Mon, Feb 19, 2007 - Page 6 News List

China welcomes foreign grocery chains

SHOPPING LISTS Beijing is happy to let foreign retailers take a bite out of the grocery market for now, but analysts say it will not let them dominate the sector

AFP , BEIJING

As Wal-Mart Stores Inc, Carrefour SA and other foreign retailers crowd into China, they are greeted with open arms by a government which, in this industry at least, shows few protectionist proclivities.

A major reason for the welcoming attitude is that the foreigners, for all their lofty ambitions and deep pockets, remain minor players in a giant market where 1.3 billion people are learning the joys of mass consumption.

"Excessive market share [by a foreign company] is not a concern for the government," said Candy Huang, an analyst with BNP Paribas in Shanghai. "The biggest player in China currently has only around a 5 percent national market share."

The foreigners are working hard to become bigger. Earlier this month, British retailer Tesco Plc said it would open 10 more outlets in China this year after its first store in Beijing opened last month.

With a 90 percent stake in Hymall -- a grocery brand under Taiwan-based Ting Hsin International Group (頂新集團) -- Tesco now effectively has 45 Hymall stores across China.

Home Depot Inc of the US also recently signed an agreement to buy China-based retailer Homeway's 14 home furnishing stores to better compete with British rival B&Q, which has 52 stores in China.

"Consolidation is definitely the trend," Huang said. "In the end there will be only three or so big players -- but the retail market will definitely not be dominated by foreign names."

Local authorities will not allow foreign players to totally dominate and will support Chinese retailers as they move to improve their procurement and marketing practices to overseas standards, analysts said.

Chinese retailers, too, are trying to become bigger using takeovers.

One example is GOME Electrical Appliances Holdings Ltd's (國美電器) purchase of Hong Kong-listed China Paradise Electronics Retail Ltd (中國永樂電器).

GOME's takeover of China Paradise would only be deemed truly successful following full integration of their operations and business styles, observers said.

"We really have to see whether GOME-Paradise works," said an analyst at a Hong Kong brokerage.

"There are thousands of employees [in GOME-Paradise] and hundreds of new stores, so the big question is how to standardize negotiating strategies with suppliers," said the analyst, who declined to be named.

Like GOME, retailers in China are often choosing non-organic expansion to attain greater reach, said Tiger Tong, an analyst with Singapore-based Asia Knowledge.

"Mergers are accelerating because the market is simply too fragmented, and bigger players hope to merge their way into attaining more effective `economies of scale' to boost margins," Tong said.

He noted that in certain "sensitive" sectors such as machinery, China has tightened rules on mergers and acquisitions but the retail sector was not an area where the government was trying to restrict foreign participation.

"In the retail sector, China is encouraging foreign mergers and acquisitions," Tong said.

A proposal last year by the central government to consider regulating the number of stores or the rate of expansion for foreign retailers is unlikely, if passed, to be strictly enforced in practice.

"In terms of real implementation it would be terribly difficult to carry out," Huang said.

"Bear in mind that regional governments want to boost their economies so they are more than willing to let foreign retailers come into their cities or provinces to open stores to solve unemployment problems," she said.

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