China Distribution & Trading
LI & FUNG RESEARCH CENTRE
China Distribution & Trading
1
landscape VIII. Merger and
May 2006
China’s retail sector in 2005-06 Part III: Market players : moves and strategies
IN THIS ISSUE : VII. The competitive
Issue 33
VII.The competitive landscape 4
1. Number of retail businesses
acquisition In 2004, there were 353,000 corporation units engaging in retail business in IX.
Features of the
6
China, with total employment exceeding 6 million, according to the latest figures
top 100 retail
from the Economic Census (see Exhibit 9). General merchandise, home
chain operators
appliance and consumer electronics, five metals, furniture and fitting, automobile, motorcycle and auto parts are the most popular types of retail
X.
Retail format
10
performance and
business. The general merchandise sector employed the largest amount of workers, making up 38% of the total employment in the retail sector.
franchising operation among the Top 30s XI.
Key expansion
Exhibit 9: 12
strategies XII. The growing power of foreign retailers
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Number of retail businesses in China, 2004
Types of retail business Total General merchandise Home appliance and consumer electronics Five metals, furniture and fitting Automobile, motorcycle, fuels and auto parts Clothing, shoes, hats, textiles and other daily goods Food, beverage and tobacco Cultural, sport and recreation products Medicine and medical equipment Non-store based and other retail business
Corporation unit (‘000) 353 46 56
Share
1
Share 100% 38% 10%
49
14%
408
7%
48
14%
674
11%
37
10%
510
8%
33
9%
487
8%
27
8%
341
6%
24
7%
430
7%
33
9%
315
5%
Source: Economic Census, National Bureau of statistics
Li & Fung Research Centre Member of Li & Fung Group
100% 13% 16%
Employment (‘000) 6,097 2,296 636
China Distribution & Trading Issue 33
May 2006
The majority of retail outlets in China remain individually
of the State-owned commercial enterprises. Under the
owned and small-scale. Some of them are no more than
slogan “Zhuada fangxiao” (retaining the large SOEs
street-corner kiosks. In 2004, over 16 million retail sole
and releasing the small ones), the Chinese government
proprietors are competing in the market. These sole
has articulated a clear plan to limit the business scope
proprietors altogether employed more than 28 million
and size of the public sector. The Chinese authorities
workers. The significance of these small-scale retailers
have stated their direction of creating 30-50 major
will continue to be great, especially in reaching the
SOEs through merger and acquisition (M & A), so that
smaller communities that large retailers have yet to be
these enterprises will be strong enough to compete
able to reach.
globally. Meanwhile, the less competitive ones may be restructured, left to go bankrupt or acquired by other
2. Ownership structure
investors. We can see that, in recent year, a number of less competitive State-owned commercial enterprises
Currently, local enterprises are playing the lead in
have gradually withdrawn from the market. And China’s
China’s retail sector (see Exhibit 10). The market share
biggest retailer – the Bailian Group – has been formed
of foreign retail enterprises remains negligible, but they
as a result of the government-led M & A deal among
are fast expanding in terms of size, number and
Shanghai No 1 Department Co Ltd, Shanghai Hualian
significance.
Co Ltd, Friendship (Group) Co Ltd and Shanghai Goods and Materials Crop.
There are nearly 300,000 domestic-funded retail corporation units in China in 2004. By broad category,
Meanwhile, private retail stores began to emerge in the
the forms of ownership of Chinese retailers include
1980s. Private retail enterprises now account for
State-owned, collectively-owned, private and others. In
around 40% of the market share. Among China’s top
the pre-reform era, almost all the retail stores were
100 retail chain operators in 2005, 46 out of 100 are
State-owned. The State-owned enterprises (SOEs) are
private enterprises. Some of the famous private retail
known for its inefficiency, overstaffing and poor
businesses are Beijing Gome Electrical Appliance,
management. To improve the overall efficiency and
Suning Appliances Group and Beijing Wumart, Sanlian
productivity of the commercial sector, the Chinese
Commerce Ltd.
government has made effort in speeding up its revamp
Exhibit 10: Wholesales and retail businesses by forms of ownership, 2004
Corporation unit
Employment
84.1%
71.9%
Invested by HK, Macau & Taiwan
0.3%
0.9%
Foreign invested businesses
0.8%
2.0%
14.8%
25.2%
Domestic-funded
Others Source: Economic Census, National Bureau of statistics
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China Distribution & Trading Issue 33
May 2006
3. Expansion and consolidation (1) Competition heating up Many big retailers embarked on aggressive expansion in 2005. Bailian Group had 845 more stores in 2005 with total number of stores reaching 6,345. Tricon Greater China is also fast growing. It opened 367 stores last year and now it has 1,757 stores in total. One worth-noting trend is that the consumer electronics professional store operators have been expanding massively last year. Beijing Gome Electrical Appliance and Suning Appliances Group, for example, opened 199 and 170 stores more in 2005 respectively with yoy growth rate exceeding 80% (see Exhibit 11). Exhibit 11: Number of stores of major retail enterprises, 2004-2005
Enterprises
No. of stores in 2005
No. of stores in 2004
yoy growth (%)
6,345
5,500
15.4
Beijing Gome Electrical Appliance
426
227
87.7
Suning Appliances Group
363
193
88.1
Shanghai Nongongshang
1,572
1,232
27.6
Carrefour (China)
78
62
25.8
Shanghai Yongle
199
110
80.9
Five Star Appliance
193
120
60.8
1,757
1,390
26.4
Shenzhen A. Best Supermarket
79
58
36.2
Hefei Baida Shopping Center
54
42
28.6
Jiangsu Wenfeng Great World
612
506
20.9
Bailian Group
Tricon Greater China
Chain Development Corporation
Source: China Chain Store and Franchise Association (CCFA)
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China Distribution & Trading Issue 33
(2) Consolidation taking place
May 2006
In the coming years, we foresee that the consolidation will go on as bigger retailers step up their M & A drive to
China’s retail sector is highly fragmented and is mostly
achieve quick and effective expansion. The competitive
serviced by local retailers. As both foreign and local
retailers will grow in scale and strength while those who
major retail enterprises pushed ahead with their
fail to cope with market changes will exit the market or
ambitious expansion plans, the sector has entered a
be taken over. The market is expected to become more
stage of “expansion and consolidation”. The severe
concentrated and achieve an overall upgrading.
competition has put tremendous pressure on
VIII. Merger and acquisition
profitability. The heat is on and only those who work smartly and innovatively are able to stand out.
1. A wave of merger and acquisition activity
Faced with the pressures of market liberalization and the aggressive expansion of the retail giants, many small and medium-sized retailers in China are either
In recent years, M & A activities among retailers are
teetering on the edge of survival or are going bankrupt.
gathering pace in China. Bigger players are eager to
Sources reveal that over the past two years, more than
pursue M & A opportunities as they hunt for outlets in
200 retail enterprises have shut down mainly due to
strategic locations, network and people. Acquiring
evade payments to suppliers. From June to September
existing retail operators is a fast and a more direct way
2005, four leading enterprises in Taiyuan, Shanxi
of expanding market share, especially in unfamiliar
province, namely Tiansen, Kaiyuan Shengshi, Kaihua
markets. The retailing conglomerate can make full use
Temple Shopping Centre and Tangrende Supermarket,
of its partners’ resources, in terms of site networks,
closed down one after another. Among them,
equipment, sourcing systems and local relationships, to
Tangrende, a supermarket with only several thousand
reduce operational costs and risk. And at the same
square meter in size, owed suppliers 8-9 million yuan,
time, they can reduce competition. Apart from that,
and the whereabouts of its owner is still unknown. A
some retailers are also considering buying stakes in
research report published by China National
companies engaged in retail-complementary
Commercial Information Center reveals that quite a
businesses, including logistics, real estate
number of small to medium-sized domestic retail
development, food processing and daily necessities
enterprises are faced with the risks of bankruptcy.
manufacturing for strategic expansion.
Not only the smaller players, big retailers also feel the
In fact, many domestic retail operators, especially those
pressing need to revamp their business models and
with 100-500 million yuan sales volume, have
maintain competitiveness. Those who fail to catch up
difficulties in surviving in the midst of competition. Some
with the market developments are unlikely to survive.
of them are more willing to exit or sell out. This
The collapse of Pricesmart and Century 21
phenomenon is not confined to small and inefficient
convenience stores are two typical examples.
retail enterprises. Some strong regional retailers, to many people’s surprise, have been taken over last year.
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China Distribution & Trading Issue 33
May 2006
(2) Pursuing M & A strategies to penetrate to second- and third-tier cities
F o r e x a m p l e , Va n g u a r d a c q u i r e d C i k e l o n g Supermarket and Tianjian Yuetan Supermarket, and Hualian acquired 51% of Guangxi Jieyong for 107
M & A is one of the fastest and easiest ways for retail
million yuan.
enterprises to expand their business, establish critical In the wave of M & A, many local retailers are seeking
mass and acquire existing store locations. The M & A
cooperation with foreign retail enterprises. However,
strategy provides a shortcut for retailers, especially the
not all local retailers can raise the interest of their
foreign ones, to penetrate to unfamiliar market. In 2005,
foreign counterparts. First, many domestic retailers
many such deals have taken place. For instance,
prefer to sell out the whole business while foreign
Beijing Gome Electrical Appliances Holding Ltd
retailers just want to take over the stores in strategic
acquired many regional retailers in northeast and
locations rather than all the stores. Second, foreign
southeast China earlier last year. In November 2005,
retailers are skeptical about the financial status of many
Gome acquired Wuhan Zhongshang Home Appliance,
domestic retailers. Third, to many local retailers’
one of the largest consumer electronics retailers in
surprise, foreign retailers are focusing on second- and
Hubei province. These moves reflected Gome’s
third-tier cities and show little interest in local retailers
aggressive expansion plan in second- and third-tier
operating in the first-tier cities.
cities. Another example is Vanguar’s acquisition of Cikelong Supermarket in Zhejaing province and
2. Highlights of the M & A activities occurred in 2005
Tianjian Yuetan Supermarket in September 2005.
(3) Multi-format operation (1) M & A between large enterprises From the moves of retail enterprises in recent years, we There is a growing trend for large retail enterprises to
can see that some of them are shifting to horizontal
form strategic cooperation. In December 2005, China’s
expansion from vertical expansion. Instead of focusing
two largest retail groups, the Dalian-based Dashang
on operating one retail channel, more retailers choose
Group and the Shanghai-based Bailian Group signed
multi-format operation. Beijing Wangfujing Department
an agreement on jointly establishing a third company,
Store Co Ltd (Group), for instance, acquired 25% of
the Dashang International Co., Ltd. The two retailers
Seven-Eleven Beijing Company Ltd’s share from
plan to build the Dashang International into a large
Beijing Shoulian Commercial Group Co. Ltd. for U$8.75
modern company with an annual volume of business
million in 2005, marking its entry to the convenience
hitting 50 billion yuan (US$6 billion) in five years. This
store market.
move is expected to further strengthen Balian Group and Dashang Group’s foothold in the country. The deal that Wumart took over its minor competitor, the Beijing Merry Mart Chain Store Development Co. Ltd for 373.5 million yuan is another example.
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China Distribution & Trading Issue 33
(4) Taking over through secondary market
May 2006
(6) Investment injection of foreign investment funds
In 2005, Nanjing Central Emporium Stocks Co, Ltd (600280.SH), Nanjing Xinjiekou Department Store
Lured by the robust development of China’ retail sector,
Co.,Ltd (600282.SH), Baida Group Co, Ltd
an increasing number of international investment funds
(600865.SH) and Wuhan Store (000501.ZH) become
have been tapping the market through investing in
the targets of acquisition in the secondary market. As
Chinese retail enterprises. For example, Warburg
China’s share reform gathers pace, it is expected that
Pincus, a leading global private equity investment fund,
more retailers will seek M & A opportunities in the
announced to invest in Gome Electrical Appliances
secondary market by purchasing shares of the listed
Holding Limited through the issuance of 125 million
retail enterprises. Besides, a rule that allows foreign
U.S. dollars convertible bonds and 25 million U.S.
investors to hold stakes in China’s publicly listed firms
dollars warrants earlier this year. When the investment
by buying the tradable A shares has came into effect on
is completed, Warburg Pincus will hold 176, 680,630
31 January 2006. Foreign strategic investors are now
ordinary shares, which is equivalent to about 9.71% of
allowed to buy A-shares directly, rather than through a
total issued capital of Gome, assuming the bonds and
handful of qualified foreign institutional investors. This
warrants are fully converted and exercised, according
will help encourage mergers and acquisitions in the
to their agreement. This deal is beneficial to both
retail sector and improve overall corporate efficiency of
parties. The Chinese party gains funding to finance its
the domestic companies.
expansion and enhance its overall competitive position in the marketplace while the investment fund gains
(5) Targeting foreign retail enterprises – as a platform to expand outside China
return from the investment that they put faith in.
IX. Features of the top 100 retail chain operators
Last year, Beijing Hualian bought the Singapore branch of Japan-based Seiyu Ltd from CapitaLand Ltd, the top
1. Rapid expansion of large retail chain operators and increasing market concentration
real estate developer in the Southeast Asia. The acquisition costs 4 million Singapore dollar, or around 19.12 million yuan (US$2.36 million). The move marks the first foray by a Chinese firm into Singapore’s retail
In 2005, the combined sales of the top 100 retail chain
market and signals the intentions of Chinese
operators (hereafter referred to as “the Top 100s”)
companies to become big players in Southeast Asia’s
reached 707.6 billion yuan, up 42% yoy (see Exhibit
retail scene. It is anticipated that more Chinese retailers
12). The Top 100s altogether have 38,260 stores, an
will seek M & A opportunities with foreign retail
increase of 26% from the previous year. Their total
enterprises, which will serve as an excellent platform for
operation area and employment also grew by 38% yoy
domestic retailers to expand outside China.
Li & Fung Research Centre Member of Li & Fung Group
in 2005.
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China Distribution & Trading Issue 33
May 2006
Exhibit 12: Performance of the top 100 retail chain operators, 2001-2005 Retail sales
Number of stores
billion yuan
Yoy growth (%)
Units
Yoy growth (%)
2001
162.0
65
13,117
–
2002
246.5
52
16,986
29
2003
358.0
45
20,424
20
2004
496.8
39
30,416
49
2005
707.6
42
38,260
26
Source: China Chain Store and Franchise Association (CCFA)
The scale of the Top 100s is fast expanding. In 2001, the sales of the Top 100s only made up 4.3% of the country’s retail sales of consumer goods. In 2005, the share of the Top 100s rose to 10.5% (see Exhibit 13). 6 out of the top 100s have annual sales over 20 billion yuan and 21 of them recorded sales exceeding 10 billion yuan. In 2004, the sales of the 100th retail chain operator was 480 million yuan. The figure climbed to 821 million yuan in 2005. Exhibit 13: The Top 100s’ share in national retail sales, 2001-2005
Source: China Chain Store and Franchise Association (CCFA)
Exhibit 14 provides the major indicators of the top 20 retail chain operators in China in 2005, ranked by annual sales. Coming out the top was the Bailian Group, with a sales revenue in excess of 72 million yuan. It was followed by Beijing Gome Electrical Appliance, Suning Appliances Group, China Resources Vanguard Co. Ltd, Dashang Group, Beijing Hualian, Wumart, Shanghai Nongongshang, Carrefour (China) and RT-MART International Ltd.
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China Distribution & Trading Issue 33
May 2006
Exhibit 14: Top 20 retail chain operators in China, 2005
Ranking 2005 Enterprises 1 Bailian Group
Retail sales (million yuan) of which: selfyoy operated growth 2005 stores 2004 (%) 72,074
55,910
67,207
7.2
2005 6,345
Number of stores of which: selfoperated stores 2004
yoy growth Ranking (%) 2004
2,674
5,500
15.4
1
Of which: Lianhua Supermarket Holdings Co Ltd 38,285
3,786
17,000
1,937
2,169
19
2,492
27
Hualian Supermarket Co Ltd Hualian GMS Homemart 2
Beijing Gome Electrical Appliance
3
Suning Appliances Group
4
China Resources Vanguard Co. Ltd
49,840
49,840
23,879
108.7
426
426
227
87.7
2
39,718
27,947
22,108
79.7
363
224
193
88.1
4
26.0
2,133
31,299
20.0
Of which: China Resources Vanguard Co. Ltd 12,019
9,658
11,014
9.1
522
464
476
9.7
15
18.120
8,023
13,880
30.5
1,503
428
1,345
11.7
7
Suguo Supermarket Co. Ltd Zhejiang Cikelong Supermarket. Company Limited 1,160 5
Dashang Group
6
Beijing Hualian
7
Wumart
125
30,117
30,117
23,085
30.5
130
130
120
8.3
3
20,800
20,800
16,000
30.0
74
74
70
5.7
6
19,072
19,072
13,277
43.6
659
423
608
8.4
9
Of which: Beijing Chaoshifa 1,683 8
Shanghai Nongongshang
9
Carrefour (China)
10
RT-MART International Ltd
11
Shanghai Yongle
44
17,549
17,549
13,703
28.1
1,572
1,572
1,232
27.6
8
17,436
17,436
13,964
24.9
78
78
62
25.8
5
11,630*
35
60
47*
28
15,700*
12
15,166
15,166
10,834
40.0
199
199
110
80.9
11
15,054
15,054
13,167
14.3
191
191
170
12.4
12
Chongqing General Trading Group
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China Distribution & Trading Issue 33
Ranking 2005 Enterprises 13 Five Star Appliance 14 15
Tricon Greater China ( ) Sanlian Group
16
Hoyodo
17
Shenzhen A. Best Supermarket
18
Parkson
19
Hefei Baida Shopping Center
20
Lotus Supermarket Chain Store Co., Ltd ( )
Retail sales (million yuan) of which: selfyoy operated growth 2005 stores 2004 (%)
2005
14,612
12,987
9,379
55.8
193
13,300
8,300
11,800
12.7
1,757
13,201
5,071
13,256
0.4
274
12,000
10.0
8,500
13,200 11,801
11,801
11,000* 10,500
10,300
10,060
May 2006
Number of stores of which: selfoperated stores 2004 133
yoy growth Ranking (%) 2004
120
60.8
16
1,390
21.0
14
32
254
7.9
10
96
27
88
9.1
13
38.8
79
79
58
36.2
17
7,383*
49.0
36
30*
20.0
7,300
43.8
54
42
28.6
7,394
36.1
61
41
48.8
49
21
* Estimated value Source: China Chain Store and Franchise Association (CCFA)
2. Forms of ownership Private enterprises are fast developing. In 2002, only 30 private enterprises entered the Top 100 list while there were 46 private enterprises among the Top 100s in 2005 (see Exhibit 15). Foreign-invested retail enterprises are also rapidly growing. 27 out of the Top 100s were foreign-invested. Some of the largest ones were Suguo Supermarket, Carrefour (China), Shanghai Yongle, Tricon Greater China, Hoyodo, China Resources Vanguard Co Ltd and Metro Jinjiang Cash & Carry Co Ltd. The combined sales of these foreign-invested retail chain operators was 261.9 billion yuan in 2005, accounted for 37% of the total sales of the Top 100s. Exhibit 15: Number of enterprises by forms of ownership, 2002-2005
Source: China Chain Store and Franchise Association (CCFA)
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China Distribution & Trading Issue 33
May 2006
3. Regional instead of national expansion The complex supply chains of China’s distribution sector and the highly fragmented retail landscape characterized by huge income disparities and local protectionism have been hindering retailers from pursuing nationwide expansion. Looking at the Top 100 retail chains dealing in fast-moving consumer goods, 78 of them are strong regional players i.e. playing a leading role in a province or in nearby provinces. In fact, in many developed countries, there are abundant strong regional players. Some of the regional players are even more competitive than the national ones. We can see that in the past few years, some retailers have embarked on rapid cross-regional expansion in China. But now many of them have adjusted their expansion strategies and concentrated their efforts in certain locality. As such, they will be able to build a more manageable, efficient and flexible supply chain, and thus improve the overall operation efficiency.
X. Retail format performance and franchising operation among the Top 30s 1. Retail format performance On average, sales per store of the Top 30s increased to 29.5 million yuan in 2005 from 27.2 million yuan in 2004. But as the scale and size of different retail channels vary a lot, it is more meaningful to look at the sales per store of different retail channels individually (see Exhibit 16). As shown in Exhibit 14, professional store recorded the highest growth in sales per store while supermarket was somewhat lagging behind. Exhibit 16: Sales per store by retail channels among the Top 30s, 2005 Sales per store (million yuan)
Yoy growth (%)
Department stores
332.1
9.2
Professional stores
84.4
60.7
Supermarkets
31.2
1.5
2.5
35.6
Convenience stores Source: China Chain Store and Franchise Association (CCFA)
Department stores, challenged by the explosive growth of modern retail channels, have been gradually losing its competitiveness. Faced with the severe competition, some department store operators have been making every endeavor to revamp their business models, introduce new business concepts and improve operation efficiency and the quality of products and services. In 2005, department stores have made significant progress and were gradually regaining market share. Department stores registered a 25.7% sales growth rate in 2005, which was 11 percentage points higher than 2004 (see Exhibit 17). Their share in the total sales of the Top 30s increased to 15.6% in 2005 from 14.9% in 2004. Sales per store of department stores also increased by 9.2% to 332.1 million yuan in 2005. Despite the accelerating growth in sales, the growth rate of the number of stores dropped from 21.8% to 13.4%. All these figures reflect that department store operators no longer solely focus on scale expansion, but have been placing more emphasis on operation efficiency and quality.
Li & Fung Research Centre Member of Li & Fung Group
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China Distribution & Trading Issue 33
May 2006
Professional stores embarked on rapid expansion in 2005, with growth of annual sales revenue and number of stores reaching 60.7% and 50.8% yoy respectively. The sales of professional stores made up 30% of the total sales of the Top 30s. The consumer electronics chains, in particular, have aggressive expansion in 2005. The combined sales and the total number of stores of the five biggest consumer electronics professional store operators, namely Beijing Gome Electrical Appliance, Suning Appliances Group, Shanghai Yongle, Five Star Appliance and Sanlian Group increased by over 66.8% and 61.0% in 2005 from the previous year, respectively. Supermarkets and hypermarkets still played a dominating role among the Top 30s. They, in total, constituted 45.2% of the sales of the Top 30s. However, amid the stiff competition with different retail channels, supermarkets and hypermarkets’ expansion rate and share in the sales of the Top 30s have shown a downward trend in 2005. Convenience stores registered a 35.6% and 11.3% growth in sales and number of stores in 2005 respectively. However, we witnessed a slowdown in growth of convenience stores, compared with the yoy growth rate of 49.7% in sales and 20.2% in number of stores in 2004. Exhibit 17: Performance of different retail channels in the Top 30s, 2005 Sales
Number of stores
(yoy growth %)
(yoy growth %)
Department stores
25.7
13.4
Professional stores
60.7
50.8
Supermarkets and hypermarkets
19.4
17.6
Convenience stores
35.6
11.3
Source: China Chain Store and Franchise Association (CCFA)
2. Franchising operation among the Top 30s Nearly half of the Top 30s have conducted franchising operation. Though 8,678 out of their total stores of 16,665 were franchised stores, the sales of franchised stores altogether only made up 17% of the total sales of the Top 30s. This was largely due to the fact that most of the franchised stores were convenience stores, professional stores and supermarkets and catering service providers, which have much lower level of sales per store. Compared with last year, the total number of franchised stores among the Top 30s increased by 19.3% in 2005. The upward trend is expected to continue along the sector development. Among the Top 30s, Bailian Group owned the largest number of franchised stores (3,671) in 2005. 22% of Bailian Group’s sales revenue was came from its franchised stores, whose average sales per store was 4.4 million yuan.
Li & Fung Research Centre Member of Li & Fung Group
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China Distribution & Trading Issue 33
May 2006
XI. Key expansion strategies
(2) Market positioning and product portfolio
1. Differentiation, innovation and brand building
Confronted with the strong competition from hypermarkets and convenience stores, Lianhua Supermarkets is looking for ways to differentiate itself.
Faced with fierce competition, homogeneity of product
The restructuring of its Jinhui Store is a successful
and operation model, and relatively low customer
attempt in which it tried to set itself apart by
loyalty, retailers have come to realize that offering
repositioning the store and restructuring the product
discount may not be a sustainable or effective strategy
portfolio. Jinhui Store is located in a community where
in the long run. Therefore, some retailers are now
most of the residents are expatriates and affluent local
organizing themselves to deliver differentiation and
people. These people are more conscious of product
putting more efforts into brand building. They place
quality, style and health. There is a strong demand for
increasing emphasis on improving shopping
“green” and fresh food. Catering to the consumer
environment and services, identifying the right market
demands, Lianhua Supermarket repositioned its Jinhui
positioning, providing quality products with special
Store to high-end supermarkets. To create a fresh and
characteristics and building brands and customer
modern atmosphere, the Jinhui Store has been
loyalty. Retailers have begun to target specific
redecorated using green and orange as the
consumer groups more accurately and effectively.
predominant colors. Besides, a wide variety of high-end
Niche retail sectors are also gaining greater
fresh food and over 1,000 imported goods have been
significance.
introduced. Sources reported the total sales of Jinhui Store on its day of reopening reached 116,500 yuan.
Case studies (1) Product and services
(3) Store environment and experience-based differentiation
Park’n Shop opened a “new concept flagship” store in
Shandong Jiajiayue Supermarket Co.,Ltd , cooperating
Guangzhou in late 2004. The store provides one-stop
with the world’s largest volunteer chain operator SPAR
shopping services for consumers with products ranging
International (SPAR), have transformed one of its
from fresh food, packaged foods from different
stores in Weihai into “SPAR Eighteen” – a hypermarket
countries, daily necessities, and wines to digital
that stresses consumer experiences. Consumers can
products. Park’n Shop has introduced the Watson’s
find a completely new shopping experience in “SPAR
Cellar in this flagship store for the first time. The Cellar
Eighteen” through the enjoyment of different senses,
offers a host of wine from a wide variety of countries.
including sight, hearing, smell, taste and touch. After the
The salesmen also provide professional services for
renovation, the former Jiajiayue store’s daily sales
consumers. By adding value to its products and
volume jumped from 10,000 yuan (US$1,235) to
services, the Guangzhou flagship supermarket has
200,000 yuan (US$25,000).
managed to attract a lot of consumers.
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China Distribution & Trading Issue 33
May 2006
2. Penetrating to the second- and third-tier cities As discussed earlier, new and strong purchasing power is emerging in second- and third-tier cities. These cities present immense potential. In fact, the second- and third-tier cities, as well as some inland cities, are fast in becoming the next battlefields. Places such as Chengdu, Tianjin, Qingdao, Shenyang, Nanjing, Xi’an and Chongqing are particularly popular. Exhibit 18 shows the opportunities and challenges facing retailers and brand owners when expanding to the second- and third-tier cities. Exhibit 18: Expanding to the second- and third-tier cities: opportunities and challenges
Opportunities in theses cities •
Challenges facing investors
Vast population
•
Market fragmentation increases the distribution difficulties and costs
•
Remarkable economic growth and surging
•
purchasing power •
•
Underdeveloped distribution network obstructing inter- and intra-regional expansion
Living expenditure is relatively low. Buying potential
•
Much time and efforts are required to get familiar
in some second-tier cities could be as strong as
with local context, and to build up relationship with
in the big cities
local government and business partners
The markets are relatively unexplored and
•
Localization is a must
competition is less severe •
More favorable retail sites are available
•
The markets are young and there are few well-established brands. Consumers have limited product and brand exposure
Many foreign retailers have already scaled up their operation in the smaller cities. Carrefour, for example, has relocated its regional headquarter for central and western China from Shanghai to Chengdu, the capital city of Sichuan province. Such relocation reflects that the retail giant’s effort to consolidate its foothold in China’s western region. Recently, Carrefour has stated its intention to open 10-15 new stores each year, and about one-third of these stores will be located in the central and western areas.
3. Land grab strategy Distribution coverage is critical due to the wide availability of local brands and limited brand loyalty (apart from beauty goods) as more than half of the consumers say they buy a different brand if they do not find the one they are looking for on the shelves. Therefore, securing strategic store locations and extending the network coverage is a key to success. As requested by the central authorities, all provincial-level and municipal cities have released a city commercial development plan of their respective city, which has taken into consideration of the city’s overall development, population distribution, consumption demand, transportation systems and environmental requirements. All new store opening should be
Li & Fung Research Centre Member of Li & Fung Group
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China Distribution & Trading Issue 33
May 2006
complied with the plan in the aspect of type of retail
retailers are eliminated. To retailers, the gross profit
channel, size and location, etc. In this regard, strategic
margin for dealing in private label products could be
retail site is getting more and more scare, especially in
20% higher than selling non-private label products.
big cities. Some retailers have been fast in securing favorable retail sites or seeking acquisition
Private branding is still in the initial stage of
opportunities to acquire existing store locations.
development in China. Private label products only constitute a negligible share in overall retail sales,
4. Better collaboration between supply chain partners
compared with the developed countries where consumers spend around 10-15% of their total expenditure on private label packaged goods. With the
The strained relationship between retailers and
expansion of global retailers in China and the
suppliers have been a hot topic in the past few years. In
increasing brand building capabilities of domestic
a highly competitive and complex business
retailers, an increasing number of private label products
environment, they often have conflicting interests. The
have been launched in the market. The private branded
poor relationship between retailers and their supply
products now take up an increasing share in the total
chain partners has undermined the efficiency of the
sales of supermarkets. Besides, the product types of
whole supply chain and greatly driven up the
private label products are ever expanding – from food
distribution costs. In recent years, commercial
products and daily necessities to clothing, home
enterprises have become increasingly aware of this
appliances and computer components.
worsening situation and strived to establish profit- and risk-sharing relationship with their partners. For
Carrefour, the world’s second largest retailers, for the
example, in an attempt to forge closer ties with its
first time, launched 435 private label products in its 46
suppliers, Beijing Gome Electrical Appliance organized
stores across 23 Chinese cities in 2004. Now Carrefour
a large-scale meeting in Beijing in May 2005, in which it
offers over 1,000 types of private label products, which
stated its strategic plan and affirmed its commitment to
account for 5% of its total sales. These Carrefour-
build cooperative relationships with its suppliers. Over
branded products include foods, daily necessities, and
200 top management or representatives from big home
clothes, etc., and are only sold in Carrefour
appliance manufacturers have attended the meeting.
hypermarkets in China. They are priced at around fourfifth the price of the non-private label products. Over the
5. Private label
past two years, Carrefour has tripled the size of its private label product development teams, which now has nearly 20 staff.
Developing private labels/ brands is a growing trend among supermarket, hypermarket, convenience store and professional store operators. It brings cost
Walmart now offers around 1,000 types of private label
reduction to the retailers in terms of sourcing, delivery
products, covering 13 broad categories and accounting
and sales thereby boosting the profit margin. It also
for 7% and 2.5% of total product offerings and total sales
helps differentiate the retailer from its competitors. The
respectively. Same as Carrefour, Walmart now has three
prices of private branded products could be 5% to 50%
private brands targeting different consumer segments.
lower than those of the similar products as the slotting
Apart from launching new private brands, Walmart is also
fees and distribution fees that producers give to
extending the product lines of each brand.
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China Distribution & Trading Issue 33
May 2006
Watson’s, a Hong Kong-based chain operator, now has
other branded products. The growth of private label
more than 500 private-branded products and it plans to
products is exerting pressure on manufacturers, brand
expand the portfolio to 700. The prices of these private
owners as well as distributors. We foresee that as
label products are generally 10-50% lower than other
private label products continue to develop at a fast
products and are well-received by the Chinese
pace, many weak distributors and manufacturers will
consumers.
gradually be squeezed out of the market.
Apart from Carrefour, Walmart and Watson’s, many
XII.The growing power of foreign retailers
retailers are also engaging in private label development. These include Hualian, Lianhua, Wumart, Metro, Ekchor-Lotus, Chaoshifa, the Home World, Kedi,
1. Foreign participation in the retail sector
Jingkelong, etc. However, retailers wishing to develop their own branded products have to identify qualified manufacturers, be ready to place large orders and
(1) Foreign-invested retail enterprises
make cash flow provision, as well as carry out strict quality control in the production process. Otherwise,
From 11 December 2004 (the date that China fully
retailers have to pay high cost, especially goodwill, for
liberalized its commercial sector) to end-2005, the
the product quality problems.
Ministry of Commerce has approved the establishment of 1,027 foreign-invested retail enterprises, among
Some manufacturers are eager to be the producers of
which 625 of them are wholly foreign-owned. The
these private label products. Though the purchasing
expansion of the foreign enterprises is impressive
price of the private label products may be significantly
compared with the fact that only 314 foreign-invested
lower than the normal products, the manufacturers
commercial enterprises owning 3,997 stores with 9.2
benefit from the elimination of slotting fees and ensuring
million square metres have been approved for the
the stable and large order quantity from the retail giants.
period from 1992 to 2004.
However, manufactures do face many challenges when doing OEM (original equipment manufacturing) for the
These foreign enterprises have strong competitive
retailers. First, the profit margin is very low. Second, the
advantages over the majority of the local retailers such
manufacturers have no control over product design and
as financial strength, deeper experience, better
quality but they have to bear the responsibility when
business models and savvier marketing strategies.
things go wrong. Third, the bargaining power of the
Industry sources revealed that in the past year, over
retailers is very high, given the vast number of suppliers
100 domestic supermarkets have been closed down
in China. Manufacturers always face the risk of losing
a m i d t h e s t i ff c o m p e t i t i o n w i t h t h e i r f o r e i g n
the retailers.
counterparts. However, the picture is not all bad for domestic retailers. Local retailers boast low-cost
All in all, the development of private label products is set
operations, market recognition and local connection.
to accelerate, especially for those products with low
Many local retailers manage to establish strong
brand loyalty. To spare more space for their private label
foothold in regional markets.
products, some retailers have been cutting the share of
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China Distribution & Trading Issue 33
(2) Volunteer chain operators
May 2006
Province, joined SPAR. Siya will open its first “SPAR Eighteen” store in March 2005 and will collaborate with
Faced with the pressures of market liberalization and
SPAR to open 40 outlets over the next three years.
the aggressive expansion of international chains, China’s less competitive small and medium-sized
US-based IGA has five members in the Mainland
retailers are either teetering on the edge of survival or
market, including South China’s Shenzhen Yourong
are going bankrupt. In this regard, the voluntary chain
and Ningbo Sanjiang, Central China’s Hunan Bubugao
operation shows a possible way out of this retail
and Hubei Zhongbai, and Northeast China’s
conundrum.
Heilongjiang Qingkelong. IGA encourages members to continue using their own brands, and collects
Foreign volunteer chain operators, including
US$30,000 in membership dues and US$30 in annual
Independent Grocers’ Association (IGA) and SPAR,
fees. The chairman of Hunan Bubugao said that he
play a prominent role in shaping the development of
liked the operation model, management experience,
volunteer chain operation in China. Members of these
and mature expansion strategy IGA provided. It has
companies can collaborate on commodity procurement
helped the company find a shortcut to grow amid the
and distribution while retaining ownership of their
intensifying market competition.
assets and independently conducting financial audits.
(3) International investment funds/ companies
Benefits along with joining the IGA and SPAR include cheaper commodity prices and advanced consultation services, but the most valuable thing IGA and SPAR
Quite a number of international investment funds or
bring to Chinese enterprises is professional training in
companies have cashed in on the booming Chinese
retail operation.
retail market. The following are some of the examples. Morgan Stanley injected US$50 million into Shanghai
SPAR, based in the Netherlands, was one of the first to
Yongle in 2005 and becomes the third largest
cash in on the Chinese market. Shangdong Jiajiayue
shareholder of the company. Then in October 2005,
Supermarket Co.,Ltd is the first Chinese retail
Morgan Stanley assisted Yongle to get listed on the
enterprise to cooperate with SPAR. In April 2005, SPAR
Hong Kong Stock Exchange. This investment not only
and Jiajiayue opened their first hypermarket – the
gives Morgan Stanley favorable monetary return but
“SPAR Eighteen” — in Shandong Weihai and they plan
also provides it with access to consumer electronics
to have 15 SPAR hypermarkets in Shandong by 2007.
distribution channels in China. Last December,
SPAR’s role in this cooperation is to conduct market
Ashmore Investment Management signed an
research and organize operations, including store
agreement with Shenzhen Agricultural Products Co
improvements, the establishment of purchasing
planning to inject 300 million yuan into the latter’s
systems, management of goods and clientele, staff
subsidiary, Shenzhen Minrun Agricultural Products
training and service design, etc. Jiajiayue’s daily sales
Distribution Chain Stores, in three years. As discussed
volume jumped from 10,000 yuan (US$1,235) to
previously, Warburg Pincus, a leading global private
200,000 yuan (US$25,000) after renovation. Inspired
equity investment fund, has invested in Gome Electrical
by this success, Sida, a company based in Central
Appliances Holding Limited.
China’s Henan Province, and Siya, based in Hubei
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China Distribution & Trading Issue 33
2. Latest developments of foreign retail enterprises
May 2006
hypermarkets in Shanghai in total, accounting for 53% of Shanghai’s total number of hypermarkets. Their combined retail sales reached 16.3 billion yuan, making
(1) Accelerating expansion
up 76% of the total sales of hypermarkets in Shanghai. Statistics from the Ministry of Commerce (MOC)
Many foreign retailers embarked on aggressive
showed that the sales value of foreign-operated
expansion in 2005. For example, Walmart, Carrefour,
hypermarkets is in general two to three times more than
Lotus, 7-11, B&Q opened around 12, 16, 20, 20 and 13
that of the local ones under the same store size.
stores in China in 2005 respectively. International retail
(3) Investment in other retail channels accelerated
giants including Carrefour and Walmart, in an attempt to map out new strategies and to strive for further growth, have shuffled their top management early last year. To realize rapid expansion in the Mainland market, Metro
Apart from supermarkets, foreign retailers have also
has broken its principle that it has committed for 40
accelerated investment in other retail channels in
years – buying but not renting store sites when opening
recent years. Examples include Circle K, 7-11 and
new stores. Metro, for the first time, opened its first
Lawson convenience stores; and specialty and
store in Shenzhen under a rental agreement. Metro
professional stores like B&Q, OBI, IKEA, Mannings,
plans to open 40 more stores in three to five years.
Watson’s, Sa Sa, MSI, Medicine Shoppe and EU-
Therefore, it will try every means and seek alternative
Watch, among which Mannings is the first wholly Hong
operation models that can help minimize the costs and
Kong-owned retail operator in the Mainland under the
speed up expansion.
qualification of CEPA. Foreign investors also have an early start in the department store sector. Jusco, Seibu,
(2) M a i n t a i n i n g d o m i n a t i n g s h a r e i n supermarket and hypermarket operation
Mitsukoshi, Sogo, Lane Crawford and Pacific are some
Foreign retailers have competitive advantage and play
(4) Striding toward full ownership
of the famous ones.
a dominating role in supermarket and hypermarket operation. In 2001, there were 64 foreign-invested
With some years of experiences in China and having
supermarket and hypermarket operators in the
familiarized themselves with the complex Chinese
Mainland. The figure grew to 90 and 137 in 2002 and by
market and business environment, some foreign retail
October 2004 respectively. The top 10 largest foreign
giants are striding toward full ownership in pursuit of
hypermarket operators have around 475 stores
autonomy. Besides, by adopting localization strategies
altogether, realizing a total turnover of 93.7 billion yuan
and strongly localized hiring policy, many international
in 2005. Walmart, Carrefour, Metro, Trust-marrt, Park’N
retailers now do not feel the need of a local joint venture
Shop, Ekchor-Lotus are some of the biggest foreign
partner which is supposed to bring local connection,
supermarket and hypermarket operators in China. The
local government support and distribution channels,
9 largest foreign hypermarket operators including
etc. Carrefour, for example, announced it had acquired
Carrefour, Metro, Auchan, Ekchor-Lotus, have 67
100% of one of its Chinese joint venture partners last
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China Distribution & Trading Issue 33
May 2006
(5) Penetrating to the second- and third-tier cities and inland regions, and seeking M & A opportunities
October, paying the Kunming Department Store (Group) 4.2 million yuan for the latter’s 35% share of the Kunming Carrefour Supermarket. Apart from Kunming, Xinjiang and Changsha Carrefour are also turning to be wholly foreign-owned. Carrefour has also established a
With GDP growth continuing to increase at a rate in
wholly foreign-owned enterprise in Shenzhen and
excess of 8%, the prosperity that was once confined to
Carrefour will have full ownership of all its Shenzhen
some big cities is now starting to filter into the inland
stores. In fact, in the case of Carrefour, many of its joint
regions and the second- and third-tier cities. Currently,
ventures were rashly entered into. In 2002, the
foreign retail stores mainly concentrate in PRD, YRD
company was found to have violated the regulations
and “Beijing-Tianjin-Hebei” region. After years of
that before December 2004 all foreign investors can
experiences in the Mainland, foreign retailers have
only have up to 49% to 65% of the shareholding of the
begun to expand to the second- and third-tier cities and
foreign-invested commercial enterprises. In order to fall
the inland cities. B&Q, for instance, shifted its
back in line, Carrefour quickly set up a number of joint
expansion focus to second-tier cities around the PRD
ventures and transferred 35% of store ownership to
and YRD and the untapped market in the West in 2005.
local companies. Aside from Carrefour, international
Lotus, another foreign retailer, is expanding to the
retail enterprises such as Metro and Lotus are also
second- and third-tier cities, and even to the counties.
pursuing full ownership and in the process of buying out
On the other hand, foreign retailers no longer just focus
their local partners.
on organic growth, but are adopting M & A strategy to explore these relatively untapped markets. In the first
Though M & A or the wholly-foreign owned ownership
six months of 2005, the MOC has already approved
structure have been the preferred weapons of choice
eight M & A deals of foreign-invested commercial
for the majority of foreign enterprises, some retailers
enterprises.
still prefer to enter the market through joint venture.
(6) Increasing sourcing in China
Tesco is a good example in place. Tesco establish a US$260 million joint venture with Hymall, a supermarket chain operator owned by the Taiwan-
China is not only the largest potential consumer market
based Ting Hsin International Group. Utilizing the
in the world, but is also the world’s supplier of a wide
Hymall’s brand, Tesco now jointly operates about 50
variety of products. Many foreign retail enterprises have
hypermarkets across the country. Tesco chose to enter
been increasing their sourcing volume in China. The
the market through joint venture because it did not want
Pearl River Delta (PRD), in particular, is an important
to jump into the vast and diverse Chinese market
manufacturing base of many foreign enterprises.
single-handedly. The top management of Tesco
International retailers such as Walmart, Carrefour,
believes that the joint venture partner can provide
Tesco, B&Q, IKEA, Jusco have already established
business value in the aspects of local support, such as
sourcing centers in Shenzhen. Statistics from
land and real estate, business contacts, sale and
Development Research Center of State Council (DRC)
marketing channels and access to local government.
showed that the total sourcing volume of Walmart, Carrefour and Metro in China in 2004 reached US$18 billion, US$3.2 billion and US$2.7 billion respectively. Sources revealed that the combined sourcing volume of
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China Distribution & Trading Issue 33
May 2006
the foreign retail giants including Walmart, Carrefour,
Store layout is also very important. Some foreign
Metro, etc. was likely to exceed 200 billion yuan in
retailers has mistakenly spent a lot of money on building
2005. According to Walmart’s top management,
a fancy and luxurious shopping environment, say
Warlmart has already built up strong relationship with
installing a lot of LCD monitors in the stores or grandly
more than 20,000 suppliers in the Mainland and now
decorating the ceiling. However, consumer researches
they have deeper knowledge of Chinese suppliers and
have shown that these investments have actually
products.
created no added value to Mainland consumers and failed to stimulate consumption. Instead, setting up
(7) Localization is essential
cooking demonstration counters in the Mainland stores to promote food products may be more effective in
There exists significant cultural, language and
boosting sales. This shows that understanding the
institutional differences between foreign countries and
Mainland consumers’ behaviors is crucial.
China. For foreign retailers to win market share in China, localization is a must. Actually many foreign
To sum up, in order to reap benefit from the lucrative
retail enterprises have been making increasing efforts
Chinese retail market, foreign retailers have to make
to localize their operation. B&Q, a retailer engaging in
every endeavor to understand the Mainland market and
home improvement business, offers a lot of DIY (do-it-
consumers, and pay special attention to company
yourself) products in the western markets. However, as
positioning, selection of store location, product and
many Mainland consumers are not used to making their
service mix, store design, and advertising and
own furniture and furnishings and show little interest in
promotion strategies, etc. In the operation aspect,
DIY products, B&Q has adjusted its traditional business
Chinese retailers can take advantage of local sourcing
model to cater to the Chinese demands. B&Q provides
to push down production costs and local recruitment to
one-stop shop for all home improvement needs. It offers
lower staff costs, and bring in local expertise and
a comprehensive set of services, including tools repair,
networks.
timber cutting, paint mixing, design service and
3. Government simplified the approval procedure of foreign commercial investment
installation services. On top of these, B&Q also provides customer education to help customers to design and decorate their houses in its decoration centres.
In December 2005, the MOC has released a circular Another example is Starbucks Coffee (Starbucks),
taking effect on 1 March 2006 to simplify and speed up
which has been very successful in bringing in the coffee
the approval process for the establishment of, and the
culture to China. Unlike the customers in the U.S. who
opening of stores by a foreign-invested commercial
prefer take-away, Chinese consumers view Starbucks
enterprise. Under the Administrative Measures on
as a place for social gathering. Therefore, Starbucks’s
Foreign Investment in Commercial Areas, the
outlets in China are usually bigger and have more
provincial-level governments are allowed to approve
seats. Besides, Starbucks has introduced a
foreign commercial investment if the conditions listed in
comprehensive Chinese-style food menu in its Chinese
Exhibit 16 under the column “The Measures” are
outlets. For example, it launched Starbucks moon-cake
fulfilled. The new circular further simplifies the approval
last year.
procedures. Details are shown in Exhibit 19 below.
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China Distribution & Trading Issue 33
May 2006
Exhibit 19: Circumstances that the provincial governments could approve foreign commercial investment
The Measures •
The new Circular
The distribution channels do not involve television,
•
Same
•
Same, and added the following items: iron & steel,
telephone, mail, internet and vending machine. •
The commodities distributed by the foreign investor do not include books, newspapers,
precious metal, iron mine, fuel oil, rubber and
periodicals, pharmaceuticals, automobiles, salts,
other important industrial raw materials.
tobaccos, pesticides, mulching films, processed oils, grains, vegetable oils, sugar and cotton. •
•
If the size per store is below 3,000m2, the number
•
If the size per store is below 300 m2, the number
of such stores operated by the foreign investor
of such stores operated by the foreign investor
does not exceed 3 in the province and 30 in the
does not exceed 30 in the province and
whole Chinese Mainland.
300 in the whole Chinese Mainland.
If the size per store is below 5,000m2, the number
•
If the size per store is below 3,000m2, the number
of such stores operated by the foreign investor
of such stores operated by the foreign investor
does not exceed 3 in the province and 30 in the
does not exceed 5 in the province and 50 in the
whole Chinese Mainland.
whole Chinese Mainland. •
The size per store is below 300 m2.
© Copyright 2006 Li & Fung Research Centre. All rights reserved. Though Li & Fung Research Centre endeavours to ensure the information discussed in this material is accurate and updated, no legal liability can be attached as to the contents hereof. Reproduction or redistribution of this material without Li & Fung Research Centre’s prior written consent is prohibited.
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China Distribution & Trading
1
landscape VIII. Merger and
May 2006
China’s retail sector in 2005-06 Part III: Market players : moves and strategies
IN THIS ISSUE : VII. The competitive
Issue 33
VII.The competitive landscape 4
1. Number of retail businesses
acquisition In 2004, there were 353,000 corporation units engaging in retail business in IX.
Features of the
6
China, with total employment exceeding 6 million, according to the latest figures
top 100 retail
from the Economic Census (see Exhibit 9). General merchandise, home
chain operators
appliance and consumer electronics, five metals, furniture and fitting, automobile, motorcycle and auto parts are the most popular types of retail
X.
Retail format
10
performance and
business. The general merchandise sector employed the largest amount of workers, making up 38% of the total employment in the retail sector.
franchising operation among the Top 30s XI.
Key expansion
Exhibit 9: 12
strategies XII. The growing power of foreign retailers
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15
Number of retail businesses in China, 2004
Types of retail business Total General merchandise Home appliance and consumer electronics Five metals, furniture and fitting Automobile, motorcycle, fuels and auto parts Clothing, shoes, hats, textiles and other daily goods Food, beverage and tobacco Cultural, sport and recreation products Medicine and medical equipment Non-store based and other retail business
Corporation unit (‘000) 353 46 56
Share
1
Share 100% 38% 10%
49
14%
408
7%
48
14%
674
11%
37
10%
510
8%
33
9%
487
8%
27
8%
341
6%
24
7%
430
7%
33
9%
315
5%
Source: Economic Census, National Bureau of statistics
Li & Fung Research Centre Member of Li & Fung Group
100% 13% 16%
Employment (‘000) 6,097 2,296 636
China Distribution & Trading Issue 33
May 2006
The majority of retail outlets in China remain individually
of the State-owned commercial enterprises. Under the
owned and small-scale. Some of them are no more than
slogan “Zhuada fangxiao” (retaining the large SOEs
street-corner kiosks. In 2004, over 16 million retail sole
and releasing the small ones), the Chinese government
proprietors are competing in the market. These sole
has articulated a clear plan to limit the business scope
proprietors altogether employed more than 28 million
and size of the public sector. The Chinese authorities
workers. The significance of these small-scale retailers
have stated their direction of creating 30-50 major
will continue to be great, especially in reaching the
SOEs through merger and acquisition (M & A), so that
smaller communities that large retailers have yet to be
these enterprises will be strong enough to compete
able to reach.
globally. Meanwhile, the less competitive ones may be restructured, left to go bankrupt or acquired by other
2. Ownership structure
investors. We can see that, in recent year, a number of less competitive State-owned commercial enterprises
Currently, local enterprises are playing the lead in
have gradually withdrawn from the market. And China’s
China’s retail sector (see Exhibit 10). The market share
biggest retailer – the Bailian Group – has been formed
of foreign retail enterprises remains negligible, but they
as a result of the government-led M & A deal among
are fast expanding in terms of size, number and
Shanghai No 1 Department Co Ltd, Shanghai Hualian
significance.
Co Ltd, Friendship (Group) Co Ltd and Shanghai Goods and Materials Crop.
There are nearly 300,000 domestic-funded retail corporation units in China in 2004. By broad category,
Meanwhile, private retail stores began to emerge in the
the forms of ownership of Chinese retailers include
1980s. Private retail enterprises now account for
State-owned, collectively-owned, private and others. In
around 40% of the market share. Among China’s top
the pre-reform era, almost all the retail stores were
100 retail chain operators in 2005, 46 out of 100 are
State-owned. The State-owned enterprises (SOEs) are
private enterprises. Some of the famous private retail
known for its inefficiency, overstaffing and poor
businesses are Beijing Gome Electrical Appliance,
management. To improve the overall efficiency and
Suning Appliances Group and Beijing Wumart, Sanlian
productivity of the commercial sector, the Chinese
Commerce Ltd.
government has made effort in speeding up its revamp
Exhibit 10: Wholesales and retail businesses by forms of ownership, 2004
Corporation unit
Employment
84.1%
71.9%
Invested by HK, Macau & Taiwan
0.3%
0.9%
Foreign invested businesses
0.8%
2.0%
14.8%
25.2%
Domestic-funded
Others Source: Economic Census, National Bureau of statistics
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China Distribution & Trading Issue 33
May 2006
3. Expansion and consolidation (1) Competition heating up Many big retailers embarked on aggressive expansion in 2005. Bailian Group had 845 more stores in 2005 with total number of stores reaching 6,345. Tricon Greater China is also fast growing. It opened 367 stores last year and now it has 1,757 stores in total. One worth-noting trend is that the consumer electronics professional store operators have been expanding massively last year. Beijing Gome Electrical Appliance and Suning Appliances Group, for example, opened 199 and 170 stores more in 2005 respectively with yoy growth rate exceeding 80% (see Exhibit 11). Exhibit 11: Number of stores of major retail enterprises, 2004-2005
Enterprises
No. of stores in 2005
No. of stores in 2004
yoy growth (%)
6,345
5,500
15.4
Beijing Gome Electrical Appliance
426
227
87.7
Suning Appliances Group
363
193
88.1
Shanghai Nongongshang
1,572
1,232
27.6
Carrefour (China)
78
62
25.8
Shanghai Yongle
199
110
80.9
Five Star Appliance
193
120
60.8
1,757
1,390
26.4
Shenzhen A. Best Supermarket
79
58
36.2
Hefei Baida Shopping Center
54
42
28.6
Jiangsu Wenfeng Great World
612
506
20.9
Bailian Group
Tricon Greater China
Chain Development Corporation
Source: China Chain Store and Franchise Association (CCFA)
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China Distribution & Trading Issue 33
(2) Consolidation taking place
May 2006
In the coming years, we foresee that the consolidation will go on as bigger retailers step up their M & A drive to
China’s retail sector is highly fragmented and is mostly
achieve quick and effective expansion. The competitive
serviced by local retailers. As both foreign and local
retailers will grow in scale and strength while those who
major retail enterprises pushed ahead with their
fail to cope with market changes will exit the market or
ambitious expansion plans, the sector has entered a
be taken over. The market is expected to become more
stage of “expansion and consolidation”. The severe
concentrated and achieve an overall upgrading.
competition has put tremendous pressure on
VIII. Merger and acquisition
profitability. The heat is on and only those who work smartly and innovatively are able to stand out.
1. A wave of merger and acquisition activity
Faced with the pressures of market liberalization and the aggressive expansion of the retail giants, many small and medium-sized retailers in China are either
In recent years, M & A activities among retailers are
teetering on the edge of survival or are going bankrupt.
gathering pace in China. Bigger players are eager to
Sources reveal that over the past two years, more than
pursue M & A opportunities as they hunt for outlets in
200 retail enterprises have shut down mainly due to
strategic locations, network and people. Acquiring
evade payments to suppliers. From June to September
existing retail operators is a fast and a more direct way
2005, four leading enterprises in Taiyuan, Shanxi
of expanding market share, especially in unfamiliar
province, namely Tiansen, Kaiyuan Shengshi, Kaihua
markets. The retailing conglomerate can make full use
Temple Shopping Centre and Tangrende Supermarket,
of its partners’ resources, in terms of site networks,
closed down one after another. Among them,
equipment, sourcing systems and local relationships, to
Tangrende, a supermarket with only several thousand
reduce operational costs and risk. And at the same
square meter in size, owed suppliers 8-9 million yuan,
time, they can reduce competition. Apart from that,
and the whereabouts of its owner is still unknown. A
some retailers are also considering buying stakes in
research report published by China National
companies engaged in retail-complementary
Commercial Information Center reveals that quite a
businesses, including logistics, real estate
number of small to medium-sized domestic retail
development, food processing and daily necessities
enterprises are faced with the risks of bankruptcy.
manufacturing for strategic expansion.
Not only the smaller players, big retailers also feel the
In fact, many domestic retail operators, especially those
pressing need to revamp their business models and
with 100-500 million yuan sales volume, have
maintain competitiveness. Those who fail to catch up
difficulties in surviving in the midst of competition. Some
with the market developments are unlikely to survive.
of them are more willing to exit or sell out. This
The collapse of Pricesmart and Century 21
phenomenon is not confined to small and inefficient
convenience stores are two typical examples.
retail enterprises. Some strong regional retailers, to many people’s surprise, have been taken over last year.
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China Distribution & Trading Issue 33
May 2006
(2) Pursuing M & A strategies to penetrate to second- and third-tier cities
F o r e x a m p l e , Va n g u a r d a c q u i r e d C i k e l o n g Supermarket and Tianjian Yuetan Supermarket, and Hualian acquired 51% of Guangxi Jieyong for 107
M & A is one of the fastest and easiest ways for retail
million yuan.
enterprises to expand their business, establish critical In the wave of M & A, many local retailers are seeking
mass and acquire existing store locations. The M & A
cooperation with foreign retail enterprises. However,
strategy provides a shortcut for retailers, especially the
not all local retailers can raise the interest of their
foreign ones, to penetrate to unfamiliar market. In 2005,
foreign counterparts. First, many domestic retailers
many such deals have taken place. For instance,
prefer to sell out the whole business while foreign
Beijing Gome Electrical Appliances Holding Ltd
retailers just want to take over the stores in strategic
acquired many regional retailers in northeast and
locations rather than all the stores. Second, foreign
southeast China earlier last year. In November 2005,
retailers are skeptical about the financial status of many
Gome acquired Wuhan Zhongshang Home Appliance,
domestic retailers. Third, to many local retailers’
one of the largest consumer electronics retailers in
surprise, foreign retailers are focusing on second- and
Hubei province. These moves reflected Gome’s
third-tier cities and show little interest in local retailers
aggressive expansion plan in second- and third-tier
operating in the first-tier cities.
cities. Another example is Vanguar’s acquisition of Cikelong Supermarket in Zhejaing province and
2. Highlights of the M & A activities occurred in 2005
Tianjian Yuetan Supermarket in September 2005.
(3) Multi-format operation (1) M & A between large enterprises From the moves of retail enterprises in recent years, we There is a growing trend for large retail enterprises to
can see that some of them are shifting to horizontal
form strategic cooperation. In December 2005, China’s
expansion from vertical expansion. Instead of focusing
two largest retail groups, the Dalian-based Dashang
on operating one retail channel, more retailers choose
Group and the Shanghai-based Bailian Group signed
multi-format operation. Beijing Wangfujing Department
an agreement on jointly establishing a third company,
Store Co Ltd (Group), for instance, acquired 25% of
the Dashang International Co., Ltd. The two retailers
Seven-Eleven Beijing Company Ltd’s share from
plan to build the Dashang International into a large
Beijing Shoulian Commercial Group Co. Ltd. for U$8.75
modern company with an annual volume of business
million in 2005, marking its entry to the convenience
hitting 50 billion yuan (US$6 billion) in five years. This
store market.
move is expected to further strengthen Balian Group and Dashang Group’s foothold in the country. The deal that Wumart took over its minor competitor, the Beijing Merry Mart Chain Store Development Co. Ltd for 373.5 million yuan is another example.
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China Distribution & Trading Issue 33
(4) Taking over through secondary market
May 2006
(6) Investment injection of foreign investment funds
In 2005, Nanjing Central Emporium Stocks Co, Ltd (600280.SH), Nanjing Xinjiekou Department Store
Lured by the robust development of China’ retail sector,
Co.,Ltd (600282.SH), Baida Group Co, Ltd
an increasing number of international investment funds
(600865.SH) and Wuhan Store (000501.ZH) become
have been tapping the market through investing in
the targets of acquisition in the secondary market. As
Chinese retail enterprises. For example, Warburg
China’s share reform gathers pace, it is expected that
Pincus, a leading global private equity investment fund,
more retailers will seek M & A opportunities in the
announced to invest in Gome Electrical Appliances
secondary market by purchasing shares of the listed
Holding Limited through the issuance of 125 million
retail enterprises. Besides, a rule that allows foreign
U.S. dollars convertible bonds and 25 million U.S.
investors to hold stakes in China’s publicly listed firms
dollars warrants earlier this year. When the investment
by buying the tradable A shares has came into effect on
is completed, Warburg Pincus will hold 176, 680,630
31 January 2006. Foreign strategic investors are now
ordinary shares, which is equivalent to about 9.71% of
allowed to buy A-shares directly, rather than through a
total issued capital of Gome, assuming the bonds and
handful of qualified foreign institutional investors. This
warrants are fully converted and exercised, according
will help encourage mergers and acquisitions in the
to their agreement. This deal is beneficial to both
retail sector and improve overall corporate efficiency of
parties. The Chinese party gains funding to finance its
the domestic companies.
expansion and enhance its overall competitive position in the marketplace while the investment fund gains
(5) Targeting foreign retail enterprises – as a platform to expand outside China
return from the investment that they put faith in.
IX. Features of the top 100 retail chain operators
Last year, Beijing Hualian bought the Singapore branch of Japan-based Seiyu Ltd from CapitaLand Ltd, the top
1. Rapid expansion of large retail chain operators and increasing market concentration
real estate developer in the Southeast Asia. The acquisition costs 4 million Singapore dollar, or around 19.12 million yuan (US$2.36 million). The move marks the first foray by a Chinese firm into Singapore’s retail
In 2005, the combined sales of the top 100 retail chain
market and signals the intentions of Chinese
operators (hereafter referred to as “the Top 100s”)
companies to become big players in Southeast Asia’s
reached 707.6 billion yuan, up 42% yoy (see Exhibit
retail scene. It is anticipated that more Chinese retailers
12). The Top 100s altogether have 38,260 stores, an
will seek M & A opportunities with foreign retail
increase of 26% from the previous year. Their total
enterprises, which will serve as an excellent platform for
operation area and employment also grew by 38% yoy
domestic retailers to expand outside China.
Li & Fung Research Centre Member of Li & Fung Group
in 2005.
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China Distribution & Trading Issue 33
May 2006
Exhibit 12: Performance of the top 100 retail chain operators, 2001-2005 Retail sales
Number of stores
billion yuan
Yoy growth (%)
Units
Yoy growth (%)
2001
162.0
65
13,117
–
2002
246.5
52
16,986
29
2003
358.0
45
20,424
20
2004
496.8
39
30,416
49
2005
707.6
42
38,260
26
Source: China Chain Store and Franchise Association (CCFA)
The scale of the Top 100s is fast expanding. In 2001, the sales of the Top 100s only made up 4.3% of the country’s retail sales of consumer goods. In 2005, the share of the Top 100s rose to 10.5% (see Exhibit 13). 6 out of the top 100s have annual sales over 20 billion yuan and 21 of them recorded sales exceeding 10 billion yuan. In 2004, the sales of the 100th retail chain operator was 480 million yuan. The figure climbed to 821 million yuan in 2005. Exhibit 13: The Top 100s’ share in national retail sales, 2001-2005
Source: China Chain Store and Franchise Association (CCFA)
Exhibit 14 provides the major indicators of the top 20 retail chain operators in China in 2005, ranked by annual sales. Coming out the top was the Bailian Group, with a sales revenue in excess of 72 million yuan. It was followed by Beijing Gome Electrical Appliance, Suning Appliances Group, China Resources Vanguard Co. Ltd, Dashang Group, Beijing Hualian, Wumart, Shanghai Nongongshang, Carrefour (China) and RT-MART International Ltd.
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China Distribution & Trading Issue 33
May 2006
Exhibit 14: Top 20 retail chain operators in China, 2005
Ranking 2005 Enterprises 1 Bailian Group
Retail sales (million yuan) of which: selfyoy operated growth 2005 stores 2004 (%) 72,074
55,910
67,207
7.2
2005 6,345
Number of stores of which: selfoperated stores 2004
yoy growth Ranking (%) 2004
2,674
5,500
15.4
1
Of which: Lianhua Supermarket Holdings Co Ltd 38,285
3,786
17,000
1,937
2,169
19
2,492
27
Hualian Supermarket Co Ltd Hualian GMS Homemart 2
Beijing Gome Electrical Appliance
3
Suning Appliances Group
4
China Resources Vanguard Co. Ltd
49,840
49,840
23,879
108.7
426
426
227
87.7
2
39,718
27,947
22,108
79.7
363
224
193
88.1
4
26.0
2,133
31,299
20.0
Of which: China Resources Vanguard Co. Ltd 12,019
9,658
11,014
9.1
522
464
476
9.7
15
18.120
8,023
13,880
30.5
1,503
428
1,345
11.7
7
Suguo Supermarket Co. Ltd Zhejiang Cikelong Supermarket. Company Limited 1,160 5
Dashang Group
6
Beijing Hualian
7
Wumart
125
30,117
30,117
23,085
30.5
130
130
120
8.3
3
20,800
20,800
16,000
30.0
74
74
70
5.7
6
19,072
19,072
13,277
43.6
659
423
608
8.4
9
Of which: Beijing Chaoshifa 1,683 8
Shanghai Nongongshang
9
Carrefour (China)
10
RT-MART International Ltd
11
Shanghai Yongle
44
17,549
17,549
13,703
28.1
1,572
1,572
1,232
27.6
8
17,436
17,436
13,964
24.9
78
78
62
25.8
5
11,630*
35
60
47*
28
15,700*
12
15,166
15,166
10,834
40.0
199
199
110
80.9
11
15,054
15,054
13,167
14.3
191
191
170
12.4
12
Chongqing General Trading Group
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China Distribution & Trading Issue 33
Ranking 2005 Enterprises 13 Five Star Appliance 14 15
Tricon Greater China ( ) Sanlian Group
16
Hoyodo
17
Shenzhen A. Best Supermarket
18
Parkson
19
Hefei Baida Shopping Center
20
Lotus Supermarket Chain Store Co., Ltd ( )
Retail sales (million yuan) of which: selfyoy operated growth 2005 stores 2004 (%)
2005
14,612
12,987
9,379
55.8
193
13,300
8,300
11,800
12.7
1,757
13,201
5,071
13,256
0.4
274
12,000
10.0
8,500
13,200 11,801
11,801
11,000* 10,500
10,300
10,060
May 2006
Number of stores of which: selfoperated stores 2004 133
yoy growth Ranking (%) 2004
120
60.8
16
1,390
21.0
14
32
254
7.9
10
96
27
88
9.1
13
38.8
79
79
58
36.2
17
7,383*
49.0
36
30*
20.0
7,300
43.8
54
42
28.6
7,394
36.1
61
41
48.8
49
21
* Estimated value Source: China Chain Store and Franchise Association (CCFA)
2. Forms of ownership Private enterprises are fast developing. In 2002, only 30 private enterprises entered the Top 100 list while there were 46 private enterprises among the Top 100s in 2005 (see Exhibit 15). Foreign-invested retail enterprises are also rapidly growing. 27 out of the Top 100s were foreign-invested. Some of the largest ones were Suguo Supermarket, Carrefour (China), Shanghai Yongle, Tricon Greater China, Hoyodo, China Resources Vanguard Co Ltd and Metro Jinjiang Cash & Carry Co Ltd. The combined sales of these foreign-invested retail chain operators was 261.9 billion yuan in 2005, accounted for 37% of the total sales of the Top 100s. Exhibit 15: Number of enterprises by forms of ownership, 2002-2005
Source: China Chain Store and Franchise Association (CCFA)
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China Distribution & Trading Issue 33
May 2006
3. Regional instead of national expansion The complex supply chains of China’s distribution sector and the highly fragmented retail landscape characterized by huge income disparities and local protectionism have been hindering retailers from pursuing nationwide expansion. Looking at the Top 100 retail chains dealing in fast-moving consumer goods, 78 of them are strong regional players i.e. playing a leading role in a province or in nearby provinces. In fact, in many developed countries, there are abundant strong regional players. Some of the regional players are even more competitive than the national ones. We can see that in the past few years, some retailers have embarked on rapid cross-regional expansion in China. But now many of them have adjusted their expansion strategies and concentrated their efforts in certain locality. As such, they will be able to build a more manageable, efficient and flexible supply chain, and thus improve the overall operation efficiency.
X. Retail format performance and franchising operation among the Top 30s 1. Retail format performance On average, sales per store of the Top 30s increased to 29.5 million yuan in 2005 from 27.2 million yuan in 2004. But as the scale and size of different retail channels vary a lot, it is more meaningful to look at the sales per store of different retail channels individually (see Exhibit 16). As shown in Exhibit 14, professional store recorded the highest growth in sales per store while supermarket was somewhat lagging behind. Exhibit 16: Sales per store by retail channels among the Top 30s, 2005 Sales per store (million yuan)
Yoy growth (%)
Department stores
332.1
9.2
Professional stores
84.4
60.7
Supermarkets
31.2
1.5
2.5
35.6
Convenience stores Source: China Chain Store and Franchise Association (CCFA)
Department stores, challenged by the explosive growth of modern retail channels, have been gradually losing its competitiveness. Faced with the severe competition, some department store operators have been making every endeavor to revamp their business models, introduce new business concepts and improve operation efficiency and the quality of products and services. In 2005, department stores have made significant progress and were gradually regaining market share. Department stores registered a 25.7% sales growth rate in 2005, which was 11 percentage points higher than 2004 (see Exhibit 17). Their share in the total sales of the Top 30s increased to 15.6% in 2005 from 14.9% in 2004. Sales per store of department stores also increased by 9.2% to 332.1 million yuan in 2005. Despite the accelerating growth in sales, the growth rate of the number of stores dropped from 21.8% to 13.4%. All these figures reflect that department store operators no longer solely focus on scale expansion, but have been placing more emphasis on operation efficiency and quality.
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China Distribution & Trading Issue 33
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Professional stores embarked on rapid expansion in 2005, with growth of annual sales revenue and number of stores reaching 60.7% and 50.8% yoy respectively. The sales of professional stores made up 30% of the total sales of the Top 30s. The consumer electronics chains, in particular, have aggressive expansion in 2005. The combined sales and the total number of stores of the five biggest consumer electronics professional store operators, namely Beijing Gome Electrical Appliance, Suning Appliances Group, Shanghai Yongle, Five Star Appliance and Sanlian Group increased by over 66.8% and 61.0% in 2005 from the previous year, respectively. Supermarkets and hypermarkets still played a dominating role among the Top 30s. They, in total, constituted 45.2% of the sales of the Top 30s. However, amid the stiff competition with different retail channels, supermarkets and hypermarkets’ expansion rate and share in the sales of the Top 30s have shown a downward trend in 2005. Convenience stores registered a 35.6% and 11.3% growth in sales and number of stores in 2005 respectively. However, we witnessed a slowdown in growth of convenience stores, compared with the yoy growth rate of 49.7% in sales and 20.2% in number of stores in 2004. Exhibit 17: Performance of different retail channels in the Top 30s, 2005 Sales
Number of stores
(yoy growth %)
(yoy growth %)
Department stores
25.7
13.4
Professional stores
60.7
50.8
Supermarkets and hypermarkets
19.4
17.6
Convenience stores
35.6
11.3
Source: China Chain Store and Franchise Association (CCFA)
2. Franchising operation among the Top 30s Nearly half of the Top 30s have conducted franchising operation. Though 8,678 out of their total stores of 16,665 were franchised stores, the sales of franchised stores altogether only made up 17% of the total sales of the Top 30s. This was largely due to the fact that most of the franchised stores were convenience stores, professional stores and supermarkets and catering service providers, which have much lower level of sales per store. Compared with last year, the total number of franchised stores among the Top 30s increased by 19.3% in 2005. The upward trend is expected to continue along the sector development. Among the Top 30s, Bailian Group owned the largest number of franchised stores (3,671) in 2005. 22% of Bailian Group’s sales revenue was came from its franchised stores, whose average sales per store was 4.4 million yuan.
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China Distribution & Trading Issue 33
May 2006
XI. Key expansion strategies
(2) Market positioning and product portfolio
1. Differentiation, innovation and brand building
Confronted with the strong competition from hypermarkets and convenience stores, Lianhua Supermarkets is looking for ways to differentiate itself.
Faced with fierce competition, homogeneity of product
The restructuring of its Jinhui Store is a successful
and operation model, and relatively low customer
attempt in which it tried to set itself apart by
loyalty, retailers have come to realize that offering
repositioning the store and restructuring the product
discount may not be a sustainable or effective strategy
portfolio. Jinhui Store is located in a community where
in the long run. Therefore, some retailers are now
most of the residents are expatriates and affluent local
organizing themselves to deliver differentiation and
people. These people are more conscious of product
putting more efforts into brand building. They place
quality, style and health. There is a strong demand for
increasing emphasis on improving shopping
“green” and fresh food. Catering to the consumer
environment and services, identifying the right market
demands, Lianhua Supermarket repositioned its Jinhui
positioning, providing quality products with special
Store to high-end supermarkets. To create a fresh and
characteristics and building brands and customer
modern atmosphere, the Jinhui Store has been
loyalty. Retailers have begun to target specific
redecorated using green and orange as the
consumer groups more accurately and effectively.
predominant colors. Besides, a wide variety of high-end
Niche retail sectors are also gaining greater
fresh food and over 1,000 imported goods have been
significance.
introduced. Sources reported the total sales of Jinhui Store on its day of reopening reached 116,500 yuan.
Case studies (1) Product and services
(3) Store environment and experience-based differentiation
Park’n Shop opened a “new concept flagship” store in
Shandong Jiajiayue Supermarket Co.,Ltd , cooperating
Guangzhou in late 2004. The store provides one-stop
with the world’s largest volunteer chain operator SPAR
shopping services for consumers with products ranging
International (SPAR), have transformed one of its
from fresh food, packaged foods from different
stores in Weihai into “SPAR Eighteen” – a hypermarket
countries, daily necessities, and wines to digital
that stresses consumer experiences. Consumers can
products. Park’n Shop has introduced the Watson’s
find a completely new shopping experience in “SPAR
Cellar in this flagship store for the first time. The Cellar
Eighteen” through the enjoyment of different senses,
offers a host of wine from a wide variety of countries.
including sight, hearing, smell, taste and touch. After the
The salesmen also provide professional services for
renovation, the former Jiajiayue store’s daily sales
consumers. By adding value to its products and
volume jumped from 10,000 yuan (US$1,235) to
services, the Guangzhou flagship supermarket has
200,000 yuan (US$25,000).
managed to attract a lot of consumers.
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China Distribution & Trading Issue 33
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2. Penetrating to the second- and third-tier cities As discussed earlier, new and strong purchasing power is emerging in second- and third-tier cities. These cities present immense potential. In fact, the second- and third-tier cities, as well as some inland cities, are fast in becoming the next battlefields. Places such as Chengdu, Tianjin, Qingdao, Shenyang, Nanjing, Xi’an and Chongqing are particularly popular. Exhibit 18 shows the opportunities and challenges facing retailers and brand owners when expanding to the second- and third-tier cities. Exhibit 18: Expanding to the second- and third-tier cities: opportunities and challenges
Opportunities in theses cities •
Challenges facing investors
Vast population
•
Market fragmentation increases the distribution difficulties and costs
•
Remarkable economic growth and surging
•
purchasing power •
•
Underdeveloped distribution network obstructing inter- and intra-regional expansion
Living expenditure is relatively low. Buying potential
•
Much time and efforts are required to get familiar
in some second-tier cities could be as strong as
with local context, and to build up relationship with
in the big cities
local government and business partners
The markets are relatively unexplored and
•
Localization is a must
competition is less severe •
More favorable retail sites are available
•
The markets are young and there are few well-established brands. Consumers have limited product and brand exposure
Many foreign retailers have already scaled up their operation in the smaller cities. Carrefour, for example, has relocated its regional headquarter for central and western China from Shanghai to Chengdu, the capital city of Sichuan province. Such relocation reflects that the retail giant’s effort to consolidate its foothold in China’s western region. Recently, Carrefour has stated its intention to open 10-15 new stores each year, and about one-third of these stores will be located in the central and western areas.
3. Land grab strategy Distribution coverage is critical due to the wide availability of local brands and limited brand loyalty (apart from beauty goods) as more than half of the consumers say they buy a different brand if they do not find the one they are looking for on the shelves. Therefore, securing strategic store locations and extending the network coverage is a key to success. As requested by the central authorities, all provincial-level and municipal cities have released a city commercial development plan of their respective city, which has taken into consideration of the city’s overall development, population distribution, consumption demand, transportation systems and environmental requirements. All new store opening should be
Li & Fung Research Centre Member of Li & Fung Group
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China Distribution & Trading Issue 33
May 2006
complied with the plan in the aspect of type of retail
retailers are eliminated. To retailers, the gross profit
channel, size and location, etc. In this regard, strategic
margin for dealing in private label products could be
retail site is getting more and more scare, especially in
20% higher than selling non-private label products.
big cities. Some retailers have been fast in securing favorable retail sites or seeking acquisition
Private branding is still in the initial stage of
opportunities to acquire existing store locations.
development in China. Private label products only constitute a negligible share in overall retail sales,
4. Better collaboration between supply chain partners
compared with the developed countries where consumers spend around 10-15% of their total expenditure on private label packaged goods. With the
The strained relationship between retailers and
expansion of global retailers in China and the
suppliers have been a hot topic in the past few years. In
increasing brand building capabilities of domestic
a highly competitive and complex business
retailers, an increasing number of private label products
environment, they often have conflicting interests. The
have been launched in the market. The private branded
poor relationship between retailers and their supply
products now take up an increasing share in the total
chain partners has undermined the efficiency of the
sales of supermarkets. Besides, the product types of
whole supply chain and greatly driven up the
private label products are ever expanding – from food
distribution costs. In recent years, commercial
products and daily necessities to clothing, home
enterprises have become increasingly aware of this
appliances and computer components.
worsening situation and strived to establish profit- and risk-sharing relationship with their partners. For
Carrefour, the world’s second largest retailers, for the
example, in an attempt to forge closer ties with its
first time, launched 435 private label products in its 46
suppliers, Beijing Gome Electrical Appliance organized
stores across 23 Chinese cities in 2004. Now Carrefour
a large-scale meeting in Beijing in May 2005, in which it
offers over 1,000 types of private label products, which
stated its strategic plan and affirmed its commitment to
account for 5% of its total sales. These Carrefour-
build cooperative relationships with its suppliers. Over
branded products include foods, daily necessities, and
200 top management or representatives from big home
clothes, etc., and are only sold in Carrefour
appliance manufacturers have attended the meeting.
hypermarkets in China. They are priced at around fourfifth the price of the non-private label products. Over the
5. Private label
past two years, Carrefour has tripled the size of its private label product development teams, which now has nearly 20 staff.
Developing private labels/ brands is a growing trend among supermarket, hypermarket, convenience store and professional store operators. It brings cost
Walmart now offers around 1,000 types of private label
reduction to the retailers in terms of sourcing, delivery
products, covering 13 broad categories and accounting
and sales thereby boosting the profit margin. It also
for 7% and 2.5% of total product offerings and total sales
helps differentiate the retailer from its competitors. The
respectively. Same as Carrefour, Walmart now has three
prices of private branded products could be 5% to 50%
private brands targeting different consumer segments.
lower than those of the similar products as the slotting
Apart from launching new private brands, Walmart is also
fees and distribution fees that producers give to
extending the product lines of each brand.
Li & Fung Research Centre Member of Li & Fung Group
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China Distribution & Trading Issue 33
May 2006
Watson’s, a Hong Kong-based chain operator, now has
other branded products. The growth of private label
more than 500 private-branded products and it plans to
products is exerting pressure on manufacturers, brand
expand the portfolio to 700. The prices of these private
owners as well as distributors. We foresee that as
label products are generally 10-50% lower than other
private label products continue to develop at a fast
products and are well-received by the Chinese
pace, many weak distributors and manufacturers will
consumers.
gradually be squeezed out of the market.
Apart from Carrefour, Walmart and Watson’s, many
XII.The growing power of foreign retailers
retailers are also engaging in private label development. These include Hualian, Lianhua, Wumart, Metro, Ekchor-Lotus, Chaoshifa, the Home World, Kedi,
1. Foreign participation in the retail sector
Jingkelong, etc. However, retailers wishing to develop their own branded products have to identify qualified manufacturers, be ready to place large orders and
(1) Foreign-invested retail enterprises
make cash flow provision, as well as carry out strict quality control in the production process. Otherwise,
From 11 December 2004 (the date that China fully
retailers have to pay high cost, especially goodwill, for
liberalized its commercial sector) to end-2005, the
the product quality problems.
Ministry of Commerce has approved the establishment of 1,027 foreign-invested retail enterprises, among
Some manufacturers are eager to be the producers of
which 625 of them are wholly foreign-owned. The
these private label products. Though the purchasing
expansion of the foreign enterprises is impressive
price of the private label products may be significantly
compared with the fact that only 314 foreign-invested
lower than the normal products, the manufacturers
commercial enterprises owning 3,997 stores with 9.2
benefit from the elimination of slotting fees and ensuring
million square metres have been approved for the
the stable and large order quantity from the retail giants.
period from 1992 to 2004.
However, manufactures do face many challenges when doing OEM (original equipment manufacturing) for the
These foreign enterprises have strong competitive
retailers. First, the profit margin is very low. Second, the
advantages over the majority of the local retailers such
manufacturers have no control over product design and
as financial strength, deeper experience, better
quality but they have to bear the responsibility when
business models and savvier marketing strategies.
things go wrong. Third, the bargaining power of the
Industry sources revealed that in the past year, over
retailers is very high, given the vast number of suppliers
100 domestic supermarkets have been closed down
in China. Manufacturers always face the risk of losing
a m i d t h e s t i ff c o m p e t i t i o n w i t h t h e i r f o r e i g n
the retailers.
counterparts. However, the picture is not all bad for domestic retailers. Local retailers boast low-cost
All in all, the development of private label products is set
operations, market recognition and local connection.
to accelerate, especially for those products with low
Many local retailers manage to establish strong
brand loyalty. To spare more space for their private label
foothold in regional markets.
products, some retailers have been cutting the share of
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China Distribution & Trading Issue 33
(2) Volunteer chain operators
May 2006
Province, joined SPAR. Siya will open its first “SPAR Eighteen” store in March 2005 and will collaborate with
Faced with the pressures of market liberalization and
SPAR to open 40 outlets over the next three years.
the aggressive expansion of international chains, China’s less competitive small and medium-sized
US-based IGA has five members in the Mainland
retailers are either teetering on the edge of survival or
market, including South China’s Shenzhen Yourong
are going bankrupt. In this regard, the voluntary chain
and Ningbo Sanjiang, Central China’s Hunan Bubugao
operation shows a possible way out of this retail
and Hubei Zhongbai, and Northeast China’s
conundrum.
Heilongjiang Qingkelong. IGA encourages members to continue using their own brands, and collects
Foreign volunteer chain operators, including
US$30,000 in membership dues and US$30 in annual
Independent Grocers’ Association (IGA) and SPAR,
fees. The chairman of Hunan Bubugao said that he
play a prominent role in shaping the development of
liked the operation model, management experience,
volunteer chain operation in China. Members of these
and mature expansion strategy IGA provided. It has
companies can collaborate on commodity procurement
helped the company find a shortcut to grow amid the
and distribution while retaining ownership of their
intensifying market competition.
assets and independently conducting financial audits.
(3) International investment funds/ companies
Benefits along with joining the IGA and SPAR include cheaper commodity prices and advanced consultation services, but the most valuable thing IGA and SPAR
Quite a number of international investment funds or
bring to Chinese enterprises is professional training in
companies have cashed in on the booming Chinese
retail operation.
retail market. The following are some of the examples. Morgan Stanley injected US$50 million into Shanghai
SPAR, based in the Netherlands, was one of the first to
Yongle in 2005 and becomes the third largest
cash in on the Chinese market. Shangdong Jiajiayue
shareholder of the company. Then in October 2005,
Supermarket Co.,Ltd is the first Chinese retail
Morgan Stanley assisted Yongle to get listed on the
enterprise to cooperate with SPAR. In April 2005, SPAR
Hong Kong Stock Exchange. This investment not only
and Jiajiayue opened their first hypermarket – the
gives Morgan Stanley favorable monetary return but
“SPAR Eighteen” — in Shandong Weihai and they plan
also provides it with access to consumer electronics
to have 15 SPAR hypermarkets in Shandong by 2007.
distribution channels in China. Last December,
SPAR’s role in this cooperation is to conduct market
Ashmore Investment Management signed an
research and organize operations, including store
agreement with Shenzhen Agricultural Products Co
improvements, the establishment of purchasing
planning to inject 300 million yuan into the latter’s
systems, management of goods and clientele, staff
subsidiary, Shenzhen Minrun Agricultural Products
training and service design, etc. Jiajiayue’s daily sales
Distribution Chain Stores, in three years. As discussed
volume jumped from 10,000 yuan (US$1,235) to
previously, Warburg Pincus, a leading global private
200,000 yuan (US$25,000) after renovation. Inspired
equity investment fund, has invested in Gome Electrical
by this success, Sida, a company based in Central
Appliances Holding Limited.
China’s Henan Province, and Siya, based in Hubei
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China Distribution & Trading Issue 33
2. Latest developments of foreign retail enterprises
May 2006
hypermarkets in Shanghai in total, accounting for 53% of Shanghai’s total number of hypermarkets. Their combined retail sales reached 16.3 billion yuan, making
(1) Accelerating expansion
up 76% of the total sales of hypermarkets in Shanghai. Statistics from the Ministry of Commerce (MOC)
Many foreign retailers embarked on aggressive
showed that the sales value of foreign-operated
expansion in 2005. For example, Walmart, Carrefour,
hypermarkets is in general two to three times more than
Lotus, 7-11, B&Q opened around 12, 16, 20, 20 and 13
that of the local ones under the same store size.
stores in China in 2005 respectively. International retail
(3) Investment in other retail channels accelerated
giants including Carrefour and Walmart, in an attempt to map out new strategies and to strive for further growth, have shuffled their top management early last year. To realize rapid expansion in the Mainland market, Metro
Apart from supermarkets, foreign retailers have also
has broken its principle that it has committed for 40
accelerated investment in other retail channels in
years – buying but not renting store sites when opening
recent years. Examples include Circle K, 7-11 and
new stores. Metro, for the first time, opened its first
Lawson convenience stores; and specialty and
store in Shenzhen under a rental agreement. Metro
professional stores like B&Q, OBI, IKEA, Mannings,
plans to open 40 more stores in three to five years.
Watson’s, Sa Sa, MSI, Medicine Shoppe and EU-
Therefore, it will try every means and seek alternative
Watch, among which Mannings is the first wholly Hong
operation models that can help minimize the costs and
Kong-owned retail operator in the Mainland under the
speed up expansion.
qualification of CEPA. Foreign investors also have an early start in the department store sector. Jusco, Seibu,
(2) M a i n t a i n i n g d o m i n a t i n g s h a r e i n supermarket and hypermarket operation
Mitsukoshi, Sogo, Lane Crawford and Pacific are some
Foreign retailers have competitive advantage and play
(4) Striding toward full ownership
of the famous ones.
a dominating role in supermarket and hypermarket operation. In 2001, there were 64 foreign-invested
With some years of experiences in China and having
supermarket and hypermarket operators in the
familiarized themselves with the complex Chinese
Mainland. The figure grew to 90 and 137 in 2002 and by
market and business environment, some foreign retail
October 2004 respectively. The top 10 largest foreign
giants are striding toward full ownership in pursuit of
hypermarket operators have around 475 stores
autonomy. Besides, by adopting localization strategies
altogether, realizing a total turnover of 93.7 billion yuan
and strongly localized hiring policy, many international
in 2005. Walmart, Carrefour, Metro, Trust-marrt, Park’N
retailers now do not feel the need of a local joint venture
Shop, Ekchor-Lotus are some of the biggest foreign
partner which is supposed to bring local connection,
supermarket and hypermarket operators in China. The
local government support and distribution channels,
9 largest foreign hypermarket operators including
etc. Carrefour, for example, announced it had acquired
Carrefour, Metro, Auchan, Ekchor-Lotus, have 67
100% of one of its Chinese joint venture partners last
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China Distribution & Trading Issue 33
May 2006
(5) Penetrating to the second- and third-tier cities and inland regions, and seeking M & A opportunities
October, paying the Kunming Department Store (Group) 4.2 million yuan for the latter’s 35% share of the Kunming Carrefour Supermarket. Apart from Kunming, Xinjiang and Changsha Carrefour are also turning to be wholly foreign-owned. Carrefour has also established a
With GDP growth continuing to increase at a rate in
wholly foreign-owned enterprise in Shenzhen and
excess of 8%, the prosperity that was once confined to
Carrefour will have full ownership of all its Shenzhen
some big cities is now starting to filter into the inland
stores. In fact, in the case of Carrefour, many of its joint
regions and the second- and third-tier cities. Currently,
ventures were rashly entered into. In 2002, the
foreign retail stores mainly concentrate in PRD, YRD
company was found to have violated the regulations
and “Beijing-Tianjin-Hebei” region. After years of
that before December 2004 all foreign investors can
experiences in the Mainland, foreign retailers have
only have up to 49% to 65% of the shareholding of the
begun to expand to the second- and third-tier cities and
foreign-invested commercial enterprises. In order to fall
the inland cities. B&Q, for instance, shifted its
back in line, Carrefour quickly set up a number of joint
expansion focus to second-tier cities around the PRD
ventures and transferred 35% of store ownership to
and YRD and the untapped market in the West in 2005.
local companies. Aside from Carrefour, international
Lotus, another foreign retailer, is expanding to the
retail enterprises such as Metro and Lotus are also
second- and third-tier cities, and even to the counties.
pursuing full ownership and in the process of buying out
On the other hand, foreign retailers no longer just focus
their local partners.
on organic growth, but are adopting M & A strategy to explore these relatively untapped markets. In the first
Though M & A or the wholly-foreign owned ownership
six months of 2005, the MOC has already approved
structure have been the preferred weapons of choice
eight M & A deals of foreign-invested commercial
for the majority of foreign enterprises, some retailers
enterprises.
still prefer to enter the market through joint venture.
(6) Increasing sourcing in China
Tesco is a good example in place. Tesco establish a US$260 million joint venture with Hymall, a supermarket chain operator owned by the Taiwan-
China is not only the largest potential consumer market
based Ting Hsin International Group. Utilizing the
in the world, but is also the world’s supplier of a wide
Hymall’s brand, Tesco now jointly operates about 50
variety of products. Many foreign retail enterprises have
hypermarkets across the country. Tesco chose to enter
been increasing their sourcing volume in China. The
the market through joint venture because it did not want
Pearl River Delta (PRD), in particular, is an important
to jump into the vast and diverse Chinese market
manufacturing base of many foreign enterprises.
single-handedly. The top management of Tesco
International retailers such as Walmart, Carrefour,
believes that the joint venture partner can provide
Tesco, B&Q, IKEA, Jusco have already established
business value in the aspects of local support, such as
sourcing centers in Shenzhen. Statistics from
land and real estate, business contacts, sale and
Development Research Center of State Council (DRC)
marketing channels and access to local government.
showed that the total sourcing volume of Walmart, Carrefour and Metro in China in 2004 reached US$18 billion, US$3.2 billion and US$2.7 billion respectively. Sources revealed that the combined sourcing volume of
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China Distribution & Trading Issue 33
May 2006
the foreign retail giants including Walmart, Carrefour,
Store layout is also very important. Some foreign
Metro, etc. was likely to exceed 200 billion yuan in
retailers has mistakenly spent a lot of money on building
2005. According to Walmart’s top management,
a fancy and luxurious shopping environment, say
Warlmart has already built up strong relationship with
installing a lot of LCD monitors in the stores or grandly
more than 20,000 suppliers in the Mainland and now
decorating the ceiling. However, consumer researches
they have deeper knowledge of Chinese suppliers and
have shown that these investments have actually
products.
created no added value to Mainland consumers and failed to stimulate consumption. Instead, setting up
(7) Localization is essential
cooking demonstration counters in the Mainland stores to promote food products may be more effective in
There exists significant cultural, language and
boosting sales. This shows that understanding the
institutional differences between foreign countries and
Mainland consumers’ behaviors is crucial.
China. For foreign retailers to win market share in China, localization is a must. Actually many foreign
To sum up, in order to reap benefit from the lucrative
retail enterprises have been making increasing efforts
Chinese retail market, foreign retailers have to make
to localize their operation. B&Q, a retailer engaging in
every endeavor to understand the Mainland market and
home improvement business, offers a lot of DIY (do-it-
consumers, and pay special attention to company
yourself) products in the western markets. However, as
positioning, selection of store location, product and
many Mainland consumers are not used to making their
service mix, store design, and advertising and
own furniture and furnishings and show little interest in
promotion strategies, etc. In the operation aspect,
DIY products, B&Q has adjusted its traditional business
Chinese retailers can take advantage of local sourcing
model to cater to the Chinese demands. B&Q provides
to push down production costs and local recruitment to
one-stop shop for all home improvement needs. It offers
lower staff costs, and bring in local expertise and
a comprehensive set of services, including tools repair,
networks.
timber cutting, paint mixing, design service and
3. Government simplified the approval procedure of foreign commercial investment
installation services. On top of these, B&Q also provides customer education to help customers to design and decorate their houses in its decoration centres.
In December 2005, the MOC has released a circular Another example is Starbucks Coffee (Starbucks),
taking effect on 1 March 2006 to simplify and speed up
which has been very successful in bringing in the coffee
the approval process for the establishment of, and the
culture to China. Unlike the customers in the U.S. who
opening of stores by a foreign-invested commercial
prefer take-away, Chinese consumers view Starbucks
enterprise. Under the Administrative Measures on
as a place for social gathering. Therefore, Starbucks’s
Foreign Investment in Commercial Areas, the
outlets in China are usually bigger and have more
provincial-level governments are allowed to approve
seats. Besides, Starbucks has introduced a
foreign commercial investment if the conditions listed in
comprehensive Chinese-style food menu in its Chinese
Exhibit 16 under the column “The Measures” are
outlets. For example, it launched Starbucks moon-cake
fulfilled. The new circular further simplifies the approval
last year.
procedures. Details are shown in Exhibit 19 below.
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China Distribution & Trading Issue 33
May 2006
Exhibit 19: Circumstances that the provincial governments could approve foreign commercial investment
The Measures •
The new Circular
The distribution channels do not involve television,
•
Same
•
Same, and added the following items: iron & steel,
telephone, mail, internet and vending machine. •
The commodities distributed by the foreign investor do not include books, newspapers,
precious metal, iron mine, fuel oil, rubber and
periodicals, pharmaceuticals, automobiles, salts,
other important industrial raw materials.
tobaccos, pesticides, mulching films, processed oils, grains, vegetable oils, sugar and cotton. •
•
If the size per store is below 3,000m2, the number
•
If the size per store is below 300 m2, the number
of such stores operated by the foreign investor
of such stores operated by the foreign investor
does not exceed 3 in the province and 30 in the
does not exceed 30 in the province and
whole Chinese Mainland.
300 in the whole Chinese Mainland.
If the size per store is below 5,000m2, the number
•
If the size per store is below 3,000m2, the number
of such stores operated by the foreign investor
of such stores operated by the foreign investor
does not exceed 3 in the province and 30 in the
does not exceed 5 in the province and 50 in the
whole Chinese Mainland.
whole Chinese Mainland. •
The size per store is below 300 m2.
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