China to Kick Off a Retail Revolution

Christmas is coming early to foreign retailers in China, with restrictions set to be lifted Saturday allowing them to enter and expand there more easily.

BEIJING — Christmas is coming early this year to foreign retailers in China.

Restrictions will be lifted Saturday on foreign-invested companies with retail interests in China, allowing them to enter and expand in the market much more easily.

The long-anticipated policy change, part of China’s agreement when it joined the World Trade Organization three years ago, isn’t expected to create any sudden shifts in the Chinese retail market. Still, experts are predicting that the removal of a lot of red tape will entice more foreign-owned retail outlets — from luxury boutiques to all-in-one supercenters — to soon develop in China.

“This will give foreign investors more opportunities to do business in China,” said Jie Tang, a partner in the Beijing offices of Coudert Brothers LLP. “From a legal perspective, foreign investors in the Chinese retailing business will now be on equal footing to that of Chinese companies.”

Until now, foreign retailers seeking to do business in China were required to enter into joint ventures with local partners to open retail outlets. In addition, those foreign-invested stores were restricted to China’s major cities and limited to a small number per city. As of Saturday, the third anniversary of China’s WTO entry, such rules will no longer exist.

Lifting restrictions also opens up opportunities for foreign companies in wholesale, commission-based and — once government-approved regulations are adopted — franchising areas.

The biggest beneficiaries are likely to be megastore chains such as Carrefour and Wal-Mart, which have launched aggressive expansion plans in China and are looking for more places to develop their businesses. Carrefour is the fifth-largest retailer and the largest foreign retailer in the country, with revenues of about $935 million in the first half of 2004, according to the Ministry of Commerce. Wal-Mart, the world’s largest retailer, had revenues in China of about $448 million for the first half of 2004, according to the ministry.

“We welcome the policy change, though it is too early to predict what will happen as a result,” said Todd Wang, a spokesman in the Shanghai headquarters of Carrefour’s China operations, which oversees 53 main stores in the country as well as other chains. “Certainly, the new policies will provide us with more opportunities within China.”

This story first appeared in the December 10, 2004 issue of WWD.  Subscribe Today.

In cities such as Beijing, where Carrefour has five hypermarkets, the demand for such megastores has been astounding. Customers often face long lines and heavy crowds, but that hasn’t seemed to reduce the numbers of people who frequent the all-in-one shopping spots. As the removal of restrictions opens up more cities to similar expansion, retailers such as Carrefour could find an enormous amount of new customers. By sheer numbers alone, China’s potential consumer base is staggering: The country has at least 40 major cities with a population of more than 1 million, according to the government-owned China Daily newspaper.

Wal-Mart, which operates 42 stores in China, already is preparing for a push after the retail opening. Last month, the company announced plans to open as many as 15 stores in China next year, including a new outlet in Yuxi, a city of 1.9 million in Yunnan Province, where it previously had not been allowed to expand.

Carrefour’s most recently opened hypermarkets have all been 70,000 square feet or larger. Wal-Mart’s most recent stores have been nearly 200,000 square feet.

Despite the anticipated boost for big retailers, other retail businesses may also see major changes after the removal of regulations. “Stores like Wal-Mart have already found ways to be successful in China under the old restrictions, so this change isn’t as crucial for them right now,” said Mark Schaub, a lawyer in the Shanghai offices of King & Wood. “Where the new legislation could really help is with smaller retail ventures, such as boutiques.”

Already, foreign luxury brands have begun spreading their stores to provincial capitals such as Harbin, Hangzhou and Shenyang, and such development plans could become easier and more expansive after tomorrow’s retail opening. Schaub predicts that the number of well-known luxury labels already growing in China could soon be joined by an influx of small, foreign-owned boutiques. Foreign investors could be especially drawn to building small businesses, he said, because the policy changes will include substantially lowering the amount of initial capital investment required by foreign companies in China from about $6 million to about $36,000.

“Now, it will be easier [for a foreigner] to set up their own little shop,” says Schaub. “They won’t have to put up as much capital as before, or be as dependent on Chinese partners.”

In Beijing, such types of small foreign-owned stores are scarce. One of the only small foreign retailers is French fashion designer Caroline Deleens, who has owned her own clothing label, Mushi, and its downtown boutique, for the past two years. Though such businesses are unusual in Beijing, Deleens — who does not have a Chinese partner — could envision a rise in small boutiques, especially as operating a retail business in China becomes less complicated. The market may be ready for such specialized stores: About 70 percent of Mushi’s target customers of professional women are Chinese.

“I think a lot of people view doing business in China as being quite difficult,” said Deleens, who cites her previous local knowledge and Mandarin language skills as major assets to starting her business in Beijing. “If it becomes easier, I think there will be more people looking here in the future.”

Given China’s recent building boom —especially in its major cities — retailers are now finding more location options from which to choose. In construction-heavy Beijing, for instance, developers are eagerly tearing down dilapidated structures in the city’s downtown to make room for more commercial spaces with central locations.

But for now, it’s clear that the one group that does not stand to gain from the change in restrictions is Chinese retailers. The increased competition from more experienced outside companies is a real threat, and one that many Chinese businesses are trying to actively combat. China’s largest retailer, the Shanghai-based Bailian Group — which competes with Carrefour and Wal-Mart — recently announced that it plans to increase its number of outlets by about 50 percent to 10,000 stores by 2010, in hopes of creating a strong stake in the local markets. Smaller retailers who don’t have the benefit of sheer size have begun creating alliances to help them prepare for a potential onslaught. 

“The competition [for Chinese companies] is about to become more fierce,” Tang said. She predicts that government support, such as favorable bank loans, might be put in place to help keep Chinese companies afloat as they adjust to the newly competitive market.

Despite the positive change for foreign-owned businesses, a true opening to the China markets isn’t expected to happen right away. A Carrefour executive has already said the company is likely to keep its Chinese joint venture partners after Saturday — even though it would no longer be required — as they provide the company with better access to local governments and stronger local retail perspective. Other companies are already reporting paperwork delays in their expansion plans or are waiting for the government to issue central guidelines on changes to areas such as business licenses and taxes.

Though the removal of restrictions is a welcome change, the Chinese market still requires some careful navigating. “With the relaxation of the law after Saturday, [companies] do have the legal feasibility to enter into the Chinese market,” Tang said. “But, to ensure business success in China, they still need to do a lot of homework.”