Retailing in China's major cities has become very competitive despite the restrictions on foreign participation, writes Tina Helsell of Pacific Rim Resources (PRR). In this environment, promotional tactics are increasingly used to attract customers.
China's retail sector has grown rapidly in recent years, particularly in the largest cities where the average household income has doubled between 1993 and 1997 (see box). Retail sales in these urban centres have risen more than 25 per cent a year since the early 1990s.
The number and types of outlets and the products which they sell have also grown considerably. For retailers and their suppliers, China's fast growing consumer market represents an opportunity and a challenge, particularly as the competitive environment becomes increasingly fierce. Three types of stores are developing quickest in China department stores, supermarkets and chain/club stores.
There are dozens of small state-owned department stores in China but only around 20 whose annual sales exceed US$100m. Each earns virtually all of its revenue from a single outlet. The Chinese government is eager to develop its retail sector and is strongly 'encouraging state-owned retailers to form. partnerships with foreign chains. With the government still in control of all retail property and wholesale/retail distribution, partnerships are crucial to market entry.
A number of chains have entered the market, primarily from Japan and Hong Kong. Under present Chinese policy, larger-scale, retail joint ventures (as opposed to boutique-type operations) are permitted in 11 of China's cities and special economic zones. They are defined by PRR as those with central government approval and annual sales in excess of Yn 100m (US$12m). To date, 18 such large-scale ventures have been established with State Council approval, including ones involving Seibu and Isetan of Japan, Yaohan and a series of retail operations from Hong Kong, Singapore and Malaysia. State Council approval means that retail joint ventures have direct import/export authority and can import up to 30 per cent of the value of goods sold each year. Provincial and municipal authorities have approved dozens of smaller joint ventures which do not qualify for import/export privileges.
In 1997 there were more than 1,000 super-markets doing business in Beijing, Shanghai, Guangzhou and Shenzhen. The typical size of a Chinese supermarket measures between 300 and 700 sq metres. Stores in Shanghai and Beijing tend to be larger than outlets in other cities, with the newer supermarkets exceeding 1,000 sq metres. In Shanghai, government regulations stipulate that all new supermarkets carry at least 2,500 stock keeping units, or product types and refrigerated display cases. This latter regulation has created new opportunities for manufacturers of frozen foods and related products, such as microwave ovens and microwavable cookware. In some of the larger outlets, foreign suppliers are pursuing joint marketing campaigns to demonstrate how to prepare and display frozen foods.
Of Shanghai's 1,000 supermarkets, the Hualian and Lianhua chains control about 80 per cent of the market. They represent domestic companies operating and expanding very quickly with foreign partners. Hualian plans to add 90 outlets in Shanghai this year, while Lianhua has plans for another 145 out-lets in Shanghai and its outlying areas.
Yaohan's China supermarket operations were recently acquired by Royal Ahold, whose ambition is to become the largest foreign supermarket operator in China, and the fourth largest in Shanghai. The acquisition has doubled Royal Ahold's presence in Shanghai, from 20 to 40 stores. By September 1998, the former Yaohan supermarkets will be converted to Royal Ahold ownership and renamed Shanghai TOPS stores.
Although Yaohan has abandoned ambitious plans to build supermarket chains throughout China, it remains a major player in the department store sector. Shanghai No. 1 Yaohan Co. manages Shanghai's largest department store in the Pudong Landmark Nextage building. Yaohan's investments in a large-scale shopping mall in the Shanghai suburbs, the International Merchandise Mart, are still underway as well.
Foreign investment in China's retail sector is to be further broadened by a pilot scheme allowing chain store joint ventures in selected key cities. Foreign chain stores such as ,Juseo are already active in China, but are operating under arrangements with local governments and a relatively restricted business scope. This new pilot scheme involves approval by the central government and allowing successful applicants with import/export authority, and ultimately the right to engage in wholesale trade.