Last year, retail sales rose 13.3% to EUR 0.49 trillion (RMB 5.4 trillion). According to recently published Ministry of Commerce rankings, domestic chain stores continue to dominate the scene by occupying the top four positions. But as a result of the opening up of the retail sector in China, eight of the top 30 chain store operators are now foreign companies, including Carrefour (France), Wal-Mart (USA), Metro Group (Germany), Suguo Supermarket and Vanguard Supermarket (Hong Kong) and Yum! Brands (USA).

Though foreign chain stores are good at branding, marketing and management, they face obstacles in the Chinese market such as inefficient logistics and insufficient infrastructure. China’s complex market, with its distinct demographic groups, different consumption cultures and diverse national economy, requires different expansion strategies for cities and regions. Further, domestic retailers have better local-government contacts than foreign operators and are thus able to influence changes to laws and regulations.

Carrefour continues to expand by opening more stores

French hypermarket giant Carrefour (the second largest in the world) is the mainland’s largest foreign retailer. Its sales increased to EUR 1.49 billion (RMB 16.24 billion) last year, up 20.9% from 2003. Last year it remained ranked fifth. The number of its stores increased to 62, rising by more than 50% from 2003. It is one of the most aggressive chain stores, planning to open 40 more outlets within five years.

Wal-Mart slips to 20th

Last year, Wal-Mart enjoyed sales growth of 30.5%, greater than that of top-ranked domestic chain store Shanghai Bailian (22.5%). Surprisingly, however, it slipped to 20th, from 16th the previous year, in the league table of stores. The reason was that last year, total Wal-Mart sales were only EUR 0.70 billion (RMB 7.63 billion), while those of Shanghai Bailian amounted to EUR 6.20 billion (RMB 67.62 billion). This indicates that its competitors are expanding even faster than Wal-Mart.

Domestic players continue to dominate the market

Sales of the three giant foreign chain stores (Carrefour, Wal-Mart and Metro) totalled EUR 2.77 billion (RMB 30 billion) last year, which was less than half the sales of the Shanghai Bailian Group (EUR 6.20 billion or RMB 67.62 billion).

The number-one retailer remains the Shanghai Bailian Group, which occupied the top position in 2003 and which accounted for 22.5% of national sales last year. The group opened 432 outlets last year, and now operates a total of 4,789.

Gome Electrical Appliance, the mainland’s largest home electrical appliance retailer, was ranked second-largest retailer overall. Gome is one of the recent success stories of Chinese capitalism.

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The reliability of statistics

"The GDP figures I received from the provincial governments were in total RMB 2.66 trillion (EUR 0.24 trillion) higher than the calculation by my Bureau."

Quotation by a Director of the National Statistics Bureau confirming overstatement of figures by lower government tiers.

China’s consumers are attracted by famous brand names, especially domestic brands are growing speedy. Sixty-four per cent of the consumer-goods market is dominated by the top 10 popular brands.

Brand awareness is strongest in the market for home electronic goods such as televisions and fridges, in which 77% of sales are accounted for by the top 10 names.

Take the sportswear (shoes and apparel) market as another example. China’s consumers prefer famous brands such as Nike, Adidas and Li-Ning. Although the sportswear market was worth about EUR 2.27 billion (USD 3 billion) last year, the market has seen double-digit growth since 2000 and estimates are that it will hit EUR 4.7 billion (USD 6.2 billion) by 2008. The top three companies currently possess less than a third of the market.

Nike, with 10%, is the top-ranked company according to market share. Last year’s estimated Nike sales were about EUR 227 million (USD 300 million). Adidas, ranked second, doubled its sales last year to about EUR 212 million (USD 280 million), which gave it a 9.3% market share. Domestic player Li-Ning Co., Ltd. was ranked third. It was founded by former gymnast, Mr. Li-Ning, a winner of five Olympic medals. Li-Ning Co., Ltd. attained an 8.7% market share last year and sales of about EUR 197 million (USD 260 million).

Li-Ning operates a total of 2,500 stores across every province in the mainland, and plans to open 1,500 more by 2008. To compete with foreign rivals it will have to concentrate its efforts on Beijing, Shanghai and Guangdong, while not forgetting small cities and towns.

▪ Deloitte Touche Tohmatsu has agreed to buy Beijing Pan-China CPA in its first merger deal on the mainland.

▪ Beijing-backed conglomerate CITIC Pacific Co. Ltd. will buy a 35% stake in a hypermarket joint venture with the world’s largest retailer, Wal-Mart Stores Inc. It has agreed to pay the state-owned CITIC Group (which owns 29% of CITIC Pacific) for the stake in Wal-Mart East China.

▪ The joint-venture deal between the Shanghai Auto Industry Corp. (SAIC) and British car maker MG Rover is waiting for approval from the central government. SAIC will hold 70% and Rover 30%.

▪ China Netcom Group, a mainland fixed-line telephone company, recently bought a 20% stake in PCCW Ltd., the dominant Hong Kong operator, for USD 1 billion.

▪ Mr. Yang Yuanqing, President and CEO of Lenovo, stated at a press conference in February that the acquisition of IBM’s businesses (including ThinkPad-Notebooks, ThinkCentre-Desktop-PCs, R&D, design, production and the IBM brand name) was progressing smoothly and was on schedule.

▪ Insurance Australia Group, the nation’s largest car and home insurer, plans to buy a 25% stake in the property unit of China Pacific Insurance. Agreement may be imminent.

▪ Carlyle Group has been working on several deals, including taking a 25% stake in insurer China Pacific Life and a possible USD 400 million purchase of Xuzhou Construction Machinery Group.

▪ Merrill Lynch & Co. Inc. will put up about USD 32 million for a one-third stake in Huaan Securities, a new Chinese investment-banking venture, joining a small but growing group of global investment houses in the mainland underwriting business.

Zhang Zhiqiang has been elected to the Board of Directors of Georg Fischer AG. He has been President and CEO of Siemens VDO Automotive (China) since 1999. Mr. Zhang was born in 1961 and lives in Shanghai.  As far as we know, he is the first Chinese citizen to be named a Director in a European public company.

On March 16, Hong Kong Financial Secretary Mr. Henry Tang announced the Budget for the financial year starting on April 1. If approved by the Legislative Council, the taxation rates will be:

Profit Tax

▪ Rate unchanged

Estate Duty

▪ Estate duty is to be abolished because the Government’s administrative costs are considered  to be too high in relation to the income received. The measure is also meant to be a tool for the promotion of local asset-management business.

Salaries Tax

▪ Rate unchanged
▪ Salaries tax is charged at progressive rates on the assessable income minus allowances (e.g. for children and parents), with a maximum tax on the chargeable income of 16%.
▪ Child allowances will be increased to HKD 40,000 (EUR 3,887) for each child.

Progressive rates for 2005/2006

Standard rate – 16%

Measures to Foster Growth and to Enhance Hong Kong’s Position as an International Financial Centre

▪ Explore with mainland authorities ways to expand the scope of RMB business in Hong Kong and the establishment of a clearing and settlement platform for RMB transactions.
▪ Introduce laws that will give statutory backing to major listing requirements and establish a Financial Reporting Council to strengthen the supervision of auditors and raise the quality of reporting by listed companies.

For further information please contact Ms. Christina Fung at cfung@fiducia-china.com