The global downturn is not just hitting developed, Western markets. The fast-growing, emerging markets of the East are also suffering – and China is no exception. One of the world’s most buoyant retail markets in recent years, China is set to see competition in the sector grow even more intense, as retailers battle for ever-more cautious consumers. In this month’s just-food interview, Wu Jianzhong, chairman of Wumart Stores, one of China’s leading home-grown retailers, insists his company can stand up to the might of Wal-Mart and Carrefour.
Go deeper with GlobalData
China, one of the world’s fastest-growing retail markets, is set to become a little tougher in the months ahead.
After years of rapid expansion, competition is intensifying and, as the effects of a sharp slowdown in the economy start hitting consumers, retailers are expected to make aggressive moves to hold onto market share.
Global heavyweights Carrefour and Wal-Mart have already announced large price cuts. But Wu Jianzhong, chairman of Wumart Stores, one of the leading domestic retailers, appears unconcerned.
“So far, there has been no evidence of weaker consumer spending,” Wu claims.
How well do you really know your competitors?
Access the most comprehensive Company Profiles on the market, powered by GlobalData. Save hours of research. Gain competitive edge.
Thank you!
Your download email will arrive shortly
Not ready to buy yet? Download a free sample
We are confident about the unique quality of our Company Profiles. However, we want you to make the most beneficial decision for your business, so we offer a free sample that you can download by submitting the below form
By GlobalDataWumart, which makes about 80% of its sales in the capital, could be better insulated than its rivals. With a high percentage of public sector jobs, Beijing’s workforce is less dependent on exports than those in the country’s coastal cities.
Wumart also has a strong bargaining position with local suppliers, allowing the company to slash prices if it needs to compete better with foreign peers. “Better prices are not a problem. We can go lower than Carrefour,” says Wu.
The French retail giant is Wumart’s closest competitor, something that Wumart’s management alludes to frequently. When analysing market share in Beijing, the Chinese retailer has the edge, with about 40 hypermarkets compared to Carrefour’s ten.
 |
Wu Jianzhong, chairman of Wumart Stores |
However, Wu recognises the limitations of his firm’s relatively short history. Wumart brought modern retail to China in 1994, a year before Carrefour entered the market. The Chinese company emerged from humble beginnings. Wu was teaching in a Chinese university in the early 1990s when he was invited, with former chairman Zhang Wenzhong, to do research in systems engineering at Michigan University. After developing a system to manage inventory, the pair of professors struggled to find buyers and decided to set up a store in Beijing to showcase the innovation.
Soon, their IT company became a fast-growing retailer, turning state-owned shops specialised in single commodities like sugar or vegetable oil into efficient supermarkets run on a centralised procurement system. Fifteen years later, Wumart accounts for a third of Beijing’s food sales. It currently also has more than 320 supermarkets, compared with Carrefour’s roughly 400, and is expected to report sales of about CNY10bn (US$1.46bn) for 2008.
“Retail is a very interesting business,” says Wu, now in his early fifties. He explains his interest using an equation borrowed from his previous profession: 1+1 is greater than 2. “Scale gives you so many advantages,” he adds.
Analysts say Wumart has been better able to turn its growing scale into profit than some of its peers. Its unique inventory system surely played a part in that, though Wu admits they have recently been forced to upgrade to the universally used SAP. He puts the growing profits – net profit increased 27.5% for the first nine months of 2008 over the previous year’s same period – down to “concentrating buying power”.
Wumart has been adding around 20% more sales area on an annual basis for the past several years but most of this has been close to the capital. That is not a coincidence, says Wu. He uses the example of a Shanghai competitor trying to make a name on Wumart’s home turf. “Shanghai Lianhua came to Beijing but no-one likes those stores. It’s partly consumer loyalty but also because of the merchandise. In China we have a lot of local producers. If you go to Guangdong, they’ll never drink Beijing beer. You must have local buying power to work with the local suppliers. We have lots of buying power here.”
 |
Expanding into new regions requires a level of management that Wu believes is missing among most Chinese firms. “Foreign companies might have 60 years of experience but Chinese retailers only have around ten. They have lower resources and management experience. When the management is far away, it can’t support the company.”
He adds that China’s capital alone, with nearly 17m people, is the same size as a foreign market. “In ten or 20 years we can go across the country. But now we need to consolidate.”
The firm is, however, expanding in Zhejiang, an industrial province bordering Shanghai. Last year, Wumart acquired Hangzhou Commerce, a supermarket chain in the affluent provincial capital Hangzhou, and it has plans to add around five hypermarkets in this area over the coming year.
Hypermarkets are the firm’s most successful and fastest growing format, driven by consumers with rising incomes who want better quality, variety and a more pleasant shopping environment. “One-stop shopping is more popular,” says Wu. “People are getting busier at work and they don’t have so much time for shopping. Also hypermarket prices are lower so that attracts young families.”
Wumart’s smaller convenience stores, known as ‘mini-marts’, are the chain’s weaker performers, contributing significantly less than the hypermarkets or ‘superstores’. The firm has closed some of these smaller stores in recent years although Wu expects them to eventually catch up with the larger formats. He plans to add more fresh fruit and other items like fast food for breakfast to attract more business.
“Usually our convenience stores are focused on residents but we did some surveys that found there are more and more people passing by and picking things up,” Wu explains.
Adding more, and fresher, fruit is a key strategy across all Wumart stores. The company started to buy directly from growers last year, shipping the produce to a newly built fruit and vegetable distribution centre on the outskirts of the capital. Up to 40% of its fresh produce is now bought direct instead of from the wholesale market, boosting shelf-life and quality.
This is important in China where freshness is attracting consumers to supermarkets. “Fresh food is really very important. Vegetables and fresh fruit are growing at more than 25% per year, that’s much faster than other items,” says Wu.
Shopping habits are changing, he adds. Many of the traditional ‘wet markets’ are disappearing from Beijing as old residential areas are demolished to make way for new housing and roads.
The markets are also facing tough competition from supermarkets like Wumart. The company will open new buying centres in regions renowned for fruit production, says Wu, appealing to the Chinese consumer’s interest in provenance and regional cuisines. “You have to bring something new to customers.”
He expects to have a banana buyer on the tropical Hainan island, another in China’s far western Xinjiang province buying Korla fragrant pears and tangerine buying in Fujian province. “There’s a higher margin when you buy direct from growers but more importantly, this is about the quality. Consumers really notice the quality.”
Promotions of fresh fruit as well as popular imported produce like wine and nuts should help to keep sales growth at a level with last year, around 8% on a same-store basis, and add a competitive advantage, believes Wu.
For the moment, the only threat to ongoing sales growth is another food safety scandal.
“Food safety problems are having a much greater impact than economic concerns,” says Wu. Although milk sales have now recovered to about 95% of their normal level, they dropped to 40% in the months following last autumn’s melamine scandal.
It is unclear whether Wumart will be able to also continue to grow through acquisitions. Much of the company’s expansion has come through buying stakes or outright ownership of smaller operators such as MerryMart. That deal proved crucial for Wumart’s larger-format business, adding 23 stores. However, many of small- to medium-sized chains have now been snapped up.
Still, Wu believes the downturn could offer up some interesting targets. “Now with the financial crisis there may be more opportunities to acquire companies not performing well.”
