In line with its commitment to the World Trade Organization, China lifted the restrictions on territory, equity and business scope for foreign retailers on December 11, 2004. According to the policy, foreign enterprises may now open wholly-owned stores of any size in any city in China. The elimination of restrictions limiting foreign retailers to joint ventures in a handful of cities and provincial capitals means that competition in the Chinese market is bound to intensify.
According to a newly released forecast report on China’s retail industry, China’s 2004 retail sales are expected to reach $600 billion and, with the nation’s middle class expanding, will continue to enjoy steady growth at an annual rate of 8 to 10 percent over the next five years. So far, 70 percent of the world’s top 50 retail conglomerates have established footholds in China. These include Wal-Mart of the US, Carrefour of France, Metro AG of Germany, ItoYokado of Japan and Thailand-based Lotus.
Carrefour, the world’s second largest retailer—which opened its first Chinese outlet in 1995—now has 53 stores in China and posted sales revenue of US$1.6 billion last year. To strengthen its leading position, Carrefour has announced that it will open 15 more stores in China in the coming months. Many analysts believe Carrefour’s “unprecedented” rapid expansion, to some extent, was based on questionable approval from some local governments, who advanced the market liberalization timetable to further local interests.
Metro AG has said it intends to increase its Chinese store count by more than 50% to 33 by the end of next year. The focus of the company’s market expansion lies in small and midsize cities near big cities, such as Nantong, as well as urban areas in Central China.
Wal-Mart opened its 40th store in Wuhan on November 2, 2004. Wal-Mart will take advantage of the new policy to open more stores in China’s tier-2 or tier-3 cities or even rural areas, capitalizing on Wal-Mart’s experience of starting in small towns in the U.S. In spite of relaxing the ownership restriction, Wal-Mart officials expressed their intention to continue to work in joint ventures. By so doing Wal-Mart can incorporate more local knowledge and expand through effectively taking over the well-developed distribution and retail networks as well as the market shares of their local partners.
The Chinese retail market is transforming from a small-scale, highly fragmented, provincial operating model to a modern, large-scale cross-regional one. However, no dominant player has yet emerged. The sales of Bailian Group, China’s leading domestic retailer, was US$373 million in 2003, equivalent to only nine days worth of sales at Wal-Mart. The foreign retailers’ rapid expansion will profoundly change the landscape of China’s retail industry and present a challenge to Chinese domestic players. Although having been alerted to the danger of “the coming wolf” for a long time, Chinese domestic retailers are still too weak to compete with their foreign counterparts in terms of capital availability, technology, real-time control of materials, costs, financial status and personnel management.
Although the Chinese market looks like a bonanza, any company doing business in China today must understand the nature of China’s market, consumerism, distribution network, and habits. Retail analysts warn that it is a mistake to think of China as one market. Each city is a separate market, with its own quirks and local regulations. Successful entrants to China’s retail market should focus their efforts on resolving key issues, including poor logistics infrastructure, an unskilled labor force, regional diversity, an ambiguous legal environment and a lack of accurate retail market data.
China has a golden rule for business: “You have polices above; we have counter-strategies below.” Some shrewd foreign businesses have learned to assimilate this golden rule into their business strategies. One such strategy is to license Chinese retailers the right to carry the products of foreign companies as a way of expanding into China. Another is to form joint-venture ‘consulting firms’ to take over the management of domestic stores. A third is to lease part of the operation from a Chinese retailer and conduct their own business under its shell. A fourth is to develop commercial real estate through joint ventures and then lease out the retail facilities to domestic firms, while maintaining control of their businesses.
It is recommended to retain experienced local experts before venturing into China. This can be a consultant or lawyer who is familiar with local business practices. This expert can help run a market study to assess consumer behavior and the past performance of other failed and successful retailers. Guidance on major shopping areas, rental levels, target groups, revenue stream, market positioning and financial analysis can be critical information for the new business. Further help could be provided in site selection and location, taking into consideration legal issues such as building height, zoning and consumer profiles. For assistance in such matters, please contact Daqin Zhang at dzhang@kmclaw.com.