VIEWPOINT

International marketing in
Southeast Asia
Retailing trends and opportunities in China
Saeed Samiee
College of Business Administration, The University of Tulsa, Tulsa, Oklahoma,
USA, and
Leslie S.C. Yip and Sherriff T.K. Luk
Department of Management and Marketing, Faculty of Business,
The Hong Kong Polytechnic University, Hong Kong, China
Keywords Southeast Asia, China, Retailing, Distribution
Abstract The aim of this study is to highlight developments and opportunities in the retail and
distribution sectors of China. In particular, we focus on the entry of international retailers into this
rapidly growing market and classify various forms of retailing in China. The emerging Southeast
Asian markets are still dependent on traditional and inefcient distribution and retailing systems.
These markets are ripe for cultivation by international retailers whose advanced systems,
processes, and management and marketing skills can bring added levels of efciency and enhanced
performance to these markets.
An increasing number of Asian countries have adopted economic policies conducive to
rapid growth and a presence in the international marketplace. The policies instituted
by most Asian nations over the last two decades provided a variety of incentives for
multinational corporations (MNCs) to invest in the region. Much foreign direct
investment (FDI) was in the manufacturing and nancial sectors of Southeast Asian
economies and, in China, FDI in the retail sector was not permitted until 1992. Since
then, the region has witnessed an increasing presence of international retailers.
Despite much interest on the part of academics and business publications in
Southeast Asia, a sharper focus on the distribution sector in China is timely, and is
warranted for several reasons. First, research on distribution in emerging markets is
scant and, given the enormous populations and size of these markets, closer scrutiny of
retail activities in these markets is warranted. Second, as Asian markets are culturally
and geographically removed from the traditional business centers of North America
and Europe, detailed knowledge with respect to prevailing conditions in Asian markets
is often lacking. Indeed, this knowledge gap has contributed to the occasional
misinterpretation of reasons for retail successes and failures in the region, and
especially in China (see, for example, Goldman, 2001; Luk and Yip, 2003). Third,
information ow with regard to social, legal, and technological progress in Asia
remains limited (Walters and Samiee, 2003). Fourth, Southeast Asian markets are
collectively the most populous nations of the world, and possess enormous natural and
human resources. Finally, key Asian markets are developing at an accelerated rate,
which is rapidly expanding demand for all types of products and services.
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Retailing
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International Marketing Review
Vol. 21 No. 3, 2004
pp. 247-254
qEmerald Group Publishing Limited
0265-1335
DOI 10.1108/02651330410539602
According to an OECD report issued in 2001, nearly $3.6 trillion was invested in
developing economies in 1998, with much of the investment destined for Asian nations.
Although the manufacturing sectors remain the main area of focus for foreign
investment, the distribution and retail sectors have attracted an increasing proportion
of foreign capital. From an international marketing standpoint, FDI in retailing in
China is an appropriate strategic move for a number of reasons. Incomes are growing
rapidly in China, and the region has virtually recovered from the economic downturn of
the late 1990s. Moreover, the retail and distribution sectors are among the last
industries that have remained largely local and substantially fragmented. Consider, for
example, that the top four retailers in China had combined sales of just over $2,057
million in 2000 (Fortune, 2002)[1]. Therefore, new entrants are unlikely to face stiff
competition from existing retailers. This condition, coupled with easier access to
capital for retailing MNCs, affords retailing MNCs market expansion and penetration
in a national sense.
A further reason for focus on retailing and distribution in Southeast Asia is the
rapid penetration and growth of the Internet and the resulting development of
e-commerce in these markets. Although the potential for e-commerce is currently
unevenly distributed across Asian nations, this is likely to change in the short term[2].
China, where Internet use is expected to grow by over 30 percent annually, is perhaps
the most promising market (Business Week, 2004). Although Internet use is still in its
relative infancy, the number of Internet users in China far exceeds the entire population
of many of its neighboring nations. As infrastructure and usage rates develop,
e-commerce in China is likely to prove to be an important force in the structure of retail
and distribution in China.
Classifying retailers in China
Retail formats are ofcially categorized into eight groups by the Chinese government.
As shown in Table I, these classications consist of convenience stores, department
stores, general merchandise stores, professional stores, shopping centers, specialty
stores, supermarkets, and warehouse-style supermarkets (Luk and Yip, 2003). An
understanding of and adherence to this classication scheme by retailing MNCs
planning to enter China is of critical importance, since store opening applications are
assessed and approved in accordance with the ofcial Chinese classication. The
intellectual contributions of other classications notwithstanding (e.g. Goldman, 2001),
their use in ofcial applications can lead to bureaucratic delays and problems[3].
The Chinese government in Beijing has long adopted a classication scheme to
facilitate the screening of applications for the establishment of retail joint ventures in
China. Retail MNCs must clearly identify the category to which the proposed retail
establishment (i.e. joint venture) belongs when submitting applications for approval.
This is an important stage which will have serious implications insofar as the
processing of the application and the subsequent decision criteria are concerned.
Foreign competition in the retail sector in China
The inuence of foreign retailers in China has grown rapidly since 1990. The major
motivating factor for many foreign investors in the retail sectors of Southeast Asia is
their saturated home-market conditions (see, for example, Sanchanta, 2004). Major
players in the region include such world-class competitors as Ahold, Metro, Carrefour,
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and Tesco, which face mature home markets coupled with cut-throat competition from
local and other international rms. Although Southeast Asia represents only one of the
areas in which global retail competitors are active, in the long term it is the most
promising one. Not surprisingly, key international retailers have already developed a
foothold in the region.
Major international rms vying for a share of the Chinese market include Tesco
(UK), Wal-Mart (US), Carrefour (France), Metro AG (Germany), and Makro (a unit of
SHV Holdings NV, The Netherlands), PriceSmart Inc., Ekchor Lotus, Fenglian,
Parkson, Top Supermarkets, Friendship Seiyu (Japan), Isetan (Japan), Lawson (US),
Shanghai No. 1 Yaohan, Pacic, Seibu (Japan), Jusco (Japan), Ito-Yakado (Japan),
Park-N-Shop (Hong Kong), Trust Mart (Taiwan). Foreign investors use a variety of
entry modes to penetrate the region (Buckman, 2003). For example, Tesco, Britains
biggest retailer, has entered China through a 50 percent joint venture with Ting Hsin
International, a rm that owns 25 hypermarkets in China (Guerrera and Voyle, 2004).
Although minuscule by Chinese standards, Ting Hsin is one of the largest retail
operators in the country. Recently, Metro announced that it will open 40 new stores
over the next ve years. The rm operates four divisions: Cash & Carry (a self-service
retail and food service warehouse operation), food retailing, non-food specialty stores,
and department stores. Metros Cash & Carry retailing in China is a joint venture with
the Jinjiang Group (Duff, 2003). Metro has a 60 percent equity in the venture.
By most estimates, foreign competition in the retail sector in China is quite small.
Carrefour, for example, has only 40 stores in China. Wal-Mart, the worlds largest
Type of business Location Mode of operation
Department stores Central business districts,
transportation hubs
Counter sales and self-service
(open-shelf display)
Supermarkets Residential areas, transportation
hubs, commercial districts
Self-service
General merchandise
stores
Suburbs, residential areas,
transportation hubs
Self-service
Convenience stores Residential areas; along major trunk
lines; near railway stations, hospitals,
entertainment facilities, government
departments, public institutions,
enterprises
Mainly self-service
Professional stores Central business districts, shopping
streets, within department stores and
shopping centers
Fixed prices, open shelf
Speciality stores Central business districts, shopping
streets, within department stores and
shopping centers
Fixed prices, open shelf
Shopping centers Business centers, transportation hubs
in suburbs
Unied planning by project manager
with shops operating independently
Warehouse-style
supermarkets
Suburbs, transportation hubs Warehouse-style product display,
self-service
Source: Adapted from Hong Kong Trade Development Council and Luk and Yip (2003)
Table I.
Classication of retail
formats in China
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249
retailer, has only 30 stores in this most populous country. A number of environmental
differences make China a very different market in which to compete.
First, Chinese consumers spend an average of about $317 a year on retail (making
the size of the retail market $412 billion). This is a relatively small amount by regional
standards, and only a fraction of the retail market in Japan, which has a population
which is only one-tenth that of China. Consumers in Japan annually spend an average
of $10,370 in stores (making a market size of $1.316 trillion). Overall, international
retailers control only about 1.5 percent of the Chinese retail market. Although this is
expected to grow fairly rapidly in the intermediate term, Bejing intends to limit
international retailers share of the market to about 8-10 percent during the next
decade.
Second, most retail expenditure by Chinese consumers is in small, independent
shops.
Third, most retail spending is concentrated in such big cities as Beijing, Shanghai,
Tianjin, Guanhzhou, Chongqing, Shenyang, Wuhan, Zhengzhou, Chengdu, Shenzhen,
and coastal cities. Therefore, current opportunities in larger cities in China are
somewhat limited. Finally, certain retail sales formats are not legal in China. Retail
parties (i.e. personal selling coordinated through in-home parties) and door-to-door
selling, as practised by such rms as Avon, Tupperware and Amway, are not currently
permitted in China[4]. However, under pressure from the World Trade Organization,
China is required to allow this form of retailing by the end of 2004.
As a matter of policy, China wishes to demonstrate greater control over the
distribution and retail trades. In the past, the great majority of permissions to open new
stores were secured from local governments without gaining approval from Beijing.
For example, only 28 international retail projects had been approved by the central
government by the end of 2000, whereas local governments had approved 277
applications. However, large-scale national retail formats are fairly new in China and
have the potential eventually to displace smaller independent shops. In the
Governments view, international retailers have caused competition in the retail
sector to become overheated. As a result, the central authorities in Beijing have
tightened the rules regarding store opening and have raised the penalties associated for
non-compliance with these rules on the part of international retailers (Buckman, 2003).
Given the long-running tradition of provincial autonomy and self-sufciency in China,
gaining only a local permit was the logical approach for local government as well as for
retail MNCs. Furthermore, given the fragmented supply market, localization makes
strategic sense. Indeed, local governments can regulate or hinder the interprovincial
transportation and distribution of products if they feel that the local economy is likely
to suffer a negative impact (Huffman, 2003; Walters and Samiee, 2003). For example,
Carrefour, one of the two largest international retailers in China, has frozen its plans to
open new stores until the new regulations are more transparent.
State interference with the retail sector is certainly not new in China. In August
1998, the State Council launched a re-certication process to check the legal status of
foreign-invested retail establishments. As a result, only 42 were allowed to continue
their operations. The State Council cancelled 41 licenses and required another 194
licensees to be restructured.
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Retail market entry models deployed by international retailers
International retailers have typically relied on one of seven models for cultivating the
Chinese market (Luk and Yip, 2003; Davies and Yahagi, 2000). These models consist of
manufacturer-run shops, retail shops as part of hotel or foreign residential facilities,
retail stores as tenants of shopping complexes, management companies (or holding
companies), joint construction projects, joint operations and licensing agreements,
single license-many outlet operations, and miscellaneous types. Each model is
discussed briey below:
.
Manufacturer-run shops. Foreign manufacturers who establish joint ventures in
China open sale counters in department stores or set up their own direct retail
stores. For example, many fashion chains such as Benetton, Baleno and Batti
have adopted this approach to enter the Chinese retail market.
.
Retail shops as part of hotel or foreign residential facilities. This model involves
opening small shops afliated with hotels or residential facilities for foreigners.
Isetans rst department store in Shanghai was set up using this approach.
.
Retail stores as tenants of a shopping complex. Isetans second department store
in Shanghai and Juscos store in Guangzhou are examples of this retail market
entry format. Foreign retailers open outlets using a leased area inside a shopping
mall or a department store using their own name.
.
Management companies (or holding companies). Foreign retailers are allowed to
establish joint venture management companies with Chinese partners and
operate retail stores under the joint ventures name. Carrefour mainly employs
this strategy to expand its business in China.
.
Joint construction project. This is not a common approach today, and may only
be viable when local builders have nancial difculties and are unable to
continue construction projects. Access by international retailers to Chinas
market through this model requires senior staff from the local developer to join
the management board of the retail establishment.
.
Joint operation and licensing agreement. Yaohan and Price Smart adopted this
strategy to set up their outlets in China.
.
Single license many outlets. Some foreign retailers such as Wal-Mart and
Yokado obtained approval either from the state government or from local
government which was in principle valid for the opening of only one retail outlet.
However, many of these retailers continued to open many outlets with only one
state/municipal license. This entry mode faces the most risk of confrontation
with and closure by the central authorities in Beijing.
.
Miscellaneous. Some foreign retailers, particularly those from Hong Kong, took
advantage of loopholes in the existing regulations on retail joint ventures to
establish retail outlets in China through special arrangements. For example, the
local partner could be a pseudo-partner, or the local partner could be appointed
as an agent to establish a chain of outlets, but the equity structure of these outlets
in fact requires prior approval from the Government. Strictly speaking, these
approaches are considered to be illegal. Of late, these retail outlets have come
under close scrutiny from central government.
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Opportunities and implications for competing in China
International retailing rms have the advantage of possessing systems and processes
that are largely lacking in Southeast Asia, notably in China. However, transforming
these capabilities into a sustainable competitive advantage demands adherence to a
number of factors and conditions that can easily steer a rm away from a formula that
has been a success in other markets. Clearly, China is a huge market, and international
retailers have only scratched the surface so far as cultivating the market is concerned.
Thus far, much of the investment has been in larger, metropolitan areas. There are
numerous medium-sized and smaller communities that are increasingly wealthy and
willing to trade up from the traditional retail scene in local communities.
A closer scrutiny of the preferences and lifestyle of Chinese consumers through
meaningful segmentation strategies can serve as basis for successfully competing in
Chinas retail sector. Recent health-related concerns (e.g. the outbreak of SARS),
coupled with rising incomes in China, is prompting an increasing number of customers
to seek the more hygienic retail conditions for which international retailers are known
(Sanchanta, 2004). Ito-Yokado is just one rm that is attempting to cultivate this
segment of the Chinese market by opening stores that focus exclusively on selling fresh
produce. Joining forces with its Chinese partner, Wangfujing Department Store, and a
minority Japanese partner, York-Benimaru, Ito-Yokado plans to open a chain of
2,000-square-feet stores that focus substantially on selling fresh foods.
The emerging Southeast Asian markets are increasing the source of high-quality
brands which are price-competitive with their developed-market counterparts. These
brands have a wide appeal and tend to be available in China. Thus, MNC retailers need
to incorporate local and regional brands in their merchandising strategies. For
example, Haier and Legend of China, Samsung and LGof Korea, Samling Malaysia and
Malayan WTK, and Acer, a Taiwanese rm with its headquarters in Singapore,
represent a growing number of locally developed and produced brands which
successfully compete for a share of global markets. Other top-rated local brands
include the Philippines San Miguel beer and Singapores Creative Technologies. Hong
Kongs Lee Kum Kee, Hello Kitty, Singha Beer and G2000, and Malaysias Maggi and
Royal Selangor Pewter, are also strong regional brands that Chinese consumers are
increasingly familiar with and also demand (Flannery, 2001). International retailers
would be well advised to devise a merchandising strategy that is consistent with local
preferences, including offering key local brands.
International retail rms competing in China must also remain cognizant that
environmental conditions are very different there from developed markets, and that
these conditions are likely to remain volatile in the intermediate future (Samiee, 1993).
In particular, political, legal and regulatory and cultural conditions will challenge both
existing foreign competitors and new entrants. The recent experience of Trust-Mart, a
retailing rm based in Taiwan, in the Chinese city of Xian demonstrates this issue.
Trust-Mart entered the Chinese retail market through a joint-venture agreement with a
local rm. The joint venture signed a rental agreement with a Chinese landlord to rent
a basement area for its discount store retail format. The agreement stipulated that
Trust-Mart would pay the electricity as billed. However, after a period of time, it
became evident to the landlord that Trust-Marts business was quite successful. The
landlord subsequently demanded that Trust-Mart paid the monthly electricity bill as a
percentage of its monthly retail sales. When Trust-Mart refused to pay under this new
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scheme, the landlord cut off the rms electricity. Trust-Mart attempted to solve this
problem by installing its own generators, but ventilation within the store was
inadequate. Needless to say, the venture was seriously affected by this unexpected
demand and heavy-handed treatment of Trust-Mart by its local landlord. The problem
persisted until local government authorities mediated a settlement (Luk and Yip, 2003).
These issues demonstrate that, while retail competition in China is intensifying in
some regions of the country, it remains a promising sector of the economy which is yet
to be fully cultivated. However, it is also evident that Chinas retail environment is not
an ordinary one. Environmental conditions, even within China, can vary considerably
from region to region (Walters and Samiee, 2003). Retail MNCs must necessarily
remain on guard and rely on sophisticated market information systems and select
reliable local partners that can help them develop networks that can successfully
resolve the types of issues that hindered Trust-Mart. Indeed, a key strength in Asian
business practice is the reliance on personal and business relationships and networks
to accomplish business tasks and consummate transactions. All rms possess some
network in managing their operations; however, Chinese rms have the added
advantage of more easily maneuvering around the regulatory and bureaucratic
requirements in their region (see Knowledge@Wharton, 2003). For example, local
brands such as Legend Computers, in addition to having the ability to adapt more
easily to local needs, tastes, and culture, have a signicant competitive advantages
over foreign brands due to their local relationships and networks. While MNCs can
develop savvy marketing campaigns and heavily promote their products in large
Chinese metropolitan areas, local rms have networks that reach deep not only into the
cities but also the very large rural regions where the mass media tend to be less
effective. These networks can offer signicant advantages to local Chinese retailers
once they are better organized and have adopted the processes and strategies of their
better-tooled retail MNC counterparts.
Notes
1. These rms were among the top 100 largest rms in China. Beijing Enterprises Holdings,
with sales of $667.8 and prots of $66.1, was ranked number 51; Shanghai No. 1 Department
Store, with sales of $515.8 and prots of $7.1, was ranked 66; Shanghai Hua Lian, with sales
of $437.2 and prots of $13.9, was ranked number 78; and Shanghai Yuyuan Tourist Mart,
with sales of $436.8 and prots of $12.6, was ranked 79 (Fortune, 2002).
2. The emerging markets of Asia, like Korea and Taiwan, where Internet infrastructures are
also fully developed and production costs are still competitive, are prime candidates for
realizing a more rapid growth in e-commerce. China, however, remains the most promising
market for e-commerce in the intermediate and long terms. The number of Chinese Internet
subscribers in 2003 was 80 million; however, this number is expected to grow to 153 million
by 2006, at which point China will have the largest number of Internet subscribers in the
world (Business Week, 2004).
3. Goldman (2001), for example, identied six transfer strategies for retail MNCs doing
business in China.
4. In order to comply with the law, direct-sales rms had to develop alternative distribution
strategies for China. Avon, for example, established 5,500 retail stores with a nominal
Chinese partner. In addition, the rm makes its products available through 1,000 beauty
salons and 300 warehouse-type stores.
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