Market Review - China
by Fabian Panthaki, Assistant Editor - Namnews

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With the world’s largest population, and quickly becoming the world’s largest exporter of consumer goods, China is the one country that is increasingly dominating global markets. And while concerns are growing about product quality and standards, the booming economy has seen international retailers moving in to grab a slice of the pie.

Numbers and Trends:

China’s retail market has been growing at a tremendous rate, and in 2006, it was the world’s fifth largest consumer of goods among 15 major world economies, accounting for 5.4% of the group’s total consumption. It is now expected to become the world's second biggest consumer goods market (after the US) by 2015, according to Credit Suisse.

Retail sales in 2006 rose 13.7% to 7.64trn yuan ($980bn) on the back of higher income, rising food inflation, improving social security and rapid increase in restaurant sales. The growth is expected to continue, and sales are forecast to rise 15% to 8.8trn yuan ($1.16trn) in 2007. The country’s top planning agency, the National Development and Reform Commission's State Information Center, has forecast that direct sales of products to consumers may rise 12.8%, after adjusting for inflation. Urban retail sales are expected to rise by 16.2% to 6.0trn yuan, while rural sales may grow by 14.9% to 2.9trn yuan.

Eleven foreign hypermarket operators opened over 100 stores in China in 2006, with unit sales volume climbing by an average of 5%. This growth is being fuelled by the increasing popularity of hypermarkets in China, with official data showing that about a third of urban shoppers prefer shopping at these outlets, up from 26% in 2005. Meanwhile, supermarkets and wet markets are falling in popularity.

Meanwhile, the surge in the growing number of Internet users has seen online spending rise to 276bn yuan ($36bn), and this figure is expected to jump 32% in 2007 to 364bn yuan ($48bn). China currently has 144 million internet users, second only to the US, and the number of users is growing by 20 million annually.

Keeping these factors in mind, it is little surprise then that China has jumped from No.5 to No.3 in AT Kearney’s recent 2007 list of the 30 most attractive emerging retail markets.

Who’s Who In Grocery:

China is home to several well-established chains, all of which are undergoing a rapid period of growth, both organic as well as through mergers and acquisitions.

The largest grocery retailer in the country is the Shanghai Bailian Group, which was formed by the merger of Lianhua Supermarket Holdings and the Hualian Supermarket chain. Other major local players include Wumart stores (the biggest chain in Beijing), the Beijing Hualian group, Jiangsu Times Supermarket, and Bubugao.

The main international grocery retailers operating in the country are Carrefour, Wal-Mart, Metro Group, Tesco, Auchan, and Aeon.

Store Numbers:

Lianhua currently operates over 3,700 outlets, mostly in Eastern China, which includes 1,960 convenience stores, 104 hypermarkets, and 1,652 supermarkets. The chain also operates nine hypermarkets in Shanghai through a joint venture with Carrefour, called Shanghai Carhua Supermarket. China Retail Enterprises has over 1,000 company-owned outlets, and over 1,100 franchises and subsidiary outlets.

Wumart Stores has over 600 outlets in and around the Beijing region, most of which are small supermarkets. The Beijing Hualian Group operates over 500 supermarkets, hypermarkets, and department stores through various subsidiaries. Jiangsu Times Supermarket operates 55 supermarkets in Eastern China. Bubugao is the largest local supermarket chain in Hunan, and now operates around 96 outlets, after its recent acquisition of the Ailisi chain.

Carrefour recently operates over 368 stores in China, and is the largest foreign hypermarket operator in the country. Rival French chain Auchan operates 17 outlets in the country. Hong Kong’s Dairy Farm International has 290 stores, while Japan’s Aeon operates 22 outlets, mainly in southern provinces such as Guangdong. Wal-Mart has 84 company-owned outlets in the country, and has a stake in discount chain Trust-Mart, which operates over 100 outlets in 34 cities. Tesco operates 47 stores in the country, through its stake in the Hymall chain, and has also launched stores under its own banner.

Developments and Plans:

Last year, Lianhua Supermarket terminated a joint venture with Carrefour, through which it operated 130 discount stores in Shanghai. The chain said the venture did not attract enough customers, leading to low gross profit margins and reduced economies of scale. Lianhua has since focused on its own stores, and has announced a major store expansion programme, with plans to open at least 400 stores a year till 2010. It is also looking for merger and acquisition opportunities, and has been linked to reports of acquiring the stores currently operating under the Hualian Supermarkets banner.

Wumart has been affected recently by an investigation into its Chairman and founder Zhang Wenzhong, about how Zhang financed the start-up of the company in 1994. However, with the case winding up, it has moved to consolidate its position, and has recently entered into a JV with traditional grocer and food processor Beijing Aoshikai Group. Under the deal, Wumart will inject capital while Aoshikai will invest assets into the new firm, called Beijing Aoshikai Wumart Co Ltd. The JV will consolidate Aoshikai's outlet resources and turn them into supermarkets under Wumart's business model. Wumart has also reopened discussions with interested buyers, offering a 10% stake in the chain (its market capitalisation stands at about US$1.0bn).

Jiangsu Times recently announced plans to invest HK$500m to acquire 18 new supermarkets in the country, and said it would also expand through organic growth. Aeon plans to boost its network to about 100 stores within the next five years, with a major shopping center to open in Beijing in 2008. Of the 100 outlets, 30 will open in the northern provinces, including Beijing and Tianjin.

Carrefour plans to open 23 hypermarkets this year, which would be the retailer’s largest ever expansion in a single year in any country. It also plans to open 20 to 25 outlets every year, and believes that it is well-positioned to be a big player in the market without having to resort to acquisitions. Auchan, which has opened just two stores on average over the past eight years, is accelerating its expansion in the market. It has announced that it will open as many as eight outlets in 2007 and 10 outlets in 2008, mostly in Beijing and affluent coastal regions around Shanghai.

Earlier this year, Wal-Mart acquired a 35% stake in Trust-Mart, which operates over 100 stores in 34 cities. Wal-Mart will take over 27 Trust-Mart stores and then revamp another 30 stores, after which it may acquire another 26% stake in Trust-Mart. The retailing giant was also reported to be considering buying all or part of Beijing Hualian Hypermarket, which is valued at over $1.0bn, although this is being denied by Hualian. Wal-Mart also plans to more than double its stores in China over the next five years, and hopes to have a 20% share of the country's retail market with the expansion. It is revamping its operations by giving more freedom to each store, and re-arranging posts for nearly 1,000 staff, moving workers from existing stores to new stores, or to existing Trust-Mart stores.

Metro is looking to expand into the country’s Tier-I and Tier-II cities, and plans to open as many as 10 new stores per year. It plans to expand through organic growth, and has set up a team in Shanghai to look for property for new stores. Metro is also building a nationwide distribution network to lower costs and boost its competitiveness, and has reached an agreement with logistics provider Sinotrans to build a multi-channel national network for distribution of dry food and non-food products by 2010.

Tesco, which entered the market in 2004 with a 50% stake in the Hymall hypermarket chain, raised its stake to 90% in 2006. It opened its first Tesco-branded store in January 2007, and has plans to open 10 further stores this year. It has now set up headquarters in Guangzhou city to manage its South China operations its presence in the region.

Dairy Farm International’s Chinese joint venture bought rival Guangzhou Lianhua Quik Convenience, to strengthen its leadership position in the province of Guangdong. Guangdong Sai Yi Convenience Stores, also known as 7-Eleven South China, acquired 110 Quik convenience stores in Guangzhou city. These were rebranded as 7-Eleven convenience stores.

Jean-Charles Naouri, CEO of French retailer Casino Guichard-Perrachon, has said that though the company wants to “accelerate expansion” in emerging countries, it has ruled out an entry into China. Naouri said an entry into the Chinese market “is ruled out ... because we want to be leader or joint leader in the countries where we are present”.
 

Financials:

In 2006, Lianhua reported income of 241.6m yuan ($31m), on net sales of 16.5bn yuan ($2.13bn). Local rival Wumart had a turnover of $739m.

Carrefour has forecast strong business this year, and expects sales to grow 22% from last year’s $3.21bn. Wal-Mart’s sales touched $1.95bn, Tesco reported sales of $1.1bn, Metro had sales of $1.2bn, and Auchan saw its sales jump 32% to £775m.

Outlook:

China’s retail and consumer sector is expected to witness more mergers and acquisitions in the near future, according to PricewaterhouseCoopers (PwC),  as consumer spending continues to grow unabated with domestic players buying out smaller regional retailers to combat the buying power of international retailers. Growing sales are also expected to help boost domestic spending to sustain growth in the economy, reducing its reliance on investments and exports.

 Date article published: 01/08/2007