Beijing: Retailers Battle New Competitors

It takes 5 minutes for Yan Ping to walk to Wumart, but 20 minutes to Carrefour. That's why she usually shops at Wumart.   "They are the same, offering the same products at nearly the same prices," the 30-year-old housewife said of two of the biggest retailers in China. Over the past two years, she has developed a habit of buying everything she wants at Wumart, from rice to toothbrushes.   Wumart's competitiveness stems from the number of its outlets relative to stores such as Carrefour, about triple that of its foreign competitor. But with a December 11 World Trade Organization (WTO) deadline for a full-market opening looming, domestic retailers like Wumart may have to do more to keep clients like Yan. Foreign challenge   Supermarkets, a concept introduced into China by Japanese Yaohan Group in 1992, are gradually becoming popular among the Chinese. People with higher average incomes are lining up at supermarkets rather than shopping at roadside markets. In Yan's eyes, products from the supermarkets are of a higher quality.   Official statistics indicate that nearly 400 supermarket retailers with more than 14,000 outlets are now operating in China. The biggest global players, such as the American Wal-Mart, French Carrefour and German Metro chains, have all successfully established footholds in this market.   Recently, Britain's biggest supermarket chain Tesco PLC declared it would purchase a 50-percent stake in the Hymall chain of hypermarkets, a wholly owned subsidiary of the Taiwan Ting Hsin Group. Hymall's stores are mostly located in East and North China, with 10 hypermarkets in Shanghai. Its sales in 2003 were valued at US$610.5 million. After three-year's research, Tesco Chief Executive Sir Terry Leahy said he believes "Hymall is the right store chain for its strategic move into this exciting market."   Sir Terry has arguments to shore up his belief. China's retail market has expanded by more than 20 percent during the past five years, nearly triple that of the country's gross domestic product. Though occupying only 25 percent of the overall retail market -the figure is more than 80 percent in the United States - supermarkets are deemed to have great growth potential.   The further opening of the retail market is expected to create more business opportunities. China will let overseas retailers own 100 percent of their local units beginning December 11. Currently, they are limited to 65 percent ownerships in their Chinese ventures, a share that has risen from 49 percent since China joined the WTO in December 2001. Overseas retailers, currently restricted to provincial capitals and big cities such as Beijing, Shanghai and Shenzhen, will also be cleared to expand to smaller towns nationwide.   Adding stores has been a concrete target for the foreign giants. Wal-Mart has opened to branches in 20 cities since its entry into China in 1996, including 8 branches in Shenzhen. With an eye on potential markets in second-line cities, which are set to open to foreign retailers at the year-end, Wal-Mart has purchased three properties in Wuhu, Anhui Province; Yuxi, Yunnan Province; and in Taiyuan, Shanxi Province.   Media reports say that Wal-Mart plans to open another 50 stores within three to five years, with the total rising to 100, about the same number of China outlets as its French counterpart Carrefour. Domestic rivals   That makes domestic players uneasy.   "There will be more competition, but we can definitely compete," said Edmund Mak, chief financial officer at Wumart. The company is adding almost one store per day to its chain. To finance its aggressive expansion, Wumart raised US$33 million in a June share sale in Hong Kong.   "Wal-Mart is already here. Carrefour is adding stores," Mak added. "We need to keep expanding and strengthening ourselves." Lianhua Supermarket, the country's No.1 publicly traded grocery chain, plans to spend about 400 million yuan (US$50 million) to open new stores in the second half of this year, company Chairman Wang Zongnan said. Its target is 3,000 stores by the end of the year, up from 2,706 at the end of June.   Some Chinese retailers are merging into larger groups. The Shanghai Bailian Group, China's biggest retail company by sales, was formed last year through a merger of four retailers. Wumart, the country's 12th largest retailer by sales, has announced two acquisitions of Beijing retailers in the past two months, adding more than 60 outlets to its network of 429 supermarkets, convenience stores and superstores.   According to the Commerce Ministry, the nation's top four retailers by sales, all of them Chinese, had 5,232 stores as of June 30 and sales in 2003 of 98.1 billion yuan (US$12 billion). That compares with 200 stores and about 19.3 billion yuan in sales for Wal-Mart and Carrefour, the world's biggest retailers. Carrefour ranked fifth in China.   However, some foreign players claim they are not competing on the same field with the local rivals. "We are after a segment of the market that is different from that of our competitors," Bill Zhang, general manager of Beijing Wal-Mart Sam's Club says. "Their supermarkets are located in the city because they are in the mass-consumer market, while our target consumer groups are small- to medium-sized companies and car owners with above-average incomes." Compared to Wal-Mart, Carrefour seems to be competing more directly with domestic players like Wumart. Carrefour's strategy is to woo local customers with large shopping areas, low prices and an efficient commodity flows. Localization of its chain stores has always been one of Carrefour's main principles. Even the trimming of vegetables is in the local style. This operating strategy is successful to the extent that it places great pressure on local supermarkets, department stores, and other transnational retailers. Over-opened market?   As competition heats up, domestic industry insiders worry that the market is opening faster than their expectations, even threatening the survival of the national retailers.   "Foreign retailers are flocking into China, regularly or irregularly. Of the over 300 foreign retailers operating in China, 80 percent are irregular," said Zhang Hongwei, chairman of the Orient Group and a member of the Chinese People's Political Consultative Conference in a report to the Conference. He worries that domestic retailers are unable to fend off foreign competition.   "In 2005, we will see domestic retailers completely defeated by their foreign competitors," predicted Gu Jianguo, director of the Shanghai Chain Store Management Research Institute.   One of the most important factors facing Chinese retailers is their relatively weak financial strength. A recent survey conducted by the China National Business Information Center indicates that the average debt-to-asset ratio of the domestic retailers is as high as 76.1 percent, while their gross profit rate is about 11 percent. Though foreign players are also operating with high debt-to-asset ratios, about 10 percentage points higher than local retailers, their profitability is also 9 percentage points higher.   "Foreign retailers are expanding at a high debt-to-asset ratio, but they have shown strong potential for getting into the black. Backed by their world brands, it is easier for them to get bank credit than local players," said the report.   "If the financing problems of domestic retailers cannot be sufficiently solved, foreign retailers will monopolize the market in the future," commented Wang Yao, vice-director of the China National Business Information Center.   Partially aiming to smooth the domestic retailers' concerns, China's Commerce Ministry promised in February to offer "special guidance and support," including financial aid, to as many as 20 of the nation's biggest retailers to help them compete with international rivals. (By Jessy Zhang,