International marketing in Southeast Asia

Retailing trends and opportunities in China

The Authors
Saeed Samiee, College of Business Administration, The University of Tulsa, Tulsa, Oklahoma, USA Leslie S.C. Yip, Department of Management and Marketing, Faculty of Business, The Hong Kong Polytechnic University, Hong Kong, China Sherriff T.K. Luk, Department of Management and Marketing, Faculty of Business, The Hong Kong Polytechnic University, Hong Kong, China

Abstract
The aim of this study is to highlight developments and opportunities in the retail and distribution sectors of China. In particular, we focus on the entry of international retailers into this rapidly growing market and classify various forms of retailing in China. The emerging Southeast Asian markets are still dependent on traditional and inefficient distribution and retailing systems. These markets are ripe for cultivation by international retailers whose advanced systems, processes, and management and marketing skills can bring added levels of efficiency and enhanced performance to these markets.

Article Type:
General review

Keyword(s):

Southeast Asia; China; Retailing; Distribution.

Journal:
International Marketing Review

Volume:
21

Number:
3

Year:
2004

pp:
247-254

Copyright
Emerald Group Publishing Limited

ISSN:
0265-1335 An increasing number of Asian countries have adopted economic policies conducive to rapid growth and a presence in the international marketplace. The policies instituted by most Asian nations over the last two decades provided a variety of incentives for multinational corporations (MNCs) to invest in the region. Much foreign direct investment (FDI) was in the manufacturing and financial sectors of Southeast Asian economies and, in China, FDI in

the retail sector was not permitted until 1992. Since then, the region has witnessed an increasing presence of international retailers. Despite much interest on the part of academics and business publications in Southeast Asia, a sharper focus on the distribution sector in China is timely, and is warranted for several reasons. First, research on distribution in emerging markets is scant and, given the enormous populations and size of these markets, closer scrutiny of retail activities in these markets is warranted. Second, as Asian markets are culturally and geographically removed from the traditional business centers of North America and Europe, detailed knowledge with respect to prevailing conditions in Asian markets is often lacking. Indeed, this knowledge gap has contributed to the occasional misinterpretation of reasons for retail successes and failures in the region, and especially in China (see, for example, Goldman, 2001; Luk and Yip, 2003). Third, information flow with regard to social, legal, and technological progress in Asia remains limited (Walters and Samiee, 2003). Fourth, Southeast Asian markets are collectively the most populous nations of the world, and possess enormous natural and human resources. Finally, key Asian markets are developing at an accelerated rate, which is rapidly expanding demand for all types of products and services. According to an OECD report issued in 2001, nearly $3.6 trillion was invested in developing economies in 1998, with much of the investment destined for Asian nations. Although the manufacturing sectors remain the main area of focus for foreign investment, the distribution and retail sectors have attracted an increasing proportion of foreign capital. From an international marketing standpoint, FDI in retailing in China is an appropriate strategic move for a number of reasons. Incomes are growing rapidly in China, and the region has virtually recovered from the economic downturn of the late 1990s. Moreover, the retail and distribution sectors are among the last industries that have remained largely local and substantially fragmented. Consider, for example, that the top four retailers in China had combined sales of just over $2,057 million in 2000 ( Fortune, 2002)[1]. Therefore, new entrants are unlikely to face stiff competition from existing retailers. This condition, coupled with easier access to capital for retailing MNCs, affords retailing MNCs market expansion and penetration in a national sense. A further reason for focus on retailing and distribution in Southeast Asia is the rapid penetration and growth of the Internet and the resulting development of e-commerce in these markets. Although

the potential for e-commerce is currently unevenly distributed across Asian nations, this is likely to change in the short term[2]. China, where Internet use is expected to grow by over 30 percent annually, is perhaps the most promising market ( Business Week, 2004). Although Internet use is still in its relative infancy, the number of Internet users in China far exceeds the entire population of many of its neighboring nations. As infrastructure and usage rates develop, e-commerce in China is likely to prove to be an important force in the structure of retail and distribution in China. Classifying retailers in China Retail formats are officially categorized into eight groups by the Chinese government. As shown in Table I, these classifications consist of convenience stores, department stores, general merchandise stores, professional stores, shopping centers, specialty stores, supermarkets, and warehouse-style supermarkets (Luk and Yip, 2003). An understanding of and adherence to this classification scheme by retailing MNCs planning to enter China is of critical importance, since store opening applications are assessed and approved in accordance with the official Chinese classification. The intellectual contributions of other classifications notwithstanding (e.g. Goldman, 2001), their use in official applications can lead to bureaucratic delays and problems[3]. The Chinese government in Beijing has long adopted a classification scheme to facilitate the screening of applications for the establishment of retail joint ventures in China. Retail MNCs must clearly identify the category to which the proposed retail establishment (i.e. joint venture) belongs when submitting applications for approval. This is an important stage which will have serious implications insofar as the processing of the application and the subsequent decision criteria are concerned. Foreign competition in the retail sector in China The influence of foreign retailers in China has grown rapidly since 1990. The major motivating factor for many foreign investors in the retail sectors of Southeast Asia is their saturated home-market conditions (see, for example, Sanchanta, 2004). Major players in the region include such world-class competitors as Ahold, Metro, Carrefour, and Tesco, which face mature home markets coupled with cut-throat competition from local and other international firms. Although Southeast Asia represents only one of the areas in which

global retail competitors are active, in the long term it is the most promising one. Not surprisingly, key international retailers have already developed a foothold in the region. Major international firms vying for a share of the Chinese market include Tesco (UK), Wal-Mart (US), Carrefour (France), Metro AG (Germany), and Makro (a unit of SHV Holdings NV, The Netherlands), PriceSmart Inc., Ekchor Lotus, Fenglian, Parkson, Top Supermarkets, Friendship Seiyu (Japan), Isetan (Japan), Lawson (US), Shanghai No. 1 Yaohan, Pacific, Seibu (Japan), Jusco (Japan), Ito-Yakado (Japan), Park-N-Shop (Hong Kong), Trust Mart (Taiwan). Foreign investors use a variety of entry modes to penetrate the region (Buckman, 2003). For example, Tesco, Britain's biggest retailer, has entered China through a 50 percent joint venture with Ting Hsin International, a firm that owns 25 hypermarkets in China (Guerrera and Voyle, 2004). Although minuscule by Chinese standards, Ting Hsin is one of the largest retail operators in the country. Recently, Metro announced that it will open 40 new stores over the next five years. The firm operates four divisions: Cash & Carry (a self-service retail and food service warehouse operation), food retailing, non-food specialty stores, and department stores. Metro's Cash & Carry retailing in China is a joint venture with the Jinjiang Group (Duff, 2003). Metro has a 60 percent equity in the venture. By most estimates, foreign competition in the retail sector in China is quite small. Carrefour, for example, has only 40 stores in China. Wal-Mart, the world's largest retailer, has only 30 stores in this most populous country. A number of environmental differences make China a very different market in which to compete. First, Chinese consumers spend an average of about $317 a year on retail (making the size of the retail market $412 billion). This is a relatively small amount by regional standards, and only a fraction of the retail market in Japan, which has a population which is only onetenth that of China. Consumers in Japan annually spend an average of $10,370 in stores (making a market size of $1.316 trillion). Overall, international retailers control only about 1.5 percent of the Chinese retail market. Although this is expected to grow fairly rapidly in the intermediate term, Bejing intends to limit international retailers' share of the market to about 8-10 percent during the next decade. Second, most retail expenditure by Chinese consumers is in small, independent shops.

Third, most retail spending is concentrated in such big cities as Beijing, Shanghai, Tianjin, Guanhzhou, Chongqing, Shenyang, Wuhan, Zhengzhou, Chengdu, Shenzhen, and coastal cities. Therefore, current opportunities in larger cities in China are somewhat limited. Finally, certain retail sales formats are not legal in China. Retail parties (i.e. personal selling coordinated through in-home parties) and door-to-door selling, as practised by such firms as Avon, Tupperware and Amway, are not currently permitted in China[4]. However, under pressure from the World Trade Organization, China is required to allow this form of retailing by the end of 2004. As a matter of policy, China wishes to demonstrate greater control over the distribution and retail trades. In the past, the great majority of permissions to open new stores were secured from local governments without gaining approval from Beijing. For example, only 28 international retail projects had been approved by the central government by the end of 2000, whereas local governments had approved 277 applications. However, large-scale national retail formats are fairly new in China and have the potential eventually to displace smaller independent shops. In the Government's view, international retailers have caused competition in the retail sector to become overheated. As a result, the central authorities in Beijing have tightened the rules regarding store opening and have raised the penalties associated for non-compliance with these rules on the part of international retailers (Buckman, 2003). Given the longrunning tradition of provincial autonomy and self-sufficiency in China, gaining only a local permit was the logical approach for local government as well as for retail MNCs. Furthermore, given the fragmented supply market, localization makes strategic sense. Indeed, local governments can regulate or hinder the interprovincial transportation and distribution of products if they feel that the local economy is likely to suffer a negative impact (Huffman, 2003; Walters and Samiee, 2003). For example, Carrefour, one of the two largest international retailers in China, has frozen its plans to open new stores until the new regulations are more transparent. State interference with the retail sector is certainly not new in China. In August 1998, the State Council launched a re-certification process to check the legal status of foreign-invested retail establishments. As a result, only 42 were allowed to continue their operations. The State Council cancelled 41 licenses and required another 194 licensees to be restructured.

Retail market entry models deployed by international retailers International retailers have typically relied on one of seven models for cultivating the Chinese market (Luk and Yip, 2003; Davies and Yahagi, 2000). These models consist of manufacturer-run shops, retail shops as part of hotel or foreign residential facilities, retail stores as tenants of shopping complexes, management companies (or holding companies), joint construction projects, joint operations and licensing agreements, single license-many outlet operations, and miscellaneous types. Each model is discussed briefly below:

Manufacturer-run shops. Foreign manufacturers who establish joint ventures in China open sale counters in department stores or set up their own direct retail stores. For example, many fashion chains such as Benetton, Baleno and Batti have adopted this approach to enter the Chinese retail market. Retail shops as part of hotel or foreign residential facilities. This model involves opening small shops affiliated with hotels or residential facilities for foreigners. Isetan's first department store in Shanghai was set up using this approach. Retail stores as tenants of a shopping complex. Isetan's second department store in Shanghai and Jusco's store in Guangzhou are examples of this retail market entry format. Foreign retailers open outlets using a leased area inside a shopping mall or a department store using their own name. Management companies (or holding companies). Foreign retailers are allowed to establish joint venture management companies with Chinese partners and operate retail stores under the joint venture's name. Carrefour mainly employs this strategy to expand its business in China. Joint construction project. This is not a common approach today, and may only be viable when local builders have financial difficulties and are unable to continue construction projects. Access by international retailers to China's market through this model requires senior staff from the local developer to join the management board of the retail establishment. Joint operation and licensing agreement. Yaohan and Price Smart adopted this strategy to set up their outlets in China. Single license many outlets. Some foreign retailers such as Wal-Mart and Yokado obtained approval either from the state government or from local government which was in principle valid for the opening of only one retail outlet. However, many

of these retailers continued to open many outlets with only one state/municipal license. This entry mode faces the most risk of confrontation with and closure by the central authorities in Beijing. Miscellaneous. Some foreign retailers, particularly those from Hong Kong, took advantage of loopholes in the existing regulations on retail joint ventures to establish retail outlets in China through special arrangements. For example, the local partner could be a pseudo-partner, or the local partner could be appointed as an agent to establish a chain of outlets, but the equity structure of these outlets in fact requires prior approval from the Government. Strictly speaking, these approaches are considered to be illegal. Of late, these retail outlets have come under close scrutiny from central government.

Opportunities and implications for competing in China International retailing firms have the advantage of possessing systems and processes that are largely lacking in Southeast Asia, notably in China. However, transforming these capabilities into a sustainable competitive advantage demands adherence to a number of factors and conditions that can easily steer a firm away from a formula that has been a success in other markets. Clearly, China is a huge market, and international retailers have only scratched the surface so far as cultivating the market is concerned. Thus far, much of the investment has been in larger, metropolitan areas. There are numerous medium-sized and smaller communities that are increasingly wealthy and willing to trade up from the traditional retail scene in local communities. A closer scrutiny of the preferences and lifestyle of Chinese consumers through meaningful segmentation strategies can serve as basis for successfully competing in China's retail sector. Recent health-related concerns (e.g. the outbreak of SARS), coupled with rising incomes in China, is prompting an increasing number of customers to seek the more hygienic retail conditions for which international retailers are known (Sanchanta, 2004). Ito-Yokado is just one firm that is attempting to cultivate this segment of the Chinese market by opening stores that focus exclusively on selling fresh produce. Joining forces with its Chinese partner, Wangfujing Department Store, and a minority Japanese partner, York-Benimaru, Ito-Yokado plans to open a chain of 2,000-square-feet stores that focus substantially on selling fresh foods.

The emerging Southeast Asian markets are increasing the source of high-quality brands which are price-competitive with their developed-market counterparts. These brands have a wide appeal and tend to be available in China. Thus, MNC retailers need to incorporate local and regional brands in their merchandising strategies. For example, Haier and Legend of China, Samsung and LG of Korea, Samling Malaysia and Malayan WTK, and Acer, a Taiwanese firm with its headquarters in Singapore, represent a growing number of locally developed and produced brands which successfully compete for a share of global markets. Other top-rated local brands include the Philippines San Miguel beer and Singapore's Creative Technologies. Hong Kong's Lee Kum Kee, Hello Kitty, Singha Beer and G2000, and Malaysia's Maggi and Royal Selangor Pewter, are also strong regional brands that Chinese consumers are increasingly familiar with and also demand (Flannery, 2001). International retailers would be well advised to devise a merchandising strategy that is consistent with local preferences, including offering key local brands. International retail firms competing in China must also remain cognizant that environmental conditions are very different there from developed markets, and that these conditions are likely to remain volatile in the intermediate future (Samiee, 1993). In particular, political, legal and regulatory and cultural conditions will challenge both existing foreign competitors and new entrants. The recent experience of Trust-Mart, a retailing firm based in Taiwan, in the Chinese city of Xian demonstrates this issue. Trust-Mart entered the Chinese retail market through a joint-venture agreement with a local firm. The joint venture signed a rental agreement with a Chinese landlord to rent a basement area for its discount store retail format. The agreement stipulated that Trust-Mart would pay the electricity as billed. However, after a period of time, it became evident to the landlord that Trust-Mart's business was quite successful. The landlord subsequently demanded that Trust-Mart paid the monthly electricity bill as a percentage of its monthly retail sales. When Trust-Mart refused to pay under this new scheme, the landlord cut off the firm's electricity. Trust-Mart attempted to solve this problem by installing its own generators, but ventilation within the store was inadequate. Needless to say, the venture was seriously affected by this unexpected demand and heavy-handed treatment of Trust-Mart by its local landlord. The problem persisted until local government authorities mediated a settlement (Luk and Yip, 2003).

These issues demonstrate that, while retail competition in China is intensifying in some regions of the country, it remains a promising sector of the economy which is yet to be fully cultivated. However, it is also evident that China's retail environment is not an ordinary one. Environmental conditions, even within China, can vary considerably from region to region (Walters and Samiee, 2003). Retail MNCs must necessarily remain on guard and rely on sophisticated market information systems and select reliable local partners that can help them develop networks that can successfully resolve the types of issues that hindered Trust-Mart. Indeed, a key strength in Asian business practice is the reliance on personal and business relationships and networks to accomplish business tasks and consummate transactions. All firms possess some network in managing their operations; however, Chinese firms have the added advantage of more easily maneuvering around the regulatory and bureaucratic requirements in their region (see Knowledge@Wharton, 2003). For example, local brands such as Legend Computers, in addition to having the ability to adapt more easily to local needs, tastes, and culture, have a significant competitive advantages over foreign brands due to their local relationships and networks. While MNCs can develop savvy marketing campaigns and heavily promote their products in large Chinese metropolitan areas, local firms have networks that reach deep not only into the cities but also the very large rural regions where the mass media tend to be less effective. These networks can offer significant advantages to local Chinese retailers once they are better organized and have adopted the processes and strategies of their better-tooled retail MNC counterparts.

Table IClassification of retail formats in China

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