| Since very recently, the retail sector in China was an | | | | These developments within the retail business give |
| impermeable one, allowing almost no entries from | | | | M&A activity a whole new life, as businesses |
| overseas. The trend is being reversed with increasing | | | | start to move towards acquiring stronger bargaining |
| activities in mergers and acquisitions ("M&A"), | | | | powers. Diversification of products line is another |
| consolidating new and emerging retail trading | | | | factor being seriously taken up by Supermarkets |
| businesses. Retailers have realized that the future lies | | | | adding modernity to their classical lines of products, |
| in linking each other gives a cutting-edge advantage | | | | for example by launching products like mobile phones, |
| on achieving buying power over suppliers; besides, | | | | fashion accessories, personal care products, and |
| the global trend goes in the same direction. | | | | similar items. Again M&A is expected to stick |
| Consolidating markets which were previously | | | | itself to these categories as the need for strength is |
| scattered in bits and pieces has resulted in the | | | | felt in every section of the retail business with a |
| creation of several investment opportunities: whether | | | | view to acquire markets beyond the traditional |
| for multinationals or local corporate and private | | | | regional reach. The Chinese top 30 domestic chain |
| investors. | | | | stores account for a rise of 21% in a year to reach |
| Investors cannot help relishing at new opportunities | | | | 16,665 in 2005 whilst their total sales increased by |
| that are created as the need for capital increases | | | | 31% to reach Rmb491bn (US$60.5bn). |
| with the growing rush to acquire strategic locations | | | | Suppliers are also expected to react to the |
| for the purpose of establishing national business | | | | M&A revolution as they are certainly not |
| outlets. The operational framework is now more | | | | indifferent to the rising power of buyers on the |
| relaxed, providing multinationals with an unequal | | | | market. |
| breathing space in their manoeuvres. Still, those who | | | | Fashion retailing |
| came in during those tight regulations face delicate | | | | In the last few years, national domestic chains have |
| issues in their quest to integrate or acquire Chinese | | | | started to appear on the local scenery. |
| businesses. New comers, on their side, can choose to | | | | Metersbonwe, is one of them. A retail chain in the |
| directly acquire existing retail businesses or set up | | | | casual clothing business, which started back in 1994 in |
| their own local sales network. Let us give a serious | | | | Wenzhou (Zhejiang province), now with an |
| look at those retails businesses where M&A | | | | impressive revenue Rmb2 bn (US$247m). It boasts |
| activities are most lively and see how this fact is | | | | of 1,500 stores around the country and 900 |
| benefiting potential investors. | | | | businesses in franchise operations. SeptWolves, and |
| Retail revolution | | | | Youngor both menswear retailers are also on the |
| China is today an indisputable economic power on the | | | | same trend. |
| world market thanks to unprecedented economic | | | | Foreign-based businesses are also very successful in |
| reshuffling of its internal business environment | | | | this venture. Casual clothing retailers, based in Hong |
| through elimination of heavy regulations. The retail | | | | Kong have entered the Chinese market very rapidly. |
| and distribution sectors were the last ones in this | | | | Reputed names like Giordano, Bossini and Baleno |
| re-engineering process since China's economic policy | | | | have deliberately chosen strong positions by making |
| has long been focused on developing its | | | | themselves available to local offers keeping in mind |
| export-oriented manufacturing sector. It was only in | | | | that local competitors learn and react quickly. |
| the mid-90s that the government decided to give a | | | | In China since 1992, Giordano now has 680 shops, |
| push to the retail and distribution markets. The | | | | which represents 45% of its business, and it has |
| strategy was clear: to implement measures by | | | | been declaring a profit situation for the past five |
| gradually liberalizing the local retail market to | | | | years. Its success is based on its sourcing capabilities |
| foreigners so as to allow Chinese operators sufficient | | | | and excellent relationship with manufacturers. |
| time to prepare themselves for the global | | | | Hong Kong based businesses had a major privilege |
| competition. The result was an unbelievable economic | | | | over their international competitors in their rush to |
| growth for the past 20 years turning the country | | | | enter China, through the Closer Economic Partnership |
| into an outstanding economic force on the global | | | | Arrangement (CEPA) allowing them to implant their |
| market. During that process, the Chinese society has | | | | wholly-owned businesses earlier, i.e. in 2004. This early |
| witnessed the transformation of its middle class | | | | entry on the Chinese market is now proving an |
| society into an urban consumer society whose | | | | important advantage through greater knowledge of |
| demands are becoming more and more sophisticated. | | | | their consumer base, stronger business relationships |
| The new changing socio-economic environment did | | | | and recognition from consumers. However, |
| not affect only the urban population. Rural inhabitants | | | | foreign-investors' aggressiveness and willingness to |
| showed their willingness to get a piece of the cake | | | | match competition is expected to gradually washout |
| by moving massively to urban areas and this in turn | | | | this advantage. |
| boosted the retail business industry through an | | | | Franchise agreements remain an option for |
| increased consumer base. The rural markets, on the | | | | international retailers, but still others have recourse to |
| other side, were naturally reduced to an insignificant | | | | concession arrangements. Esprit has 280 concessions |
| proportion. The attractiveness of the Chinese market | | | | to date; it started in the Chinese clothing industry in |
| lies in its size and inequalities that resulted from a | | | | the 90s. The French retailer, Etam, made an even |
| one-sided migration, i.e., from rural to urban areas. | | | | more impressive move with 2,000 concessions |
| Before its admission to the World Trade Organisation, | | | | spread over China and sales increasing by 14% in |
| inward foreign investment was a process full of | | | | 2005, group profits of US$17.2 as compared to a |
| obstacles, deliberately slowing down the growth rates | | | | reported lost of US$68.2m in 2004. In September |
| of foreign investors. Most trade barriers and tight | | | | 2002, Fast Retailing Co, a Tokyo listed company, |
| regulations have been eliminated leaving traders with | | | | launched its first Uniglo store in Shanghai. They are |
| a less hostile business environment to perform in. For | | | | now reporting a constant revenue growth and |
| example, foreign traders no longer have to establish | | | | opened two new stores in Beijing in September 2005. |
| joint ventures with Chinese companies to set up | | | | The Zara brands, owned by Spain's Inditex set up in |
| business in China, they can now do so through | | | | Hong Kong in early 2004 and are now considering |
| wholly-owned foreign enterprises (WOFEs). Thus, | | | | seriously opening several other outlets in Shanghai |
| foreign traders now find themselves in a reassuring | | | | and Beijing by end 2006. |
| and comfortable environment, visibly impacting on the | | | | The modernization and developments in the retail |
| business growth. They are entering China not only via | | | | sector has revamped the overall retail environment, |
| their own retail outlets but also through M&A, | | | | providing shoppers with new experiences. Developers |
| taking over existing businesses. The Ministry of | | | | are not hesitant to launch themselves in the |
| Commerce (Mofcom), which has authority to monitor | | | | development of modern shopping malls. Investors, on |
| small and medium-sized foreign owned retail business, | | | | their part, are seizing any opportunity to grab their |
| further alleviated the hardships by empowering local | | | | share of retail property investments as real estate |
| provincial Mofcom bodies as from 1 March 2006. | | | | and property development business hit high scores. |
| China now hosts more than 35 of 50 the top retailers | | | | Reputed brands are not insensible to all these |
| of the world. Contractual foreign direct investment | | | | happenings and feel the urge to be present in these |
| (FDI) was evaluated at US$1.9bn for the year 2005, | | | | world-class malls be it in Shanghai or Beijing. |
| with more than 1000 foreign-own retail and wholesale | | | | Outlook and opportunities |
| projects approved by Mofcom. Astonishingly these | | | | China's retail industry is expected to continue on its |
| represent only 2.6% of the total retail market sales in | | | | move, increasing the strength of deal activity for the |
| 2004. Foreign-retail businesses stand only at 17 | | | | time being and until a particular sector reaches |
| among the top 100 Chinese ones. Only Carrefour of | | | | consolidation. New entrants will try to follow the |
| France has been able to enter the top ten list of | | | | paths of Gome, Wumart and Shanghai Yongle, by |
| retailers. | | | | staying on the lookout for investors who can provide |
| It is undeniable that local retailers are still maintaining | | | | financial support to their aggressive expansion |
| their supremacy in China due to government's | | | | strategies, including M&A solutions. |
| support. Mofcom has even agreed to provide financial | | | | Foreign-investors investment capabilities and the |
| support to 20 top retailers in 2004, among which is | | | | restructuring of state-owned enterprises will |
| Shanghai Bailian (Group) Co, the top retail business | | | | undoubtedly create further opportunities. Pre-IPO |
| with declared revenues of Rmb72.1 (US$8.9bn) in | | | | operations will be particularly appealing to investors in |
| 2005. Chinese government is well aware that its local | | | | the private equity category. All these developments |
| businesses have to keep themselves on the watch, | | | | in the retail sector also have an impact on the |
| with the gradual entrance of foreign players on their | | | | supplier base pushing it towards further consolidation; |
| ground. They need to match the new standards of | | | | the real estate business, on its side, is reaping some |
| foreign investors who provide innovation, | | | | of the benefits. |
| sophistication and modernity as complements to their | | | | Deal activity is increasingly involving foreign retailers |
| products base. Chinese have definitely understood | | | | as market start to open up and liberalize itself. The |
| the trick, and are now increasingly facing the | | | | need to take over existing stores or to benefit from |
| emergence of original business ventures having | | | | relaxed business regulations with their own WOFEs is |
| potential to expand overseas using government's | | | | now a reality for foreign investors in the retail |
| supports. However, there is a strong feeling that the | | | | business. Joint Ventures are not to be written off, |
| Government is favoring more state-owned or | | | | however. Carrefour, for example, was forced into a |
| previously state-owned companies, but the fastest | | | | JV in its beginning, even if the local partners were |
| growths are clearly visible within domestic private | | | | not appropriate for this venture. It then took benefit |
| sector where M & A keeps it attractiveness as | | | | of eased regulatory framework to shake-off its |
| an interesting tool. | | | | partners by acquiring their stakes in the JV. But for |
| The urge to merge | | | | new entrants like Tesco, using a JV will still be a |
| The rush to expansion is generalized in the retail | | | | suitable solution, as it capitalises on the strength of its |
| business pushing everyone, from domestic to | | | | Chinese partners and their knowledge of the market. |
| foreign-owned enterprises towards rapid expansion - | | | | Local businesses are learning the market rules very |
| all in an aggressive mood. The objective lies in | | | | quickly, and are now in better positions to impose |
| strengthening bargaining power against supplier, a | | | | higher valuations on their foreign counterparts |
| trend confirmed on the Global market. Acquisition | | | | entering their market. They are less likely to release |
| remains the best option, giving an instant physical | | | | control of their businesses, being more aware of their |
| growth to business size; multinationals entering the | | | | strengths and most importantly, they are aware of |
| market late favor this kind of expansion to move | | | | other financing options available. |
| ahead of competitors in less time than normally | | | | Achieving success in Chinese retail business is not a |
| required. M&A is still mostly seen in the domestic | | | | precisely defined mechanism. Working your way |
| retail sector where business owners are moving | | | | through choice of the appropriate strategies is the |
| straight towards expansion head-down as an | | | | best method, as regulations will continue to change |
| inevitable necessity. Strengthening power, and | | | | under WTO. |
| increasing size are two objectives on which retail | | | | The main target of M&A will continue to be |
| businesses are not ready to make any concessions, | | | | transactions involving exclusively domestic companies, |
| no matter the lines of products they are dealing with; | | | | in turn transforming these consolidated domestic |
| whether food, sports, fashion, or home electronics. | | | | businesses into attractive acquisition targets. On the |
| M&A have only been considered as an | | | | other hand, giants emerging from such expansions will |
| interesting option during the past ten years and this | | | | obviously have greater ambitions, for example to |
| relatively young existence has surpassed the speed | | | | expand and set up overseas. Gome, specialist retailer |
| at which new retail businesses are being created. | | | | in home appliances having six stores in Hong Kong is |
| Those willing to enter M&A activities are | | | | contemplating possibilities to set up not only in |
| confronted to a shortage of suitable solutions | | | | South-East Asian countries, but also Europe and even |
| available for acquisitions. But the market is responding | | | | US! Product overlap in the Asian market might as well |
| superbly with creation of new retail outlets. 2005, | | | | give some strength to the partnerships between |
| China has seen the apparition of 70,000 new | | | | Chinese retailers and suppliers. The game to snatch |
| supermarkets. Beijing joins this trend; it is expecting | | | | market shares from Chinese retailers will soon leave |
| the creation of 600 new retail businesses in its region | | | | the China playground to be played on the global |
| this year. | | | | market playground. |