China’s Retail Market Restructuring and Future Outlook

Author: Greater China Team

The blog post was written by the Greater China Team, Caleb Washington and Yikai Ma, interns in APCO’s Shanghai office.

China’s retail recovery remained sluggish and highly uneven in H1 2026. Goods consumption increased just 1.1% year-on-year, far below the 5.3% rise in services spending. Meanwhile, e-commerce continued to outperform physical retail, expanding 4.8% compared with 1.3% for overall retail sales. Among brick-and-mortar formats, convenience stores and supermarkets remained the strongest performers, posting gains of 6.6% and 3.8%, respectively, while department stores saw a 2.1% decline.

As consumer spending increasingly shifts toward services and convenience-oriented formats, traditional retailers face mounting pressure to adapt. In response, the Chinese government is seeking to unlock new consumption drivers through restructuring the retail sector. China’s 15th Five-Year Plan and recently issued policies identify new retail formats, online-offline integration and multi-format convergence as key priorities for modernizing the sector.

Current Policy Framework

In July, the Ministry of Commerce (MOFCOM) released Opinions on Accelerating Innovation and Development in the Retail Sector and the 15th Five-Year Plan for Expanding Consumption, outlining a new policy framework for revitalizing physical retail.

A central objective of the framework is to create new consumer demand by promoting more experiential consumption. Recognizing e-commerce’s advantages in convenience and speed, the Chinese government is encouraging physical retailers to differentiate themselves through stronger experiential offerings. One key approach is the development of a “Retail+” ecosystem, a hybrid business model that integrates physical retail with entertainment, culture, dining and tourism services. By bringing together multiple consumer needs within a single space, Retail+ provides value-added services that increase customer engagement while encouraging repeat visits.

The new policy framework also promotes emerging business formats aimed at reducing search costs and wait times. One example is the online-to-offline (O2O) approach, which allows customers to place orders online and complete purchases in physical stores. Another is instant commerce, which leverages local inventories and rapid delivery networks to meet immediate demand, creating a more seamless shopping journey and encouraging more frequent purchases.

Beyond business model innovation, the framework promotes a “One Store, One Policy” approach to upgrading physical retail assets and reducing homogenized competition. It encourages legacy retailers to develop distinctive concepts rooted in local history, culture and consumer preferences, supported by tailored store redesigns and facility upgrades. By fostering greater differentiation, the initiative aims to revitalize underperforming commercial properties and enhance the competitiveness of brick-and-mortar commerce.

Finally, the policies underscore improving product and service quality to strengthen consumer trust. Notably, MOFCOM has publicly cited the leading domestic mall and grocery store operator Pangdonglai as an industrial benchmark. Known for its rigorous quality standards, cost-effective products and customer-centric services, Pangdonglai has emerged as a model of building consumer trust and loyalty. Several of its practices have been incorporated into the new policy framework, including transparent weighing, family-friendly facilities (such as nursing rooms) and more customer-friendly return policies, aimed at delivering concern-free services and raising service standards across the retail sector.

Looking Ahead

The latest policies indicate three clear signals that are expected to continue driving China’s retail recovery in 2026 H2:

1. Given the government’s target to raise total retail sales from RMB 50.12 trillion (~USD 7.43 trillion) in 2025 to RMB 60 trillion (~USD 8.89 trillion) by 2030, retail is likely to remain a policy priority in China’s medium-term growth strategy. Future policies are therefore expected to continue supporting retail expansion.

 

2. The Chinese government is shifting its focus from subsidy-driven consumption growth to broader improvements in the consumer environment, which could support more sustainable retail development over the longer term.

 

3. Competition is likely to extend beyond price, with retailers placing greater emphasis on product quality and service standards. These policies could strengthen consumer confidence and support more sustainable retail growth over the longer term.

 

However, structural challenges in the Chinese economy remain the greatest source of uncertainty for sustained policy implementation. Although the policies include measures to promote employment and raise household incomes, these provisions remain broad and focus primarily on expanding job opportunities and income growth. Factors such as job insecurity, inadequate social safety nets and weak income expectations continue to weigh on consumer spending, even as consumers place greater emphasis on quality. Without additional demand-side stimulus measures, the current policy framework may have limited impact on improving consumer confidence.

The policies also provide limited clarity on how to address the structural cost disadvantages faced by brick-and-mortar retailers relative to e-commerce platforms. Many physical retailers remain exposed to developments in China’s real estate market, with high rental costs continuing to impose significant operational pressure. Whether retail innovation alone can overcome these structural constraints remains an open question.

Implications for MNCs

Consumer-facing multinationals should continue to closely monitor evolving government priorities in the retail sector and align with them where appropriate. Companies should strengthen their instant retail capabilities by leveraging China’s advanced logistics networks and on-demand delivery platforms to meet rising expectations for speed and convenience. Beyond fulfillment, AI offers opportunities to create more engaging customer experiences through personalized recommendations and virtual try-on services. At the same time, foreign brands can deepen localization efforts by incorporating local cultural and historical elements into store concepts and product offerings.