WAL-MART EXPANDS CHINA STRATEGY, CITES ‘TREMENDOUS’ OUTLOOK
Byline: Mark Tosh with contributions from Sharon Edelson
NEW YORK — Is China a market ripe with opportunity or a potential pitfall for U.S. retailers keen on global expansion?
It’s could be a billion-dollar question.
While many retailers are looking closely at China and its 1.2 billion consumers, only a few are moving aggressively to open stores in the world’s largest country.
One of those is Wal-Mart Stores, the world’s largest retailer.
Wal-Mart expects to open wholesale clubs in the cities of Shenzhen and Shanghai late this year as the first steps in its Chinese expansion plan.
“Somewhere down the road we will add supercenters and, potentially, discount stores as we move into these markets,” said, Bob L. Martin, president of Wal-Mart International.
Speaking here at the National Retail Federation convention, Martin said Wal-Mart sees middle-class income and purchasing power growing in emerging Asian markets, especially China.
“A tremendous opportunity, in our opinion, exists in areas like China, where we projected an 11 percent increase in middle-class growth,” he told an audience at an NRF sesssion entitled, “Where the Future Lies in Global Retailing.”
Martin said Wal-Mart believes there is an opportunity in Asia for “highly efficient, low-cost, value-driven formats because the consumer, much like the consumer here, is very value-focused. They appreciate assortment and selection, but they have high expectations as relates to quality and value.”
The discounter’s Asian expansion began last year with the opening of three 20,000-square-foot Value Clubs in Hong Kong. Charoen Pokphand, a division of the Thai conglomerate CP Group, is Wal-Mart’s partner in its Asian expansion.
Martin acknowledged that expansion in China carries a risk, but he added the long-term opportunity must be weighed against that danger.
“We think the rewards are higher as well,” he said.
Alfred F. Lynch, vice president and director of international development for J.C. Penney Co. Inc., said there is already consumer demand for Western style clothing and home furnishings in China.
“However, retailers opening new operations in China have generally overestimated the spending potential of consumers and underestimated the costs involved,” he said. Lynch spoke on the same NRF panel as Martin.
Inflation, which has been running at about 10 percent per year, and recent Chinese government moves to renege on agreements also are concerns for international investors, Lynch said.
Still, given the right combination of circumstances, Lynch said, he believes China could “quickly develop” into a major world trading zone.
For those with patience and guidance from a local business partner, China’s $127 billion retail market is hard to ignore.
“Discretionary income is rising for most Chinese,” said Nitin Sanghavi, senior fellow in retailing and director of the center for business research at the Manchester Business School. “There is a 50 percent increase in spending on clothing in China.”
Speaking on a panel, “Expanding Your Retail Options to Developing Countries,” at the NRF convention Wednesday, Sanghavi said, “There is concern over China’s high inflation rate and concern that reforms may be faltering. But the economy is growing by over 10 percent a year.
“Cartier opened its first shop in Shanghai last year and sees China as its most promising foreign market,” Sanghavi said. “Ikea is opening stores in Bejing and Shanghai in 1996 and will follow those with eight other new store openings.”
However, retailers expanding in China are certain to find a rocky retail terrain. The significant barriers, according to a recent Coopers & Lybrand study, include
A regulatory environment that is complex and subject to rapid change.
Subsidies for government-controlled stores, such as rent-free space, that permit them to offer very low price points.
A lack of infrastructure, which makes distribution difficult.
A manufacturing sector that traditionally has driven retailing.
A low level of skill among management.
Although a number of upscale retailers have opened stores in China, only a few are aiming at the mass of Chinese consumers. They include Pacific Concord, a Hong Kong firm with about 25 stores in various cities, and Giordano, which has 40 locations.
Giordano, a private label retailer with a mid-market offering, which, according to Coopers & Lybrand, is facing “losses in the millions” in China.
Mark Kingdon, manager of the retail industry consulting group at Coopers & Lybrand, said the Chinese government is trying to create opportunities for international expansion in China, and he believes retailing is poised for takeoff.
“But it’s uncertain where it will go,” he added.
Coopers & Lybrand’s recently completed a study of the Asian market called, “Global Retailing: Assignment Asia.” It was released here this week in conjunction with the NRF convention.
According to the study, steadily increasing incomes have helped the retail industry flourish. Sales rose 22 percent in 1993 to about $150 billion (1,340 billion yuan) and are expected to more than double by the year 2000.
In interviews with women consumers under the age of 25, Coopers has found a group that likes to shop and is willing to make impulse purchases, Kingdon said.
However, Kingdon said the challenge of operating in China is that the consumers don’t have the requisite spending power. In the five major coastal cities, only about 9 million Chinese have a monthly income that would permit moderate to high consumption of consumer goods.