HONG KONG - China's retail sales rose
12.9% last year to 6.7 trillion yuan ($837
billion) - not bad for a nation that has developed
an obsession with saving ever since the government
started breaking down its cradle-to-grave welfare
system, often referred to as the "iron rice bowl".
Now, however, with a new shift in
Beijing's economic policy away from investment
growth and toward domestic consumption, retailers
both foreign and domestic are licking their chops
at the prospect of the world's biggest savers -
the Chinese have tucked away a stunning $3.5
trillion for a rainy day - turning into the
world's biggest spenders.
With Beijing predicting 11%
growth per year in retail spending and
sales of $1.2 trillion by
2010, the stakes are high, the competition is
tough and there will be winners and losers.
Retailers in the hypermarket sector, such
as Wal-Mart and Carrefour, are making plans to win
big. But the once-vibrant smaller players who
operate out of neighborhood stalls will soon be
going the way of the rickshaw. And even the larger
Chinese players are worried about being buried
under a wave of foreign competition.
So
far, however, Chinese retailers are holding their
own. Domestic companies continue to dominate the
Commerce Ministry's list of China's top 30
retailers - whose sales, the ministry reports,
rose by 31% in 2005 to $61 billion.
Shanghai Brilliance sits at the top of the
heap, recording sales of $9 billion last year. The
closest foreign competition at this point is the
French giant Carrefour, whose 25% rise in sales
last year boosted it to ninth place on the
ministry's list, with sales of $2.2 billion.
Carrefour, the world's second largest retailer,
now has 78 stores in China and plans for many
more.
Interestingly, the world's biggest
retailer - the Bentonville, Arkansas-based
Wal-Mart - did not make the top-30 list, but that
is likely because the company chooses not to share
financial data with the Chinese government.
Wal-Mart hopes for faster growth in China, a
nation of 1.3 billion people, as higher oil prices
in the United States cut into consumer spending,
crimping the company's expansion plans there.
In a bid to catch up with Carrefour and
domestic chains, Wal-Mart plans to open 14 new
superstores this year, adding to the 48 outlets it
currently operates in 23 Chinese cities.
Wal-Mart's current strategy is to expand into the
nation's smaller cities, building on its
established strengths in large cities like
Beijing, Shanghai, Guangzhou and
Shenzhen.
But the domestic chains are also
growing and adapting to hold off foreign
competition. For example, Shanghai-based Lianhua
Supermarket Holdings, which already has 3,377
supermarkets and convenience stores, plans to add
600 more this year, expanding westward in a quest
to become a truly national chain. On the other
hand, Beijing-based competitor Wumart Stores has
decided to hunker down in the capital, expanding
around the city in a strengthen-your-forces and
hold-your-ground approach.
China's retail
market, second in Asia to Japan's, has become a
magnet for foreign companies since the country
joined the World Trade Organization (WTO)in 2001.
And business really picked up in December of 2004
when, to meet pledges made to the WTO, the country
began to allow overseas retailers to open stores
without a domestic partner.
The
disadvantage that foreign retailers face, of
course, is their late start. But they also have
some powerful advantages. At a time when many
Chinese managers are still stuck in the lethargic
mindset of a planned economy, foreign companies
bring an aggressive spirit, superior technology, a
savvy, market-oriented approach and staff training
that leaves many of their local rivals in the
dust.
To compete, domestic retailers have
been compelled to adjust their strategies and
restructure. While service quality continues to be
an issue for many of these companies, there is
nevertheless a growing emphasis on customer
preferences and the dynamic nature of consumer
behavior in a country so relentlessly on the
economic rise. In addition, a number of big local
retailers have raised money through public
listings on the mainland and in Hong Kong and have seen
their stocks rise 25%-77% this year.
Shanghai's Lianhua and the Wangfujing
Department Store Group in Beijing have fueled
their expansion plans through such listings.
Wangfujing has purchased a 25% share of 7-Eleven
in Beijing, and Lianhua has teamed up with the
Shanghai No 1 Department Store to create Shanghai
Bailian, China's biggest retail group.
Retailers must bring in annual sales of at
least $375 million to be serious players in the
market, according to industry analysts. So as the
foreign and state-owned giants expand, it is
crunch time for smaller players, who are fading
fast.
Will the government intervene with
protective measures for retailers who cannot
compete? So far, there are no signs of that, and a
largely unsuccessful history of previous attempts
to shore up certain sectors of the economy argues
against such a move.
One thing the
government could - and should - do, however, is to
unify the tax rate paid by foreign and domestic
firms. At present, foreign ventures are taxed at
15% while Chinese companies pay a 33% rate. This
disparity has existed for years as a result of the
slowly turning wheels of the Chinese bureaucracy.
Despite uncertainties, both foreign and
big domestic retailers are optimistic - if not
downright ecstatic - about the future. They
salivate not just over the growth projections but
also over the astonishing demographics: within the
next decade, there will be 100 Chinese cities with
populations of more than a million and 150 million
city dwellers with annual incomes above $10,000.
Add to that the retail bonanza that is
expected to accompany the 2008 Olympics to be
hosted in Beijing. And add to that the Chinese
leadership's new emphasis on building a "new
socialist countryside" - which, despite the
antiquated rhetoric, translates into loading the
nation's 800 million rural population onto the
consumer bandwagon.
As a part of the 11th
Five-Year Plan, the government scrapped an
agricultural tax that dated back more than 2,000
years and made compulsory education free in rural
areas. As this year began, it also raised the
income threshold for paying personal income tax
from $99 to $197.
The emphasis is clearly
on encouraging spending and retail growth, and the
country offers great room for both. Last year,
consumption amounted to only 33.3% of China's
gross domestic product, according to the
state-owned China Daily, whereas in developed
nations like the United States it is typically
70%-80% of GDP.
Rapidly rising incomes in
the cities - and soon, the government hopes, in
the rural areas as well - has turned China into a
happy hunting ground for big retailers.
IKEA, the Swedish furniture maker,
provided another vivid reminder of that reality
this month when thousands of Beijing shoppers
turned out for the opening of its biggest store in
Asia, which is also its biggest store outside the
chain's base in Stockholm. The company is cashing
in on the country's rising homeowner class - and
their increasingly cosmopolitan tastes - with a
store that includes 430,000 square feet of
showrooms, a 700-seat restaurant, a 1,200-car
underground garage and a grocery store stocked
with Swedish food.
Welcome to the new
China. It is a shopper's - and, if you have the
brains and the capital - a 21st-century retailer's
paradise.
Kent Ewing is a
teacher and writer at Hong Kong International
School. He can be reached at
kewing@hkis.edu.hk.
(Copyright 2006
Asia Times Online Ltd. All rights reserved. Please
contact us about sales, syndication and republishing
.)
