Global retailers invade China's regional cities
consumption, Western retailers are flocking to China's provincial
cities - but what success will they have?
China has long been a mecca for competition-weary global companies, but only now are supermarket chains confident enough to move out of major economic centres, such as Shanghai, and venture into unknown territory.
News that French-owned Carrefour, China's number one hypermarket chain, is expecting another 25 per cent sales growth in 2006 - following a similarly spectacular performance last year - comes as little surprise to many in the sector.
Encouraged by this phenomenal growth the company plans to swell its base to cover little-known cities around the country, marking a trend in global retail expansion in the region.
Many firms are shifting focus from booming cities Beijing and Shanghai to second-tier regional cities such as Xiamen and Hang Zhou, as urbanisation spreads through China and household consumption in provincial areas catches up with the more established financial centres.
But what barriers exist for foreign investors in the provincial marketplace?
PricewaterhouseCoopers (PwC), in its 'Beijing to Budapest' report, warns: "Foreign companies have to adapt to local markets and devise strategies to address diversity and the evolving market landscape."
In other words, newcomers must be dynamic and flexible if they are to conquer the notoriously transitory regional market. The challenge will be to get a handle on consumer demands.
"Consumers in the cosmopolitan cities are used to Western brands, but rural consumers will not be familiar with these, which will be an initial obstacle for all retailers moving into provincial China," Euromonitor retail analyst Raphael Moreau told FoodandDrinkEurope.com.
He believes that chains with more experience in operating different formats and offering diverse product lines will do better, citing Carrefour as an example of adaptability.
"Wal-Mart may find it harder as they only have hypermarket formats. But they are good at sourcing products from China, which is an advantage," Moreau said.
"They currently get 95 per cent of products from inside the country, although some of these will be from multinational brands produced under licence."
But so far, China has been easy pickings for the retail giants.
Late last year Carrefour cemented its status as the leading hypermarket retailer by acquiring 100 per cent of its Chinese joint venture, Kunming Carrefour Supermarket.
And Tesco, the world's fourth largest food retailer, currently holds a 50 per cent share in Hymall, jointly operating 50 Chinese hypermarkets in Shanghai and neighbouring regions.
It now plans to extend its presence in southern China and Beijing, embarking on a mammoth growth plan.
China has long advocated this type of foreign investment, and since the country's 2001 accession to the World Trade Organisation (WTO), the government has changed more than 2,300 domestic laws and regulations governing the distribution sector.
Macro-economic policy, aimed at encouraging domestic demand and private consumption, will drive GDP growth of 7-9 per cent over the coming years.
This, coupled with an urbanisation push that will see 60 per cent of the vast population living in urban centres by 2030, puts the cherry on the cake for Western retailers.
