China Consumer

Retail therapy

With demand at home sagging, foreign stores look to China for growth

Retail therapy

Sucking up: Foreign retailers seek sales growth in China

China is trying to increase consumption but don’t overly count on China to increase consumption to save the world,” warned China’s Premier Wen Jiabao at this year’s World Economic Forum at Davos.

But many of the world’s largest retailers are doing just that. As Western consumers retreat from the fray, China’s shoppers are increasingly being looked to for retail salvation.

Despite dampened consumer sentiment, China’s economy posted retail sales growth of 17% in the fourth quarter of 2008. According to the Shenzhen Daily, retail sales shot up by 14% year-on-year for the Lunar New Year holiday period too, with Rmb290 billion ($42.5 billion) passing through cash registers over the seven-day period.

Walmart, the world’s largest retailer, will continue to open China stores at a double digit pace this year. Already boasting 227 retail outlets across the country (30 were added last year), it is refusing to slow down expansion. Carrefour, the French hypermarket, is also planning to open 22 stores in 2009, compared to 28 last year. And Tesco, the British chain, is committed to expanding its store network in China even as it cuts down on capital expenditure in Britain.

Domestic chains claim to be unfazed. High-end Sichuan restaurant group, South Beauty Group, is pushing forward with its plan to more than triple in size to 100 units by the end of 2010. Zhang Lan, South Beauty’s 50-year-old Chairman, told the Wall Street Journal: “We have nothing to be concerned about, except to hunt for opportunities.”

Starbucks, the popular international coffee chain, agrees with her. It is courting Chinese customers by adding new stores, and also trying to win them over with a new brew, including a blend of beans grown in Yunnan province, a region traditionally known for tea production. The blend, “South of the Clouds” (the literal translation of “Yunnan”) is described as having “bright acidity, herbal spiciness and cocoa feel.”

More cynical observers detect an ulterior motive: it is much cheaper to source beans from the mainland than importing them from Columbia. But Starbucks has a lot of riding on the China market; the region is still posting double-digit growth whilst sales in the US have slowed to a crawl.

China’s burgeoning appetite for foreign goods is being driven by the young and relatively affluent. The younger generation today is less inclined to save and more willing to spend. So high-end supermarkets that sell imported groceries to expats are also now targeting local white collar-types. The homegrown supermarket chain BHG Market Place, which offers foreign groceries and wines, is planning to open four new stores in 2009, all located in the premier commercial areas in Beijing. Likewise, the market for imported food, which amounted to about $31 billion in 2007, is forecast to grow to Rmb1 trillion in the next five years ($146 billion).

Despite the veneer of confidence, it’s not all good news for foreign restaraunt brands. KFC, owned by Yum! Brands Corporation, has cut prices by 30% on five of its regular meals since last December, citing disappointing sales in the fourth quarter. McDonald’s quickly followed suit, launching an “Everyday Super Value Meal” that offers up to 30% savings on at least 40% of its menu. Some items will sell for as little as Rmb6 (88 cents).

But leave it to Walmart to up the discount stakes again. Last week it marked down hundreds of products by an average of 20%, according to the South China Morning Post.

The cuts alarmed the Ministry of Commerce which warned in a public statement of the “adverse impact” of price competition. It asked large retailers to consider the health of smaller, local players in future sales campaigns. It will be interesting to see if they comply.

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