Academic journal article Multinational Business Review

Entry Opportunities and Environmental Constraints for Foreign Retailers in China's Secondary Cities

Academic journal article Multinational Business Review

Entry Opportunities and Environmental Constraints for Foreign Retailers in China's Secondary Cities

Article excerpt

Foreign retailers have begun to seek opportunities in the major economic centers in the People's Republic of China. However, the second- and third-tier cities remain almost devoid of foreign retail investment. This paper outlines some of the obstacles and challenges which foreign retailers will face in order to enter the second and third-tier Chinese markets. The paper also identifies some strategic options available to foreign retail investors, including: leased space in department stores, cooperative agreements, joint ventures, franchising, and chain stores.

INTRODUCTION

Despite the obstacles and challenges, the People's Republic of China offers tremendous opportunities for international retailers. Foreign retailers have already been quite active in the major centers of Shanghai, Beijing and Guangzhou, as well as in the Special Economic Zones (SEZ's). As a result, competition in these locales has increased significantly. In contrast, China's second- and third-tier cities present relatively untouched and potentially lucrative opportunities for foreign retailers. The challenges which foreign retailers face in these markets do not differ greatly from those which foreign retailers first faced when entering the major cities and SEZ's. They include dealing with the still pervasive influence of the central government, mastering the intricacies of the Chinese distribution system, and adapting to the subtleties and contradictions of Chinese consumer behavior.

This paper outlines some of the obstacles and challenges which foreign retailers will have to deal with to tap into the second- and third-tier markets. The paper then discusses some of the tragic options available to foreign retailers. These options are evaluated in terms of several criteria, including what resources, if any, are provided by the local Chinese partner; the extent to which the foreign retailer can maintain control over its marketing mix and protect its trademarks against the rampant intellectual property theft which occurs in China; the degree to which name recognition can be developed among Chinese consumers; whether or not the foreign retailer must receive central government versus local approval; the degree to which the foreign partner realizes economies in purchasing, distribution and staffing; and, the extent to which the leverage of the foreign retailer is increased by having its existing retail distribution network market Chinese-made goods thus earning foreign exchange.

The paper is the result of extensive meetings which the authors had with department store managers in the Shanghai-Suzhou region of China in the Spring of 1995 and secondary sources, as cited in the paper. In-depth interviews were conducted over a period of two weeks in May, 1995 with five department store General Managers and their staffs and a Chinese college professor and consultant of retailing and marketing, all located in cities outside of the SEZ of Shanghai. As well, informal discussions and observations based upon site visits in several cities in Shanghai and the area surrounding Shanghai and in Beijing provided information for this paper. These discussions suggested several avenues for secondary research, which was conducted by the authors subsequent to their return from China and which is also incorporated in this paper.

Retail Trends

The official Chinese economy, fueled by growing consumer demand, grew by an estimated 10.3% annual rate in the first half of 1995. While this is somewhat lower than 1994's growth rate, it is still above the govemment's target of 9-9% ("China's economy", 1995). Retail sales have grown rapidly. From June 1992 through June 1993, retail sales grew 23.6%, topping $150 (US) billion by the end of 1993. The retail market slowed in 1994 with nominal growth of only 6.1% from September 1993 to September 1994. Although retail sales picked up in 1995, they remain sluggish compared to the spectacular growth of the early 1990's. …

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