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Fast Facts Retail sales increased 16.3% in 2011 Q1, while P expanded 9.7%. Retail sales are expected to double in the next three years. Retail sales in China amounted to nearly $2.1 trillion in 2010, nearly 50% of those in the U.S. Chinas retail sales are expected to grow by around 10% in 2011. []
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Retail sales increased 16.3% in 2011 Q1, while P expanded 9.7%. Retail sales are expected to double in the next three years.
Retail sales in China amounted to nearly $2.1 trillion in 2010, nearly 50% of those in the U.S. Chinas retail sales are expected to grow by around 10% in 2011.
Chinas retail sector is showing some signs of consolidation in 2011. The market share of the top 20 retail chains rose to 8.9% in 2011 from 8.4% in 2010
Five of Chinas domestic retailers are ranked among the 250 largest global retailers on the Global Powers of Retailing for 2010.
By 2015, China is poised to zoom to the position of the third biggest consumer market globally, after the U.S. and Japan.
China slipped to the 6th rank on A T Kearneys Global Retail Development Index 2011, from the top position in 2010.
Chinas growth story has been one of the most spectacular economic marvels of the new millennium. Over the last 30 years, China has ushered in an era of economic reform, emerged as an export juggernaut, and has experienced unprecedented urbanization. All these ctors, backed up by the states unswerving commitment to development, have vaulted the Middle Kingdom to a venerable position globally in terms of Purchasing Power Parity P, second only to the United States (U.S.). Over the past two decades Chinas Gross National Income (GNI) per capita has expanded 13 times.
And as incomes have grown, so has the capacity to spend. By 2015, per capita consumption in China is set to increase to 17,000 renminbi ($2502) from 13,400 renminbi ($1975) in 2008. Total urban consumption in 2015 is likely to exceed 13.3 trillion renminbi ($1.96 trillion), the country the third biggest consumer market after the U.S. and Japan according to the 2009 Annual Chinese Consumer Study by McKinsey.
These sweeping changes in Chinas socio-economic framework have also led to the emergence of a buoyant retail sector, which thrives on the progressive Chinese consumer. With this, domestic retailers have come to benefit from the mounting retail appetite, and global retail chains have made a beeline to grab a share in the booming Chinese retail market.
As demand in the developed countries reaches maturity, the lure of the flourishing retail market in China has attracted global retailers since the floodgates of the sector were thrown open to foreign players. With consumption demand in most of the developed world still reeling under the aftermath of the global slump, the bustling Chinese retail market provides greener pastures for retailers looking for growth. Moreover, now that the Chinese government is consciously trying to retool its development model more towards domestic consumption rather than export dependence, retailing in the worlds stest growing economy is poised for exuberant growth.
China has experienced unparalleled levels of urbanization since the onset of economic reforms begun in 1978. Compared to 1980, today Chinas urban population has increased by over 200%. According to a McKinsey research study, by 2025, two-thirds of the Chinese will be living in urban areas. By 2030, Chinas urban centers will be inhabited by 350 million more people, this increase itself beating the entire population of the U.S. today. Also by 2025, 221 Chinese cities will boast of a population of over one million, with 23 cities registering over five million. In comparison, Europe has just 35 cities with a population of over one million currently. The urban economy is expected to generate 90% of Chinas P by 2025, with its aggregate consumption and disposable incomes twice those of Germany.
While the 1990-2005 period saw the emergence of two mega-cities in China with a population of over ten million, namely Beijing and Shanghai, by 2025 the number of mega-cities is expected to climb to eight, adding Tianjin, Shenzhen, Wuhan, Chongqing, Chengdu and Guangzhou to the group. These mega-cities are st emerging as urban retail hubs in China.
World over, the resurgent demand from the growing middle-class has been instrumental in driving global growth. The World Bank estimates that the global middle-class will grow from 430 million in 2000 to over 1.15 billion in 2030 (incomes ranging from $3650-$7300 annually). More importantly, while the developing countries accounted for 56% of the global middle-class in 2000, this figure is expected to zoom to 93% by 2030. China and India together will account for a phenomenal two-thirds of this expansion. In China, the process of economic growth led to st-paced urbanization and improvements in the standards of living, and with this, more and more urban migrants were propelled to the emerging middle-class.
Source: Understanding Chinas Middle-Class, Kheehong Song & Allison Cui, chinabusinessreview1
Gome Home Appliances: Established in Beijing in 1987, GOME is a leading retailer in home appliances and consumer products in China. It is the largest Chinese electronics retailer by number of stores. By the end of December 2010 GOME Group had a presence in 336 large and medium-sized cities through 1320 stores. Listed on the Hong Kong Stock Exchange in August 2004, it is a pioneer of the retail chain model in China.
While it derives the lions share of revenues from from Shanghai, Beijing, Guangzhou and Shenzhen, second-tier cities account for a fourth of its total revenues too. GOME has undertaken a series of strategic mergers and acquisitions which include China Paradise, Dazhong Home Appliances, and Shaanxi Cellstar. In order to maintain its margins and remain competitive, the company closed down 39 underperforming stores in 2010. In a strategic move, GOME restructured its operational model, transitioning from a shopping mall model to a retail shop merchandise management model, with added emphasis on the product-mix, in-store layout and product display.
Suning Home Appliances: Although domestically listed on the Shenzhen Stock Exchange, it is worthwhile to mention Suning as it was ranked the largest retailer by sales revenues in 2010. Established in 1990, the company was listed in July 2004, and now operates about 1000 stores spread across 300 cities. It follows four chain formats: flagship stores, neighborhood stores, specialized stores and boutique stores. Suning has adopted an aggressive strategy to expand its markets in Mainland China, while eyeing overseas markets as well. In a well-planned strategic move, it acquired a 51% stake in Laox, a Japanese retailer last year, and stands to benefit from the Laox Japanese technology as well as standards of service. Suning plans to open over 110 Laox outlets in China over the next three years, and will revamp the Laox Japanese stores to cater to Chinese tourists. Suning also acquired Citicall in 2010, a leading consumer electronics retailer in Hong Kong, gaining access to 22 stores and cilitating its overseas expansion.
Belle International Holdings: Primarily engaged in the womens footwear and sportswear business, Belle International Holdings has an overwhelming presence in Mainland China, operating about 11,967 retail outlets with another 172 outlets in Hong Kong and Macau. While company-owned brands contribute substantially to total revenues, the company follows the brand licensing and the retail distribution policy for other brands. Sportswear is restricted to retail distribution of brands like Nike, Adidas, Reebok, PUMA and Converse. The company covers product research and development, procurement, manucturing, and distribution as well as retailing for in-house brands, with Mainland China contributing about 94% to the total revenues. Listed on the Hong Kong Stock Exchange in May 2007, Belle has undertaken strategic acquisitions, acquiring the Mirabell and Millies business in China, Hong Kong and Macau, as well as the Senda Brand in China.
Golden eagle Retail: Established in December 1995 in Nanjing, Golden Retail has 20 self-owned stores and one management store in China. The stores are spread across 11 cities in the three provinces of Jiangsu, Shaanxi and Yunnan. Jiangsu remains the major market for the group. Situated in prime shopping locations in cities, the group boasts of 70.7% self-owned properties, with the balance of properties on long-term leases. It focuses on its VIP Customer Expansion Plan, which already has 826,000 enrolled loyal customers.
Parkson Retail: The retailing arm of the Lion Group in Malaysia, Parkson Retail was established in 1987 and started operations in Beijing, China in 1994. Positioned in the middle and upper-middle end of the retail market, the company focuses on shion and lifestyle products. Listed on the Hong Kong Stock Exchange in November 2005, it has a network of 46 stores spread across 30 cities in China. On average, the group aims to build up its portfolio annually with about 15% additional operating area. Parkson is now focusing on acquiring a controlling interest in its existing subsidiaries operating its stores in China, as well as third-party managed stores. It also plans to purchase the property of current as well as potential flagship Parkson stores, in order to eventually own about 20-25% of its operational retail space. Toward this end, Parkson has completed the acquisition of the Parkson branded managed stores in Nanning, Tianjin and Kunming. The company has also bought the Anshan Parkson property, and acquired controlling stakes in Xian Lifeng Parkson apart from the Xian Changan and Xian Shidai Parkson stores. The Jiangxi K & M store in Nanchang city, as well as the Anshan and Beijing Parkson stores have also been completely acquired.
China Donxiang and Anta Sports are two other prominent sportswear enterprises operating in China. While China Donxiang has held all rights to the internationally recognized Italian brand Kappa in China and Macau since 2006, it also acquired Phenix, a renowned Japanese ski brand in 2008. Since the Phenix company manages the Phenix and Kappa brands in Japan, now China Donxiang owns rights to the Kappa brand in Japan as well. Similarly, Anta Sports is engaged in the design, development, manucture and marketing of branded sportswear in China, and has also acquired the business for the Fila brand, Italys largest sportswear company, in Mainland China.
While the Chinese retail sector holds tremendous potential and seems poised for phenomenal growth, it must confront a few challenges.
CONSOLIDATION: In order to promote efficiency as well as reap economies of scale, consolidation is a top priority for the Chinese retail industry. Currently, Chinas retail segment is highly fragmented. Competition is especially cut-throat in the supermarket and the hypermarket segment of Chinas retail segment. The largest player in the supermarket segment, the China-based Shanghai Bailian Group, enjoys only 11% market share. Even Walmart which dominates the retail market in the U.S. commands only around 6% market share in China, despite the ct the big-box retailer set up shop nearly 15 years ago in the country.
LEASING VERSUS OWNING PROPERTIES: As competition in the retail sector intensifies, there is an acute need to manage costs and improve margins, especially when it comes to real estate costs. While acquiring property often proves to be an expensive proposition, retailers can exercise the option to operate from leased properties, which often is an economical option. For instance, leading electronics retailer GOME owns only about 8% of the floor area for its stores, with the remainder of its retail business operating on leased property. However, even leasing floor space is getting progressively expensive in the country. In 2010, leases and rental costs jumped nearly 30% year-over-year.
OUTSOURCING NON-CORE OPERATIONS: Moreover, retailers can also consider outsourcing some of their non-core functions like IT infrastructure, and other back office activities, focusing on their core competencies in retailing and customer orientation. This could play a major role in driving down costs.
BRANDING AND DISPARATE CONSUMER PREFERENCES: While brand positioning is clearly an important aspect of the retailing business, the extremely diverse and dissimilar consumption patterns of Chinese consumers makes branding a formidable exercise. On the one hand, while China is emerging as the stest growing market of premier luxury brands worldwide, there is also a large category of consumers who are price sensitive and are attracted to value offerings. While brand awareness has been on the rise, the same cannot be said about brand loyalty among Chinese consumers. Hence, while the scope for developing brands by domestic retailers is immense, cultivating brand loyalty remains a challenge.
ENCOURAGING FOREIGN RETAILERS: All said and done, while many global retailers have made their presence felt in the Chinese retail arena, they still ce restrictions and lack of clarity in rules. This is evident in the ct that only 5% of Chinas retail enterprises are foreign-invested. Foreign retailers have played an instrumental role in providing impetus to organized retail in the country as well as modernizing the sector through best practices and state-of-the-art technology. In the best interest of the Chinese retail industry, it may be beneficial to support and encourage joint ventures and partnerships between domestic and foreign retailers. Currently, some of the foreign retail giants contend that prime retail real estate space always goes to a local player, which puts them at a disadvantage.
Challenges and hurdles notwithstanding, continued urbanization and a prosperous middle-class will continue to be the drivers of the booming Chinese retail sector. Not surprisingly, the world is bracing to witness the emergence of China as one of the largest global retail market in the next decade.
Thomas White International is an independent, employee-owned asset management firm with offices in Chicago and Bangalore, India. Employing a value style, our investment approach blends a highly detailed, quantitative equity valuation method, with disciplined stock selection by a seasoned investment team. Backed by an exhaustive research process, the breadth of our research allows us to spot opportunities in relatively less known regions, while the depth of our process seeks to reduce risks through detailed evaluation of the regulatory environment, industry competition, and management quality. From mutual funds, to separately managed accounts, and institutional portfolios, Thomas White International now offers a large bouquet of asset management offerings, covering international, global, and emerging markets mandates.
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