Distribution: Specialty Retailers Come To China

In “Distribution, China’s Next Big Opportunity,” I described why I believe the area of wholesale and retail distribution represents one of the next big opportunities in China.

In short, provisions agreed to as part of China’s entrance into the World Trade Organization at the end of 2001 have opened up the country’s distribution sector to foreign investment. Previously, distributing products in China was off-limits to foreigners.

In the general merchandise category, Lianhua Supermarket Holdings, a local company, is China’s largest retailer. Carrefour is the leading foreign retailer and now has over 100 stores throughout the country, with plans to open 20 more per year. Following closely behind is Wal-Mart.

The general merchandisers have already become rather sizeable. Lianhua had sales of Rmb 44 billion ($5.7 billion) last year, and Carrefour was not far behind with sales of RMB 24.8 billion ($3.2 billion).

Now that the way has been paved, specialty retailers are arriving, one by one, to set up shop in the country. At the end of October, Staples announced that it has teamed up with UPS to launch new co-branded stores in China, Staples UPS Express. The new format combines office supplies and document processing services from Staples, the world’s largest office products company, with packaging and international shipping services from UPS, the world’s largest package delivery company.

The first two Staples UPS Express locations have already opened in Beijing. Two additional locations are planned to open in Shanghai by the end of 2007.

Earlier this year, Brown Shoe Company announced a joint venture with Hongguo International Holdings Limited, one of China’s leading footwear companies, to begin marketing footwear in China.

Over the next five years, the two companies expect to open more than 400 stores throughout China, along with department store shops carrying the Naturalizer brand, and more than 100 carrying the Via Spiga brand. The joint venture will set up a wholly owned subsidiary in Dongguan, Guangdong Province, where Brown Shoe currently maintains a sourcing operation with nearly 600 employees.

A similar Sino-foreign joint venture between global home appliance retailer Best Buy and China’s Five Star Appliance was announced in May, 2006. The combined company, known as Best Buy Five Star, plans to open one thousand new stores by 2011.

Day by day, the landscape in China’s major cities becomes more familiar, and less foreign. The foreign-branded restaurant chains were the first to bring that air of familiarity. KFC lead the way, followed by McDonalds, KFC, Starbucks, Pizza Hut and others. It is now just as easy to get a Big Mac, a bucket of chicken wings, a Starbucks latte or a pizza with pepperoni in Beijing or Shanghai as it is in any city in the United States. Now that the dam surrounding distribution has broken, I expect that we will see a flood of specialty retailers following in the footsteps of the food chains.

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