Consumer Products

International Introspective-The wild, wild East: Retail in China

When was the last time you picked up a toy that didn't have 'Made in China' printed on it? China now manufactures an estimated 80% of the world's toys, and it's catching up in other finished consumer goods destined for export (think apparel and footwear). What's interesting is that within China, there's a growing demand for the products its factories are churning out, too. But for Western companies casting sideways glances at the booming retail market, there is a caveat - the retail landscape is huge, diffuse and unorganized, and efficient distribution systems are almost nonexistent.
May 1, 2004

When was the last time you picked up a toy that didn’t have ‘Made in China’ printed on it? China now manufactures an estimated 80% of the world’s toys, and it’s catching up in other finished consumer goods destined for export (think apparel and footwear). What’s interesting is that within China, there’s a growing demand for the products its factories are churning out, too. But for Western companies casting sideways glances at the booming retail market, there is a caveat – the retail landscape is huge, diffuse and unorganized, and efficient distribution systems are almost nonexistent.

The good news is that in a year punctuated by a SARS crisis that knocked the country for a loop, China’s 1.3 billion people spent US$540 billion at retail in 2003, up 9.1% from 2002. And that growth is not slowing down. The Chinese National Bureau of Statistics says consumer spending for January and February was up 10.5%, with the car, telecommunications equipment, home electronics and furniture categories making big retail gains.

China’s central government is actively trying to stimulate consumer spending, particularly in large cities, where it’s hoping to create a ‘well-off society’ that can serve as the centerpiece of an economic reform campaign. Accordingly, the government is encouraging lending institutions to issue more credit. In 2003, consumer lending shot up 38% from 2002, contributing an additional US$61 billion to the credit pot.

The strategy seems to be working so far. Norman Janelle, senior VP of Disney Consumer Products for Asia Pacific, says that while Shanghai, Beijing and Guangzhou (the three largest cities in China) house just 3% of the population, they account for roughly 13% of all retail sales.

But how does one access this growing market? Janelle says Disney’s kids products are sold largely through manufacturer-owned retail outlets, specialty boutiques in malls, department stores, supermarkets and hypermarkets (supersized big-box stores). In addition to these outlets, there are countless local convenience stores and street markets to consider. So defined retail tiers exist as they do in Western Europe and North America, but they don’t function in the same way.

Ray Mok, president of Hong Kong-based licensing agency RM Licensing, which represents Peanuts and Teenage Mutant Ninja Turtles in China, says the retail players vary from city to city. There are no national chain stores with countrywide distribution. And even with established regional chains, there are no central buyers – each store takes care of its own ordering. Launching any kind of cohesive retail program involves a lot of relationship-building and is generally forged one handshake at a time.

Mok says most of his goods move through mid-tier outlets, and he finds that branded shops work well. Right now, he oversees adult and children’s merchandise programs in 200 Peanuts/Snoopy-branded stores and corner outlets and 300 Betty Boop shops. Interestingly, fast-food giant McDonald’s is taking a similar approach with its McKids line of clothing, having opened up 12 in-store boutiques in Shanghai this March with Chinese licensee Shanghai Longtrust Trade.

Distribution in China is somewhat nightmarish. Companies haven’t traditionally been able to ship products from Guangzhou directly to Beijing, for example, because government law does not permit transprovincial movement of goods. So theoretically, in order to ship cross-country, you would have to unload the goods at each provincial border, place them with a carrier who’s licensed to distribute in that province, and keep transferring them in a like manner until they reached their destination.

But what may be changing everything is the influx of international über-retailers like Wal-Mart and France’s Carrefour, which both started to move into China in the late 1990s. Wal-Mart currently operates 35 stores in 17 cities and has just announced plans to spend US$18 million to build three hypermarket-style outlets in the Shanghai area. Carrefour has 42 stores in 21 cities and plans on opening another 12 hypermarkets this year. There is one distributor, Hong Kong-based Product Network Asia, that is licensed to ship nationally to these stores and other supermarkets.

These 77-odd stores service a small portion of the population at the moment, but they seem to be catching on with the middle class, which has a relatively high level of disposable income. Nicholas James, CEO of London-based Noddy owner Chorion, has spent the last 20 years in Hong Kong and China and says there’s been a big cultural change in the country in the last five years. Retail has leapfrogged over the barren corner shop, where ‘it’s difficult to buy virtually anything,’ to the lush, product-rich land of the superstore.

‘The big stores require a whole different way of thinking than traditional retail. They’re all about brand names and high quality,’ says James, adding that although they are definitely not the cheapest retail options in town, they are attracting people with money for that very reason. There’s a certain ‘snob value,’ he says, when members of the Chinese middle class can say they shop at Wal-Mart or Carrefour and only buy U.S. or Japanese goods.

For his part, James finds this development very exciting because these stores can really showcase a product at retail. You get a lot of shelf space – these retailers want reputable, non-pirated goods – and gain the much-coveted access to national distribution.

It’s too early yet to say whether Western-style retailers like Wal-Mart and Carrefour will ultimately be successful in the Chinese market. There are reports that Wal-Mart has yet to turn a profit with its Chinese stores, and there’s still a lot of country to penetrate. That said, Carrefour reports that sales in its Chinese stores rose by 13% (or US$413 million) in 2003, and they are the chain’s top performing outlets in Asia. U.K. retail giant Tesco is rumored to be throwing its hat into the ring with a China-based partner, and some of the larger local operations are sitting up and taking notice.

Shanghai No. 1 Department Store and Hanghai Hualian recently merged to create the Shanghai Brilliance Group, with a combined tally of 14 department stores and US$721 million in assets. Notably, the company cited the encroachment of foreign retail giants as a chief reason for the merger.

China’s peak purchasing periods

Chinese New Year (January or February)

During this year’s January festivities, China’s National Bureau of Statistics reported a 20% spike in retail sales. Kids get a winter break from school, and parents give gifts. Also, all single people – kids included – receive red envelopes from their elders containing cash to spend on whatever they choose.

Children’s Day (June 1)

It’s a national summer holiday for children, and kids receive gifts at home and at school.

National holiday (October 1)

This holiday celebrates the founding of the People’s Republic of China on October 1, 1949.

Christmas/Calendar New Year

While the majority of the country’s population identifies itself as Buddhist, this largely Western holiday period is catching on commercially – with all the usual trimmings.

About The Author
Lana Castleman is the Editor & Content Director of Kidscreen and oversees all content for Kidscreen magazine, kidscreen.com and related kidscreen events. lcastleman@brunico.com

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