaboration between different function areas and undesirable company institution
A common problem of some entrepreneurial business owner is that they are likely to rely on personal capability. They usually prefer outstanding personal capability to a good company institution in operating their business. Nonetheless, the biggest
6 7 advantage of a good company institution is its capacity of optimizing the overall profitability, even sometimes it also causes the loss of individual one. For example, 10 stores are operated in one model and each of them makes 6 million RMB margin. Then the total margin of these 10 stores will be 60 million RMB. While in another case of these ten stores under different business model, 9 of them makes 10 million RMB each but 1 store loses 40 million RMB. Then the total margin of the second model only totals 50 million RMB. It is quite clear that the first business model can make more money. Therefore we can conclude that as long as we can improve the efficiency of our company institution and standardize store operation model, the overall profitability will be sure, although may be slowly, to increase in the long run. Currently, the relationship between the function areas and their according operation units is still far from the ‘Articulation’ that Wal-Mart promotes. Many CE retailers prefer to push several function departments to take charge of one responsibility, which often causes retail stores receive different direction on same issue. Since store is the place for all the company functions to be implemented, how to organize different functions of retailers in a good way is very important for retail stores to achieve good operation performance. Another reflection of poor systematic collaboration is the immature conclusion, refinement and consolidation of experiences. There are often a lot of ideas but very few SOPs, which leads to the waste of many resources. Many CE retailers only have very superficial understanding on standards. On many occasions managers do not abide by standards at all (except making essential innovations). To many CE retailers, standard is just like a mill. The machine is one machine, but the output depends on what kind of crops is processed. Solution: The management team of CE retailers should progress the standardization, upgrade collaborative management platform, and keep their companies away from over-innovation. Although China’s domestic CE retail has already shaped itself into a large scale, it still takes a long way for the retailers to develop core competence, brand themselves, and enhance customer loyalties, and they must do so. Chinese CE retailers may suffer several hard years soon, but they are sure to embrace another spring after innovation.

翻译：徐欣