The New Land of Opportunity

Discussion
Nov 15, 2005
George Anderson

By George Anderson


Wal-Mart, Home Depot, Circuit City, McDonald’s, KFC and Starbucks are there. So are Metro and Carrefour. All these large retail and foodservice companies are doing business far from their American and European homes in the new land of opportunity – China.


As an article on the Retail Traffic web site points out, China is a huge consumer market that is growing at a phenomenal rate. According to the report, the retail business is now a $700 billion market with disposable income in urban areas growing at an average of 64 percent a year.


The nearly unlimited upside to the Chinese market has many that are there looking to expand, and many who have yet to crack the market considering a means of entry.


Morgan Parker, president of Taubman Asia, a unit of Taubman Centers, said, “Virtually everyone in commerce generally, and in our sector particularly, is looking at China.”


The realities of entering China, however, can make it a daunting task. As Mr. Morgan pointed out: “China is not a slam dunk.”


First, the country has many successful homegrown retailers. Only Carrefour is among the “imports” in the country’s top ten list of retail businesses.


“The real strength of the retail market is in national retailers that are building chains,” said Taubman’s Parker.


While it may be true that incomes are growing, most of that is limited to urban areas and the differences between rich and poor remain sizeable. China is still looking to create a vibrant middle class.


For those looking to enter the market, there is good news. The Chinese government has relaxed regulations over foreign investment in the country, allowing retailers to build as many stores as they wish with limited restrictions on where they are built.


Still, issues ranging from product counterfeiting, personnel challenges and bureaucratic red tape make doing business in China a constant challenge for those seeking the rewards they seek.


Meeting the needs of consumers vastly different than those retailers are used to serving is also a major hurdle to overcome. Points of difference and a competitive advantage in the U.S. may not translate to China. Wal-Mart, for example, has found that it is not the low price leader in China. Street vendors, who represent the largest “segment” of Chinese retail are able to sell goods for lower prices than Wal-Mart.


To be competitive in China, said Ira Kalish, director of global consumer business at Deloitte Touche Tohmatsu’s Deloitte Research unit, means the retailer has “to compete on the basis of quality, product mix and convenience.”


Personnel issues are also huge largely because there are more jobs than workers. According to Mr. Kalish, turnover is significant. He told Retail Traffic the story of a trucker who, after finding a better paying job, left the products he was hauling on the side of the road. After a couple of weeks, someone else picked them up and made the delivery.


Moderator’s Comment: What do you see as the biggest opportunities and challenges facing retailers looking to do business in China? Do you expect to see
a sizeable number of U.S. retailers opening up stores in China? Are there retailers here that you think would do particularly well there?

George Anderson – Moderator

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11 Comments on "The New Land of Opportunity"


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Gene Hoffman
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Gene Hoffman
15 years 3 months ago

On the other side of the Great Wall of China is a massive marketplace emerging for world class products. In it are 1.3 billion Chinese citizens who crave the same product quality, tailored mix and convenience – as well as the resulting psychic rewards – that consumers everywhere else in the world desire.

The big challenge is how to reach and to appeal to them on their turf and on their terms; how to show appreciation for their dignity; and how to honor their cultural preferences. This represents a Shangri-La opportunity for American manufacturers and retailers. Expect them to rush into China faster than the “Charge of the Light Brigade” … but let’s trust that American companies still to arrive in China will give better generalship to their charge than was given at Balaklava in 1854.

Kai Clarke
Guest
15 years 3 months ago

China is a great opportunity, but faces many socio, cultural and economic issues which stand in its way of achieving its potential. First are the cultural and social issues which have separated regions of China for thousands of years. Added to this is the complexity which China’s government adds to the system breakdowns and communications mishaps and you have serious issues which cannot be diminished. Despite all of this, there is a burgeoning middle class, and this is the key to China’s prosperity. How the government allows this to flourish in the upcoming years will dictate not only China’s growth rate, but how and where it will grow. The majority of China’s growth is Urban, and connectivity to rural cities and villages are critical to China’s future. Development of an infrastructure to encourage education, adopt new ideas and initialize new systems is critical to this success.

M. Jericho Banks PhD
Guest
M. Jericho Banks PhD
15 years 3 months ago
Our small wine wholesaling company has been trying to do business in China for over a year with no success. Perhaps because we don’t have the clout of our country’s mega-firms. We’ve encountered roadblocks at every turn, and have been openly asked for bribes several times. Today it was reported that the Chinese yuan increased in value against the U.S. dollar. That will do as much as anything to encourage U.S. business in China. An additional major impetus will be China’s hosting the upcoming Summer Olympics. They are dedicated to putting on a great show and using the Olympics to establish themselves as a modern, progressive country. This will expose their population to the outside world as never before, and show the world the Chinese culture as never before. That culture is also changing with the recent elimination of the so-called “peasant class” designation — with the objective of creating a new, capitalistic middle class in China. And finally, the gradual relaxation of restrictions against worldwide Internet contact inside China will contribute a great deal… Read more »
Craig Sundstrom
Guest
15 years 3 months ago

To take Slmeat1’s comments a little further still: it’s also important to remember that those 480M have, on average, far lower incomes than their American/European counterparts; the equivalent is probably more like 50-100 million – though, of course, 4 $10K incomes isn’t exactly the same as a $40K one.

Anyway, however many consumers there may be, it’s like any other emerging market (rapidly growing, corrupt, “foreign”): large upside AND large downside potential…. There will be a few large winners, and many losers.

Bernice Hurst
Guest
15 years 3 months ago

With regard to Slmeat1’s comment, I read just today that the Indian government is planning to resist invasion by Western retailers because they do not believe it will improve their economy and prefer to support their own type of retail operation. There has also been historical evidence of countries first welcoming incomers and then shutting the door in their faces. This could happen with China. Those retailers who get in fast, make their bucks and leave themselves with a safe exit route may feel triumphant in a few years. But there are already stories coming out about the effects of Western style foods and fast food eating on people who are tempted by them. Based on past government behaviour, and the ability of the Chinese to replicate any product they want to at a much lower cost than anything they import, I would definitely suggest that any retailer making a move into that country should watch their back.

Chris Leitner
Guest
Chris Leitner
15 years 3 months ago

China will be the next economic “superpower.” However we must keep in mind that only 37% of China’s population live in Urban areas, which makes the potential customer base closer to 480 million people, still a huge market but not much bigger than the US or Europe. Most of the country is still made up of sustenance farmers who live off what they produce and can trade for. The potential for disaster is always present when you are doing business in a Communist state. It would be foolish to ignore China and its burgeoning business opportunities, but I would proceed with caution and guarded optimism under the current political regime. (See Cuba pre-1961.) Let’s not forget India, with a population that will soon surpass that of China, and a democratic style of government. I will be the first to say that the government is shaky, at best, but India is still a market that deserves some attention.

Mark Lilien
Guest
15 years 3 months ago

Number 1 problem for retailers entering China: finding the right leadership. This is the same problem for retailers entering the American market, the Canadian market, the Mexican market, or the Eskimo market. Any retailer can find locations, buy merchandise, build stores, hire people. There are no patents or copyrights in retailing. Starting with very similar tools and resources, some retailers make fools of themselves and others thrive. The only significant difference is leadership, whether it is Chinese or American or Russian or Egyptian.

Bill Bittner
Guest
Bill Bittner
15 years 3 months ago

The big concern of companies expanding into China has to be the same as for any foreign investment … Politics. Whenever someone talks about China, I still have the image of the lone protestor standing in front of the tank in Tiananmen Square. The protestors were eventually subdued without any significant reforms. Although China seems to want to join the world economy, they don’t seem to want to play by “foreign” rules. As the article points out, they have only reluctantly begun to address their lax enforcement of property rights and to permit greater foreign investment. Their economy is still heavily managed by government intervention which can have a big impact on the success of foreign companies.

Having said all that, 1.3 billion consumers are hard to ignore. The potential rewards are huge.

Mike Bavington
Guest
Mike Bavington
15 years 3 months ago

The greatest thing that the Chinese market has over the North American market is a consumer population that doesn’t feel or behave as though they are kings of the world, that they deserve everything they can dream of, and that they can do no wrong.

Think of large issues that really hurt companies, such as unions and strikes, high cost pensions, health care and other benefits, damages, thefts, returns, excessive retail and business taxes imposed by governments, etc.

China doesn’t have any of this and, for that, it is extremely attractive. I can’t wait until China becomes the powerhouse that it can be, one which will bring into line the North American attitude of entitlement. It’s amazing to me when I hear North American consumers consistently demanding lower prices, yet conversely asking for higher wage rates and benefits plus garnishing the expectation that production and services remain in our hemisphere. When the Chinese force us to be more competitive, everyone will be better off.

Roy Fossum
Guest
Roy Fossum
15 years 3 months ago
What a timely topic! I have been in the supermarket business for 39 years, and never thought I would entertain the thought of getting involved in China, but I am on my way! I have worked on a regional basis, as well as a national level, for both supermarket and wholesale. As I looked into the growth in China, I was pretty amazed! Not only do they have over 1.3 billion people, but they are also experiencing a migration of people from the “countryside” into the cities, as business growth has opened opportunities for jobs, and a step up in their lifestyle. It is estimated that this migration includes anywhere from 200-300 million people! I will begin working there next month, for one of the Chinese owned hypermarkets. It occurs to me that this is an opportunity to be involved in the growth of the retail business, right from its infancy. Who knows what all the challenges are for an American working in China? But, I am about to find out. I suspect that the… Read more »
Bob Houk
Guest
Bob Houk
15 years 3 months ago

Three disconnected observations from my recent and first experience in China:

Even in Shanghai, by far the wealthiest city in China, per capita income is only about $4,000. The rural areas should be totally ignored by most western marketers — there’s no potential there for now (and probably for a good long while).

There may be in theory a crackdown on pirating, but street vendors near my hotel were quite openly selling DVDs for 7 yuan (87 cents), including movies that were still in theatres in the US (e.g. The 40 Year Old Virgin).

I was struck by the contempt in which Wal-Mart was held by Chinese vendors. I’m so used to the awe/reverence with which so many American suppliers speak of them. In China, they’re viewed as bumblers, and definitely no match for Carrefour.

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