The maker of Dove soap, Lux shampoo and Comfort fabric softener warned in October of a 20% drop in its third-quarter China sales. The next quarter, the company announced another 20% fall.
Unilever blamed a slowing Chinese economy and a pullback by shoppers. But a close look at retailing trends in China suggests Unilever was also feeling the pain of the migration of hundreds of millions of Chinese consumers to online shopping.
An estimated 461 million Chinese consumers, a third of the population, are now shopping online, up from 46 million in 2007, when e-commerce started gaining momentum. China’s e-commerce market increased 49% last year—after gains in the prior three years of 59%, 51% and 70%, respectively. In 2013, China overtook the U.S. as the world’s biggest e-commerce market, and last year the country rang up $453 billion in sales online, 11% of all retail sales.
Nearly half of Chinese consumers are already buying groceries online, compared with just a quarter of global consumers, according to a Nielsen survey of 30,000 consumers. Last year, 42% of skin-care sales were online, the market-research firm said.
The shift is reverberating across China. Malls such as Beijing’s Zhongguancun electronics market, once packed with hawkers and buyers, have emptied out. Some analysts warn about related labor shortages, blaming “Taobao villages,” where residents who in the past would have gone to cities to fill low-skill jobs are staying home to run stores on Alibaba Group HoldingBABA-0.67%’s Taobao marketplace or to handle deliveries. Alibaba, meanwhile, aims to offer next-day delivery in 50 cities by the end of this year.
The shrinking role of large traditional retailers hurts the big consumer-products companies, who had dominated their store shelves.
“If we like it or not, e-commerce will change our business,” said Reinhold Jakobi, Nestlé China’s food-and-beverage managing director. “If you go online, everyone gets the same screen space.”
Lai Yan, a 26-year-old researcher at a Beijing-based technology consulting firm, says she now buys everything but her groceries online. When she was still shopping in stores she used to buy Procter & Gamble Co.s Pantene shampoo, but online she has more choices. “I change often,” she said.
Some top multinational retailers in China have either exited or are rethinking their goals there.
Best Buy Co.BBY0.00% sold all its remaining stores in China last year; its executives told investors on earnings calls that the electronics retailer struggled to compete with Chinese online rivals.
European retailer Metro AG pulled its consumer-electronics business from China in 2013, citing the market shift online.
Wal-Mart Stores Inc.,WMT-0.70% which entered China in 1996, no longer aims to be China’s largest retailer and it says it needs to work on its online strategy. Its store traffic in China has fallen steadily over the past three years. Wal-Mart said in April that its first-quarter traffic fell 8.9% from a year earlier; sales rose only slightly.
Copying strategies of Chinese rivals, Wal-Mart is now attempting to link its online arm, Yihaodian, with its stores via an app that lets shoppers order goods on their phones and either pick them up in a store or have them delivered. Yihaodian, which is a small competitor in Chinese e-commerce, has a strong foothold in shelf-stable milk, a popular Web product.
“Everyone is struggling to figure out what the best business model is right now,” said Matthew Crabbe, Asia-Pacific research director for consultancy Mintel Group Ltd.
Consumer-goods sales from the top 100 retail chains accounted for 8% of total sales in 2014, down from 11% in 2009, according to the research arm of DTZ, a commercial real-estate-services firm.
‘“If we like it or not, e-commerce will change our business... If you go online, everyone gets the same screen space.’
The Anglo-Dutch company entered the Chinese market in 1923, selling soap in Shanghai. It was kicked out when the Communist Party took control in 1949 but returned in 1986. Over the following decades, it developed one of the biggest networks of retail distributors in the country.
A Unilever spokeswoman attributed the company’s China declines to soft consumer demand, adding that the company hasn’t been slow to adapt online. The company’s online sales in China have more than doubled each year since 2012, she said. “Unilever China has been right at the forefront” of e-commerce growth among consumer-products companies, she said.
On Monday, Unilever said it is opening a store on Alibaba rival JD.com’s cross-border platform to sell brands including some products from its Lux shampoo line that are best sellers in Japan and that are being offered for the first time in China. The company already has storefronts on JD.com’s direct-sales site.
Unilever said it expects overall sales growth in China this year. Indeed, there are signs of stabilization. In April, it said first-quarter sales in China were flat, with personal-care product weighing down overall sales.
Demand has decreased markedly in China for many businesses. President Xi Jinping’s campaign, begun in 2012, to limit corruption and waste in state-run companies has cut into gift-giving and, thus, sales. Among the casualties were gift cards handed out to officials—which kept people shopping in brick-and-mortar stores—and the baskets of shampoo, soap and detergent that many state-owned companies gave employees.
Sales of nonfood items, which include shampoo and soap, fell 13% to 7.3 billion yuan ($1.18 billion) in 2014, according to market-research firm Kantar Worldpanel China.
But when other companies were warning in the first quarter last year of slowing sales in China, Unilever executives shrugged it off.
“We read a lot on what competition has to say,” said Mr. Huët in an earnings call last April. “We’re just happy about the scale, the margin and the competitive performance there.” By July, the tone had changed. “On China, there has been a big slowdown in Tier-1 cities,” the finance chief warned.
Making things worse for Unilever and others during this time, industry insiders say, was that they didn’t have adequate information to see that products were moving more slowly.
When foot traffic slowed in stores, the industry insiders say, some retailers quietly unloaded products to wholesalers, who sold them online or to mom-and-pop stores at a discount. This made it very difficult for companies like Unilever to get a fix on demand.
In announcing the 20% sales drop in October, James Allison, Unilever’s head of corporate strategy at the time, said he wasn’t sure how much stock Unilever had in supply in China. “It’s very, very difficult for us to be absolutely sure because the visibility across the extended supply chain in China is not that great,” he said.
By the second half of 2014, Unilever was doing damage control. With demand falling and retailers cutting inventory, the company made the decision to reduce promotional activity in an attempt to protect margins, which cut the amount of stock supplied to distributors even further. Unilever said the combined effect—known as destocking—was the 20% fall in sales for two consecutive quarters.
Unilever opened its first store on an Alibaba site in 2009 but consultants say it was slower than rival Procter & Gamble to put all its product on China’s e-commerce sites. That made its products harder to find and affected its Alibaba search rankings, which are heavily influenced by sales figures.
“If you are late to the game, then it’s self-perpetuating,” said Maureen Mullen, who leads digital research at L2, an e-commerce and digital-marketing research firm based in New York.