Despite Growth, China Remains Fragmented Retail Market

 
 
That group posted $200 billion in total sales last year, an impressive 13.5 percent increase from 2008, and the total number of outlets rose 18.9 percent.

Even with rapid growth over the past several decades, the Chinese retail market remains highly fragmented — the top 100 players still account for only 11 percent of overall retail sales. Leading local retailers include formerly state-owned operators, department store chains and a few new retailers. The leading international retailers generally operate hypermarkets and have higher average store performance than their local rivals, and operations focused on second- and third-tier cities are enjoying much faster rates of growth than those in major cities.

Electronics retailer Suning overtook rival GOME to become the largest retailer in China. GOME experienced the consequences of unsustainable rapid expansion and had to close more than 100 locations in 2009. In addition, the arrest of its founder and former president shrouded the retailer and investors in great anxiety and uncertainty.

At the same time, Suning’s investments in supply chain and information technology have generated positive results. GOME still has more than 1,000 stores, however, and its reorganization is expected to position the retailer for future growth. In the future, GOME will fight to retake its crown.

Even when combined with partner Five Star, Best Buy’s sales are roughly one-quarter those of Suning and GOME. The U.S. electronics giant has had little impact on the Chinese electronics sector to date.

In the grocery sector, RT-Mart has overtaken Carrefour in sales to become the leading foreign retailer in China, though Carrefour still has more stores than RT-Mart. Wal-Mart opened more than 50 stores in China last year; it now has more units there than Carrefour and is narrowing the sales gap as well. Carrefour slowed its rate of growth late last decade in a bid to restructure, and then hit the accelerator again last year.

Tesco was slowed by localization following its acquisition of Hymall and has fallen well behind its international rivals. The retailer began 2010 with an aggressive expansion plan, however, which includes the opening of freehold shopping malls. Tesco is expected to compete on efficiency rather than scale, and benefits from promising loyalty programs.

In the fast-food restaurant sector, Yum! Brands continues to hold a commanding advantage over McDonald’s. While McDonald’s is more competitive than local fast food operators, Yum! has been testing Chinese fast food outlets – a development that has the potential to further widen the gap with its U.S. rival.

Bailian (Brilliance) Group’s large and complex business gives it the overall lead among domestic grocery retailers, though its primary brand, Lianhua, remains slightly behind China Resources Enterprise (CRE). Both companies are comfortably ahead of RT-Mart and other international retailers, but given that Lianhua and CRE operate thousands of units in multiple formats relative to RT-Mart’s 200 locations, their average store performance could stand to improve. This serves as another point of differentiation between domestic and international players: Foreign retailers focus on hypermarkets and experience average store performance, while local retailers leverage store scale and multiple formats to make up for comparatively lower efficiencies.