Mon, Jul 29, 2002 page11

• Retail faces new hurdles in China

  As incomes in China rise, so do the number of modern trade outlets like convenience stores and supermarkets. Alistair Watts, managing director of ACNielsen China, was in Taiwan recently to deliver a report on the opportunities now presenting themselves and the conditions in the world's largest consumer market. Staff reporter Richard Dobson spoke with Watts about the phenomenal growth of China's retail market and how multinational brands are making headway on the shelves of modern retailers

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  Taipei Times: How fast are modern retailing methods expanding throughout China?

  Alistair Watts: Fantastically. The total number of modern trade stores -- hypermarket, supermarket and convenience stores -- has been going up by anywhere between 70 to 90 percent per year for the last two to three years. That rate of development is unprecedented anywhere in the world. Admittedly it's coming off a low base as you have to bear in mind that less than 2 percent of the total stores nationally are modern trade. But on the other hand, at that rate of growth, it's having a huge impact on people's shopping habits and what products they're able to buy and where they shop.

  TT: Accounting for less 2 percent, modern trade retailing has only just started to scratch the surface.

  

  Alistair Watts, managing director of ACNielsen China, talks about the pitfalls multinationals have encountered while trying to make headway into China's markets.

  PHOTO: CHEN CHENG-CHANG, TAIPEI TIMES

  Watts: But you're got to remember that a huge number of those other stores are little mom-and-pop operations or those hole-in-the-wall outfits selling a couple of cans of coke, chewing gum and detergent so it's got to be kept in context because around 40 to 45 percent of total sales are going through those 2 percent of stores that are modern trade. So it's a huge imbalance between sales and that's because those modern trade stores tend to be concentrated in the cities and the more developed towns and of course that's where most of the action is.

  TT: How is modern retailing changing the shopping habits of the Chinese people?

  Watts: There's a bit of a paradox. Because a lot of people even in the big cities still go to a wet market. It's an interesting phenomena because I looked at this when I was in Singapore and said here's basically a developed country where the underlining pattern of people going and buying fresh on a daily basis has changed.

  As the wet markets disappear they might start going to a hypermarket but the underlying behavior hasn't changed.

  We've noticed the same thing in Hong Kong. Now with the total increase in the number of stores, it's not that inconvenient to go to a modern trade store in Shanghai. In Western countries there's been a huge consolidation where there's now a smaller number of large format stores. In the West people say on Friday at 10pm, "I'm going to go and do the shopping for the week." But in China those underlying shopping habits are still there and it's still eight-plus store visits a week for the average person. In China I think it's "I need to buy something today. When should I go?" So it's still a more convenience-based shopping habit. Even though it might not be to a hypermarket or supermarket.

  TT: While modern retailing growth rates are strong in the cities, how are they faring in the countryside?

  Watts: A lot of the huge rate of growth is being driven by what's happening in the key cities -- the 27 "A" cities. But the rate of growth is very much slower in the countryside. One would assume that over time the ripple will spread, but probably it won't attain rates of growth similar to the cities because we know that even in the developed world rural communities tend to be lower income. But having said that there's a huge number of those people and even a 1 percent increase in their income would have a huge effect.

  TT: Growth rates aside, what kind of development are we seeing in rural areas in regards to modern retailing?

  Watts: I think there are a number of stores opening up there that we classify as modern trade convenience stores. But in reality if you went inside one there you would see the outlines of a modern trade convenience store but you wouldn't be standing in a 7-11. So the contrast isn't nearly as pronounced as it would be in a city. Even in a place like Harbin for example, the convenience stores there still have a long way to go in terms of range of product, layout and checkout facilities. It's an evolution rather than the revolution that we're seeing in the 27 big "A" cities as we call them. There it's a revolution. People are opening up modern trade formats at an alarming rate.

  The interesting thing there is that it is far outstripping the rate of growth in the total sales of those stores. So although we've got this 80 to 90 percent growth in the number of stores the total growth of their sales is around 30 percent. So there's the paradox. More and more stores open, it's more and more convenient for the consumers to get to them, therefore, they get a greater percent of the sales. But at the other end of the equation, the sales per store are actually going down because there are far more stores open than the sales share they're attracting. At some point it's got to come out in the wash.

  TT: How do you see market share shaking out between the foreign multinationals and local stores?

  Watts: The issue in China is because it's the biggest and fastest growing market, nobody wants to be the one who says not me. They can't afford to be that guy whether they're a multinational or a local company. What I think will happen is we'll start to see some consolidation. We're still in a situation where no one retailer nationally has got more than 1 or 2 percent of the total sales.

  There's some extremely strong players in the cities and even in the provinces but there's no Walmarts or Carrefours in the sense of where they are in their home markets. Walmart and Carrefour are both very strong players contextually in China but not anything like their positions in their national markets. My prediction is that there will be link ups between various chains either with locals or by opening more stores and will start to shake out in the long run. But how long the long run is, I don't know, but certainly in the next 4 to 5 years I could easily see a similar pattern carrying on with the traditional stores being the main losers.

  TT: How have chain stores come to dominate the retail market in major cities and how are sales performing in a society based on shopping at wet markets and traditional stores?

  Watts: Opening more stores is essentially the business plan, which has been logical given the rate of growth. It's logical because people still make lots of shopping trips. Even the most successful hypermarkets in China as far as we can tell still only has an average basket size of around 138 yuan. That's not huge. So a vision of people wheeling great big carts around stacked full of goods is still a ways off. So the logical response to that is you've got to be in lots of places as most shopping trips in China are made within 10 minutes from home, most are still on foot or on bicycle.

  TT: How do multinational retailers market their products in competition with Chinese products?

  Watts: A lot of multinational brands came in and thought they would be able to establish a reasonably dominant position. Part of that was based on their expertise in marketing and advertising and distribution. And partly also of their knowledge of modern trade and how it worked.

  While it might not be this simple, it probably was a feeling that in the long run they would be dealing with multinational retailers that they knew and had global relationships with. I think what upset the apple cart first of all was a lot of the modern traders are in fact local Chinese companies and enterprises which for all intents and purposes -- apart from label -- are functioning just the same as a lot of modern trade stores around the world.

  Additionally the local brands have shown to be very adept at gaining share not only in the traditional trade but in the modern trade as well. In fact as they've developed their marketing expertise they're invested big sums in all the usual marketing tools; promotion and advertising.

  As such modern trade has been just as favorable with those strong local brands as they would with the multinationals. Some multinationals entered the market at a premium price and that's a sensible market strategy. It's exactly what the textbook tells you to do. But equally the text book also tells us that in the long run there will be competition and prices will have to come down. I'm not sure whether the process of how that was going to be implemented had been gone through.

  And in China, unlike a lot of the other countries in Asia, the local brands have retired to their corner a little bit battered and bruised and come back fighting more or less entering on a low price platform but moving off that fairly quickly and with fairly aggressive marketing. I think it came as a bit of a surprise but it really shouldn't have.

  We know just about every major manufacturer is looking to China as a cheap source of manufacturing. Why would it be a surprise that Chinese manufacturers could manufacture at a lower cost in their home market to meet multinational specifications?

  They're doing it every day of the week with computer chips, cars, you name it. Where's the news that they can do it with shampoo, soap and things like that. So perhaps we are a little bit blinkered in our thinking. The other thing is that we should recognize aspiration to move to being brands in themselves. I don't think a lot of these so-called local enterprises have got a vision of just being big in China. I'm sure they can see aspirations of themselves as multinationals and I'm sure they'll turn into that.

  TT: What's the most important principle for retailers to understand if they want to succeed in China?

  Watts: We have to adapt in China. I think it's big enough and it's got enough big opportunities that if I was part of a multinational or I was looking at entering a market like New Zealand or Australia, I'll probably take an existing model or existing business and pop it in there and say "this is more or less something that suits a middle-class market, let's give it a go. If it doesn't work it doesn't work."

  The market is relatively homogenous so if you go into a store, more-or-less, it's the same categories and brands. The top 100 SKUs (stock keeping unit) will be stocked right across the board. But that's not true in China and for all those reasons I think people have to be prepared to adapt and not say "We're a multinational. This is what works in Taiwan, therefore it should work in China."

  But take the core expertise in retailer or instant noodles or whatever and say, okay, that's a start point but we know we're in Sichuan Province. We know people like it spicy, or we're in Shanghai know they like it a little bit oily. Let's get it right.

  Globalization is a wonderful thing but I just get concerned that the pendulum swings too far and we're moving into a one-size-fits-all across a large number of businesses. It would be a mistake to assume that's not necessarily the case.

  We're moving from a model of marketing -- which is about understanding the consumer and adapting the product -- to selling there as take it or leave it. China is a bit too big to take that risk.
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