Slowing economic growth and rising unemployment in China may have had slowed growth from the country’s retail sector but, as Dominique Patton reports from Beijing, the challenging trading conditions have thrown fresh opportunities for larger retailers to expand – through consolidation.

Slower growth in China is speeding up consolidation in the country’s retail sector, as leading chains find new opportunities to expand in a tougher market.

According to Euromonitor International, China’s retail sales hit US$855bn last year. However, the sector has been hit by the global slowdown, which has pushed thousands of people out of work in the country’s manufacturing hubs.

As a consequence, China’s retailers have witnessed same-store sales growth slow. Sales at stores open a year or more averaged a growth rate of 7-10% throughout 2007 but, in 2008, sales dropped to just 1-2% – and stayed low into the first half of 2009.

Those weaker sales have led to substantial price erosion as retailers use “promotion after promotion” to attract customers, according to Bruno Lannes, head of retail and consumer products at Bain & Co in Shanghai.

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Nevertheless, while the economic crisis has had its casualties – with the likes of domestic chain Lianhua posting a 1.7% drop in first-half identical sales – the tough climate is also a chance for the top retailers to extend their lead in China’s still fragmented market.

Analysts suggest foreign chains may have had an edge in this department, with greater experience in dealing with downturns.

Indeed, Tesco China vice-president Zhuang Nanbin reveals the retailer’s promotions have won it new customers in the downturn. Tesco receives an average 3m customers a week at its 66 Chinese hypermarkets and six Express stores.

“Our marketing data has shown that customers liked our approach and we have also seen increase in our customer counts,” he tells just-food.

Nevertheless, some domestic players are benefitting too. Chinese retailer Wumart Stores insists that its promotional activities have been more effective than those of its rivals, allowing it to book same-store sales growth of 3.5% during its first half.

“Last year we started to use a POS system that helps us to do different kind of promotions, not just reduce prices,” said Wang Yi, head of investor relations at Wumart, China’s fourth-largest supermarket chain. “For example, if customers spend more than CNY38 (US$5.57) they can get cooking oil for CNY10 instead of CNY20. This helped us to attract more customers with a new shopping experience and also allowed us to keep our gross margins.”
Wumart is also increasing its fresh produce offering to win new customers and improve margins. Fresh food is increasing in popularity in China as incomes rise and Wumart started direct sourcing of fruit and vegetables this year, improving its gross margin on those products by 50% or more, Wang says. Wumart will also spend on a network of ‘everyday’ stores, a relatively undeveloped format compared to the competitive hypermarket segment. It plans to open around 40 such stores, remodelling some of its mini-marts to offer more fresh food.

However, it will face competition from the international chains: Wal-Mart is trialling a similar concept in Shenzhen under the Huixuan (Smart Choice) brand while Tesco is testing its Express format in the north-east.

Sales volumes come from hypermarkets, however, and Wal-Mart will be a formidable competitor when it completes the acquisition of Trust Mart next year, becoming the largest hypermarket operator with around 200 stores.

Before then, Auchan and Taiwanese partner RT Mart are expected to bypass Carrefour to take the lead in hypermarket sales, according to Euromonitor.

RT Mart focuses on less developed cities where growth is strongest. But domestic players, with their regional concentration, still have an advantage in sourcing, believes Wang.

Wumart also plans to open bigger hypermarkets and is setting up a new 60,000 square metre distribution centre in Beijing so it can work with larger suppliers.

To fund this and further expansion, Wumart sold shares worth US$200m to two private equity firms last month. This is important as both foreign and domestic chains race to grab key locations ahead of urbanisation.

According to reports, Wumart may also by eyeing the Times chain, recently put up for sale for around $560m. Such a move would expand Wumat’s geographic footprint; like other domestic retailers, Wumart operates largely in one region – around Beijing – concentrating its buying power across 400 stores to get the lowest prices from local suppliers.

Acquiring Times, with 65 stores in eastern China, could be an opportunity to develop in a new region.

But foreign retailers may also be interested, argues Mavis Hui, analyst at DBS Vickers in Hong Kong. “Carrefour and Wal-Mart are moving aggressively into smaller cities. They may want to acquire domestic operations to expand their growth that way.”

Carrefour, the French retail giant, has already added five hypermarkets this year and is on target to add a total of 20 to 25 for 2009, the same as the previous years, says spokesman Chen Bo. But, in some parts of the country, it takes years for a store to become profitable, he adds.

“Carrefour tries to maintain a balance between so-called first-tier and second- and third-tier cities. About 40% of our stores are in the central, western and north-east regions,” says Chen.

The retail “land grab” is not a new phenomenon but the financial crisis has made certain conditions more favourable for expansion. “Rent is cheaper and you can get staff more easily,” says Alex Liu, analyst at Euromonitor.

A tougher climate will also force weaker retailers to sell, speeding up the consolidation process started some years back, Bain & Co.’s Lannes argues. “This is an incredibly fragmented industry given the size of the country. There are hundreds of chains we have never heard of. The weaker ones will become prey for the stronger ones.” China had almost 500 supermarket or hypermarket companies operating in 2007, according to government statistics.

Lianhua is also manoeuvring for further growth. It recently agreed a deal to merge with Hualian Supermarket, owned by the same parent company, Shanghai Balian Group, for CNY491.8m. The deal will boost its market share in the Yangtze River Delta region and increase its bargaining power with suppliers. With more stores in close proximity of each other, the group will aim to squeeze out competitors.

And domestic players will also get government support, adds Lannes. “Beijing would like to have some national retail champions. We assume that they’re not going to let the sector stay in the hands of the foreign retailers.”

Beijing has already helped the sector with its stimulus package, which has boosted consumer confidence. Hui says most retailers have seen sales pick up in the second quarter and expect gradual improvement towards the end of this year and into 2010 as CPI starts to rise.

“Even though 2009 may not be a great vintage for anyone, the potential for growth in modern retail is still huge. Expansion is the number one priority,” Lannes observes.