Vulnerable to a downturn

The processed food market in China 'attracted considerable investment in the mid-1990s. Most of the major multinational food companies now have plants across the country.

However, profits have been hard to come by and one of the major brakes on a more rapid development of the processed food market in China has been the fact that the food retail sector has been very underdeveloped. This situation is now changing, with food retailers following their producer sup-pliers in investing in the mainland.

First wave of investment

Although foreign investment has been allowed by Beijing since the late 1970s, some sectors were ring-fenced to protect domestic companies, most of which are state-owned. It was not until 1992 that foreign investment in retailing was first allowed, although restrictions still remain today. For example, foreign companies can only operate through joint ventures, and they are not allowed to import the goods which they sell.

The first wave of investors included Ise-tan and Seibu of Japan, Dickson Concepts of Hong Kong and Printemps of France. They tended to focus on high quality non-food items, but over-estimated the real demand for such goods. The number of consumers rich enough to buy designer labels is still very small and many of the shops became `shopping museums', attracting sightseers curious to gaze at the high-priced imported goods but unable to buy them. Few made any money and many were forced to trade down. Parkson, for example, is a subsidiary of the Lion Group and operates the largest retail chain in Malaysia. The company opened its first store in Beijing in March 1994 but low sales forced it to move away from luxury goods and to focus on household items instead. The company has since expanded to Chengdu, Chongqing, Shanghai and Wuhan, with all stores selling discounted mid-range goods.

Retailing then followed a similar pattern to food manufacturing, but over a much shorter period of time. After the initial trail-blazers, things quietened down for a couple of years until the mid-1990s. This periodcoincided with the economies of Europe and North America emerging from recession and continued growth in the Chinese economy. By 1998 Seymour-Cooke's research was able to identify about 40 confirmed foreign investments in food retailing in China, with the Chinese government having awarded around 200 licences permitting companies to set up retail joint ventures.

Retailers from four main regions have been attracted to China. Japanese companies have tended to focus on department stores, although Daiei has signed an agreement to invest in 24-hour convenience stores through its Lawson format, which has more than 6,300 outlets throughout Japan. The European and American companies which have been attracted to China have been supermarket and hypermarkets operators. Carrefour, the French market leader, now also leads in the hypermarket sector in China, and will have 11 stores open by the end of 1998. Wal-Mart has three stores in and around Shenzhen. Metro, the German retailer, is due to open its third store in Shanghai in 1998. SHV, now part of Metro, may have sold off its European retailing operations, but the group continues to invest in China. British companies have yet to invest in mainland China, but both Tesco and Marks and Spencer are thought to be conducting detailed feasibility studies. The fourth group of investors are based in other parts of Asia, including Hong Kong, Taiwan, Thailand, Malaysia and Singapore.

Supermarket
Hypermarket
Convenience store
Department store
Super grocery
Western grocery
Chinese grocery
Kiosk
Cosmetics store
Haberdashery
Barber shop
Western drug store
Chinese drug store speciality out!
China's commercial capital

Shanghai's population is about 11 million, but the city also has a huge hinterland. The number of people within `shopping trip distance' of the city is increasing year-on-year, due to inward migration and the improvement of road and rail links. Its retail sector is one of the most dynamic in China and has attracted considerable foreign investment.

The first step was the proliferation of Western-style department stores in direct competition to domestic state-owned counterparts. This then spread to supermarkets, convenience stores and hypermarkets. It is these channels which are now the most dynamic in food retailing, with foreign investment being the driving force. By the end of 1997 the Shanghai municipal authority had approved at least 40 retail joint ventures in the city.

The first Western-style supermarket was opened in the residential north-eastern area of the city in 1991 by Lianhua Supermarket Commercial Company. State-owned companies began to develop supermarkets and foreign investment in supermarkets snowballed in the mid-1990s. The number of such outlets rose from fewer than 300 in 1994 to almost 1,000 in 1996, according to Nielsen's definition. Information from the municipal government, which uses a slightly narrower definition, predicts continuing growth into 1998 and beyond, with sales per store increasing even faster.

Most supermarkets in Shanghai are medium-sized operations, covering 700 to 1,200 sq metres of shopping space. Most shoppers live within three to five minutes walk of the shop, visit the store about three times a week and spend Yn20-30 (US$2.50-3.50) per visit. As such these `supermarkets' are in reality closer to Western concepts of convenience stores. It is important to remember that very few Chinese own cars. Most shop-ping is done on foot or by bicycle and there are important limits on the amount a shopper can physically carry home. This situation is unlikely to change before 2020.

Following the expansion.of the supermarket sector, hypermarkets have been developed. These are variously defined: Nieslen adopts a lower limit of 2,500 sq metres,while other authorities place it at 5,000 sq In 1996 .the Shanghai Municipal Govern-
metres. They tend to be visited by shoppers ment stated that it wished to build 10 hyper three or four times a month. The first to markets between the inner and outer ring open in Shanghai appeared in 1996 and were roads before 2000. This plan may have been owned by Yaohan, Park'N Shop and Metro. revised following concerns about over capacity in the sector, but there is no doubt that many of the major infrastructure improvements being undertaken in Shanghai improve the prospects for out-of-town shop-ping centres. These include the east-west expressway from Pudong to Hongqiao air-port, an underground Pudong-Puxi tunnel, another east-west subway line and numerous high-rise apartments in these districts.

Chains and convenience stores

The retail sector is now sufficiently mature to have developed de facto chains, despite the reticence by the authorities to license this next stage in the growth of retailing. It is estimated that there are 28 companies in Shanghai which operate what could be classed as chain stores, eight of which are Sino-foreign joint ventures. Together, these companies operate about 800 stores. The Shanghai Commercial Commission reports that the profit margin for the 28 firms dropped from seven per cent in 1993 to just over one per cent in 1997, perhaps indicating the current extent of over-capacity in the sector.

Most of the supermarkets in Shanghai are small, with a floor area of under 100 sq metres, and fill the role of convenience stores in Western markets. The modern convenience store, open 24 hours a day, is a new concept in China and the major investor is Dairy Farm, which manages 44 stores under the 7-Eleven franchise in southern China. There are several small opera-tors in Shanghai, but the only major investor to date is Daiei, the Japanese company which opened a couple of dozen stores under its Lawson format in the city. Further foreign investment in this sector seems inevitable.

The rapid expansion of the retail sector in Shanghai has become a cause of concern to the local authorities. At the start of 1996 the Commerce Commission proposed to the Shanghai Construction Commission that approvals for large-scale retailing projects be halted due to the poor response to some of the newer department stores. However, statistics from the Shanghai Commerce Information Centre showed reasonable returns by most department stores.

A year later in April 1997, the local authorities were quoted as saying that the number of chain store companies operating in Shanghai would be reduced from 40 to 20 in order to `form efficient groups through merger and optimisation of assets'. The number of chains was officially cut to 28 in 1997 and then to 14 by March 1998 and the plan is to reduce this still further to 10 during 1998. The published plan consists of mergers, joint ventures and co-operations involving state-owned enterprises (SOEs). But it is not clear exactly what these forms of amalgamation mean in practice ?for example, in terms of financial accounting ormanagement. In addition to the SOEs, it is significant that Ahold is included in the list. This indicates that its takeover of the Yaohan store was contingent on the approval of the municipal authorities. However, an alternative explanation is that it would have happened anyway, but was a useful means of the authorities demonstrating their continuing power over the private sector.

Major foreign investors

The scale of retail investment in Shanghai over the last five years makes the sector vulnerable to a downturn in the market. Shake-outs are an on-going occurrence, with many smaller supermarkets finding it hard to compete. Further restriction on investment in retailing appeared inevitable when, in mid-1997, the Shanghai Foreign Investment Commission announced that the city government would no longer approve licences for supermarkets, with future licences being issued only by the central government.

However, the underlying trend remains strong. The deregulation of recent years cannot be undone and in the long term there seems certain to be less protection for the state-owned sector of the retail industry. The fragmented nature of retailing also means that there are huge market shares to be grabbed by those companies which can consolidate their bridgeheads in Shanghai.

Ahold The Dutch company has invested heavily across Asia, although it has yet to see any returns on investment. These have been cut back somewhat in the light of the turmoil which hit the region in 1997, but the company retains confidence in the underlying strength of the region and hopes to be able to break even on its Asia operations by 2000.

Ahold established a 50:50 joint venture in China in 1996, backed by the municipal government because Ahold has emphasised the supply of fresh food. This accords with Shanghai's `vegetable basket' project to guarantee an abundant supply of non-staple foods to residents. The company manages the 15 supermarkets of the Zhonghui chain. Some US$50m is to be invested in two of Ahold's regional retail chains, TOPS and BILO discount food stores, with the stated goal of opening 100 supermarkets before 2001. All of the Zhonghui shops will be converted to the TOPS format.

The first new outlet of Ahold's TOPS was opened on Yude Road, Shanghai, beside the Hua Ting Hotel in January 1997. The floor area is 100 sq metres. By mid-1997 the company had opened three TOPS and three KILO outlets, with two outlets owned by CVIC converted into TOPS formats by early 1998. The company plans to open one store a month, all in Shanghai. By January 1998 the joint venture had 18 TOPS supermarkets, with total sales estimated to be US$30m in 1997. TOPS outlets are expected by Ahold to sell US$5m-6m of produce a year within a couple of years of opening.

Ahold made further investments in China when it acquired the Yaohan Liancheng supermarket chain in January 1998 from the Yaohan paient company of Japan, which was in financial difficulties. The acquisition included 22 supermarkets in Shanghai, bringing Ahold's supermarket portfolio to around 40 in the region. The new additions will be converted into the TOPS format during 1998 and Ahold is now the leader in the supermarket sector in Shanghai. The company is also planning to build its own distribution centre on the outskirts of the city to overcome distribution problems.

China, focusing on Shanghai. It entered Shanghai in 1995, had 20 stores by mid-1997, with plans to open a distribution centre and to build a chain of 60 outlets by 2002. The Park'N Shop chain allows Hutchison Whampoa to claim that it is the largest non-domestic retailer in China, with 74 outlets.

a 40 per cent stake. A local distribution company, Tianjin Fruit & Vegetable Co, owns the remaining 10 per cent.

The choice of President may indicate a key change in strategy in China, and was encouraged by the success of the partnership in Taiwan, as well as pending legislation in that market which would regulate the growth of convenience stores. The company is due to open four more stores during 1998, bringing the total to 1 1 , and making them the market leader in hypermarkets in China.

Carrefour: investments in hypermarkets

Metro AG The company is a leading German retailer, with operations in most sec-tors, including wholesaling, department stores, consumer electronics, furniture, clothing, computers, mail order and restaurants. Metro opened its first members-only cash-and-carry store in Shanghai in October 1996, offering 6,450 food items and 8,500 non-food lines, including electronic goods, office stationery, sports equipment, bicycles and household items. A second store opened in early 1998 near the Jingiang Amusement Park and a third store is under construction. ^

Source: Carrefour. Note. includes scheduled 1998 openings

Hutchison Whampoa Hutch is on Whampoa of Hong Kong own the Park'N Shop food retail chain, which is one of the two major food retailers in the city. The company opened its first store in China in Shekou, Guangdong province, in 1984 and was the first foreign investor in retailing in China. There are 23 outlets in central and northern

This article is based on Food Retailing in China, priced at ?50 (US$1,660) and covering 35 cities and the top 200 food retailers. It was published in June 1998 by Seymour-Cooke Ltd, 42 Colebrooke Row, Islington, London, NI 8AF, UK. Tel: +44 (0)171 704 9951. Fax: +44 (0)171 226 5298. E-mail _ HYPERLINK rnailto:sales @seymourcooke. corn

Carrefour Carrefour is the market leader in the supermarket sector in France. The company has invested in Taiwan in association with the local food giant President and set up 10 hypermarkets between 1991 and 1996. Initial investments in main-land China were with local Chinese partners and the French group opened its first store in Beijing in December 1995, followed by a second in Shanghai. The latter covers 4,000 sq metres and offers customers about 2,000 food items and 4,000 non-food items. In January 1996 the company announced its intention to invest in Tianjin, this time in association with President. The French partner invested US$7.5m and owns 50 per cent of the shares; President invested US$6m for Outside Carrefour's supermarket in Beijing most shopping is done by bicycle.