China is Booming -- Go There for Growth, Part III, Retail Works Just Fine

China Daily just ran a story entitled, "Tesiro Unveils Sparkling Diamond Strategy," discussing Belgian diamond brand Tesiro's plans to spend 100 million dollars to open over 300 stores in China in the coming three to five years.  The plan is for 20 to 30 per cent of the stores to be wholly owned by the company, with the rest as franchises.  The company already has over 40 stores in China, more than a dozen of which are franchises.  The company is increasing its China presence because it expects China's "rapidly improving living standard" will cause Chinese diamond demand to "skyrocket." 

Starbucks too continues to enlarge its China footprint, going from 152 mainland stores at the end of 2004, to 209 today.  According to Starbucks Chairman, Howard Schultz, (for whom I am sometimes mistaken, especially when I go to Seattle Supersonics or Seattle Storm basketball games -- go to the links of Mr. Schultz and of me to see why), "The No. 1 priority of our company in terms of new growth is in China."  During my last China trip (I am in the airplane returning from it right now), I had a couple of meetings in the Shanghai Starbucks just off People's square and I went to both Starbucks in Qingdao.  Each time, the stores were busy and the majority of patrons were Chinese.  Starbucks in China is pretty much the same as Starbucks everywhere, but, to my disappointment, they do not sell orange juice.  This surprises me because Starbucks sells orange juice at its stores in Korea and in the United States and the Chinese love orange juice. 

Japanese convenience store chain, 7-11, also has big plans for expanding its China retail operations.  7-11 just received China government approval to franchise its stores throughout China and, in light of this, it  plans to open 350 stores in Beijing alone before 2008. 

Today's Asian Wall Street Journal has a story on the rush to China by retail clothing stores.  According to the article [NOTE: a subscription is required for viewing it], Spanish retail giant Inditex SA, which runs the Zara chain, will open its first store in mainland China this week, "part of a surge of foreign retailers entering China's booming apparel market."

This store opening "comes amid a spurt of U.S. and European entrants into the China market, including Spain's Mango group, Japan's Fast Retailing Co.'s Uniqlo and Italian jean maker Diesel SpA. U.S.-based Gap Inc., which recently signed its first franchise agreement with a Singapore-based distributor, is also said to be looking at the China market." 

According to the Wall Street Journal, "this flood of chain stores" is happening now because China only recently lifted its requirement that foreign retailers must form joint ventures with local partners.  (We have frequently blogged -- e.g., here and here  -- on the typical advantages of going entering China as wholly foreign owned entity, or WFOE, as compared to in a joint venture, or JV).  The article goes on to say that, "previously, most foreign players were luxury purveyors such as LVMH Moet Hennessy Louis Vuitton and Prada Group NV," which, because they are luxury brands with higher profit margins, were more willing to share profits with local investors.  The article goes on to highlight the significant room for growth in both China's retail clothing sector and in the market share for foreign clothing store retailers: 

Retail-apparel consultancy Kurt Salmon Associates estimates China's casual-wear retail sector -- the segment Zara is entering -- will grow to 468 billion yuan (about $58 billion) by 2010, with 10% annual growth rates.

Kurt Salmon analyst Atiff Gill sees the sector as apparel's fastest-growing. "The field's still wide open," he said. "Nobody has major market share."

China's retail sales increased nearly 13% in 2005 from 2004 and predictions are for another double digit increase in 2006.  We hardly need to tell you that we too see significant opportunities for  growth by foreign owned retail entities in China.  However, this article from today's China Business Weekly, makes clear that the competition for consumer money is already intense within a number of product sectors.  Bottom line on China retailing:  China is just like everywhere else; you have to be good to succeed.