B.C. entrepreneurs who want a piece of China’s multitrillion-dollar retail scene should come in big at multilevels and be backed with brand name cachet to have a shot at success. The potential is enormous but so are the risks, says Hong Kong-born Anthea Wong, a China retail analyst with PricewaterhouseCoopers.
Even such a strategy is no guarantee that a North American retailer would survive on the competitive streets of such cities as Beijing or Shanghai. Witness Home Depot, which pulled out of the Chinese capital last year, shutting six stores after losing a two-front battle against lower-priced competition and convincing middle-class Beijing residents to do home repairs themselves when labourers can be hired for less than $2 a day.
Best Buy shut its last store in China a year ago and has relaunched under the Five Star banner with a Chinese joint venture. Even Mattel closed its Barbie store in Shanghai, unable to compete against much cheaper, but precise, knock-offs.
Still, Swedish furniture giant Ikea is thriving, Apple outlets are packed, the Gap chain is expanding, and when Wong went shopping for a $500 Hermes scarf in Shanghai – where the high-brand retailer has a 40,000-square-foot outlet – the entire stock was sold out. Levi’s found that sales increased in Beijing when they doubled the price of their famous blue jeans to $200 a pair.
Luxury brands are huge in China, Wong said. “Louis Vuitton, Chanel and Gucci have a strong hold,” Wong told a recent Vancouver seminar on China retail, also citing Hugo Boss and Ermenegildo Zegna as enjoying “tremendous success” in a male-dominated and growing middle and upper class consumer market.
China’s middle class – defined by those earning the Canadian equivalent of $10,000 to $80,000 per year – now totals about 104 million consumers, but there are at least one million Chinese with a personal wealth of more than $1.5 million and 60,000 individuals worth in excess of $20 million.
“China is on its way to becoming the world’s biggest market for luxury goods,” Wong said. On the other hand, more than 5% of China’s population, or 650 million people, are listed at a poverty level, equal to earning $1.25 per day.
Wong, who couldn’t name a Canadian brand name or product other than Lululemon and maple syrup, said B.C. retailers could start their Chinese foray with a multilevel marketing approach.
“Chinese online retail transactions have increased at a staggering rate,” she said, with 62% of consumers now doing at least some shopping online – from near zero six years ago – compared with 66% in Canada and 47% in the U.S.
There are also opportunities in the franchise sector, which is worth about $50 billion in annual sales.
There are now more than 4,500 franchise businesses with 400,000 stores in China. Vancouver-based White Spot, which opened in Hong Kong nine years ago, now has three locations in Asia’s biggest country.
Wong cautioned, however, that Chinese franchisees are often “fiercely protected” by local governments, which could make it difficult for a foreign franchisor.
It takes deep pockets to lease retail space in the major cities that represent 86% of China’s consumer market, which has tripled to $2.3 trillion annually since a liberalization policy began six years ago. In Shanghai, annual lease rates for ground-floor space on East Nanjing Road, a premium shopping district, run to $347 per square foot, while even lower-tiered streets can top $150 per square foot, comparable to Vancouver’s Robson Street, according to a report from Cushman Wakefield’s Shanghai office.
Still, with a population 30 times the size of Vancouver, Shanghai shop owners have a much bigger consumer pool.
Wong recommended foreign retailers also look at second-tier cities, where the development of high-speed rail transit and highways has opened markets. As well, under China’s latest five-year plan – which started in 2011 – consumer spending is being encouraged through an increase in wages and strengthening of distribution networks, Wong explained.
Aside from luxury items, the fastest-growing retail sectors are fashion, which Wong described as a “competitive frenzy,” furniture and food and beverages. The latter category could hold potential for Canadians. According to PricewaterhouseCoopers, China is on a fast track to become the world’s biggest market for beer.
