China Lowers the Bar for Foreigners

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China Lowers the Bar for Foreigners

By W.B. King - 10/22/2007
When it comes to retailing in the People's Republic of China (PRC), misconceptions and preconceived notions run rampant. Coercion and secretive, government-controlled commerce regulations were once common rumblings. In recent years, however, a shift occurred, with more U.S.-based companies, including convenience retailers, partnering and flourishing with Chinese companies.

"Wholly Owned Foreign Retail [W- OFR] outlets in China are a relatively new phenomenon," said Merrill Weingrod, CEO of China Strategies, which operates offices in Providence, R.I. and Shanghai, China. "Until two years ago, the PRC only permitted foreign investors to form joint venture partnerships in China. 100-percent foreign ownership of any kind of distribution, including retail, was forbidden."

As regulations change, new retail topography is emerging with extended benefits for companies that have been operating in the PRC for decades. "To be successful, you must be able to navigate the market and be able to manage all the different and difficult issues," said John Patton, director of international franchise for Circle K.

The first Circle K store was established in Hong Kong in 1985. Today, there are more than 320 Circle K outlets in Hong Kong, Guangzhou, Dongguan and Shenzhen, provinces located within a 100-mile radius of Hong Kong. And while that number might appear small compared to the company's approximately 6,500 stores worldwide, the motto "Speed, Tidiness and Friendliness," has made all PRC-based company owned- and -managed stores successful, according to Patton.

This success is due in large part to Circle K's partnership with Convenience Retail Asia Ltd., a member of the Li & Fung Retailing Group, which maintains exclusive rights to use the Circle K brand name for convenience retailing in Hong Kong, Macau and southern, eastern and northern Chinese Mainland, Patton explained.

"You need both a team [partner], which is required by law, as well as a local knowledge base," Patton explained, adding that, "We have both."

According to a recent survey that was conducted by Access Asia, the PRC convenience store retail market is developing at a quick clip.

Outside the top three cities of Beijing, Guangzhou and Shanghai, there are new chain store networks already emerging, and in some cases entrenched forcing new c-stores to extend their reach to second- and third-tier cities.

"There is aggressive consolidation in the market, as larger operators swallow up smaller players, while many chains in the major cities are now struggling to operate profitably, due to the high concentration of stores, which has led to fierce competition," the report noted. And according to PRC governmental data, which focuses on mid-to-large stores, the PRC's c-store retail market comprises approximately 12,000 stores, a number that grows significantly each year.

Beijing: An Olympic Host

Hosting the 2008 Summer Olympics is not only a great honor for the PRC and the city of Beijing, but will provide a platform for the world to see the PRC's new approach to international business concepts, a philosophy that is still gaining traction.

"The Olympics is a threshold event for the PRC to show 'modern China' to the world at large. Tremendous modern infrastructure projects are underway in Beijing," Weingrod said. "China has been on the course of rapid modernization for the past 25 years. It is certainly accelerating and spreading from the major cities like Shanghai and Beijing to the second-tier cities like Nanjing, Chengdu, Tianjin, Chongqing and Kunming. The Olympics is a result, but not a cause, of modern business practices."

While not all second-tier cities boast a population of nearly 16 million like Beijing, the opportunity for retail success is attractive, although various obstacles remain. "It's one country with two systems," Patton said of the tiered cities. "The logistics are very different than in the United States. There are no independent suppliers and many retail challenges exist; you have to be prepared."

Since China entered the World Trade Organization in 2002, at least 35 of the global top 50 retailers -- including Wal-Mart, 7-Eleven and Tesco -- have moved into the country. To succeed, foreign companies must adapt and change while maintaining brand identity. "You can't take the same business model that works elsewhere, drop it in China and expect it to work," Patton said. "Those who are unprepared will essentially go out of business."

Weingrod added, "Western chain stores, big box and mall retail have most intensely penetrated major urban centers like Beijing, Shanghai, Guangzhou and Shenzhen. However, modern retail has now spread all across urban China and will continue to spread."

To this end, competition is coming at every turn. By 2005, Wal-Mart was operating 56 China stores and the French-based Carrefour 78, with new construction slated. The same year, approximately 70,000 new local- and foreign-owned supermarkets opened outside major cities. Last year, the Beijing municipal government forecast that roughly 600 new convenience stores and supermarkets would open in its suburbs. "We have competition like 7-Eleven that does a great job with roughly three times the stores we have, but we are happy and confident with our business model and the direction we are headed," Patton said.

To compete, foreign retailers must understand the differing characteristics of the PRC demographic, Weingrod said. "Chinese consumers enjoy shopping and shop often. An afternoon in the mall or on major shopping streets is a form of entertainment. Window shopping is a popular activity," he said. "And, the concept of convenient shopping for time-pressured urban consumers has certainly been a driving force behind the explosion of urban convenience stores. Consumers are highly brand loyal and have their preferred retail outlets. Product quality, style and efficacy are more important reasons to purchase than price."

Aside from ascertaining demographics, foreign businesses have to do their homework in other areas. Weingrod's company has assisted and consulted countless foreign companies about entering the PRC. "China has a very complicated retail value added tax [VAT] system and a burdensome logistics infrastructure that makes it a difficult operating environment for foreigners," he said. The local Chinese have no choice, but understanding and responding to local product preferences is a daunting task for foreign retail companies."

The Circle K Approach

While many categories such as tobacco, beer, soft drinks and snacks are the same, Patton said Circle K's PRC business model is altered to meet the expectations, as well as acknowledge the inherent differences presented by the Chinese market.

"Baked goods, pour-and-go and take-away items make up a larger percentage of sales. Chinese consumers are different than Americans in that they purchase their foods like meats daily opposed to going to the supermarket once a week." A typical store will sell an abundance of fresh bakery products, including pizza, rice, noodles and pasta-meal box solutions; and fresh-made drinks such as milk tea, corn juice and fresh-ground Soy milk, as well asspecialty coffees drinks, Patton explained.

In the PRC, gasoline can only be sold through the state-owned petroleum monopolies, which alter store layouts. "There is no seating allowed, so our floor plans are pedestrian models," he said, adding that the average size is 425 square feet. "We have a tremendous amount of foot traffic."

When Patton, who travels to the PRC a half-dozen times a year from his base in Houston, was asked what business characteristics Circle K absorbed from its Chinese counterparts, he said, "We are always learning -- there's a lot of back and forth. We see two-thirds the amount of traffic in the stores, so we have learned lessons about speed of efficiency and service.

"They are very good with high-tech applications. We have also learned about offering tremendous variety of [fresh] food offerings which is different than in the U.S."

Twice a year, Circle K holds a conference in the United States that is attended by approximately 35 Chinese delegates. "We share information and talk about different equipment, food and merchandise," Patton explained. The company's dedication to customer service, for example, has yielded several awards in that category.

The next conference will be held in early November in conjunction with the NACS Show in Atlanta.

Bridging the Gap

Despite the PRC's new approach to international business partnerships, some global retail observers view the government's attitude as merely "tolerant" of the newcomers. PricewaterhouseCoopers' 2006 report, "Investing in China's Retail Industry," noted that while China's Ministry of Commerce (Mofcom) approved more than 1,000 foreign-invested retailers and wholesalers totaling $1.9 billion, it is merely scratching the surface of PRC's economy -- representing approximately 3 percent of total retail sales. And of the country's top 100 retail chains, the report noted that just 17 were foreign-invested, with only one foreign player, Carrefour, making it into the top 10.

"On the one hand, China has capitalized and modernized its economy by inviting foreigners to participate in its markets. Learning from Western business models, technologies and manufacturing methodologies has been the foundation of China's progress," Weingrod said. "The country would not be at its current level of development had it not followed an open-door policy. "On the other hand, Chinese are xenophobic and wary of foreign influences in China."

Circle K will continue growth in the country, explained Patton, adding, "We are very optimistic about the market and our partnerships."

And with the upcoming Olympics games and a more inclusive foreign business philosophy, Weingrod said the future looks bright. To the Chinese government, "the attraction of Western progress outweighs the risks of cultural pollution," he said. However, he warned that "the pendulum may swing the other way once China's economy is more self-sufficient and less dependent upon its export trade."