This Week in Leadership
A Wrench in the Hiring Boom?
The triple threat of rising inflation, sooner-than-expected interest rate hikes, and a potential stock market correction could slow down the pace of hiring.
This past summer, China surpassed Japan to become the world’s second-largest economy behind the United States and, according to sources ranging from The World Bank to Goldman Sachs, is on its way to becoming number one sometime around 2025. Yet, as world energy prices increase, the appreciating yuan reduces demand for Chinese exports and China tightens its monetary policy to rein in inflation, the question is: Where will the predicted growth come from? The answer, according to many observers, is the retail sector.
China has one of the most lucrative and rapidly growing retail markets in the world. Retail sales there doubled between 2003 and 2008 and, despite the global economic downturn, will hit $1.8 trillion in 2009, a year-over-year increase of 15.5 percent. They will rise 70 percent by 2014, according to Business Monitor International’s China Retail Report.
“Retail is maturing quickly in China,” wrote Jason Inch and James K. Yuann in their blog, China Supertrends. “A recent report by A.T. Kearney ranks China as the world’s fourth most attractive retail market. It seems there is now an international-style mall on every major street to replace what once was a local- or state-owned retailer.”
This retail explosion is fueled by burgeoning demand from China’s middle class, which is growing by 50 million people a year and now represents one-fourth of China’s population. As higher incomes and better living standards have shifted people’s focus from basic needs to quality of life, they are spending more on automobiles, housing, health care, pharmaceuticals, electronics, telecommunications and big-ticket luxury items.
Because of the wide disparities among China’s regions and the country’s rural-urban income gap, purchasing power and retail demand vary greatly. The growth in both affluence and retail sales is, however, primarily an urban phenomenon. Per capita disposable income in urban areas is nearly triple what it was a decade ago and significantly higher than that in the first-tier cities of Beijing, Shanghai, Guangzhou and Shenzhen. As urban populations continue to grow — doubling by 2025, according to the McKinsey Global Institute — some commercial developers forecast the proliferation of mega-malls, even in the second- and third-tier cities.
At present, China’s retail market remains highly fragmented and composed of many small and medium-size enterprises. That offers great opportunity for foreign retailers, who today account for only about 12 percent of total retail sales, despite the presence of such major foreign players as Nike, Wal-Mart Stores, Carrefour, McDonald’s, and Starbucks.
There is also significant opportunity for foreign entry into the retail sector through partnerships, mergers and acquisitions. Since joining the World Trade Organization in 2001, China has gradually relaxed what were very heavy geographic and ownership restrictions on foreign investment, opening the door to joint ventures or wholly foreign-owned enterprises, which still represent only about 5 percent of China’s retail operations.
Perhaps the greatest retail opportunities in China now are in department stores, supermarkets, franchised food services, and convenience or specialty chain stores. There are more than 1,000 mostly small department-store operators in China — a carryover from the days when each city had its own state-owned store. But the top five together have just 8 percent of the market, according to The Boston Consulting Group, and most analysts expect a good deal of jockeying and consolidation in the sector.
There is also tremendous potential in franchised professional services, such as consulting, advertising, public relations, accounting, temporary employees, maintenance and outsourced office services. Xerox and Kodak have already established successful presences in China.
Demand for automobile aftermarket services is also soaring; at present, most automotive service shops are small, family-owned companies. Another auto-related industry — value-added services at gas stations, such as shopping, food and auto maintenance — is just emerging in China but will very likely increase in popularity as car ownership rises.
Although online sales nearly doubled to $36.6 billion between 2008 and 2009, e-commerce in China is still relatively undeveloped and represents a wide-open playing field for foreign participants. The Chinese government supports the development of e-commerce in the retail sector and aims to have online shopping sales account for more than 5 percent of China’s total retail sales by the end of 2015.
The retail pharmaceutical market is yet another highly fragmented one. There are many small enterprises, 99 percent of which have annual sales of less than $7 million. Drug retailers with foreign investors are still rare in China, in part because of the current health care system, under which 85 percent of drugs are sold directly through hospitals. However, that seems to be changing; the government has announced plans to encourage foreign participation through mergers and acquisitions and the development of chain stores that use modern logistics.
Whether foreign players expanding into China opt for directly operated stores, direct selling to retailers, going through a distributor, franchising, wholesaling or e-commerce, most experts agree there is a set of best practices for them to follow.
First and foremost, they must rigorously assess whether the current environment in China offers real opportunity for their business and whether they are prepared to accept the low volumes and margins they are likely to experience during the market-entry phase.
Second, they should know China’s business licensing and market-access policies. Although many restrictions have been relaxed, foreign retailers generally have to jump through more hoops than do their domestic counterparts. Further, they should make sure their strategy is closely aligned with the Chinese government’s goals for developing the sector in which they do business.
Third, they should work with local partners. That offers great leverage in developing business networks, government relations and knowledge of local market conditions. What is more, there is evidence that the government prefers foreign investment in the form of mergers and acquisitions, since that helps consolidate industries and curb competition.
Fourth, they should offer strong service support. Services such as third-party logistics, distribution, wholesale and supply-chain management are just beginning to develop in China, and the government welcomes foreign investors who can provide the technologies and expertise to help them grow.
Finally, they must have a coherent, long-term plan for market entry and expansion. Management structure, financial resources, legal and regulatory status, and partner relationships should all be clearly established prior to entry. That said, because local market conditions vary greatly, flexibility and rapid adjustment are essential.