December marks another shift of the seismic plates. In only weeks, China will lift restrictions on foreign retailers. Rules limiting their activities to specified locales, limiting network growth and mandating other assorted hurdles – will be officially jettisoned into history. Wal-Mart, Carrefour and other big foreign chains, which have so far been allowed only selected nibbles of China's US$240 billion retail market, will get down to serious business.
Local players have been rushing to fill out their flanks. Shanghai Lianhua Supermarket, with 2,706 outlets, said it would boost its fast growth, largely by acquisition, adding 700 new hypermarkets, supermarkets and convenience stores in 2004 alone. China's chains have to get moving because offshore retailers, which have hitherto had to operate as joint ventures, will be able to operate as wholly-owned ventures anywhere they like.
Carrefour had first half sales of RMB 7.76 billion (US$934.9 million); Lianhua, a unit of China's largest retailer, Shanghai Bailian Group, had turnover of RMB 5.24 billion (US$631.3 million) and Wal-Mart RMB 3.72 billion (US$448.2 million). Lianhua posted a first half profit of RMB 107.17 million, up 25.9% on 2003's first half. Lianhua has 34 hypermarkets, 1,192 supermarkets, including seven joint venture outlets with Carrefour.
That China's retail market is distorted is plain by Wal-Mart's ranking on the Mainland. It comes in only at 17th place even though it has been in China since 1996, starting what is reported to be an eight-year losing streak, including losses last year of RMB 40 million.
French giant Carrefour, which arrived in 1995 and turned in its first profitable year in 2003, is China's biggest foreign retailer and ranks number five overall.
In the US, Wal-Mart steamrollers everything in sight, thanks to aggressive buying and pricing and sheer size. It is unlikely to stay in 17th place for long. In 2005, it plans to open 20 stores, three of them in Shanghai, where Carrefour already has seven. Expansion will bring Wal-Mart's store count up to nearly 60.
Carrefour opened 27 stores between 1995 and 2000, some joint ventures with local governments and unauthorized by Beijing. That moved China's State Council in 2001 to order the chain to stop opening outlets – an order that turned out to be merely a speed bump on Carrefour's expansion road. It immediately opened another eight stores in 2002.
On paper, Carrefour and Wal-Mart look like they have their work cut out, battling against the local EWuMarts and Lianhuas. Between the two chains, they operate only 200 stores, ringing up around RMB 20 billion in sales in 2003. China's top four retailers by sales have over 5,200 stores that generated 2003 sales of RMB 98.1 billion, or US$12 billion, according to the Ministry of Commerce.
Put another way, China's top retailers generated five times the sales of the world's top two, but required 50 times as many stores to achieve them.
Lianhua's strategy of opening many hundreds of outlets a year suggests it wants to locate stores in every nook and cranny consumers are likely to turn. Wal-Mart's strategy is based on having stores so big there will be no need to shop anywhere else, requiring shoppers to go longer distances less often. Wal-Mart's smaller number of giant stores makes distribution tidier and cheaper. As China's roads and transport infrastructure develop and distances fade, the future would seem for now to favor the Wal-Mart approach.
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