China Draws In Foreign Retailers
Many U.S. and foreign retailers are accelerating their investments in China, spurred by further easing of government restrictions and the allure of the world’s fastest-growing consumer market.
Companies such as Wal-Mart Stores Inc. and French giant Carrefour, are planning significant expansions in China this year, while others, such as Home Depot Inc., are gearing up to enter the country’s $600-billion retail market.
The stepped-up investments are certain to intensify competition and bring vast changes for China’s 1.3 billion consumers, including giving them more choice of goods and, in many cases, lower prices and better service and quality.
The moves are being driven in part by new Beijing policies that scrapped joint-venture requirements and softened other rules that had limited what and where foreign companies could sell in China.
The policy changes, which took effect in December on the third anniversary of China’s entry into the World Trade Organization, aren’t expected to have much near-term effect on America’s soaring trade deficit with China.
Nor will it make China an easy street for foreign companies, which will still find plenty of potholes and dead ends. Although countless overseas businesses have taken advantage of China’s cheap manufacturing costs, a relatively small number have profited from selling goods here.
Business owners and analysts attribute that to such factors as historically thin profit margins, an undeveloped credit system and difficulties in setting up efficient distribution networks. What’s more, Chinese consumers are die-hard savers and unusually price-conscious.
“The basic problem is, how do I get the Chinese people to buy something at a price that doesn’t kill me,” said Paul French, marketing director at AccessAsia, a Shanghai research and consulting firm.
Still, China’s further opening represents a big opportunity for companies facing weaker sales growth in other major markets. Analysts estimate that China’s retail sales increased 13% in 2004 from the year before, double the rate of the United States. Retail sales actually fell in Japan and Germany, the two largest economies after the U.S.
In one product category after another, China is leapfrogging other countries to assume a leading share of the world market. In 2003, for example, China overtook the United States to become the No. 1 beer consuming nation, guzzling an estimated 6.5 billion gallons. Worldwide, beer sales are increasing at between 1% and 2% a year, but the figure is closer to 8% for China, said Steve Burrows, chief executive and president of Anheuser-Busch International Inc.
That’s why Anheuser-Busch spent $139 million in 2004 to buy Harbin Brewery Group, China’s fourth-largest beer producer, and agreed to be a corporate sponsor for the 2008 Olympics in Beijing. Burrows said the company entered China more than a decade ago but only began eking out a profit in 2000.
As with other products, the beer market in China is highly dispersed and cutthroat. There are no national breweries and only a handful of provincial players. Instead, some 400 small beer operations, run mostly by the government, account for 90% of the beer sold in the country, Burrows said.
“While the Chinese beer industry is the biggest in the world, it’s one of the lowest in unit profitability,” he said.
Burrows and others are counting on China to keep up its rapid economic growth, thus creating more wealth and greater demand for consumer goods. Disposable income in China’s urban areas crossed $1,000 per person in 2003, climbing 9%, right in line with growth in the nation’s gross domestic product. Rural residents, who make up roughly 60% of China’s population, on average had less than $320 to spend or save after taxes in 2003.
The low base means there’s a lot of room for growth. Foreign investment in China for 2004 is expected to surge more than 20% from the previous year, to $60 billion. Plans for investing in later years are running at an even higher rate.
Besides allowing foreigners to take 100% ownership of retail operations, the latest Beijing policy changes permit them to set up shop with much less capital and locate just about anywhere. Foreign companies can also sell third-party or imported goods. Previously they could ply only what they made in China.
“I think it’s possible to import almost anything into China now, and tariffs are a lot lower than they used to be,” said John Grobowski, a partner at Baker & McKenzie in Shanghai. He and other experts say it remains to be seen how quickly Beijing will issue new retail licenses, and there are unsettled issues regarding direct selling and electronic commerce. Even so, they say, the rule changes are likely to have far-reaching implications.
In general, smaller retailers will find it easier to do business without costly middlemen at every step. Larger companies, which have long cut their own deals with Beijing, will have greater ability than before to control their destiny.
Some companies already have begun to take advantage of the liberalized rules. British-based Kingfisher’s B&Q;, a home-improvement retailer, said its 21st store in China would be wholly owned, with several more like it to follow this year.
Wal-Mart said it would open as many as 15 stores in China this year, adding to the 40 it already operates here. Wal-Mart outlets in China generated $704.8 million in sales in 2003, according to the Chinese government.
Carrefour, the largest foreign retailer in China with sales exceeding $1.6 billion in 2003, has said it is aiming for 15 more stores in coming months, which would bring its total to more than 60.
Carrefour was one of the earliest to enter China. Others are just starting out. Retail giant Tesco of United Kingdom made its foray into China’s market last summer by investing $260 million in Hymall, a Shanghai-based chain.
Atlanta-based Home Depot hasn’t said when it plans to strike in China. But since the summer, Home Depot Asia President Bill Patterson and his team of 60 have been prowling Shanghai and elsewhere in search of potential takeover targets and store sites. “Any time homeownership improves and you have a broader middle class that enjoys a variety of products for personal use, that signifies a market is coming of age,” he said.
Overseas companies control about 7% of China’s retail market, according to Xu Xiaofang, an analyst with Guotai Junan Securities. China’s leading domestic retailers are steeling themselves for a dogfight to preserve their market share.
“I won’t give up this market,” said Jia Jianyu, marketing manager at Shanghai-based Homemart Decoration Co., China’s largest home-improvement supermarket chain, with 23 stores.
Although Jia said he had no special strategy to battle Home Depot, he indicated that his company was ready.
Jia said he’d learned and borrowed practices from foreigners. A no-questions refund policy is a given, he said. Homemart also adopted the Western practice of paying the price difference to customers who had bought merchandise at its stores and later found the same good selling for less elsewhere.
The emergence of supermarket-style stores already has begun to create new shopping habits.
Zhou Zhe, 28, used to buy household goods at small shops, but now he will often go to big home-improvement stores where he can buy many things under one roof. “It’s more convenient,” he said as he came out of a B&Q;, carrying two bags containing light bulbs, chopsticks and a dust pan.
Large foreign companies have had success with various store formats, and have deeper pockets and more experienced management than many of their Chinese counterparts. But Chinese retailers say they know the local market better and what customers want -- the cheapest price in town.
Along Shanghai’s Yi Shan Road, hundreds of mom-and-pop shops deal in paints, kitchen tiles, bathtub showerheads, lights and fixtures. None of the half-dozen interviewed had heard of Home Depot. Nor were they particularly worried about the arrival of another big chain. Sure, those competitors provide convenient one-stop shopping, but small merchants said they could undercut their big rivals by up to 30%.
“Price is everything,” said Wang Ma, who sells Chaoyang Sanitary faucets and other bathroom products.
As competition heats up, it could lead to price wars, which would be great for customers but could lead to a consolidation in some segments. An oversupply of mobile phones coupled with strong foreign competition already has taken a toll on TCL Communication Technology Holdings, China’s second-largest cellphone maker, which said sales fell significantly in November. China is the world’s largest market for cellphones.
