Shanghai used to be called a shopping paradise because of its high concentration of shops and consumers. For its retailers, though, the city has become more like a battleground than a heaven. A weak economy and more market entrants have turned Shanghai's retail industry into the most competitive in the country.
In this city of 18 million people and a compact laid-out downtown, shops are everywhere, in the furthest suburbs and on the most obscure street corners. There are an estimated 400 department stores, 1,000 supermarkets and 1,400 convenience shops that are open up to 24-hours a day.
As recently as 1991, there were no chain supermarkets or convenience shops in Shanghai, served then by traditional mom-and-pop shops and fresh-food markets. Butonce the government decided to promote retailing to boost the local economy, hundreds of new retail outlets were born each year. In 1998 alone, 105 supermarkets and 206 convenience shops were set up. There are now an estimated 150 stores with a business area of more than 5,000 sq metres.
In the early 1990s, Shanghai could easily absorb a large number of new shops each year because its economy was growing at double-digit rates. In the last two years, however, the city has run out of steam, making life difficult for retailers. Last year, Shanghai's retail sales grew a year-on-year 11 percent to Yn147.1bn, half the annual average rate of 21 percent between 1991 and 1997.
Selling to Shanghai consumers, who already own more electrical appliances and other consumer goods per head than the rest of the country, is not easy. Weaker players have already disappeared. The Friendship Gifts Shopping Centre on Nanjing Road and Shui Hing Department Store on Huaihai Road shut down in 1997 and 1998 respectively. The bankrupt Yaohan group of Japan sold out its stake in the Nextage Department Store in Pudong to its joint-venture Chinese partners. Numerous small grocery stores were also wiped out by the bigger supermarkets.
Mr Norman Sze, partner of Arthur Andersen (Shanghai) Business Consulting, expects more consolidation of the retail industry this year. "There is too much supply and too much duplication of merchandise," he says. Another retail analyst agrees: "Go to Nanjing Road East, where all the big department stores [are located]. They all sell the same things." A recent article in China Daily revealed that the shopping centres on this street reported a fall in retail volume during this year's Spring Festival compared with the same holiday season last year. The news-paper blamed the poor performance on uniform store layout and products.
Competition has concentrated on price, squeezing the margins of retailers badly. In the first four months of this year, 40 percent of the 53 major department stores in the city registered losses, official statistics indicate.
The rise of supermarkets
Department stores have been hit the hardest because new retailers are taking away their market share. The traditional Chinese department store sells everything from electrical appliances and apparel to food and furniture. Now, supermarkets have taken much of their food business away, while specialty shops encroach on their other product lines.
Department stores also are competing among themselves, as more shopping malls have opened up in new districts. For instance in Xujiahui, once a quiet area in north-east Shanghai, there are six big department stores at its major crossroads.
So intense is the competition that even the city's best-selling store, Shanghai Number One Department Store, has asked an international consultancy for business advice. The shop wants to upgrade its image from being a mass-market store for bargain-hunting Chinese from outside Shanghai. "We told the company it had to be careful in changing its focus, or else it could risk losing its traditional clientele without getting new ones to compensate for the loss," says a retail analyst at the consultancy.
High-end retailers, such as Dickson Concepts, Maison Mode and Printemps, also are not doing well in the current climate. These retailers, which carry international brand names, used to enjoy very high margins as China's nouveau riche were keen on lavish consumption. Now, these same customers can travel worldwide to buy the same products. "Our competitors are retailers in Hong Kong, where many rich Chinese people can go freely now," admits Mr. Frank Lo, a director of Printemps.
For low-to-middle-grade department stores, the biggest threat is chain supermarkets, a new retail genre in China. Chain supermarkets provide easy shopping, bargain prices and consistent quality, making them an instant success in Shanghai served for decades by inefficient state grocery stores. From a zero base in 1991, chain stores now account for 12.5 percent of all retail sales in the city – and the share keeps growing. All the top chain supermarkets, such as Hua Lian and Lian Hua, enjoy high double-digit annual sales growth.
Call for protectionism
Retail chain stores in Shanghai fall into three categories. One is the hypermarket, large warehouse-like stores of at least 10,000 sq metres and offering more than 10,000 varieties of goods at rock-bottom prices. The French chain Carrefour opened the first hypermarket in January 1995, followed by Auchen, also from France, Metro of Germany, Lotus of Thailand, E-mart of Korea and Ding Xin and RT-mart of Taiwan. All the stores are joint ventures with Chinese partners. Together, the eight hypermarkets account for 20 percent of all supermarket sales.
The second and most common type of chain store are small-to-medium-sized stores of 700-1,200 sq metres. Hua Lian and Lian Hua dominate the sector, each with 300-400 outlets. The third and newest format is the round-the-clock convenience shop, which include the likes of Lawson, Basic and 24-hour.
Sze of Arthur Andersen believes that the supermarket industry is close to saturation, although there is still room for expansion in newly developed residential districts on the city's outskirts.
In face of greater competition, Shanghai retailers are pleading with the government not to approve new retailers, especially from abroad. Says Mr. Liang Wei, deputy general manager of Lian Hua: "Our rivals are the giants from the outside, like Carrefour and Metro. They have more experience, modem management and capital in running big stores. They also can source goods globally, keeping their operation costs low." Liang warns that, if the government continues to open the door to retailers in an indiscriminate way, some chain stores will have to shut down soon.
Newcomers to face stringent rules
Shanghai appears undecided what to do next with foreign retailers, even though the central government has laid down more restrictive conditions for joint venture retail operations. In a circular issued last August, the State Council ordered that joint ventures must not engage in non-retail businesses, such as wholesale, and that they should be majority-controlled by Chinese partners.
Industry sources say that most retail joint ventures in Shanghai do not meet the restrictive requirements but none has made big adjustments to date. Mr Peter Come, a lawyer at Simmons & Simmons in Shanghai, believes that newcomers, rather than existing operators, will have to comply with the more stringent rules.
Another source adds that, in the current poor economic climate, the Shanghai government is reluctant to make life more difficult for foreign businesses by demanding they comply with the new Beijing rules. In any case, few Chinese partners in these ventures have sufficient money to raise their stake to over 50 percent, as required.