Retail rivalry aids local outlets
By Dai Yan (China Daily)
Updated: 2004-04-06 08:48

Lilliputian in Gulliver's Travels, who imprisoned the giant and tried to kill him, ended up being assisted by Gulliver to prevent an invasion.

Drawing a parallel, Chinese retailers  which are only about 1 per cent of the size of their international counterparts such as Carrefour and Wal-Mart in terms of revenue  feel the entry of the overseas giants has benefited their growth to some extent.

But fears exist as some small retailers are going bankrupt in unprecedented numbers, battered by the winds of intense competition brought by foreign groups.

Statistics show that over the past 18 months, more than 150 supermarkets have closed down across China.

And Yu Shuhua, a research member at the China Commercial Economy Research Centre, said there had been a string of complaints from local retailers unable to adapt to the presence of the giants.

"But you cannot deny that some of the local retailers have been stimulated to grow stronger, which benefits the industry and consumers themselves," said Yu, who believes the future of the industry will be carved out by a battle for survival.

The influx of foreign-funded retail enterprises has pushed capable Chinese retailers to develop rapidly, said Yu.

For example, Shanghai, home to four of the outlets like Carrefour, Metro and Lotus, has also gained the services of the country's top local retailers Shanghai Lianhua and Hualian.

Shanghai Lianhuan Supermarket Co Ltd's sales jumped by 60 per cent and net profit surged by 30 per cent last year.

Its sales totalled 24 billion yuan (US$2.9 billion) in 2003 compared to 14 billion (US$1.7 billion) in 2001, the year China entered the World Trade Organization (WTO). But it was minuscule compared to Wal-Mart's global sales of US$256 billion.

The Dalian Dashang Group has succeeded in a quick expansion through mergers and acquisitions over the past three years. Its emergence has been mirrored by aggressive entry of foreign rivals.

Its sales reached 18 billion yuan (US$2.17 billion) in 2003, compared to 7.5 billion yuan (US$906 million) in 2001.

"Without incentives brought by fierce competition, domestic retailers, which used to enjoy protection from government, would not have worked towards improvement and growth," Yu said.

Foreign companies not only bring in capital but also come armed with improved international marketing methods and management know-how, Yu said.

Hua Ming, manager of a Beijing outlet of Shanghai Hualian, said domestic retailers have learned strong operational procedures from further competition.

"For example, we have improved our purchasing skills and use a rigorous purchasing process rather than relationship-based purchases," Hua said.

He said the company is also moving to establish cost-effective information technology systems, such as a supporting system like that of Wal-Mart, whose success is largely attributed to its advanced IT and logistics networks.

Hua said many local companies have created market development departments to specifically focus on site expansion and selection, following in the footsteps of their foreign rivals.

They are also giving specialized training programmes to their staff to improve services.

Learning from foreign companies, local groups have progressed from supermarkets to running hypermarkets, convenience stores, membership stores and shopping malls, Hua said.

Many large domestic retailers such as Shanghai Lianhua and Hualian have found that their foreign counterparts are not so strong as they had imagined, and that they are able to match them.

Lianhua Supermarket Holdings Co Ltd, flush with US$85 million from a June initial public offering, intends to stay ahead of the pack.

Deputy General Manager Hua Guoping said he has no qualms about competing with better-funded foreign rivals.

"It's true that foreign supermarkets tend to have more experienced managers. But Chinese retailers ultimately have better local knowledge, and they can tailor products to suit local tastes and usually operate at lower costs," Hua said.

Lianhua Supermarket will have 8,000 branches by 2008, with sales expected to rise to 80 billion yuan (US$10 billion).

Shanghai Hualian, whose business had been limited to East China, has also eased into Beijing and pledged to open 6,000 outlets throughout China within five years.

"There are hopes that these companies can become the Chinese Carrefours or Wal-Marts some day," Yu said.

The optimism has been created by the double-edged sword of the nation's opening up, said Yu, who cited the wholesale sector as an area that was struggling.

Little foreign investment has been allowed into the sector, which is weak because of government indulgence.

Wholesale losses have exceeded the total profits of retail, catering and other commercial-related companies for five consecutive years, Yu said.

Despite the differences, foreign retailers have so far failed to dominate China's retail industry.

Only 11 overseas-funded retailers were on the list of China's top 100 retailers last year.

France's Carrefour SA was the top foreign retailer. Its sales in China rose 25.7 per cent from a year earlier to 13.4 billion yuan (US$1.62 billion) in 2003.

Wal-Mart Stores Inc, which runs 33 chain stores across the country, posted a more modest 5.85 billion yuan (US$706 million) in sales.

However, many foreign giants opened their stores illegally by bypassing the central government and making deals with local governments.

China's WTO commitments put location and capital limits on foreign retailers in the first three years.

They are required to operate through joint ventures in which they can hold a maximum 65 per cent stake. As for companies opening more than three outlets, the foreign party cannot hold a controlling share.

Huang Guoxiong, a professor from the Renmin University of China said the WTO agreements, which gradually lift restrictions in the commercial sector, aim to give some breathing space to local players.

But some foreign investors' illegal and aggressive expansion moves did not give local businesses enough time to prepare, putting them under extreme pressure, Huang said.

The central leadership has decided to draft guidelines to regulate foreign retailers.

Under the proposed regulations, China will compile a list of foreign retail violators and non-violators.

The law-abiding groups will be permitted to expand, while a one-year ban on expansion will be imposed on those who have violated the norms. Chronic violators will be banned indefinitely from expanding.

But Huang believes the regulation is not enough to make up for the losses of the earlier opening-up. China's complete opening of the retailing business will make the situation worse.

China will abolish joint venture requirements and end restrictions on the location and number of foreign-funded stores before December 11.

"Government support, especially in smoothing financial channels, is mostly wanted," he said.

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