Retailers adapt in China

07 July 2011

BEIJING: Retailers including Wal-Mart, Ikea and Tesco are adapting their business models in China, reflecting several long term changes in consumer habits.

Wal-Mart currently runs 339 branches in over 120 cities across China, and first purchased its own trading sites for stores - rather than renting the sites - in north-east Dalian in 2010.

Ed Chan, chief executive officer of the discounter's operations in the world's most populous nation, revealed it was basing such decisions on the fact urbanisation is gradually transforming the landscape.

"When we open a store, we look at a very long term, many, many years," he told Bloomberg. "Urbanisation and the creation of the middle class will be still quite robust for the next ten, 20 years with additional cities being created."

The Inter Ikea Centre Group, part-owned by Ikea, the furniture chain, has also splashed out $1.2bn on some 5.5m square feet of shopping malls.

At present, the company's joint venture owns eight of the nine sites from which it trades, and the intention is to snap up further appealing locations.

Gillian Drakeford, Ikea China's retail president, suggested such moves represent a global tactic the firm is pursuing but makes sense on the local level.

"Ikea's approach to store establishment is long-term with substantial investment in existing and new markets," said Drakeford.

"This allows Ikea to lead the process and to ensure that the right conditions are secured for the stores."

Soaring rental costs are encouraging the acquisition, rather than leasing, of property, especially in areas like Shanghai and Beijing.

"The economics of doing retail development look very attractive now if you can get the land," Michael Klibaner, head of China research at Jones Lang LaSalle, said.

"It's becoming more and more difficult for them to get extraordinary leasing terms because Chinese landlords are becoming more sophisticated.

"China is now probably more important to the future of these companies than it's ever been."

In March, Tesco, the UK-based supermarket giant, formed a joint venture with Specialist Investments, an arm of HSBC, and Metro Holdings, a unit of the German retailer, covering three new malls.

These will be based in Fuzhou, Xiamen and Shenyang, all house flagship Tesco stores, and occupy a combined 2.5m square feet in all.

Elsewhere, Tesco has also extended an existing partnership with Gome, China's second-largest electrical appliances manufacturer.

This deal means the two firms are to cooperate on enhancing Tesco's current network of Lifespace shopping centres, containing its own stores and those of Gome - part of a wider 53bn yuan ($8.2bn) investment plan.

"We will take advantage of each other's advantages and make our shopping malls expand rapidly," said Remco Waller, CEO, Tesco China Property Co.

Wang Junzhou, president of Gome, added that the organisation's Lifespace outlets would benefit from early exposure to new product launches and promotions.

"The shopping mall is the trend of the retail industry, which will change the business pattern of Chinese cities," Wang said.

"Shopping malls can give customers one-stop service, and the ability to bring in good brands is key to their success."

Data sourced from Bloomberg/China Daily; additional content by Warc staff