Carrefour continues to pioneer in China.

Date published: 14 Apr 2003

China represents one of the fastest growing economies worldwide. Its retail sector alone grew over 28% in value between 1997 and 2001. The market for grocery retailing is still embryonic and with over a billion mouths to feed, the opportunities for food retailers are huge.

Typically, the Chinese consumer purchases grocery products on a daily basis from supermarkets or open-air markets, however since the introduction of hypermarkets, sales through this format have grown at a far higher rate than any other outlet type. Revenues from hypermarkets have increased on average 60% per year between 1997 and 2001, compared to 2% for supermarkets, 7% for department stores and 15% for convenience stores.

Hypermarkets attract customers by offering relatively low prices which may be up to 10-20% lower than those in supermarkets and department stores. Furthermore, hypermarkets compete directly with supermarkets and traditional food markets by offering a wider range of fresh produce. Because they achieve significantly higher throughput than supermarkets, the re-stocking of fresh foods in hypermarkets occurs much more frequently, and this is attracting more buyers.

Carrefour, the French retail giant, was one of the first foreign companies to tap into China’s potential. Asia as a whole now accounts for around 7% of group revenues or US$5 billion in 2002. Since 1995, it has opened 36 stores, but this is just the start. The stated aims are now to double the number of hypermarkets to 70 by 2004, and to offer both food, and, increasingly, non-food items. More importantly, Carrefour is to introduce both supermarkets and discount stores. In order to fulfill the government’s requirement to establish these new businesses within the framework of joint ventures with local businesses, the new supermarkets are unlikely to open until early 2004, but the commitment to this scale of investment, and to establishing the logistical support required is no small undertaking.

Once again, Carrefour is taking a pioneering role amongst its foreign and domestic counterparts, as news of a joint venture with China’s largest supermarket chain emerges. Carrefour’s Spanish fascia, DIA, and the domestic chain Shanghai Lianhua Supermarket, will open 300 discount outlet stores in the residential areas of Shanghai. Longer term plans are in place to expand the DIA chain by a factor of ten by 2007.

What is of real significance, is that the goods sold through these new discount outlets will retail at prices 10-15% lower than in hypermarkets. The plan for the discount outlets is to attract low-income customers. However, with only 1,500 varieties of goods in its stores, as compared to the 35,000 that a Chinese hypermarket might stock, the discount stores would appear tailored towards capturing a niche market. The displacement, therefore, that we would be more likely to see, is that of hypermarkets increasing their share of the retail market at the expense of supermarkets and the traditional open-air markets.

For now, hypermarkets face little competition from other retail formats and look set to strengthen their position. However, the Chinese government is also taking action to maintain some form of competition against the likes of Carrefour, Wal-Mart and other global companies with aspirations. The government’s initiative is to merge the four leading indigenous retailer groups into one organisation, and then into sub-units according to type of outlet: hypermarkets, supermarkets, department stores, and convenience stores.

The simple explanation for this is to ensure that domestic firms do not compete against each other which seems to imply some form of centrally planned, stocking and pricing policy. This will be an interesting exercise for the government and its involvement with the newly formed group. While it probably will not trouble the multinationals, it could be an opportunity for the government to take a profitable interest in a high growth market. With China’s retail sales projected to increase by 25% between 2003 and 2006, this offers ample opportunity for everyone.