Since 1995, when the first foreign retailers entered the Chinese market, urban income levels have grown at an average annual rate of 10.4%. The fact that urban Chinese work longer hours makes the convenience of large retail stores with different product ranges more and more attractive. Consumer's expectations of the distribution channels are also changing in China, from the groceries and open markets and state owned shops to large retail shops where groceries can be bought together with clothes and consumer goods.

Surveys show that the most important factor for the average shopper in China to decide where to buy is convenience, followed by spaciousness, comfort, selection and only then by price. In addition, a large number of consumers are fairly loyal not only to brands but also to distribution channels or chains. This applies not only to first tier cities which already feature a large number of chain stores, but is also increasing in market share in second tier cities.

These figures and the changing consumer behavior, the assumptions of experts that China may account for as much as 20% of the world's growth in retail sales over the next 15 years combined with the slower growth in the Western Market make China a 'most go' market for foreign retailers.

Changes in the Regulations for Foreign Retail Stores in China

Though only as few as100 large local department stores were established in China in the 1980's, the late1990's brought expansion and large local supermarket chains developed, particularly through the competition of the foreign stores. By 1995 over 350 million people in China had an annual income over US$ 500, so foreign companies started to show interest in entering the Chinese Market.

At this time foreign investment in retail shops was only approved in the form of a Joint Venture. In addition, the stores locations was limited to capitals of provinces or first tier cities such as Shanghai, Beijing, Tianjin, Chongqing etc.

The regulations were made in order to give local companies a chance to copy the Western big store model and win the majority of the market share, and they have done so very successfully. Until the regulations changed on 11 December 2004, the top four retailers in China were all run by either state-owned enterprises or local entrepreneurs.

The Joint Venture format was not all negative for the foreign companies as it provided them with a chance to work with a local partner in order to benefit from their distribution networks and "guanxi" as well as obtain their local partner's knowledge in order to adapt their concepts to the consumer's requirements.

With the foreign companies already in good positions, the change of the regulations is bound to bring interesting changes in the market shares and fiercer competition, especially in the second tier cities. However, not all of the major retailers are changing or expanding by incorporating these new regulations. Many of the retailers are happy with their partners and prefer to continue in the same way. Other retailers have kept several of their entities in the form of Joint Ventures, while creating their new ones as WFOE's, trying to compare and contrast the differences between having a partner and "going it alone".

Since 1 January 2004, Hong Kong and Macau based companies have been able to set up foreign investment commercial enterprises due to the Closer Economic Partnership Arrangement (CEPA).

After 11 December 2004, investment by Wholly Foreign-Owned Enterprises (WFOE) or individuals will be accepted and there is no limit on the location. The capital requirement has been set in the Company Law stating as the minimum being USD 36,000 allowing for more foreigners to establish small retail outlets in China.

China Market Entry: example Carrefour

Without a doubt, Carrefour has been the most successful foreign retailer in China so far.
Though the revenues from China only reached 3% of the total revenue of Carrefour in 2004, China's retail market is a high priority for Europe's largest and the world's second largest retailer.

From 1995 until 2000, Carrefour had established a presence in 15 Cities with revenues reaching US$ 1 billion, which rose to US$ 1.9 billion by 2004. However, it took Carrefour close to 10years to just break even after investing billions into the country.
With 61 Carrefour Hypermarkets, 8 Champion supermarkets and 201 DIA hard discount stores (End of June 2005), Carrefour's expansion since the change of the regulations is growing rapidly. In the 2005 China Retail Ranking by CTR Market research and CIB, who base the ranking on the sales of fast moving consumer goods (namely food and daily chemical products) in 15 major cities including for example Beijing, Shanghai, Guangzhou, Shenzhen and Chengdu, Carrefour over took local retailers on the overall Market share Trust Mart. Carrefour is showing the fastest growth in most surveyed cities, and it's attracting more consumers.

After arriving in Taiwan in 1989 with visions of building hypermarkets like in France and realizing the concept was not successful, the concept for setting up the stores in China and in Asia in general changed. Carrefour's strategy for success has been to attract local customers with large one stop shopping areas, low prices, high quality products and the choice of both local and global products. Each new project focuses on best location and strong localization. In addition, Carrefour has decentralized its management in order to achieve better localization.

Foreign Retailers

Despite its strong market position, Carrefour undoubtedly faces major rivals and challenges in the coming years. While the changes in the regulations will help the chain to expand, it will also benefit the strategies of its biggest rivals.

Wal-Mart already have a strong China presence, with 47 stores. Compared to many local retailer's strategy's, for example Lianhua, who open hundreds of outlets a year, Wal-Mart's strategy seems to be based on having big stores so that there is no need to shop anywhere else. Wal-Mart also encountered trouble during the recent years by its strategy around the world to keep unions out of its stores, but it has responded that it has no unions as its employees do not wish to form any unions.

German retailer METRO started its operation in China as Carrefour in 1995, with the cooperation of the Jinjiang Group, establishing METRO Jinjiang Cash & Carry Co., Ltd. In 1996, METRO opened its first store in Shanghai, and proved quite successful, although it did have the initial problem of explaining its concept as a bulk buying store for wholesalers and not just individuals. However, over time the store has become successful, with now operating a total of 26 stores in China.

The British rival Tesco, in comparison, is a late arrival on the Chinese Market by buying into the Hymall chain in 2004, will face challenges in trying to adopt quickly to the China Market. Nevertheless, Tesco's focus on China will no doubt lead to further expansion.

On the home improvement chains, OBI, a German chain has exited the China market after fierce challenges by selling it 13 stores to its British rival Kingfisher, who runs B&Q chains. Home Depot is still to enter the Market. The home improvement market in China is currently estimated at US$ 40 billion.

Local Retailers

The list of local retailers battling over the market with the foreign retailers is extensive. To name a few, Lianhua, one of China's leading grocery chains, is planning to add hundreds of new stores to it's chain per year. The Shanghai based company operates mainly small to medium sized supermarkets. Having an extensive presence, it has been losing market share to foreign hypermarkets over the last few years. With the regulation allowing foreign retailers to take even more of that market share, part of the business plan for Lianhua is substantial expansion.

China Resources Enterprises, who operate stores like China Resources Vanguard, has been reported to trim its staff and approaching foreign chain management. The foreign trained managers bring in the training and market expertise, and China Recourse Enterprises have already started brand loyalty for frequent shoppers with discounts, private labels and its opening of lifestyle stores for the more high quality products.

Wumart, a Beijing based retailer operates in addition to small and medium supermarkets also convenience stores and hypermarkets, and has proved to choose convenient locations for consumers. Combined with low prices, Wumart has a steady and returning custumer base.

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All information in this report is verified to the best of our ability and is assumed to be correct at time of release; however, Klako Group does not accept responsibility for any losses arising from reliance on the information provided within.