The growing economic powerhouse is now the world’s biggest grocery market, and where the supermarkets go, others are following.

M&S

The growing appeal of China to international retailers was reinforced last week by figures showing the country has now eclipsed the US as the world’s biggest grocery market.

Food retail in China was £607bn at the end of last year, versus the US’s £572bn, a study by grocery industry body IGD found. The Chinese market will be worth £918bn by 2015, compared with a US value of £675bn.

Between 2011 and 2015, the US grocery retail market should experience growth accelerating to reach a compound annual growth rate of 4.2%, but China’s rate will be double that at 10.9% over the same period.

Similarly, general merchandise retail is growing apace to account for an expected $78.9bn (£49.4bn) in 2012 compared with $63.5bn (£39.7bn) in 2011. So it is little surprise British and other foreign retailers are building operations in China.

Observers believe a slowdown in China’s growth in the last year, when quarterly GDP growth fell from 8.9% to 8.1% in the last quarter, may have bottomed out. With a period of improved prosperity now expected by global banking giants, there remains plenty of opportunity in China for food and general retailers alike.

IGD chief executive Joanne Denney-Finch says grocery growth can be attributed to three main factors: “Rapid economic growth, population and rising food inflation.”

But even though the market is growing overall, there are variations around the country. Growth in the largest cities - the so-called tier one centres of Beijing, Chongqing, Shanghai and Tianjin - has showed signs of slowing down along with the economy, and tightened planning laws have affected retailers such as Tesco.

But the grocer’s former chief executive Sir Terry Leahy is confident that China’s tier two cities - including Ningbo and Wenzhou - offer strong opportunities for the shopping centre venture he is backing in the country. The retail legend is engaged in raising $750m (£470m) to launch the Chinese shopping centre chain.

“These are still huge cities, they have up to 10 million people,” Leahy said last month. “It is part of the burgeoning consumer population in China. There is an under-supply of modern, international standard shopping malls.”

But succeeding in China can be challenging. Tesco entered the market in 2004, acquiring a 50% stake in local hypermarket business Hymall. It now operates 99 Tesco hypermarkets and 14 Tesco Express convenience stores in 40 cities, replicating its worldwide offer with initiatives such as Clubcard and private-label.

However, a focus has been on Lifespace malls, taking large retail lets to lease back to other tenants with a hypermarket as an anchor. Tesco had hoped to open 80 by 2016 but had to scale ambitions back to 50 in the same time frame.

At present there are just six Lifespace malls. The target of 50 looks unlikely, and the grocer has been criticised by observers for misjudging the ratio between international brands and small, bargain shops in the malls.

Tesco is up against its traditional foes - Walmart and Carrefour - in China. The latter recorded a 5% decline in sales in China in the first quarter and has had trouble in the country, falling foul of national planners after receiving consent from local planners but building some stores without national consent.

Planet Retail analyst Robert Gregory says: “Lots of international retailers were welcomed by local governments in the past due to their prestige. Now names are plastered everywhere and planning is much tighter.”

But the big names continue to invest. Alongside a store business, Walmart has set a marker for its ambitions in China with a 51% stake in the holding company of fast-growing food and general merchandise etailer Yihaodian.

Fashion forays

Outside grocery, international fashion stores are also keen to expand in China.

As fashion retailer Ted Baker opened its first store in Beijing last year, founder and chief executive Ray Kelvin said it would “develop and sell a luxury product and make it more affordable” and promised a “big roll-out” in China in the process.

Meanwhile, Superdry operates a franchise operation and has benefited from a strong international brand.

Marks & Spencer also has a small presence in China, although progress has sometimes been slow. The retailer, which now has six shops there, got off to a poor start. Former executive chairman Sir Stuart Rose admitted there had been basic shopkeeping mistakes in aspects such as clothing size when it opened in Shanghai.

According to Gregory, M&S’s experiences illustrates some aspects of international brands’ translation into the Chinese market that may be relevant to other retailers.

Things have since improved in China for M&S. On Tuesday it reported double-digit growth there in the fourth quarter, and it regards the country as one of its “strategic international markets”.

There are other challenges too for retailers. Tristan Rogers, chief executive of Concreteplatform.com, which advises retailers including Tesco and M&S on overseas expansion, says: “Consumer-wise it [China] is still pretty primitive. The way the Chinese shape their own retail offer is to mimic, so anything European retailers do is followed.”

Simply entering China can be difficult and defining a business’s presence is vital. As in many markets, a franchise operation or joint venture is often the easiest way to gauge a market. But Rogers warns: “Retailers do need to look carefully at how they get visibility and control.

“They can enter via a joint venture initially, but to really get a handle on how they are trading and how their proposition translates they need to trade directly with consumers. With a joint venture you risk the partner pulling out if it does not work immediately.”

And Denney-Finch warns that “given China’s size and diversity, it’s essential not to treat the country as one homogenous market”.

Lessons to learn from B&Q’s trip to China

Kingfisher’s experience in China provides an interesting case study for other retailers. After opening its B&Q stores from the turn of the millennium, the retailer was forced to perform emergency surgery following its realisation that the DIY culture did not exist in China in the same way as in the West.

The retailer closed 22 stores and sub-let space in the remaining 44 to retailers including Carrefour.

Kingfisher has now switched some of its efforts to a showroom format to cater for the ‘Do It For Me’ rather than the ‘Do It Yourself’ market.

Chief executive Ian Cheshire has said the Chinese don’t do small projects: “They either do brand new apartments fitted out from a concrete shell or, when they do refurbish their apartment, it’s once every 10 years.”

Pros and cons

Next chief executive Lord Wolfson cautioned recently that China is not necessarily a promised land for retailers. Next operates five stores there, two of which are company-owned and three franchises, and is launching a Chinese language website later this year, but Wolfson is wary.

“China’s an enormous place but the average wages are a quarter of what they are in the UK. Our prices are not going to be any cheaper so the number of people who can afford Next clothing there is limited,” he told Retail Week last month. “We’re cautious on the opportunity.”

Mothercare sees plenty of opportunity to expand in China, as overseas activity props up its ailing UK business. Mothercare executive chairman Alan Parker told Retail Week last week: “We have 20 stores there and intend to grow that significantly. It’s a good market for Mothercare with its growing middle class.”

There is much conjecture over who will enter the market next. Gregory says: “There is some potential for fashionable brands like Topshop [which is eyeing China] that Chinese people have been exposed to in the media.”

Asos is expected to enter China in the next few years. Boss Nick Robertson is ambitious about prospects but has adopted a cautious approach. Work is under way on a country-specific website.

Alliance Boots executive chairman Stefano Pessina told Retail Week earlier this month that the health and beauty retailer would enter the market “in the coming years”.

And Argos has entered into a £45m joint venture with the world’s largest appliance brand Haier - which itself is worth $1.2bn (£750m) - and will open a trial store and internet delivery service in Shanghai later this year.

Sainsbury’s, which has sourcing offices in China, remains tight-lipped about whether it will enter the country as a retailer. A spokesman says: “Sainsbury’s is a UK retailer and we will continue to focus on growing our business in this country.

“We do not see international expansion as part of our short-term plans but we are exploring, as we have always done, other possibilities for growth in the medium to long term.”

Whichever international retailers enter the Chinese market, excitement about the scale of the opportunity must be tempered with the difficulty of the task. However, the race for market share in China is likely to remain one of the most engaging in retail.

IF NOT CHINA, WHERE?

Vietnam

Population 87 million

GDP $106bn (£66bn)

Planet Retail’s Rob Gregory says “There are a lot of well-educated people and it’s fast growing. In 10 years’ time Tesco will be there.”

Indonesia

Population 239 million

GDP $706bn (£442bn)

Gregory says “It’s a huge market and fast-growing, but it is fragmented and has restrictions on international retailers - small grocery stores cannot open in certain zones.”

Cambodia

Population 14 million

GDP $11bn (£7bn)

Gregory says “Hong Kong retailer Dairy Farm has acquired a 70% stake in local retailer Lucky Market”

Burma

Population 48 million

GDP $51bn (£32bn)

Gregory says “Japanese convenience retailer Lawson plans to open 100 stores in the country”

PLAY BY THE RULES

John Giles, divisional director at international market analysis company Promar International, believes there are five key factors to consider when entering China.

  1. Spend on talent “Employing and retaining good people is a challenge, but if you are a leading global player you have to be in China and have to take a long-term view. Global players shy away from ultra- cheap labour for corporate social responsibilty reasons”.
  2. Know the rules Understanding the laws on joint ventures, property and protecting brands from copycats as just a start can be challenging and take up a huge amount of time and energy”.
  3. Be there “Servicing the Chinese market from the UK is possible in the short term, maybe, but in the medium to long term, you really have to be over there on the ground to make it work”.
  4. Understand Chinese politics “The Communist government has of course liberalised the economy but the hand of government is never far away from you and understanding the local politics is key”.
  5. Recognise other opportunities “For many businesses, the potential size of the prize in China still far outweighs the opportunity in other emerging markets. The good news is that for businesses there are plenty of other international opportunities”.