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China's retailers fight hard to keep market share

(chinadaily.com.cn)
Updated: 2008-12-26 18:22

At first, Chinese retailers were baffled: How could the sales of microwave ovens run so wild (50 percent growth year-on-year), while other goods were seeing such sluggish sales?

It took a Harvard-educated economist to tell them of a historical equivalent - at times of famine, when all goods were sold at a discount, the price of potatoes would rise to a point higher than ever.

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The astonishing sale of microwave ovens reflects a move by consumers back to home cooking instead of eating out in order to save a little money.

Come the turn of the year, almost every other product on the Chinese retail market will appear to contradict the growth in microwave sales. Competition will be fierce, the price war will be rampant and many merchants will fear that they will be unable to make a profit. Some shops may soon even go out of business all together.

According to figures from the Ministry of Commerce, China's retail sales broke the 10-trillion-yuan ($1.47 trillion) mark in the middle of December 2008 and may amount to 10.8 trillion yuan by the end of the year, a growth of 21 percent over 2007.

But now, at a time when consumers are clutching their purses tighter in the face of the worst financial crisis in the world in 80 years, retailers can rely only on discounts deeper even than previous years, to generate turnovers.

A price war is being waged in all cities. A price cut of 30 percent is nothing, as labels of 50 percent discount will be seen in many shops during the festival season spanning from Christmas to the Chinese lunar New Year, which falls on Jan 26, 2009.

China-based international merchants, led by Carrefour and Wal-Mart, are also offering 20 to 30 percent discounts on a wide array of daily goods and food items, which already earn small profit margins, Chinese-language business press reported.

Department stores are facing some of the greatest difficulties. They saw their share fall from No 1 in China's total retail business to No 8 in 2008, according to Men Xiaowei, an official from the Ministry of Commerce.

Department stores usually offer fancier and more expensive goods than supermarkets. They would be losing their advantage by offering similar discounts to those of other shops, industry analysts said.

Home appliance merchants are in trouble, too. In the third quarter of 2008, the home appliance industry's revenue growth declined 10 percentage points from a year ago, with more manufacturers claiming operational losses.

Suning and Gome, China's two largest home appliance retail chains, have both lowered their revenue forecast and slashed their budget for opening up new outlets.

As the discouraging business environment continues, retailers are looking desperately for ways to increase business. The most promising areas to seek sales growth, according to an analysis by the domestic investment bank China International Capital Corporation (CICC), are in second-tier cities, or regional business hubs, such as Hefei (of Anhui province), Wuhan (of Hubei province), Xi'an (of Shaanxi province) and Shenyang (of Liaoning province).

Only supermarket chains commanding a dominant regional market share and department stores with good cash and management are likely picks for the investors, according to the brokerage China Jianyin Investment Securities.

Marketing experts also pointed out that only merchants able to attract the younger generation are likely to become winners in the future market.