CHINA’S RETAIL SCENE: ONCE BARRIERS LIFTED, FORTUNES MAY UNFOLD
Byline: Constance Haisma-Kwok
HONG KONG — The time may finally be on the horizon for U.S. specialty chains like Gap, The Limited and Niketown to scale the Great Wall of China.
While none of these chains have immediate plans to do so, the road east began to be paved for them by a recent agreement between the U.S. and China. The accord will make it easier for American single-brand retailers to open stores in the world’s most populous country without being required to have a local partner, removing a major impediment to opening the door to the Chinese market.
Slated to go into effect three years after China enters the World Trade Organization, which could come this year, the deal presents a major growth vehicle for U.S. chains and for the further Westernization of urban centers such as Beijing and Shanghai.
The agreement came just days before China reported an 8 percent annual growth in gross domestic product for the first half of the year. According to a 1999 economic report, from 1984 to 1996 China’s average gross national product growth rate was 10.2 percent. Earlier this month, the government’s Statistical Bureau said the economy was expected to slow down in second half, with expectations of a 7.5 percent growth rate due to falling exports.
But those with firsthand China experience warn that while the potential is there, there are hurdles to overcome.
Foreign retailers have to contend with a complicated bureaucracy, business-ownership restrictions, high import taxes, distribution difficulties and the need for long-term investment. In addition, they need to know that Chinese consumers, while eager to embrace Western brands, have a problem with prices.
So far, the most successful stores to open in China are consumer-product-oriented retailers with deep pockets and plenty of patience.
“Success in China is going to be determined by how long you’re willing to do business there,” said Mohan Komanduri, director of East Asia for retail consultancy Kurt Salmon Associates. “If people are looking five or 10 years out, OK, but if they have the view of the typical Western retailer, which has a three- to four-year investment horizon, it may take a little more than that.”
Komanduri noted that historically, foreign retailers were required to average $2 billion in sales for three years and $200 million in assets to open shop in China.
“That should be evaporating as things [with the WTO] move forward, but it’s kept the bar pretty high for entry,” he said. “That’s why you see Wal-Mart as the only American retailer that has made a foray into China. Metro, Macro and Carrefour are the major European retailers that have made an entry.”
Supermarkets aside, department stores are the norm throughout the country and shopping at them is still considered an event. Indeed, most retailers making their initial entry into the nation set up shops, corners or counters within existing department stores, most of which are state-run or locally owned.
“It’s all hotels, department stores and arcades,” said Kevin Ching, executive director of Dickson Concepts International, the Hong Kong-based company that has Asian distribution rights for brands such as Polo Ralph Lauren, Charles Jourdan and Brooks Bros. “If you go out of the bigger cities, the only decent place you can find in any town or city is the department store. The streets are always so messy, it would be difficult to find any decent shop space with street frontage.”
Even when suitable locations are found, it is not a given that there is a market for high-end merchandise. In 1998, the Chinese government reported a nominal per capita income of 6500 yuan or about $783, an amount that will not allow for the purchase of pricey goods.
According to Komanduri, it is a mistake to presume that China’s large population equates with great buying power. He said, “China’s market is not three times bigger than the U.S. because there are many, many fewer people who can make as much as the per capita income of the States.”
There is a big income disparity between rural and urban workers, which has lead to a huge migration to cities like Shanghai. The 1998 statistical yearbook showed the rural income average was 2090.10 yuan ($253) per capita and urban was 5160.30 yuan ($621) per capita. However, China’s income data can be misleading, since so many people are employed by state-run enterprises and their wages are supplemented with housing, food and government-supplied services.
According to Komanduri, real opportunities exist for low-price fashion retailers who are willing to invest.
“If Giordano [a Hong Kong chain specializing in casual clothes] can make it, then the Gaps of the world can make it, too,” he said.
Giordano has nearly 2,000 stores in China and analysts feel it has plenty of growth potential.
Still, inroads have been made in the up-market arena. Dickson, for example, built an arcade in Shanghai that contains freestanding stores for most of its brands. To date, the company has opened more than 60 shops and corners in China and has plans to open another 30 in the coming year. Ching anticipates that the new agreement will have little effect on his business.
“We still have the China territorial rights for certain brands, so it’s up to us whether or not to open more stores,” he said. “The new agreement doesn’t make anything easier for me because I already have no problem.”
Typical of foreign retailers, Dickson’s stores are set up under joint ventures or in hotels that “already have the proper retail licenses.” While he declined to divulge specific plans, Ching said the company expects to launch Brooks Bros. into the mainland, as demand for men’s suits is high.
“We believe it will do well because it’s simple — the shirts match with the ties,” he said. “The shopper doesn’t have to worry about matching because it’s all done for him.”
Other Dickson brands, including S.T. Dupont and Polo Ralph Lauren, already in China for more than a decade, will see their presence increase. Dickson’s stores are spread further across the country than many other foreign brands, who concentrate initially on China’s four relatively wealthy cities — Shanghai, Beijing, Shenzhen and Guangzhou — where there is demand for luxury goods.
“In China, there is a significant crowd of people who can afford the price points of Hong Kong or higher,” said Hugues Witvoet, president of Louis Vuitton Pacific. “There is a middle class and a class of entrepreneurs that is growing fast. We’ll very quickly find ourselves in a market where there are millions of people who are able to afford the purchase of luxury items on a regular basis.”
Witvoet noted that Louis Vuitton opened its first shop in China 10 years ago at the Palace Hotel in Beijing. Today, there are seven Louis Vuitton stores, three Celine boutiques and two Loewe shops. All are free-standing boutiques in hotels or shopping malls.
Likewise, The Estee Lauder Cos. has some 23 counters in China, representing two brands, Estee Lauder and Clinique. The cosmetics have been available in the country since 1993. Hermia Pavanetto, managing director of Estee Lauder Hong Kong, said the company’s strategy is the same when entering any new market.
“There must be demand before there is distribution,” she asserted.
To that end, Lauder advertised in China Elle for five years before opening the first counter in the Shanghai Isetan.
The company’s efforts to build brand recognition are not typical, however. Both Vuitton and the Dickson group take a different approach.
“You have to establish a reputation through shop openings,” said Ching. “Chinese consumers are certainly more aware of brands, but at the moment, the masses are still at the stage of admiring, not actually being able to afford, top-brand products. It requires a lot of patience and investment. Once they’re ready and wealthy, we’ll be in position.”
Witvoet agreed, saying: “As yet, there are only a few luxury brands in China that have high brand awareness. Probably watches, like Rolex or Omega, enjoy the highest brand awareness because this is the first thing the Chinese would buy.”
Witvoet said that for LVMH companies, brand recognition depends greatly on whether or not a store exists in a particular city.
“This is very true for Vuitton,” he said. “A city in which we have already opened a store will have brand awareness that grows very quickly.”
While all retailers struggle to some degree with brand awareness, few would talk publicly on the difficulties of doing business in China. Not for attribution, many executives commented on broadly written regulations that are open to interpretation, and strict, counterintuitive distribution rules as impediments that still exist. Piracy, in terms of products and business practices, is also a big issue, as are the high duties placed on imported consumer products, which allow inferior, state-produced goods to compete with imported goods and keep the market artificially limited.
Frustrations aside, many companies seem eager to push ahead.”For China, the WTO is an opening to the trade rules of the rest of the world,” said Witvoet. “For our industry, the end game is to be able to operate our own stores fully. This is something that is more or less embedded into the WTO negotiations.”
Pavanetto acknowledges that progress will take time, but she also is quick to point out China’s success to date.
“China’s know-how isn’t going to be caught up in 30 years, but they have done an excellent, outstanding job, so far,” she said. “I don’t think any other place in the world could have done what China has done in the past 10 years.”