China opens doors to western food retail

China has recently relaxed the rules obliging foreign retail groups to take a local partner, a move expected to lead to rapid growth in the number of international food and beverage retailers doing business there. But despite Chinese consumers' eagerness to try out new retail formats, making a success of the business there is not simply a matter of rolling out western-style outlets.

As we reported earlier this month, the likes of Carrefour and Wal-Mart are likely to be joined by other ambitious international players such as Tesco in the Chinese market over the next few years, helped by the relaxation of the local partner rules as part of China's commitment to the World Trade Organisation.

But being able to do business there without the need for a local partner does not of course guarantee success, and winning over local consumers is the key to building long-term growth for the hypermarket format - the layout of choice for the major store groups in China. While in some other Asian markets companies have stuck to their tried-and-tested way of doing business (and in the case of Carrefour in Japan, for example, have sometimes come unstuck as a result), the Chinese approach has by and large been one of a mixture of cultures, the advantage of having to partner with a local retail group.

As Paul French of market research company Access Asia told CeeFoodIndustry.com, the world's biggest food retail groups have been quick to see the need to adapt their offering to local tastes, despite the high level of interest from shoppers.

"Basically consumers are keen to see any new retailing format, as witnessed by the crowds that tend to flock to the opening of a new Carrefour or Wal-Mart," French said. "However, it is noticeable in these stores that basket sizes are smaller than in western equivalents, and a lot of taste testing of new products goes on.

"Foreign retailers have several strategies to try and get round this - the major one is 'localising' their stores, which means that in Carrefour, for example, you can buy live fish, turtles and cuts of meat unfamiliar to westerners, as well as highly popular products such as instant noodles. But these stores also have the largest ranges of wines and are the only places to get cheese - offering a combination of both east and west.".

Combining a western style hypermarket with a Chinese market atmosphere - often over several stories - is designed to make shoppers feel at home while at the same time offering a touch of exoticism to entice them back again, but there are other reasons why the major players have been obliged to tailor their offer to local requirements.

"Daily shopping for fresh food is still the norm, and with the recent bird flu epidemic, the need for freshness has been accentuated, and will do more so as the long hot summer approaches," said French. With few homes with fridges, let alone freezers, short-life products are the norm, and the hypermarkets are already finding themselves facing a new threat from convenience stores, according to French, in particular in the major cities with wealthier consumers.

"Two consumer factors that are likely to slow the development of larger retailers are the lack of credit cards and the low ownership rate of cars, which make out/edge of town locations problematic for many people," French added. "Cheap restaurants [offering a major disincentive for people to cook for themselves] and generally smaller, poorly equipped kitchens also mean many people just buy pre-cooked and prepared food."

Food retailing in China is likely to be big business for local and international players alike over the next few decades, with the massive population and lack of existing competition a perfect combination. But more liberalisation is likely to be necessary to generate true growth, according to French, while an overhaul of the current distribution system will be vital if nationwide coverage is to be achieved.

Most of the major stores are located in the densely populated, and relatively wealthy, eastern coastal region, where the major cities of Beijing, Shanghai, Tianjin and others are located. But distribution networks need to spread across more of the country, especially into more inland and rural regions, if the true potential of what China has to offer is to be realised.

While this will inevitably take time, Access Asia predicts that "modern, organised retail chains could account for as much as 25 per cent of total consumer retailing by 2005, if the legislative and distributional structure of the market is developed so that the retail industry can reach more of its potential market outside the main urban centres."

These modern chains will not all be foreign-owned, however, with many local players learning a lesson or two from foreign rivals and putting them to good use. "Many [local players] are reorganising and forming conglomerates to try and combat the foreigners - the two biggest in Shanghai for instance are Lianhua and Hualian," French said. "Their new stores are far more modern, better laid out and less cramped - shoppers appreciate this."

Domestic food retailers have also become much more aware of consumer spending patterns. "What many traditional retailers are finding is that although average incomes are rising, Chinese consumers remain highly value focused, which means that they will only spend more on a product if they feel the added quality merits the added cost. This means that retailers now have to be a lot choosier about the products they stock," said French.

"Without much domestic experience in stock purchasing, many domestic retailers find it hard to identify which products are most popular, and therefore most likely to sell well in sufficient quantity to be profitable. Product manufacturers and wholesalers are also becoming a lot more aggressive in getting products into stores, as well as negotiating as high a margin as they can for themselves, due to their own profit constraints, which is further adding to the pressure on retailers."

Most domestic retailers, particularly in the cities, are now much more aware of the need for them to shift stock as rapidly as possible, according to French. "This has resulted in the greater use of marketing techniques such as discount sales, in-store brand promotions, advertising, etc., in order to raise customer throughput, and increase the rate of product turnover."

All will not continue to be rosy for China's retail sector, of course, with rising house prices, a slowdown in the economy, the development of the savings market (prompting more people to save, rather than spend) and growing unemployment rates all likely to take their toll, according to Access Asia. Nonetheless, French predicted food retail sales of around RMB3 trillion by 2008, with rural regions accounting for an increasingly large share of sales as companies expand over the next few years.

China is undoubtedly a land of opportunity for European food retailers, but their skills as international players are likely to be tested to the full if they are to successfully take a share of the world's biggest consumer market.