China Inc.: Super market
By KRIS HUNDLEY, Times Staff Writer
But the birthday cakes carry greetings in English, the Budweiser and Pringles are stacked chest-high, and at the front of the store there's a big picture of a beaming Sam Walton.
Wal-Mart, the world's biggest retailer, is gaining a toehold in China. And China's emerging middle class is drawn to the spectacle.
After starting slowly, opening eight locations in four years, Wal-Mart more than doubled its China operations to 15 Wal-Marts, three Sam's Clubs and one Neighborhood Center by the end of January. It plans to add another eight stores before year end, breaking into both Beijing and Shanghai for the first time.
Wal-Mart focused most of its initial efforts in China's southern provinces, where two decades of foreign investment have generated unprecedented wealth. Household income in Shenzhen, where there are four Wal-Marts and one Sam's Club, is nearly twice that in Shanghai, according to Chinese government data.
Ira Kalish, chief economist at Retail Forward, a consulting company in Columbus, Ohio, estimates the chain's Chinese supercenters are generating sales of more than $500 per square foot, slightly higher than the same formats in the United States. According to Kalish, Wal-Mart's China sales reached $235-million in 2000 with eight stores.
"It's safe to say their sales in China doubled in the last year," he said. "But I doubt they're profitable yet. I don't think anybody over there is."
In Dongguan, an industrial city of more than 6-million people about an hour north of Shenzhen, the Arkansas discounter built a supercenter that adapts its mass merchandising formula to the world's biggest mass market. Outside the store, which occupies the ground floor of a three-story shopping mall, a big red-balloon arch billows in front of giant pink columns topped with gold. The red Wal-Mart SuperCenter banner is most prominent on the building's facade. Around it are emblems of two other U.S. imports: a big green 7UP billboard and familiar red and white signage for KFC.
Unlike U.S. Wal-Marts, which are surrounded by acres of asphalt for autos, the Dongguan store has a small parking area in front jammed with motor scooters. Also cluttering the plaza in front of the mall are kiosks selling cell phones and Internet service as well as a temporary stage. Drivers of scooters for hire jostle for customers as they exit the mall, burdened with bags.
Inside the store, the atmosphere is early five-and-dime, with low ceilings, exposed ductwork and stark fluorescent lighting. Wal-Mart associates in red shirts abound, often two to an aisle. They stack, they pack, they promote 25-inch Skyworth TVs for $260 or men's faux alligator shoes for $10. Towering piles of health and beauty products fill aisles in the center of the store, with familiar names such as Head and Shoulders shampoo ($4.20 a bottle) competing with domestic -- and less expensive -- brands such as Hair Song.
Playing off the popularity of the upcoming World Cup series, in early May the Dongguan store was festooned with soccer balls and stuffed monkeys decked out in soccer gear. A video of game clips was blaring above a display of Gillette razors selling for about $6.25 each. Stacked nearby was Budweiser beer, at 60 cents a can. Pringles for $2.70. Frosted Flakes for $1.60. Unlike U.S. stores where pet food and supplies dominate several aisles, in China those items were relegated to a corner in the back, reflecting the government's desire to discourage pet ownership.
Next to prickly durian fruits in the produce section were baskets full of bok choy, mushrooms and locally grown melons. Cellophane-wrapped meats, including chicken feet, fish balls and roasted duck, were stacked in coolers. But customers were swarming around a butcher's table in the middle of the aisle where an employee was cleaving chunks of meat to order from a whole side of pork.
There were bins of breads, pork-filled buns and an assortment of noodles. As workers with microphones announced specials, customers maneuvered their shopping carts, smaller than the U.S. version, through packed aisles, often with one child in tow.
Across the store, a clutch of customers gathered in the book section, leaning on racks, lounging on the floor, rifling through pages. A crowd of young men gathered nearby around a big-screen TV with massive speakers, watching Pearl Harbor blare in English. Priced at $2,100, the state-of-the art entertainment center was more aspirational than attainable for shoppers in a country where average per capita income is less than $900 a year.
Nearby, chrome rounders held ladies' pink polyester blouses for $8.75, with yellow signs showing prices "slashed" from $9.20. Men's green polo shirts were selling for $5. Kids' T-shirts with Disney characters were priced at $4.
A random sampling of apparel showed all of it carrying "Made in China" labels. Wal-Mart reportedly buys about $4-billion of Chinese-made goods annually for its 4,500 stores around the world. The company said it intends to buy up to 80 percent of the merchandise in its Chinese stores from local suppliers.
John Menzer, president of Wal-Mart's international division, told shareholders at the company's annual meeting in June that the retailer's buying power came to the rescue recently after Chinese farmers were inundated with a record cucumber harvest. Two farmers committed suicide over the situation, Menzer said, before Wal-Mart bought the crop and quickly sold it through its local stores.
That kind of buying clout -- along with a cautious growth strategy -- has worked well for Wal-Mart in China. Earlier this year, Wal-Mart reaffirmed its commitment to the market by moving its sourcing and logistics center to Shenzhen from Hong Kong. And the giant retailer is about to gear up its presence in mainland China. Xiao Yong Long, general manager at Shenzhen International Credit Investment Company, Wal-Mart's partner in China, told the Chinese newspaper 21st Century Economic Herald earlier this year, "Wal-Mart will speed up development in China; it's been too slow before."
Working in Wal-Mart's and all foreign retailers' favor are regulatory changes that will come about over the next three years as a result of China's entry in December into the World Trade Organization.
Foreign retailers, previously limited to certain regions of China, will be permitted in more cities. They will be allowed to have majority ownership in joint ventures, compared with a maximum of 49 percent ownership today, and also to operate wholly-owned subsidiaries in China. They also will be permitted greater control over distribution of goods within China, using their own wholesaling networks rather than inefficient and sometimes corrupt local wholesalers. And rather than having to secure licenses in each locale where they intend to operate, foreign retailers will be able to obtain a nationwide license from a single central government agency.
This last change will hopefully eliminate roadblocks like the one Wal-Mart faced several years ago when it first tried to open a store in Shanghai. Retail Forward's Kalish, who has been following foreign retailers' efforts in China since 1996, said he met the Shanghai official who nixed the giant discounter's initial request.
"He told me he denied the license because too much competition is unruly," Kalish remembered. "That was the old socialist mentality, that competition had to be managed. Now the power of the local governments is going to be removed. That's probably the most significant thing."
Still, U.S. retailers can expect competition for the Chinese consumer's growing discretionary income to be intense. Open-air farmer's markets, offering everything from live eels to eggplant to electric rice cookers, are still a daily shopping routine for most of the population. At the other end of the spectrum, the French hypermarket Carrefour has rolled out 29 stores in China, often ignoring local licensing requirements. As a result, Carrefour now has nearly a 30 percent share of the hypermarket niche in China, according to Retail Forward, compared with Wal-Mart's 9.6 percent share.
"Hypermarkets are still a fairly small share of total retail in China," Kalish said. "But it's the fastest growing share."
And Chinese retail chains, typically either state-run or a public-private partnership, are fighting back. Soon after Wal-Mart SuperCenter opened in Dongguan, CRC Supermarkets, a quasi-government enterprise, opened a giant People's Resource Center nearby. Occupying the ground floor of a three-story mall, the CRC store is a near duplicate of the Wal-Mart, except the 25-inch Skyworth TV is selling for $80 less than at its foreign competitor's.
Another issue, though perhaps more for brand managers than for retailers, is pervasive counterfeiting in China as well as throughout Asia. From Shenzhen to Shanghai to Beijing, street vendors sell cheap knockoffs of everything from Louis Vuitton bags to Rolex watches to Timberland jackets.
While foreign chains such as Wal-Mart have nurtured a reputation among consumers as a place for quality goods, they aren't immune. In Guandong province recently, a Wal-Mart SuperCenter was blasted in the local press after counterfeit merchandise was reportedly found in the store.
The flap was brushed off by Lily Liao, an English teacher at Houjie Vocational and Technical School in Dongguan. She prefers Wal-Mart to stores like CRC or open-air markets. "Wal-Mart is cleaner and has better quality," she said. "I shop there even though Wal-Mart's prices are a bit higher."
Wal-Mart will be counting on that kind of customer loyalty as it continues its rollout of stores in China. Kalish, who has never worked with Wal-Mart but said he'd like to, said it's inevitable that foreign retailers will become bigger players in China. But it's not going to be easy or fast.
"I think the degree to which reform takes place depends on the overall strength of the economy," Kalish said. "A stronger economy will make it easier for the government to take painful medicine and deal with the internal politics in Beijing. The direction will probably be the correct one. But the speed of it is hard to say."
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