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CHAPTER 1 – FOREIGN RETAILERS IN CHINA: STORIES OF SUCCESS AND SETBACKS Introduction - Transnational corporations (TNC) o Retail corporations, mostly in Europe and North America, sought to acquire others in order to consolidate resources and markets o Active in mediating produce-consumer relations (e.g., creation of new, and re-configuration of existing, retail spaces to induce consumption) - Retail internationalization o Saturation of home markets o Exploration of foreign markets in Asia and Latin America o Migration of retail capital across national borders o Development of retail spaces in foreign consumer markets o Dawson’s four-phase model
Stability • There is considerable fluidity as the firm familiarizes itself with the new market
Consolidation • The firm adjusts to new conditions, consolidating its position
Control
•
o -
The firm will attempt to exert control over vertical and horizontal channel relationships Dominance • Once the retailer becomes established in the new market, mature strategies seeking market dominance are applied Influenced by firm characteristics (e.g., resource availability and commitment, differential advantages) and external retail environment (e.g., market conditions, consumer affluence, cultural preference, competition, regulation)
China
o New frontier for many international businesses o Offers both a massive source of cheap labour and a market of mass consumption o Largest emerging market in the world of 1.3 billion consumers Recent Changes in Market Conditions and Elimination of Unconventional Trade Barriers - Two benchmark indicators of consumer market size o Population size o Per capita income - Foreign retailers entered China in 1992 to experiment, but their first stores did not open until 1995 o Chinese government confined the experiment to 11 cities in the east coastal region o China was admitted to the WTO in 2001
o
China was required to remove all remaining trade barriers and open its retail market completely within three years China shifted to regulating foreign retailers by legal means (e.g., planning legislations)
Future retail establishments must conform to municipal plans and local land use bylaws Land use rights must be publicly bid on Large facilities that are 10,000 m2 or more must go through a public hearing process Foreign-invested enterprises must accept and pass annual inspections with audited financial reports
Market Penetration and Performance of Foreign Retailers - Two indicators of success of foreign retailers o Degree of market penetration
o
Number of stores Geographic distribution = a wider geographic distribution indicates success over local protectionism and cultural barriers Level of business performance
-
Total sales, but retailers with high sales volumes may not yet be profitable Profit levels, but not readily available Three groups of major foreign retailers o Western retailers (include both North American and European retailers)
•
Achieved higher levels of market penetration in China than other foreign retailers Market penetration has taken place in two directions simultaneously • From the eastern coastal region to the western interior
From large urban centres (mainly provincial capitals) to second and third-tier cities
o
E.g., Wal-Mart, Carrefour, Metro, Auchan, B&Q have high market penetration E.g., Ikea, Makro have limited market penetration High total sales, but only higher per store sales than Southeast Asian retailers Japanese retailers
o
Among the earliest foreign entrants to China’s retail market Expansion has been much slower and geographically limited E.g., Jusco, Isetan, Iro Yokado, SOGO, Daiei, Lawson Low total sales, but highest per store sales Southeast Asian retailers Have been able to capture a much larger market share in China than the Japanese retailers E.g., Trust-Mart, RT-Mart, Hymart-Hymall, Lotus, E-Mart are all hypermarket operators High total sales, but lowest per store sales
Examination of Corporate Strategies - Every growth strategy must be built on the following pillars in order to maintain a competitive edge: o The retailer must offer a competitively superior product as defined by local consumers o The retailer must be able to develop superior economics across the value chain that delivers the product to the local consumer o The retailer must be able to execute in the local environment - Western retailers o Possess more capital resources than Japanese and Southeast Asian retailers o Choose the big box format
Able to dominate specific retail sectors with little competition in the local market o Hypermarkets = offers a wide assortment of goods to mass consumers Serve the local markets better than department stores or supermarkets Adapt to the local geography where land is scarce o Warehouse membership clubs = open only to registered members, who are mostly corporate
o
consumers and small retailers Does not serve the local market as well as hypermarkets Signs of a lack of consumer support Supermarkets
Not a competitive format Failure due to fierce competition from local supermarket chains A particular format must be supported by
o o
Right location Available and affordable real estate Settlement patterns of the local market and the imbedded transportation system Approaches to acquiring business premises
-
Constructing self-owned stores Leasing space from other developers Acquisition o Not able to replicate efficient distribution systems o Know the importance of developing and maintaining good relations with the various levels of government in China o Take advantage of local government officials who pursue political credits measured by the amount of FDI that they attract to their cities (e.g., officials offered Western retailers land and sites at premium locations with deep discounts) Japanese retailers o Expansion affected by a combination of three factors
The formats they choose to penetrate the Chinese market • Choose the department store and supermarket format o Saturation of department stores Competition from specialized stores, convenience stores, and outdoor markets
o
• •
Target wealthy families
The financial difficulties of their parent companies at home • East Asian Financial Crisis
The rigidity of their business decision-making • Every new store location had to be approve by the HQ office in Japan
• •
o
Focus on high-end consumers
Lost first-mover advantages to their competitors in many cities
Paid high prices in a market where regulation is far from being perfect and ‘under-the-table’ deals are rampant • Slow in consolidating their operations in China Perform relatively well
-
Chinese suppliers are satisfied with the way Japanese retailers do business with them Japanese department store chains are still expanding, and being modified by adding either a food department or a supermarket Southeast Asian retailers o Mimic the Western retailers by using the hypermarket as the leading format to penetrate the Chinese market Proves that the hypermarket competes better than other formats in China o Rely on their local partners or local developers for business premises o Taiwanese retailers
Benefited from two major factors over other Southeast Asian retailers • Preferential government policies
•
Cultural and ethnic affinity with the mainland
Opened stores in various cities with different names to disguise itself before WTO Delay payments to their suppliers Seek partnerships with Western retail giants
SUMMARY AND CONCLUDING REMARKS - International retailers have been the movers and shapers of the global economy - In the last 15 years, over 300 foreign retailers have established a business presence in China - None of the foreign retailers have passed through the complete four-phase model o Western retailers have completed the consolidation phase o Japanese retailers are in the early stages of the consolidation phase o Southeast Asian retailers are beginning to relinquish a significant part of their business interests to Western retail superpowers - While China is embracing global liberalism, China is nurturing its own retail heavyweights to combat foreign competition and defend the national market o Chinese government will provide special assistance if needed to the ‘national team’ of 20 domestic retailers, which will force foreign retailers to focus on second- or third-tier cities in the next round of expansion
Stability • There is considerable fluidity as the firm familiarizes itself with the new market
Consolidation • The firm adjusts to new conditions, consolidating its position
Control
•
o -
The firm will attempt to exert control over vertical and horizontal channel relationships Dominance • Once the retailer becomes established in the new market, mature strategies seeking market dominance are applied Influenced by firm characteristics (e.g., resource availability and commitment, differential advantages) and external retail environment (e.g., market conditions, consumer affluence, cultural preference, competition, regulation)
China
o New frontier for many international businesses o Offers both a massive source of cheap labour and a market of mass consumption o Largest emerging market in the world of 1.3 billion consumers Recent Changes in Market Conditions and Elimination of Unconventional Trade Barriers - Two benchmark indicators of consumer market size o Population size o Per capita income - Foreign retailers entered China in 1992 to experiment, but their first stores did not open until 1995 o Chinese government confined the experiment to 11 cities in the east coastal region o China was admitted to the WTO in 2001
o
China was required to remove all remaining trade barriers and open its retail market completely within three years China shifted to regulating foreign retailers by legal means (e.g., planning legislations)
Future retail establishments must conform to municipal plans and local land use bylaws Land use rights must be publicly bid on Large facilities that are 10,000 m2 or more must go through a public hearing process Foreign-invested enterprises must accept and pass annual inspections with audited financial reports
Market Penetration and Performance of Foreign Retailers - Two indicators of success of foreign retailers o Degree of market penetration
o
Number of stores Geographic distribution = a wider geographic distribution indicates success over local protectionism and cultural barriers Level of business performance
-
Total sales, but retailers with high sales volumes may not yet be profitable Profit levels, but not readily available Three groups of major foreign retailers o Western retailers (include both North American and European retailers)
•
Achieved higher levels of market penetration in China than other foreign retailers Market penetration has taken place in two directions simultaneously • From the eastern coastal region to the western interior
From large urban centres (mainly provincial capitals) to second and third-tier cities
o
E.g., Wal-Mart, Carrefour, Metro, Auchan, B&Q have high market penetration E.g., Ikea, Makro have limited market penetration High total sales, but only higher per store sales than Southeast Asian retailers Japanese retailers
o
Among the earliest foreign entrants to China’s retail market Expansion has been much slower and geographically limited E.g., Jusco, Isetan, Iro Yokado, SOGO, Daiei, Lawson Low total sales, but highest per store sales Southeast Asian retailers Have been able to capture a much larger market share in China than the Japanese retailers E.g., Trust-Mart, RT-Mart, Hymart-Hymall, Lotus, E-Mart are all hypermarket operators High total sales, but lowest per store sales
Examination of Corporate Strategies - Every growth strategy must be built on the following pillars in order to maintain a competitive edge: o The retailer must offer a competitively superior product as defined by local consumers o The retailer must be able to develop superior economics across the value chain that delivers the product to the local consumer o The retailer must be able to execute in the local environment - Western retailers o Possess more capital resources than Japanese and Southeast Asian retailers o Choose the big box format
Able to dominate specific retail sectors with little competition in the local market o Hypermarkets = offers a wide assortment of goods to mass consumers Serve the local markets better than department stores or supermarkets Adapt to the local geography where land is scarce o Warehouse membership clubs = open only to registered members, who are mostly corporate
o
consumers and small retailers Does not serve the local market as well as hypermarkets Signs of a lack of consumer support Supermarkets
Not a competitive format Failure due to fierce competition from local supermarket chains A particular format must be supported by
o o
Right location Available and affordable real estate Settlement patterns of the local market and the imbedded transportation system Approaches to acquiring business premises
-
Constructing self-owned stores Leasing space from other developers Acquisition o Not able to replicate efficient distribution systems o Know the importance of developing and maintaining good relations with the various levels of government in China o Take advantage of local government officials who pursue political credits measured by the amount of FDI that they attract to their cities (e.g., officials offered Western retailers land and sites at premium locations with deep discounts) Japanese retailers o Expansion affected by a combination of three factors
The formats they choose to penetrate the Chinese market • Choose the department store and supermarket format o Saturation of department stores Competition from specialized stores, convenience stores, and outdoor markets
o
• •
Target wealthy families
The financial difficulties of their parent companies at home • East Asian Financial Crisis
The rigidity of their business decision-making • Every new store location had to be approve by the HQ office in Japan
• •
o
Focus on high-end consumers
Lost first-mover advantages to their competitors in many cities
Paid high prices in a market where regulation is far from being perfect and ‘under-the-table’ deals are rampant • Slow in consolidating their operations in China Perform relatively well
-
Chinese suppliers are satisfied with the way Japanese retailers do business with them Japanese department store chains are still expanding, and being modified by adding either a food department or a supermarket Southeast Asian retailers o Mimic the Western retailers by using the hypermarket as the leading format to penetrate the Chinese market Proves that the hypermarket competes better than other formats in China o Rely on their local partners or local developers for business premises o Taiwanese retailers
Benefited from two major factors over other Southeast Asian retailers • Preferential government policies
•
Cultural and ethnic affinity with the mainland
Opened stores in various cities with different names to disguise itself before WTO Delay payments to their suppliers Seek partnerships with Western retail giants
SUMMARY AND CONCLUDING REMARKS - International retailers have been the movers and shapers of the global economy - In the last 15 years, over 300 foreign retailers have established a business presence in China - None of the foreign retailers have passed through the complete four-phase model o Western retailers have completed the consolidation phase o Japanese retailers are in the early stages of the consolidation phase o Southeast Asian retailers are beginning to relinquish a significant part of their business interests to Western retail superpowers - While China is embracing global liberalism, China is nurturing its own retail heavyweights to combat foreign competition and defend the national market o Chinese government will provide special assistance if needed to the ‘national team’ of 20 domestic retailers, which will force foreign retailers to focus on second- or third-tier cities in the next round of expansion
