Distribution: China’s Next Big Opportunity
A great deal of China’s progress over the past thirty years has stemmed from its evolution as the “world’s workshop.” One of the questions I am frequently asked is: Outside of manufacturing, what are the next big opportunities?” Clearly, distribution is one which is receiving a great deal of attention these days. Many of the world’s largest retailers are nowputting significant stakes in the ground, and China consulting firms are doing a land office business churning out reports for private equity firms anxious to provide capital to this sector.
Prior to China’s accession to WTO in December, 2001, distribution was off limits to foreign investment. The basic rule was that foreign companies could only distribute in China what they made in China. Without access to foreign investment, and with limited financing available from China’s banks, the hundreds of thousands, indeed millions, of local private wholesalers and retailers in China have remained small, and virtually all distribution in China has been extremely fragmented and “disordered” in the words of my Chinese colleagues.
WTO changed all of that. By the end of 2003, foreign wholesalers and retailers have been able to get licenses as WOFE’s (wholly owned foreign invested enterprises), and this has touched off a tremendous amount of foreign investment. According to China’s Ministry of Commerce, the eighteen foreign retailers which currently operate in China had sales of RMB 196.7 billion ($25.5 billion) in 2006.
Lianhua Supermarket Holdings, China’s largest retailer, had sales of Rmb 44 billion ($5.7 billion) last year. Carrefour, the largest foreign retailer in China, was not far behind with sales of RMB 24.8 billion ($3.2 billion), ranking 5th in the country. Carrefour now operates 95 hypermarkets in China, including many in Tier 3 cities, and plans to open 20 more each year. Carrefour’s sales in China reportedly grew by 53% in 2006.
Despite these already large numbers, there is plenty of room for growth in China’s distribution sector. Carrefour, the world’s second largest retailer, had global sales of 87.4 billion euro’s ($113.6 billion), while Wal Mart, the world’s largest, had sales of over $348 billion. The China retail market has a long way to go to catch up to those in the West.
How to get in on this future growth? Companies like Carrefour have found that the key to success in China is to adapt business models to “local budgets as well as tastes,” according to Newsweek (May 28, 2007). As reported by the magazine, “Carrefour…… now has some of the highest volume stores in China. Its trademark wide, brightly lit aisles display tanks of live eels, bullfrogs and turtles at prices that compete withChina’s ‘wet markets.”
Turtle soup anyone?
