Our Thoughts > Should retailers still care about how many locations they have in China?
Should retailers still care about how many locations they have in China?
...or is it time to stop worrying about location count?
getcheehas been working in China for over 10 years. In the early part of the last decade, store development managers saw a blue sky market with strong potential no matter where they opened a new store. I clearly remember one store network manager for a major auto company describing potential in China to be “like a watermelon — no matter how you slice it, you always get a juicy piece.”
As the decade wore on, this build-it-and-they-will-come approach to network development started showing signs of trouble. Our observations of the marketplace and recent work with clients show that retail brands are starting to place much more emphasis on per-store productivity by putting the right store format in the right location.
For many retail brands, the amount of stores you had in China used to be the headlining statement on success in China. But in mature markets it can be difficult to find information on the number of stores (try a web search for “number of KFC stores” and you will quickly learn that there are about 5,000 KFCs in China, but you won’t easily find out how many there are in the US). And for many sectors, China is rapidly maturing.
Although trumpeting a big store count is not surprising — China is a big market and brands want to show that they have a big network — but as the global economy slows, competitors grow, and Chinese consumers become more sophisticated, it can be a distraction to focus too heavily on store number only. Moreover, for apparel and other durable consumer goods, rapid expansion in store count may be a sign that management may not have a good handle on driving sales through existing stores.
There are many signs that a market is maturing, but a clear one is certainly the rise in importance of tracking same-store sales. This metric is taking great prominence which is a change from the past. In November last year, Yum!’s New York listed stock price fell 10% when the company announced that KFC same store sales would grow by only 6% in 2012. Yes I know, strange to use the word “only” here, but in 2011, same store sales for KFC in China was 20%, and the overall retail market in China grew around 13%.
So when thinking about a retail store network, the question needs to be one of productivity. Sales per store, or even better, sales per square meter. This is, of course, not a surprise and many brand owners have made the shift from “outsourcing” product distribution through partners to taking retail sales operations back in house. Moves by Esprit and Burberry in the past few years are some of the biggest examples of this. More recent entrants into China such as Carl’s Jr. are also looking for much more control over their points of sale.
There are many factors of retail operations that drive productivity, starting way up the value chain with brand image and product quality. As you move closer to the point of sale, however, the question of store location and proper store network management take a very prominent role in impacting same-store sales.
A good location means foot traffic, regular customers, and stable growth revenue. But how to choose the right location?
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