There’s not much you can’t find at Carrefour’s flagship Shanghai hypermarket in the well-heeled suburb of Gubei. It may still trail its sister stores overseas in customer service but, in most other respects, it fulfills all the requirements of a one-stop shop.
In addition to hypermarkets, open-air markets offering a wide range of fresh seasonal produce and meat can be found in most neighborhoods, and convenience stores and small to medium-sized supermarkets dot the urban landscape.
For Angela Cui, a Shanghai office worker in her 20s, there is no shortage of choices as to where, when and how often she shops.
"If there are lots of things that I want then I will go to Carrefour," she said. "If I don’t want a lot of things I will just go to my local supermarket."
This newfound choice is a direct result of the rapid modernization of China’s retail space, much of it at the expense of the traditional mom and pop retail format that until recently characterized the Chinese shopping experience.
In turn, Cui is part of the new generation of middle-income Chinese consumers that are driving this modernization, and providing a powerful magnet for global large-format retail chains like Carrefour, Wal-Mart and Best Buy.
National Statistics Bureau figures show China’s retail market grew 12.9% last year to ring up US$850 billion in sales. Ernst & Young estimates the sector will grow 12-13% this year to US$950 billion, before stabilizing at 14% annual growth until 2010, at which point annual retail sales will have hit a massive US$1.6 trillion.
While no one player is winning significant market share, as a group the modern retailers are making steady progress.
ACNielsen research shows that although the number of retail stores in China only increased 2% in 2005, the number of modern retail shops – hypermarkets, supermarkets and convenience stores – rose by 25%, with one new outlet opening every minute (See: Getting fresh).
"Three and a half years ago there was only one or a handful of retailers with more than US$1 billion in turnover," said Accenture Greater China retail business senior executive Joe Mueller. "Now we are approaching 30, and that says it all about the massive growth we have had here."
In the 20 years since China began opening its economy, around 80 foreign retailers have commenced mainland operations. Grocery chains and convenience stores were the first, followed by consumer electronics, do-it-yourself and apparel retailers.
The pace of entrance accelerated at the end of 2004 when China lifted barriers to foreign entry in line with WTO obligations. Ministry of Commerce figures show 187 foreign-funded retail enterprises were approved last year, six times the number in 2004. Two-thirds of those applications were from fully foreign-owned groups.
The pace of mergers and acquisitions also rose, with many entrants targeting existing joint venture partners. Late last year, Carrefour, the world’s number two retailer, acquired three of its hypermarket joint ventures and has said it has its sights on up to 10 local retailers.
As CHINA ECONOMIC REVIEW went to press, Wal-Mart announced it had joined the buying spree, leading a US$1 billion race to buy out China’s second biggest foreign hypermarket chain, the Taiwan-owned Trust-Mart. The bid, which still requires regulatory approval and has also piqued Carrefour’s interest, would more than double the US giant’s mainland presence (See: When in Rome).
It is not just the grocery chains. Do it yourself retailer B&Q bought out German home decor company OBI’s China operations last year and wants to open 100 new stores in five years. In May, Best Buy, America’s leading consumer electronics chain, took a 75% stake in home appliance retailer Jiangsu Five Star Appliance.
Two months later, Gome, China’s largest electrical appliances chain store, retaliated with the purchase of China Paradise, its main competitor and the third ranked player in the market.
According to Ernst & Young, retail mergers and acquisitions were worth US$1.4 billion in 2005, about 3% of total M&A activity in China last year. And there is plenty of space for further deals, with China’s top 100 retailers – 45 of which are state-owned, 32 privately-owned and 23 foreign-owned – sharing less than 10% of total retail sales.
In the M&A stakes, cash rich foreign retailers have a natural advantage over domestic competitors, said Yang Fan of market research group Euromonitor International. The top seven durable goods manufacturers in China generate about US$17.5 billion in annual sales, against the US$24 billion raked in by Best Buy.
"One company in the US can easily acquire the top seven in China," he said.
According to a report released by Euromonitor in September, the government hopes to compete with international retailers by developing 5-10 major retail chains via mergers, restructuring and investment.
"The government has to abide by WTO rules but it has invested a large amount of money for top retailers to expand networks," said Yang. "This support will continue for the next few years to help them compete with foreign retailers."
Domestic competition is led by the listed conglomerate Shanghai Bailian. It was set up in 2003 by the Shanghai government as a loose organization of six listed companies, including competing food retailers Lianhua and Hualian.
The group is China’s number one chain-store operator, with sales of US$4.85 billion in the first half of 2006.
But there is more to the government’s efforts than xenophobia, explains Selina Sia, head of China consumer research at UBS, with domestic realities rather than any nationalistic impulses driving government efforts to consolidate the sector.
"Consolidation is a win-win situation," she said, adding there was little evidence that foreign entrants were offering a serious threat to domestic dominance. "The smaller ones will be forced out but they will get good compensation when they close down, and the bigger chains will benefit from enlarged market share."
However, low entry barriers to the industry mean this will be a slow process.
"We have seen this industry growing for a sustainable number of years. Once that happens it appeals to new entrants even though consolidation is still happening. That will be a repeating pattern for the next 5-10 years at least."
New entrants face a rapidly closing window of opportunity according to an annual study of emerging retail markets.
China dropped from fourth to fifth place in AT Kearney’s 2006 Global Retail Development Index, released in April this year, behind Russia, Vietnam, Ukraine and first placed India. While undoubtedly big and still growing, China’s retail market is one in decline, the report said, with space for new entrants becoming tighter as a result of rapidly increasing competition from incumbents and recent entrants.
Fadi Farra, lead author of the report, said the results underlined the importance of timing: there is a 5-10 year window for entry into an emerging market.
"China was number one five years ago. Now China isn’t the place to be: India is."
But it isn’t the end of the road for retailers in China, although saturation in key tier one cities means new entrants may have to hit the road in search of new opportunities.
Shortage of space
As a testament to the overcrowding in the main centers, Jones Lang LaSalle’s large format retailing rental series shows the indicative rental prices for supermarkets, electronic stores and big box discount retailers in Shanghai grew 21% between January 2004 and July 2006.
"All the big retailers are facing shrinking profit margins, particularly in Beijing, Shanghai and Guangzhou where available outlet resources are decreasing," said Euromonitor’s Yang.
"It is very difficult to find a good location. This has already been a big problem, even for Wal-Mart and Carrefour."
As a result, they are starting to look further afield. Accenture’s Mueller said retailers are paying close attention to the government infrastructure initiatives to boost investment in western China and other less-developed areas, as set out in the latest Five-Year Plan.
"Where is this investment going and where is the infrastructure being built up? Companies are using satellite imagery to see where infrastructure is changing month to month and where they think the urban centers are being developed."
As foreign retailers increasingly look to untapped areas, domestic operators may begin to feel the bite from competition, said Yang. "If they can get a new outlet in a new city, with their brand they can easily beat out the small players."
That brand pull should not be underestimated. "I choose Carrefour because I don’t know what else is around," said Shanghai’s Cui. And there is little reason to doubt that those following her up the income ladder will feel the same.
When in Rome
Flexibility is paying off for Carrefour, the world’s number two retailer, in its battle against top ranked Wal-Mart for China sales
The tightly regulated and efficient operation that has enabled Wal-Mart to become the world’s top retailer is as an impediment in a nation plagued by supply chain nightmares and a geographical and cultural landscape that fights tooth and claw against uniformity.
"Wal-Mart is supply chain-driven," said Accenture Greater China retail business senior executive Joe Mueller. "They are world class in that and they have tried to take that and come here and as a result they may not be hitting all the consumer preferences around the stores that they have set up."
Last year, the US retailer, which operates 60 locations in 30 cities in China, hit US$1.2 billion in sales, far inferior to the US$2.2 billion generated at Carrefour’s 79 stores in 32 Chinese cities.
"The Carrefour model is very much around the Chinese consumer, looking at each store on its own merits and driving it based on what the consumers want in those stores and then improving it continuously," said Mueller. "They are trying to adapt themselves to the local market rather than just take their global footprint and just slap it in here, and their results are proving that."
It is not the first time that Wal-Mart has misjudged new markets. An embarrassing US$863 million exit from Germany this year was blamed on tough competition from domestic discounters and a lack of product appeal to consumers, while a similar pullout from South Korea came amid criticism that product assortment and store layouts were not adapted to local tastes.
Hainan Mu, general manager of consultants CSSL Group China said that Wal-Mart has realized its errors and was now looking to localize its approach. "China is a unique market," he explained. "If you just copy the same system from the States or from Europe it might not be workable in China, as Wal-Mart has found."
It may have already lost ground to its principal global competitor, but the war is far from lost. If Wal-Mart is successful in its recently revealed US$1 billion bid for Trust-Mart, the number two foreign hypermarket in China, it will not only more than double its mainland presence, it will also inherit a winning formula and haul itself right back to the front of the foreign pack.
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