Walk down any busy street in China and you can see why German wholesaler Metro Cash & Carry is doing well here. No block is complete without several garish multi-level restaurants. These are possible customers of Metro, as are the hundreds of two- and three-star hotels in every city.
Finding and signing up these types of customers isn't easy, so Metro sends out special teams to canvass neighbourhoods. "We go street by street, house by house to see where our customers are, who has a business. Each customer for us is a profit centre," says Mr. Heinrich Bin, chief operating officer, Asia-Pacific for Metro Cash & Carry.
That approach has helped Metro sign up 1.5m businesses in China in the five years it has been here. It sold an estimated Yn4bn worth of meat, vegetables, dishes, mops and office supplies in China last year, says Mr. Oliver Heil, manager of the company's China operations.
Small business focus
About 40 percent of Metro's customers are hotels, restaurants and caterers; another 40 percent are small and medium-sized businesses, with food retailers making up the remaining 20 percent. Several leading hotel chains are among Metro's clients. In Chongqing, for example, the Marriott and Holiday Inn shop at Metro because of hygiene concerns at local markets, says Heil.
However, competition is more intense in primary cities, such as Shanghai. Here, for example, the Portman Ritz-Carlton goes to Metro to buy certain specialty food items, but little else. "We did a price comparison – it is cheaper for us to go straight to the supplier," says Mr Allan Leong, the hotel's director of purchasing. However, he does praise Metro's efficiency.
Metro has invested US$300m in 12 stores in China, stretching from the small coastal resort town of Qingdao in the north to the steamy inland city of Wuhan. That total will grow to 15 by the end of this year, as the group embarks on an ambitious expansion plan in Asia. "Here we see the future development," says Birr. The China stores are Metro's first in Asia.
The location of each new outlet is care-fully researched. The four Shanghai stores are all located on the outer edge of the city, next to a major highway. It's not an accident. "The major issue and key for success is location," says Bin.
Stores must have easy access to major roads and the company takes into account local car ownership levels. In addition, local regulations have to be considered. Some Chinese cities won't allow large trucks into the city centre, for example. The catchment area of each store in a flat city such as Shanghai is about 50 sq km, though it is less in a hilly city such as Chongqing. Metro also tries to cluster its stores to give it more purchasing lever-age with local suppliers.
Deciding which cities to locate in is equally well researched. Metro looks at the official data, then does its own survey. It's a full-time job. "We have a special expansion team," says Bin. "They do nothing else but locate new sites for stores."
Go into any Metro Cash & Carry, any-where in the world, and you will notice that they look the same. From the stainless steel shelving stacked ceiling-high with boxes of crackers and crisps to the aisles of ice-cream freezers and spotless refrigerated meat lockers, all Metros are identical. The buildings are even the same size – a 12,500 sq metre footprint with 8,500 sq metres of sales space. All Metros also have covered parking lots, so customers and suppliers can pick up and deliver during the worst of weather. China is no different. Duplicating operating procedures and store layouts is all part of the business strategy. "The cash and carry business concept has to be executed 100 percent the same," insists Bin.
Allowance for local tastes
That may sound like stereotypical German rigidity, but Metro does make allowance for local tastes in its product mix. Chinese like to support local brands, so 80 percent of the home appliances in the Metro store in Qingdao are locally-made Haier and Hisense brands, says Heil. Food tastes vary from province to province and Metro takes note. "In Ningbo they like salty food; in Shanghai they like sweet food," Heil claims.
Fresh produce is a Metro speciality. Heil compares the Chinese to the French in their appreciation of fresh food, and Metro's fresh vegetable and meat sections are impressive. Whole pig carcasses are delivered to the store, to be cut and packaged by Metro workers in a special refrigerated section. The area certainly smells better than the open-air markets still popular with most Chinese. The vegetable section has a few loose green varieties, but most are already shrink-wrapped and ready to go. "We want to sell more and more packaged goods. China is slowly accepting that packaging is more hygienic," says Bin.
The fresh meat and vegetables come from local companies, and Metro likes to portray itself as the local suppliers' friend. At a meeting in the central Chinese city of Chengdu, 500 potential new suppliers showed up to try to win a Metro account, says Bin.
Mr Wu Haining is certainly a Metro admirer. He is the head of the Shanghai office for the Jiangsu Furun Meat Processing Factory, which sells 500-600 tonnes of meat to Metro every month, about half of the factory's total sales. "Metro is a very good business partner," says Wu. "It pays on time and has a good reputation. It is fast in opening new chain stores nationwide, which has helped us to expand our sales network."
Good neighbour policies such as helping local businesses grow can be good for business in China. The central government named Metro a `pilot retail enterprise' in 2000, partly based on its positive impact on the local economy. Bin claims that Metro's fastidious record-keeping regarding how much value-added tax it owes also endears it to local governments.
"The government wants to know it can rely on you," says Bin. Perhaps because it carefully toed the line in China, Metro was the first foreign chain store to win a national retailing licence from the central government in 1999.
Most foreign retailers in China have to go through a painstaking process, getting central government approval for each new location, then finding a local partner. French retailer Carrefour was recently scolded by China's central government for opening stores with only local government approval. But Metro can open outlets nationwide with the same partner – Shanghai-based Jinjiang Group. Metro owns 60 percent of the joint venture, a relatively high stake that the group was only able to achieve through arduous negotiations with the central government.
Finding a joint venture partner in China can be a sobering experience, and some foreign companies complain that their local partners hinder the joint venture's development. Metro has enjoyed a better experience. The German company seems to have achieved a comfortable equilibrium with Jinjiang. Metro handles the stores, while Jinjiang looks after government relations and expansion. Jinjiang "does not intervene into the daily business," asserts Bin.
All six of the joint venture's stores that have been open for at least two years are profitable, although they have not yet attained a target margin of three percent. Overall, Metro is not yet profitable in China, but Bur says this is not a realistic ambition for a company in expansionary mode.
After China's enters the World Trade Organisation, restrictions on foreign retail operations will be lifted slowly. Metro is not worried about an influx of competition, though. "For sure we will have more competition, but being first means we can keep our position," says Bin.
Today, Metro's main competitors in China are the traditional wholesale markets. Each Chinese city has a traditional wholesale market made up of 400-500 small companies, Heil explains. The sellers there often don't pay value-added tax, and mix fake products with real products. Customers can't tell the difference.
That is one of the drawbacks of doing business in China. "There is still unfair competition because of all the counterfeiting issues," complains Bin. "For example, fake Lux soaps cost 50 percent less than our purchasing price. It gives a hell of a pressure on margins."
Another problem is local protectionism. For example, different cities will have different labelling laws to give local products the edge. That makes it difficult to form a nation-wide plan. "Whenever we go to a place, we have to analyse it like a different country," Heil rues.
And despite its national licence, laws that favour local businesses make opening new stores a headache for Metro. "There is still unfair treatment between locals and foreigners. We don't have the same land and rental prices, and local chains get cheaper loans," continues Birr.
Metro Cash & Carry is part of Germany's Metro AG, a Dusseldorf-based, Frankfurt-listed conglomerate encompassing whole-sale and retail food operations, consumer electronics, home improvement stores and department stores. The Cash & Carry whole-sale food operations accounted for 45 percent of the group's ?46.3bn in 2000 sales.
Asia is the focus of Cash & Carry's future growth plans. The company recently signed an agreement to open three stores in Vietnam and is in talks for stores in India. However, China remains the priority in Asia.
Metro refuses to predict how many new stores it will add in China next year, partly because of time-consuming local land negotiations. But China's western region is a good bet. That would have the advantage of fitting in with Beijing's plan to develop that region.
"We promised the central government not only to expand on the coastline, but also to the west," explains Bin. "You have to go there to be here."