China Powers of Retailing 2010oportunidades.deloitte.cl/marketing/Reportes-internos/... · 2010....

China Powers of Retailing 2010

Contents

1. Preface .......................................................................................................... 3

2. Executive Summary ...................................................................................... 4 2.1 The Retail Industry in China in 2009 ................................................... 4 2.2 Main Trends in Retailing in China ........................................................ 8

3. Overview of the Chinese Retail Industry .................................................. 12

3.1 The Global Retail Industry Recovers from Recession .................................... 12

3.2 China Leads the Global Retail Rebound ....................................................... 15

4. The Top 100 Retail Chains, 2009 ............................................................... 18

2009 Rankings of Top 100 Chinese Retail Chains ............................................... 20

4.1 Retail Industry Players Diversify Overall, while Chain/Franchise Retailers Become More Concentrated ............................................................................. 26

4.2 Foreign Companies Continue to Penetrate China's Retail Sector .................... 28

4.3 Geographical Focus of Top 100 Retailers Affects Performance ...................... 31

4.4 Sector Profiles ........................................................................................... 35

Leading Companies by Sector ........................................................................... 41 4.5 The Fastest Growing Retailers .......................................................... 43

5. Retailers' Counter-Crisis Measures ........................................................... 46

6. Major Retail Trends .................................................................................... 48 6.1 Integrating Channels to Promote Sales .............................................. 48 6.2 Mergers and Acquisitions .................................................................. 50 6.3 Supply Chain Management ............................................................... 52

7. Contact Information ................................................................................... 57

Exhibits Figure 1. Comparative Growth Trends of Monthly Retail Sales of Consumer Goods in China,

2000-2010 ................................................................................................................. 5 Figure 2. GDP Growth Rates of the World's Key Economies (%), 2007-2009 ..........................12 Figure 3. U.S. GDP vs. Retail Sales Growth, Year-on-Year (%), 2007-2009 .............................13 Source: STAT-USA, OECD ..................................................................................................13 Figure 4. 4th Quarter Retail Sales Growth of 21 Main OECD Countries (%), 2009 vs. 2008 ......14 Source：OECD ..................................................................... Error! Bookmark not defined. Figure 5. China Consumer Confidence Index，2007-2009 ....................................................16 Figure 6. China's GDP vs. Total Retail Sales of Consumer Goods, Year-on-Year (%), 2007-2009

................................................................................................................................18 Source：National Bureau of Statistics, China .......................................................................18 Figure 8. Growth in Sales vs Store Number Among Top 100, by Regional Base of Retailer, (%),

2009 .........................................................................................................................31 Figure 9. Contribution to Total Sales Revenue among Top 100 by Geographical Coverage, 2009

................................................................................................................................34 Figure 10. Growth Rate of Revenue vs Store Number Among the Top 100, by Geographical

Coverage (％), 2009 ..................................................................................................35 Figure 11. Sales Growth of the Top 100 (%), by Sector, 2009 ...............................................36 Figure 12. Growth Rate of Revenue vs Store Number in the Top 100, by Sector, (%), 2009 ....41

China Powers of Retail 2010

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1. Preface

Deloitte China and the China Chain Store & Franchise Association (CCFA) are

pleased to present the China Power of Retail 2010. The report reviews the

industry performance of the last year and summarizes the key findings.

Findings are based both on a survey conducted by CCFA of the top 100 retail

chains in China, and on Deloitte's perspective on China's retail sector. Also

discussed are possible future directions in which China's retail industry may

develop, as well as four major industry trends, in light of the recovering

global economy and China's own continuous economic development.


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2. Executive Summary

2.1 The Retail Industry in China in 2009

In late 2008 and 2009, China's overall economy experienced a sharp decline

from its high growth rates of recent decades and then a sharp recovery, in

the span of only three quarters. As a result of the government's aggressive

economic stimulus efforts, China's economy was the first to enter a clear

recovery phase among the major economies in the world. Government-driven

fixed asset investments saw rapid growth. Weakened foreign demand was

offset by strong domestic demand, much of it for infrastructure and property

development related to stimulus, as well as major consumer purchases also

fueled by rebates and subsidies.

In order to maintain growth in this year of financial crisis, many retailers of

unsubsidized non-durables focused on increasing sales volume and shifted

their focus of expansion to third and fourth tier urban markets. Since early

2009, department stores, supermarkets, home appliance chains, retailers of

home construction materials, and furniture chains all offered aggressive

promotions to attract customers and increase sales volumes.

Although sales volumes increased overall, in the face of tough financial

conditions, profit margins declined considerably, a phenomenon like other

major consumer markets. Early in the downturn, Chinese consumer

confidence fell dramatically. It was boosted again by the recovering global

economy, as well as by central and local government policies designed to

stimulate domestic demand, maintain growth, and restructure certain

industries. China's retail sales of consumer goods increased 15.5 percent from

2008 to 2009.


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Figure 1. Comparative Growth Trends of Monthly Retail Sales of Consumer

Goods in China, 2000-2010

However, as is evidenced by the figure above, retail sales of consumer goods

as measured in China is often an aggregate of sales of consumer goods that

extends far beyond the scope of individual or household retail purchases.

Often this number includes not only food, apparel, electronics, furniture, and

recreation products, but also construction materials. This last category

encompasses building materials used in the construction industry and its

sharp upswing in 2009 occurred with a corresponding increase in consumer

confidence and an upturn in the property market. When making comparison

to retail sales data from other economies, it is important to be aware of the

broad data catchment of the Chinese data.

In this report, we present data against the unique background of the Chinese

retail sector. Sustained growth in the 12%-15% range for years has created

a sizeable base, very fast expansion, and some volatility in the sector. As

Chinese consumer demand branches and diversifies, retailers are doing the

same in response, showing substantial innovation with respect to format,

channel strategies, and consumer relations. Foreign operators and financial

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Total Retail Sales (RMB bn) Total FoodApparel Sports & Recreation Products Home ElectronicsFurniture Petroleum & Related Products Construction & Decoration Materials

Growth rate, Long-term trend (%)

Retail Sales(RMB bn)

Comparative Growth Trends of Monthly Retail Sales of Consumer Goods in China – Inflation and Seasonally Adjusted

Source: NBS, CEIC database, The Conference Board


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investors have been drawn into the sector, from the Bamboo Network and

from well-known multinational retailers.

The speed of growth and diversity of players mean that there are many ways

to parse the data, and many ways to interpret what it says. Some of these

are familiar to readers of sector data globally, by store format, product class,

chain size, inventory strategy, product strategy, and the like.

Others are more unique to China, like the divergent strategies of state,

domestic private and foreign chains, strong regional differences in consumer

behavior, divergent supply chain relationships, and even various fixed and

negotiated pricing approaches. For example, the analysis of tier one, tier two,

and smaller cities is a particular feature of China's data and market

development.

Also somewhat unique to China is the channel diversity, with chains and

franchise retailers capturing only a part of the retail value. Niche malls, for

things like computers, accessories, and parts, or flooring and wall coverings,

are also becoming branded chains, but they only brand and rent the space,

occasionally distribute or warehouse goods. They are retail-relevant brand

owners but they do not engage in retail themselves. Many of these

comparison variables are captured in our data, but we are steadily working to

improve the resolution we get on the issues the data addresses. In particular,

as chains begin to cross national borders, with more foreign retailers entering

China and Chinese retailers expanding though acquisition in off-shore markets,

understanding how they perform in their home markets will be the key to

anticipating primary global trends in retail.

There is no argument that modern retail formats are displacing traditional

ones. Hypermarkets are visibly displacing farmer's markets or wet markets.

But there is also no argument that modern retail formats in China have been

significantly reshaped by traditional local formats and practices. It goes

without saying that a major factor in the success of the top 100 chain

retailers is their ability to build their formats and value proposition on an

understanding of traditional consumer demand drivers as well as emerging


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ones. How that is actualized is of great interest to all retailers competing in

the Chinese marketplace, and it is one of the focal points of our analysis.

A key point is that the top 100 chain retailers in 2009 actually

underperformed the sector average. Their sales totaled 1.36 trillion RMB

(USD 199 billion), up 13.5 percent annually, also underperforming the Top

100 increase in 2008 of 18.4%. The top 100 accounted for 10.8 percent of

total domestic retail sales. Within that group, the Top 10 chain retailers

demonstrated an aggregate sales growth of 10.1 percent, even lower than

the 13.5 percent total sales growth of the Top 100 chain retailers.

The fact that sales by the Top 100 chain retailers accounted for a reduced

percentage of total sales of consumer goods, combined with the fact that the

Top 10 accounted for a shrinking proportion of sales in the Top 100, seems at

first mystifying in light of the fact that consumer confidence is increasing in

China, and the Chinese customer has ever more disposable income to use

towards the purchase of consumer goods. Retailers should be having

increasing success as opposed to diminishing sales.

We postulate that this apparently contradictory trend may be reflective of

several competing phenomena. First, it may reflect that the retail sector

became more diverse in 2009, with market share less concentrated within a

small group of key players. However, because M&A activities are noticeably

increasing, we argue that retailing among chains/franchise operators is in fact

becoming more concentrated, as national/regional players work to optimize,

strategize, and strengthen, often by absorbing local operators. Simultaneously,

retailing on the whole is becoming more diversified as non-branded retail

channels increase in number, size, and market share. So the trend may

actually reflect intensifying competition for chain operators from China's

alternative retail formats we described above.

2009 also saw changes in the Top 10 rankings, but they did not represent

major shifts. For example, Suning Appliance Group maintained consistent

growth, surpassing Gome Electrical Appliances Co., Ltd. in sales to grab the

number one spot.


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2009 sales of all foreign retailers in the Top 100 increased by 26.3 billion RMB

(3.85 billion USD) compared to 2008, reaching 307 billion RMB (44.96 billion

USD) in total. This represents an increase in sales of 9.4 percent in 2009

compared to 2008.

Among the retailers in the Top 100, nationwide and single province/city

retailers took the lead in controlling the retail market, contributing the most to

total sales. In terms of average sales volume, nationwide retailers led all

other types of retailers, while average sales volume of inter-regional retailers

was about equal to that of regional (inter-provincial/city) retailers. Revenue

growth rates for single province/city retailers were the highest among all

retailers. Regarding the performance of various retail sectors in 2009, multi-

sector retailing grew strongly, while convenience stores saw diminished

results. The growth rates of electronics/home appliances stores and

supermarkets decreased even more significantly. Drug stores, meanwhile,

saw slightly increased rates of growth.

In response to the financial crisis, retailers developed many strategies to

minimize the impact of the economic downturn. For instance, many retailers

of agricultural products increased profitability by purchasing products directly

from farmers' cooperatives. Others launched private brands as a means of

opening up new areas for growth; many also focused on store upgrades,

including renovations, improved layouts and branch restructuring. In order to

manage and reduce costs, retailers took a number of measures, including

improving supply chains, establishing logistics and distribution centers,

optimizing human resources structures, and improving budget controls to

minimize unnecessary expenditures.

2.2 Main Trends in Retailing in China

Looking forward, Chinese retailers will largely focus development efforts on

developing and expanding multi-channel operations. For instance, after years


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of modest results, recently the explosive growth and huge potential of online

retailing has made this sector increasingly important for retailers. Transaction

settlement options and delivery options are maturing, and other impediments

to on-line retailing are being addressed. As a result, a steadily growing

number of traditional retailers have started to engage in eBusiness, including

developing online retail channels and otherwise expanding internet-based

operations, although it is important to note that many approach this new

endeavor cautiously and conservatively. The structure on China's on-line

market also reflects unique characteristics. Multi-channel retailers often use

online channels as the initial interface through which customers purchase

goods, with physical stores serving as delivery terminals; the companies

continue to use their own logistics networks for delivery to warehouses, while

outsourcing to logistics service providers for distribution to customers. In

terms of the integration of supply chain management, information

management systems and other back office structures, multi-channel retailers

normally use a gradual process to integrate online and offline retail channels.

Online retailing is only one of a number of new and varied channels that will

grow as a focus for retailers in the future who are looking to tap into new,

non-traditional, or previously inaccessible consumer groups.

In 2009, organic growth was augmented by mergers and acquisitions (M&A)

which were particularly significant in two well-established segments of China's

retail industry: supermarkets and department stores. In China, M&A activities

are traditionally initiated by national chain leaders who merge with or acquire

regional chain retailers, or by regional chain leaders who merge with or

acquire local retailers within the same industry or sector. With this in mind,

and because the retail industry is a classical example of economies of scale

and economies of scope, we see increasing market concentration for China's

chain/franchise retail market to be inevitable in the next few years; as the

diffusion of revenue growth from the Top 10 to the Top 100 to retailers


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outside the top 100 indicates, China's retail sector is currently not as

concentrated as retail markets in the developed world.

In terms of geography, more deals are taking place in developing regions as

M&A competition increases in velocity and intensity. Because the growth

potential of retailers in second and third tier cities is greater than of those in

large cities, where markets are mature and often undergoing price wars,

retailers anticipate larger profit margins in developing markets. These markets

will likely become a focus of M&A activities in China's retail industry in the

future.

Looking ahead, we believe cost management will remain a top priority.

Supply chain management and optimization will be a critical factor for

retailers' growth in the future. To keep pace with network expansion, retailers

need to increase their investment in logistics infrastructure in order to

establish an appropriately-sized logistics network. Retailers normally manage

products via product categorization to simplify things logistically. Ideally,

direct supplying (i.e. suppliers deliver to retailer stores independently or via

their distributors) is frequently employed to distribute goods.

In addition, retailers continue to improve their relationships with suppliers.

Cooperation with suppliers and manufacturers was strengthened by

innovative win-win processes. For example, a supermarket chain might

cooperate with a farmer for mutually beneficial results; the supermarket

receives fresher products at a lower price, and the farmer receives help in

procuring financing, through support of the retailer's stronger credit position.

On the marketing front, manufacturers cooperate with retailers to increase

the effectiveness of sales promotions and attract more customers. In terms

of the value chain, retailers can create win-win situations with real estate

developers through inter-industry cooperation. Strategic alliances that add


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efficiency, reliability, and stability to the entire value network on which

retailers depend are becoming a strong feature of China's maturing retail

sector.

Note:

Tier 1 city: Beijing, Shanghai and Guangzhou

Tier 2 city: capital cities for all provinces

Tier 3 city: prefecture-level city

Tier 4 city: county-level city

Tier 5 city: villages and towns


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3. Overview of the Chinese Retail Industry

3.1 The Global Retail Industry Recovers from Recession

2009 was the worst year for economic performance in recent memory, but

the year ended on a more positive note, with economists anticipating an all

but certain recovery and only differing on its speed and strength. Most of the

world's major economies are now growing; some even began to rebound

sooner than many analysts expected. The global crisis was notable for the

near synchronicity of the downturn among markets; likewise, the recovery

also appears to be simultaneous in many places, an unusual phenomenon

when compared to previous recessions. This concurrent rebound is

strengthening global demand in a self-perpetuating cycle, especially as it

boosts trade flows and export-oriented production. Among the major

economies, China and India are leading the growth trend, bringing hope to

other countries that continue to struggle.

Figure 2. GDP Growth Rates of the World's Key Economies (%), 2007-2009

Source：IMF April 2010 Report

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US UK EURO Zone

Japan Brazil Russia India China2007

2008

2009


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Figure 3. U.S. GDP vs. Retail Sales Growth, Year-on-Year (%), 2007-2009

Source: STAT-USA, OECD

The recovering economy has put the global retail industry back on a growth

track. As the most important market in the retail industry, the U.S. has

demonstrated an increasingly healthy economy since the second half of 2009;

both GDP and retail sales showed reduced quarter-on-quarter declines, finally

exhibiting positive growth at the end of 2009. Consumption expenditure was

also on the rise.

The global retail market started to recover gradually in the third quarter of

2009. At that time, out of 24 member countries of the Organization of

Economic Cooperation and Development (OECD), more than 60 percent

showed reduced quarter-on-quarter decline in growth of retail sales.

Furthermore, certain European countries like Poland, Sweden, Austria and the

U.K. all demonstrated quarter-on-quarter growth. In the fourth quarter of

2009, more than 60 percent of the 21 main OECD member countries showed

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quarter-on-quarter growth, and most of them exhibited trends that pointed to

recovery.

Figure 4. 4th Quarter Retail Sales Growth of 21 Main OECD Countries (%), 2009 vs. 2008

Source：OECD

-6 -4 -2 0 2 4 6 8

US

UK

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Portugal

Poland

Norway

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Australia


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3.2 China Leads the Global Retail Rebound

With highly effective government stimulus action in place, China's economy

was the first to rebound from the economic downturn among the major

economies in the world. The official GDP growth rate reached 8.7 percent,

surpassing the country's growth target of 8 percent. China's retail industry in

particular demonstrated remarkable topline growth but also suffered serious

margin compression.

Overall, the Top 100 did see growth in 2009. The best performers saw

remarkable growth. But, a majority of the top 10 saw top line growth fall

(some very significantly). Profits were down across the sector, most likely a

result of intensifying competition. We hold that the reason top 10 leaders saw

growth fall so dramatically, while overall the retail sector maintained stability,

was that these leaders were the companies poised for expansion, ready to

deploy resources and develop, at the time the crisis hit. Ready to take risks,

they seemingly hit a brick wall when the financial downturn struck. Also, as

competition rises, leaders are those that other companies mimic when

deploying new business models, products, brands, and ad campaigns. There

are emerging many new players that offer similar or identical shopping

experiences, brands, goods, services, to market leaders, but have low

overhead. Although these newcomers might not be viable players in the long

term, and may go bankrupt or otherwise exit the marketplace, they can still

wreak significant damage on the market and on competitors in the short

term.

An additional factor contributing to the Top 100 chain retailers accounting for a reduced percentage of total sales of consumer goods is the growing consumer demand in third and fourth tier cities, where Top 100 chain retailers have a weaker presence. Their reduced presence may be attributed to the the logistical difficulties involved in supplying these areas, as many suppliers of products and logistical services are segmented. Further contributing is the extremely rapid growth of some markets: retailers have not had a chance yet to solidify market presence in these municipalities. As well, standardized business models are often difficult to apply uniformly in third and fourth tier cities because customer demand differs widely across regions. Poor


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information systems and a general lacking of retailing talent in more rural or remote areas is a further factor.

Although Chinese consumer confidence fell dramatically as a result of the

global financial crisis, it was boosted again by the recovering global economy,

as well as by central and local government policies designed to stimulate

domestic demand, maintain growth, and restructure certain industries. In the

first quarter of 2009, Chinese consumer confidence showed that it was

beginning to rebound, exhibiting a significant increase since the end of 2008.

The combination of an improving macroeconomic outlook and general

optimism about future employment conditions and household income was

reflected in the steadily increasing Chinese consumer confidence index

throughout 2009, which gradually trended positive over that time.

Figure 5. China Consumer Confidence Index，2007-2009

Source：National Bureau of Statistics, China

The "Study of Consumer Confidence, Fourth Quarter 2009" conducted by the

National Bureau of Statistics of China and The Nielsen Company breaks down

the main uses of disposable income nationally. Survey respondents could

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choose as many answers as applicable, and as such, a majority of consumers

agreed that disposable income was used towards shopping (62 percent of

respondents) and then for savings (54 percent of respondents). For

consumers with increased household expenditures, the main products

purchased for consumption included food and groceries, communications

products and services, water, electricity and heat, and clothing. In addition,

spending on vacations, household products, dining out and consumer

electronics accounted for an important portion of increased consumer

expenditure. In the next 12 months, consumers predicted that they would be

most willing to spend towards the purchase of digital products and home

appliances, which accounted for 28 percent and 22 percent of forecasted

spending, respectively. Consumers also exhibited high willingness to spend on

furniture, real estate and automobiles, at 14 percent, 13 percent and 13

percent of spending, respectively. The rebound of consumer confidence was

also reflected in the quarter-on-quarter increase of retail sales of consumer

goods in the first quarter of 2009, which were also up 15.5 percent from 2008

to 2009. With the economy getting back on track and with effective policies in

place to stimulate domestic demand, the total consumption of retail goods will

continue to increase.


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Figure 6. China's GDP vs. Total Retail Sales of Consumer Goods, Year-on-Year (%), 2007-2009

Source：National Bureau of Statistics, China

Looking at the three figures above, it is important to recall that total retail

sales of consumer goods is a broad category also encompassing construction

materials, as discussed above. As GDP and consumer confidence rose in early

2009, retail sales also rose; however, retail sales as a category includes much

more than individual purchases of consumer goods and this should be kept in

mind.

4. The Top 100 Retail Chains, 2009

Growth rates of both sales volume and store number of the Top 100 chain

retailers in 2009 hovered near 13 percent, a figure that represents the lowest

growth rate ever recorded by the CCFA (China Chain Store and Franchise

Association). After having been so severely impacted by the economic

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Total retail sales of consumer goods GDP


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downturn, retailers in the Top 100 for 2009 became more cautious about

opening new stores, which weakened their revenue growth momentum. Most

did still see growth (except for the notable exceptions in the Top 10,

discussed above) but it was slower growth than in many previous years.

Several major trends will be discussed in detail below.

• Retail industry players diversify overall while franchise/chain operators

become more concentrated

• Foreign players continue to penetrate the Chinese market

• Geographical focus of Top 100 Retailers affects performance

• Sector profiles reveal who is weak and who is strong

o Multi-sector retailers maintain dominant market position

o Electronics retailers maintain good performance

o Convenience stores, home appliances retailers, and

supermarkets struggle

o Drug store growth rates rise

• The fastest growing retailers are diversified, multi-sector players


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2009 Rankings of Top 100 Chinese Retail Chains

Rank Company Sales（RMB

10k） Growth

(%) Stores Growth (%)

Net Profit Rate (%)

Sector Region

1 Suning Appliance Group 11,700,267 14.3 941 15.9 4.8 Electronics specialty store

More than 200 cities in all regions

2 Gome Electrical Appliances Co., Ltd 10,680,165 2.1 1170 -14.1 2.6 Electronics specialty

store More than 200 cities

in all regions

Of which：Sanlian

Commerce CO.,LTD 137,996 -27.0 5 -37.5

Electronics specialty store Shandong

3 Bailian Group Co.,Ltd 9,791,537 3.8 6153 -4.1 N/A

Supermarket、Department store、Convenience store、Home improvement

store

East China

Of which: Lianhua Supermarket Co.,

Ltd.(including Hualian） 6,716,978 3.2 5599 -4.7 N/A

Supermarket、Drug store

East China

Hualian GMS Shopping

Center Co., Ltd 392,618 -2.9 22 4.8 1.2 Department store East China

Homemart Decoration

Materials Co., Ltd 210,000 -17.0 14 -44.0 N/A Home improvement store

Shanghai、Wuhan、Hefei、Nanjing、

Ningbo、Guangzhou

4 Dashang Group Co., Ltd. 7,053,590 12.8 160 6.7 N/A

Supermarket、Department store、Electronics specialty

store、Home improvement store

Northeast, north and west

5 Vanguard Co., Ltd 6,800,000 6.6 2926 8.5 N/A Supermarket 25 provinces and cities in China

Of which: Suguo

Supermarket Co., Ltd. 3,323,600 9.5 1852 2.8 1.0 Supermarket、

Convenience store

Jiangsu、Anhui、Shandong、Henan、

Hebei

6 RT-MART International Co.,Ltd 4,043,169 20.5 121 19.8 N/A Supermarket 21 provinces and

cities in China

7 Carrefour (China)

Management Consulting Services Limited

3,660,000 8.2 156 16.4 N/A Supermarket 21 provinces and cities in China

8 Anhui Huishang Group Co,Ltd 3,437,883 13.5 2884 15.5

Supermarket、Department store、Convenience store、Electronics specialty

store

Anhui

Of which: Anhui

Shangzhidu Co,Ltd 726,413 14.6 928 41.9


store

Anhui

Anhui Huishang

Nongjiafu Co, Ltd 184,490 4.9 1918 6.2 1.2 Supermarket Anhui

9 Wal-Mart (China) Investment Co.,Ltd 3,400,000 22.2 175 45.8 N/A Supermarket 22 provinces and

cities in all regions

10 Wumart Holding Group Co., Ltd 3,270,000 6.7 2333 16.1 N/A


store

Beijing、Tianjin、Shanghai、Hangzhou、Suzhou、Shaoxing、Bengbu、Yinchuan


21


10k） Growth


Net Profit Rate (%)

Sector Region

Of which: Beijing

MerryMart Chain Ltd. 436,596 6.6 35 12.9 6.4 Supermarket Beijing

Zhejiang Gongxiao Supermarket Co,Ltd 220,207 10.1 2000 4.2 6.0

Supermarket、Convenience store

Zhejiang

11 Chongqing General

Trading (Group) Co., Ltd

3,004,698 14.4 313 6.5 N/A


store

Chongqing、Sichuan

Of which：Chongqing General New Century

Department Store 1,380,065 32.1 115 8.5 Department store Chongqing

Chongqing Department

Store Co., Ltd 834,285 13.0 123 5.1 2.2


store

Chongqing、Sichuan、Guizhou

12 New Cooperation Joint-stock trade chain CO.,

Ltd. 3,000,000 76.5 88653 24.8 2.0

Supermarket、Donvenience store、

Drug store

More than 16 provinces and cities in

all regions

Of which：Jiangsu New Cooperation

Changkelong Chain Supermarket Co Ltd

172,115 12.8 816 22.5 1.8 Supermarket、

Donvenience store、Drug store

Jiangsu

13 Yum! Brands Inc., China Division 2,880,000 9.9 3200 18.5 Food and beverage All the regions

14 NGS Supermarket Group 2,673,800 0.2 3331 0.0 N/A


Shanghai、Jiangsu、zZhejiang、Anhui、

Jiangxi

15 Best Buy China Co.,Ltd 2,570,000 262 Electronics specialty

store Shanghai、Suzhou

Of which: Five Star Appliance Co., Ltd. 2,470,000 7.4 256 0.0 4.3 Electronics specialty

store

Jiangsu、Anhui、Zhejiang、Shandong、Henan、Sichuan、

Yunnan

16 Shandong Commercial Group Cooperation（

Yinzuo Group） 2,564,116 37.0 206 25.6 N/A



Shandong、Hebei、Henan

17 Hefei Department Store Group CO., Ltd. 2,090,000 7.7 136 8.8 5.1


store

Anhui

Of which: Hefei Baida Hejiafu Chained

Supermarket Inc 202,560 12.4 102 15.9 N/A Supermarket Anhui

18 A Best Supermarket Co.,Ltd 1,723,600 -2.0 109 3.8 1.5 Supermarket

Guangdong、Hunna、Hubei、Shandong、Sichuan、Shannxi、Jiangsu、Zhejiang、Tianjin、Hebei

19 Wuhan Zhongbai Group Co., Ltd. 1,685,519 18.4 674 7.0 N/A


store

Hubei、Chongqing

Of which：Wuhan

Zhongbai Chain Store-1,050,606 25.4 139 13.9 N/A Supermarket Hubei


22


10k） Growth


Net Profit Rate (%)

Sector Region

Supermarket Co.,Ltd

Wuhan Zhongbai Bianming Chain

Supermarket Co.,Ltd 272,760 8.1 500 4.6 Supermarket Hubei

20 Trust-Mart Management

Consulting Services (Shanghai) Co Ltd

1,650,000 0.6 104 0.0 Supermarket More than 16

provinces and cities in all regions

21 Hisap High Technology Corporation 1,593,775 -11.2 170 -11.5 2.2 Electronics specialty

store

Beijing、Shanghai、Jiangsu、Zhejiang、

Anhui

22 Wenfeng Great World Chain Development

Corporation 1,566,457 11.1 978 7.2 N/A



Jiangsu、Shanghai

23 Liqun Group Co.,Ltd 1,516,622 9.4 890 3.9 2.3


store

Shandong

24 New World Department Store China.Co, Ltd 1,500,000 1.4 34 3.0 Department store

North China、East China、Southwest

China、Central China

25 Wuhan Wushang Group Co., Ltd 1,352,248 17.6 75 27.1 3.0

Supermarket、Department store

Hubei

Of which：WuShang

BulkSale Chain Co.,LTD 730,790 23.8 69 30.2 N/A Supermarket Hubei

26 Changchun Ouya (Group) Co.,Ltd 1,347,068 11.0 30 66.7 2.9

Supermarket、Department store、Convenience store

Changchun,Jilin,Siping,Tonghua,Baicheng,Liaoyuan,Shenyang,Ji

nan

27 TESCO 1,330,000 15.7 79 29.5 N/A Supermarket 36 provinces and cities in all regions

28 Beijing Wangfujing Department Store CO.,Ltd.(GROUP)

1,327,000 10.6 19 18.8 N/A Department store Beijing,Sichuan

29 Shanghai Lotus

Supermarket Chain Store Co., Ltd

1,300,000 0.0 77 1.3 Supermarket 30 provinces and cities in all regions

30 Parkson Retail Group Ltd. 1,237,000 15.7 44 10.0 department store 26 provinces and


31 Metro Jinjiang Cash & Carry Co.,Ltd 1,202,277 -4.9 42 10.5 0.7 Supermarket

Zhejiang、Shanghai、Beijing、Tianjin

32 ShijiaZhuang Beiguo Renbai Group corp 1,167,541 37.3 80 14.3 0.7


store

Hebei

33 Rainbow Department Store Co.,Ltd 1,161,990 22.7 37 15.6 N/A department store

Guangdong、Hunan、Jiangxi、Fujian、Jiangsu、Zhejiang、

Beijing

34 Yonghui Group Co.,Ltd 1,021,800 45.6 268 30.7 3.0 Supermarket、

Convenience store Fujian、Chongqing、

Beijing

35 Shandong JiaJiaYue Department Store

Group Co, Ltd 1,012,021 18.6 489 7.2 2.1


Shandong


23


10k） Growth


Net Profit Rate (%)

Sector Region

36 Beijing Jingkelong Company Limited 1,006,410 1.9 247 1.6 1.9


Beijing,Langfang

37 Renrenle Commercial Group CO.,LTD. 1,003,779 13.8 90 25.0 2.6 Supermarket

Guangdong、Sichuan、Shannxi、

Chongqing、Tianjin、Guangxi、Fujian、

Hunan

38 Shandong Xinxing Group Co.,Ltd 987,787 17.6 532 13.2 4.5


store、Home improvement store、

Drug store

Shandong

39 Auchan (China) Investment Co.,Ltd 986,000 21.0 35 12.9 Supermarket

Shanghai、Beijing、Jiangsu、Zhejiang、

Anhui、Sichuan

40 Shandong Wuifang Department Store

Group Co ,Ltd 952,521 14.0 318 0.3 0.6



Weifang、Qingdao、Taian、Yantai、

Binzhou

41 Golden Eagle Retail Group Limited 936,000 33.9 17 30.8 11.2 department store

Jiangsu、Shanghai、Shannxi、Yunnan

42 Jiangsu Times Supermarket Co, Ltd 929,590 2.8 68 1.5 N/A Supermarket

Jiangsu、Zhejiang、Shandong、Anhui、

Shanghai

43 Wuhan Zhongshang Group Co , Ltd 880,687 14.2 42 2.4 1.4

Supermarket、department store、convenience store

Hubei

Of which：Wuhan Zhongshang Group Co ,

Ltd Discount Chain 424,249 3.7 32 3.2 N/A Supermarket Hubei

44 AEON China 861,077 11.7 21 16.7 N/A Supermarket Beijing、Shandong、

Guangdong

45 Intime Department Store(Group) Co, Ltd 758,659 34.9 22 46.7 Department store Zhejiang

46 Zhengzhou Dennis

Department Store Co Ltd

710,000 16.2 50 8.7 Department store Henan

47 Fujian NewHuaDu Supercenter Co, Ltd 694,678 29.2 75 44.2 2.2


Fujian

48 Beijing New Yansha Holding (Group) Co.,Ltd 690,988 12.4 10 0.0 N/A Department store

Beijing、HARBIN 、Taiyuan

49 Beijing D Phone Co. Ltd 687,255 4.0 1310 2.0 3.5 Electronics specialty store

East China、Central China、South China、Sichuan、Beijing

50 Mc Donald's China 650,000 6.6 1100 10.0 Food and Beverage More than 25

provinces and cities in all regions

51 Guangzhou Grandbuy Co, Ltd 643,690 9.7 19 58.3 N/A

Department store、Electronics specialty

store Guangdong

52 Liaonoing Xinglong Happy Family Business 639,159 16.6 15 36.4 N/A


Liaoning


24


10k） Growth


Net Profit Rate (%)

Sector Region

Group

53 Inner Mongolia Little Sheep Catering Chain 621,700 2.1 431 9.7 Food and beverage

25 provinces and cities in all regions, 6 countries overseas

54 Bu Bu Gao Busincss Chain Store Co.,Ltd 572,400 10.0 123 11.8 Supermarket Hunan、Jiangxi

55 Hunan Friendship & Apollo Co.,Ltd 519,861 11.9 22 15.8 N/A


Hunan

Of which:Hunan Jiarunduo Supermarket

Co, Ltd 147,099 2.4 15 25.0 1.1 Supermarket Hunan

56 Chengdu Hongqi Chain Co.,Ltd 502,938 7.0 980 14.2 3.5 Supermarket Sichuan

57 Sanjiang Shopping Club Co.,ltd 496,362 10.4 127 19.8 N/A Supermarket Shanghai、Zhejiang

58 HNA Retail Business Holding Co.,Ltd 470,841 14.2 64 4.9 1.1


Shannxi、Gansu、Tianjin

59 Sichuan Huhui Business Group Co , Ltd 450,000 7.1 1200 50.0 1.0 Supermarket Sichuan

60 Nanjing Central Emporium.Co,Ltd 448,000 17.9 7 0.0 Department store Jiangsu

61 Park N Shop China (not including Hong Kong) 358,196 -9.5 39 -9.3 N/A Supermarket Guangdong、Sichuan

62 Chengdu Ito Yokado Co.,Ltd 351,380 21.9 3 0.0 6.7 Department store Sichuan, Chengdu

63 Emart Supermarket Co., Ltd. 351,000 9.7 20 11.1 Supermarket

Shanghai、Tianjin、Beijing、Wuxi、

Ningbo、Suzhou and Hangzhou

64 Oriental home Co., Ltd. 350,000 21.6 25 0.0 3.1 Home improvement store

Beijing、Shenyang、Chengdu

65 Qingdao Weekly Group Co, Ltd 328,135 6.5 828 -1.4 2.0


Qingdao、Weifang、Yantai

66 GuangZhou Friendship Group Co., Ltd. 320,000 6.7 4 0.0 Department store Guangzhou、Nanning

67 Beijing ShunYi Guotai Plaza 316,000 25.1 12 20.0 2.5 Department store Beijing

68 IKEA GROUP China 312,000 15.6 7 16.7 Home improvement

store

Beijing、Shanghai、Guangzhou、

Shenzhen、Chengdu、Nanjing

69 Beijing Cuiwei Plaza Co. Ltd 311,214 11.7 3 0.0 3.0 Department store Beijing

70 Shenzhen Nepstar Chain Drugstore 310,000 10.7 2867 5.8 N/A Drug store

13 provinces and 3 cities including

Guangdong、Fujian、Zhejiang、Jiangsu

71 Shanxi Meet All United Supermarket Co Ltd 306,800 14.2 27 28.6 1.6 Supermarket

Shanxi、Shandong、Hebei、Inner

Mongolia

72 Jiabei Logistic Co. Ltd 305,000 22.0 314 0.3 2.5 Supermarket、

Convenience store Zhejiang、Jiangxi

73 Hebei Bao-Long Wharf Business Development

Co., Ltd 302,000 14.8 14 7.7 3.1 Supermarket Hebei、Shandong

74 Jiangxi Hongkelon Touzi Co.,Ltd 300,000 18.1 26 23.8 2.0


Jiangxi


25


10k） Growth


Net Profit Rate (%)

Sector Region

75 Beijing Xidan Youyi Market Company 294,137 5.9 222 16.2 1.9 Department store Beijing

76 Hunan Jiahui Department Store Inc 288,000 13.1 200 4.2 1.8


Hunan

77 Handan Yangguang Department Store

Group 272,404 23.9 60 130.8 1.2


Hebei

78 Ito Yokado 271,000 -4.9 9 12.5 N/A Supermarket Beijing

79 Hunan Laobaixing Drug Store Co., Ltd 268,000 5.1 350 66.7 2.5 Drug store

Hunan、Hubei、Henan、Hebei、

Guangdong、Guangxi、Beijing、Tianjin、Shandong、Shanghai、Jiangxi、Jiangsu、Zhejiang、Shannxi

80 Beijing Chaoshifa Supermarket Co., Ltd 264,381 14.5 80 21.2 1.2 Supermarket

Beijing、Chengde、Xuanhua、Zhangjiakou

81

Shandong Quanfuyuan Commerce (Group)

Co.,Ltd ( Shouguang Department Store)

261,808 36.3 72 16.1 2.6



Shandong

82 Home Inns & Hotels Management Inc. 260,064 39.0 616 30.8 Express Hotel More than 100 cities

in all regions

83 Zhejiang Renben Supermarket Co. Ltd 258,426 13.2 599 54.8 1.1


Zhejiang

84 Shenzhen Shirble Department Store 250,085 8.1 11 22.2 N/A Department store Shenzhen

85 Zhejiang Hualian Shopping Center Co. Ltd 248,000 15.9 221 -5.2 1.0

Supermarket、Department store、Convenience store、

Drug store

Zhejiang

86 Shanxi Taiyuan Tangjiu Supermarket Co. Ltd 238,673 5.6 1006 10.7 1.2 Convenience store Shanxi

87 Changsha Tongcheng Holdings Co.,Ltd 230,000 27.0 56 21.7


store

Hunan

88 Telephone World Digital Chain Group Co.,Ltd 225,000 1.6 283 14.1 1.0 Electronics specialty

store Zhejiang、Shanghai

、Anhui

89 China Quanjude (Group) Co. Ltd 219,627 8.6 85 6.3 Food and Beverage 7 cities in all regions

90 Xiongfeng Group Co.,Ltd 200,775 4.5 115 8.5 0.6


store

Zhejiang、Anhui、Chongqing、Fujian

91 Ajisen (China) Holding Limited 199,409 35.7 380 35.7 Food and Beverage 23 provinces and


92 Chongqing Peace Drugstore Co. Ltd 198,000 15.1 2460 0.8 0.5 Drug store

Chongqing、Sichuan、Guizhou、

Guangdong、Hubei

93 Fuyang Hualian Supermarket Co. Ltd 192,660 9.5 555 17.8 2.5

Supermarket、Department store、 Anhui


26


10k） Growth


Net Profit Rate (%)

Sector Region

Convenience store

94 Guangxi Nancheng

Department Store Joint-Stock Co.,Ltd

191,250 28.5 17 112.5 5.3 Supermarket Guangxi、Nanning、

Guilin

95 Shanghai Hsdrug Pharmacy Co.,Ltd 190,362 34.9 811 47.2 N/A Drug store

Shanghai、Guiyang、Huangshan、Ningbo、Nantong、Jiaxing、

Kunshan、Suzhou

96 Chengshang Group Co.,Ltd 172,224 20.8 11 22.2


Chengdu

97 Shenzhen Baijiahua Stores Holdings Limited 171,595 14.8 18 20.0 2.6


Guangdong、Guangxi

98 Harbin Zhongyanhong Group Co., Ltd 163,833 9.0 183 24.5 2.3


Harbin、Daqing

99 Jinan Hualian Supermarket Co.,Ltd 161,181 61.1 15 25.0 1.8


Shandong

100

Home Depot Investment

Management (Shanghai) Co, Ltd

160,000 4.6 12 0.0 Home improvement

store

Beijing、Tianjin、Shenyang、Qingdao、Xi‘an、Zhenzhou

Source：CCFA

4.1 Retail Industry Players Diversify Overall, while

Chain/Franchise Retailers Become More Concentrated

In 2009, sales of the Top 100 chain retailers grew at the reduced pace of 13.5

percent, compared to 18.4 percent in 2008, but still reached 1.36 trillion RMB

(USD 199 billion). This accounted for 10.8 percent of the total nationwide

retail sales of consumer goods, down from 11.1 percent and 11.2 percent in

2008 and 2007, respectively. Furthermore, the percentage that the combined

sales of the Top 10 retailers contributed to the total sales volume of the Top

100 fell from 48.3 percent in 2008 to 47 percent in 2009. Both the declining

influence of the Top 100 chain retailers in total sales of consumer goods and

the declining weight of the Top 10 in the Top 100 reflect that the total retail

sector is becoming less concentrated among a small number of players, as

non-branded retail channels gain increasing market share. The channel

diversity inherent in the Chinese market poses a challenge to both domestic


27

and foreign retail chains as they seek to increase their competitiveness in the

marketplace.

The Top 10 chain retailers demonstrated aggregate sales growth of 10.1

percent, even lower than the total sales growth of the Top 100 chain retailers

at 13.5 percent. In fact, only half of the Top 10 chain retailers maintained

two-digit growth rates. Besides Anhui Huishang Group Co., Ltd., all other nine

chain retailers experienced reduced growth rates, with Dashang Group Co.,

Ltd., Vanguard Co., Ltd. and RT-MART International Co., Ltd. showing

especially significant declines in growth. This was discussed above and is

most likely a result of increasing competition, with new players emerging that

damage market share for leading by promoting similar goods and business

models. It is also probably a lingering result of the downturn, as market

leaders struggle to recoup the losses sustained when they were blindsided at

a time of company growth by a rapid and sharp economic decline.

There were also changes in the Top 10 rankings. For example, Suning

Appliance Group maintained consistent growth, finally surpassing Gome

Electrical Appliances Co., Ltd. in sales for the first time to become the leading

retailer nationwide. Anhui Huishang Group Co., Ltd. also rose substantially to

become the eighth largest in sales. However, Vanguard Co., Ltd. and

Carrefour both moved down one spot from last year, and Wumart Holding

Group Co., Ltd. dropped two places, to tenth. NGS Supermarket Group fell

from the Top 10 list and was ranked the 14th.


28

Top 10 Retailers, 2009

Rank Company Main Sector Sales

（100M） Growth（％）

1 Suning Appliance Group Electronics specialty store 1,170 14.3

2 Gome Electrical Appliances Co., Ltd Electronics specialty store 1,068 2.1

3 Bailian Group Co.,Ltd Supermarket, Department store, Convenience store, Home improvement store

979 3.8

4 Dashang Group Co., Ltd.

Supermarket, Department store, Electronics specialty store, Home improvement store

705 12.8

5 Vanguard Co., Ltd Supermarket 680 6.6

6 RT-MART International Co.,Ltd Supermarket 404 20.5

7 Carrefour (China) Management Consulting Services Limited

Supermarket 366 8.2

8 Anhui Huishang Group Co,Ltd

Supermarket, Department store, Convenience store, Electronics specialty store

344 13.5

9 Wal-Mart (China) Investment Co.,Ltd Supermarket 340 22.2

10 Wumart Holding Group Co., Ltd

Supermarket, Department store, Convenience store, Electronics specialty store

327 6.7

Total of Top 10 6,384 10.1 Total of Top 100 13,579 13.5 Top 10 Share of Top 100 total Sales 47.0%

Remark: According to data from the Top 100 retailers Source: CCFA

4.2 Foreign Companies Continue to Penetrate China's

Retail Sector

With China's retail industry being the first of its kind to rebound in 2009,

foreign retailers experienced growth in their Chinese businesses. In that year,

sales of all foreign retailers in the Top 100 increased by 26.3 billion RMB (3.85

billion USD) compared to 2008, reaching 307 billion RMB (44.96 billion USD)

in total. However, the percentage of combined sales of foreign retailers in the

Top 100 fell from 23.4 percent in 2008 to 22.6 percent in 2009. In terms of


29

retailer ownership, most of the foreign retailers in China were based in the

U.S., Hong Kong, Taiwan or Europe.

Figure 7. Breakdown of Share of Revenue in the Top 100, by Regional Base of Retailer, 2009

Source: CCFA

In terms of retail sectors, American retailers covered a wider range, whereas

Asian retailers, including Japanese, focused primarily on department stores

and supermarkets. American retailers led in sales and in scope of operations,

with average annual sales of 19.3 billion RMB (2.83 billion USD) far above the

average for the Top 100. Hong Kong-based, Taiwanese and European

retailers also ran operations larger in scope than the average, while other

Asian retailers generally operated on a smaller scale.

Average Sales Revenue in the Top 100, by Regional Base of Retailer, 2009

Country Number of Companies Number Sector Coverage Average Sales

（100M）

Top 100 100 - All Sectors 135.8

EURO 5 (1) Supermarket, Home improvement store 149.8

US 5 - Supermarket, Food & Beverage, Electronics 193.2

Euro5.5% US

7.1%

Asia3.0%

HK & TW6.8%

China Mainland

77.6%


30

Country Number of Companies Number Sector Coverage Average Sales

（100M）

specialty store, Home improvement store

Asia 6 1 Supermarket, Department Store 72.8

HK & TW 6 － Supermarket, Department Store 153.2

China Mainland 78 － All Sectors 133.0 Source: CCFA In 2009, sales of all foreign retailers in the Top 100 demonstrated a growth

rate of 9.4 percent compared to 2008, which was lower than the 14.4 percent

of domestic retailers in the Top 100. As for store number, foreign retailers

had an average increase of 13.6 percent since last year, quite similar to that

of domestic retailers (13.3 percent). Ito Yokado's entry into the Top 100 list

changed the lay of the land, as it has few branches but high sales volume per

store (over 1 billion RMB, or 146 million USD). Its entry drove sales of Asian

retailers up significantly, with sales growing at 27 percent, despite the

number of stores having increased only 9 percent. However, as Wal-mart and

Yum continued to expand their coverage in China, the number of American

retailers' stores increased by 16 percent over the previous year. On the other

hand, due to the fact that B&Q dropped from the Top 100 because its sales

were down significantly, both sales volumes and number of stores among

European retailers fell.


31

Figure 8. Growth in Sales vs. Store Number Among Top 100, by Regional Base of Retailer, (%), 2009

Source: CCFA

However, when discussing foreign versus domestic retail chains, we must

bear in mind the potentially different growth and development models used

by companies originally based in different national markets. Top line growth,

often higher in the case of Chinese companies, may not always be the best

measure of long-term profitability. Foreign retailers often employ more

measured development strategies, focusing on longer term goals. This is

evidenced by the facts that while average sales for foreign retailers in the Top

100 remain lower than those of Chinese retailers, increase in number of

stores among both foreign and domestic operators was roughly the same,

with foreign chains leading slightly. For the space they utilize, foreign retailers

often have higher yield per meter, and better margins, better profitability, and

healthier growth overall.

4.3 Geographical Focus of Top 100 Retailers Affects

Performance

Retailers have a variety of geographic strategies, i.e., aiming for nationwide,

inter-regional, regional or province/city-wide coverage; in 2009, nationwide

companies contributed the most in total sales volume. In terms of growth

rates, single province/city-wide retailers grew the fastest, followed by regional

-4

14

27

1014

-5

16

96

13

-10-505

1015202530

EURO US Asia HK & TW China Mainland

Sales GrowthStore No. Growth


32

(inter-province/city) retailers, both exceeding 20 percent growth. In

comparison, nationwide and inter-regional retailers were mainly focused on

expanding their number of stores; they increased total stores by 17 percent

and 20 percent respectively.

Based on an analysis of geographically-focused operations, a company can

expand the scale of their sales efforts mainly by increasing the depth of their

network coverage within a single area, or by increasing the breadth of their

network coverage over a number of areas. Using the sales of the Top 100 as

an example, nationwide retailers have a considerable competitive edge over

others. This reveals that coverage expansion and scale effects are still

important components of company expansion and sales growth.

Among retailers in the Top 100, nationwide and single province/city retailers

were the main players in the retail market, with a similar numbers of chains

(38 and 39 respectively) in 2009. In comparison, there were 12 regional

(inter-province/city) retailers and 11 inter-regional retailers.

Nationwide retailers led all other types of retailers in sales volumes, with an

average of 20.9 billion RMB (3.06 billion USD), followed by 14.6 billion RMB

(2.14 billion USD) for inter-regional retailers. Nonetheless, retailers confined

to one region could still achieve decent performance—the key seemed to be a

certain degree of market dominance or monopolization. On average, regional

(inter-province/city) retailers reached 14.2 billion RMB (2.08 billion USD) in

average sales. In terms of the number of stores, nationwide retailers naturally

had the most stores per company, with 3,025 stores on average, followed by

regional (inter-province/city) retailers with 817 stores per company on

average. These two types of companies expanded their geographical

coverage by continuous mergers and acquisitions of leading regional


33

supermarkets and local department chain stores, so their number of stores

continuously kept ahead of that of others.

Performance of Top 100 Companies by Geographical Coverage, 2009

Region No of Companies Average Sale（100M）

Average No of Stores

Top 100 100 136 1369

Single Province/city 39 60 211

Regional (inter- province/city) 12 142 817

Inter-regional 11 146 354

Nationwide 38 209 3025

Note: Single province/city: stores of the retailer are located within only one province/city Regional (inter-province/city): stores of the retailer are located in more than one single province/city, but within a geographic region or two adjacent provinces/cities Inter-regional: stores of the retailer are located in two or more geographic regions, excluding two adjacent provinces/cities Nationwide: stores of the retailer are located more than two geographic regions, and coverage is extensive

Source: CCFA

In 2009, within the geographical breakdown of Top 100 retailers, nationwide

companies had the highest contribution to total sales revenue at 58 percent,

followed by single province/city retailers, with 17 percent. Regional (inter-

province/city) and inter-regional retailers contributed 13 percent and 12

percent, respectively. This distribution was similar to the previous year, with a

slight increase for single province/city retailers and a small decline for

nationwide ones.

Based on these observations, nationwide and single province/city retailers are

the two most important segments in the retail market. Nationwide retailers

realize sales growth by expanding the breadth and scale of their operations


34

throughout the country (often through M&A), whereas single province/city

retailers focus on deepening their presence in their respective markets.

Specifically, single province/city retailers use their local resources and unique

market advantages to meet the particular needs of local consumers, in order

to achieve consistent growth in sales.

Figure 9. Contribution to Total Sales Revenue among Top 100 by Geographical Coverage, 2009

Source: CCFA

In 2009, single province/city retailers grew the fastest, with a year-on-year

growth rate of 29 percent, followed by regional (inter-province/city) ones with

23 percent. Significantly below them, nationwide and inter-regional retailers

showed similar growth rates of 9 percent and 8 percent, respectively.

In terms of the number of stores, nationwide retailers demonstrated the

fastest growth, up 20 percent in 2009, comparable to the rate in 2008. Inter-

regional retailers were second, with a growth rate of 17 percent. For

nationwide retailers, the growth was mainly driven by M&A of supermarkets

and department stores, as well as by the rapid expansion of hypermarket

Single Province/city

17%Regional (inter-province/city)

13%

Inter-regional12%

Nationwide58%


35

chain retailers including Suning Appliance Group, Wal-mart, Carrefour and RT

Mart. Single-province/city retailers also demonstrated a growth rate of 10

percent. However, regional (inter-province/city) retailers saw store numbers

shrink significantly, but this can be attributed to the fact that Luohe

Shuanghui Commerce Chain Store Co., Ltd., a convenience store chain with

over 4,000 stores, did not participate in the 2009 survey in this category.

Figure 10. Growth Rate of Revenue vs. Store Number Among the Top 100, by Geographical Coverage (％), 2009

Source: CCFA * Due to the fact that Luohe Shuanghui Commerce Chain Store Co., Ltd., a convenience store chain retailer with over 4,000 stores, did not participate in the 2009 survey in the Regional (inter-province/city) category, this category saw significant drop in number of stores.

4.4 Sector Profiles

The Top 100 chain retailers can be classified into seven sectors: supermarkets,

department stores, convenience stores, electronics/home appliances retailers,

retailers of home construction materials, pharmacy chains, and food retailers.

Companies with operations spanning a number of sectors were considered

multi-sector, while those with relatively insignificant sample sizes were

classified in the others category.

2923

9 810

-31

17 20

-40

-30

-20

-10

0

10

20

30

40

Single Province/city Regional (inter-province/city)

Inter-regional Nationwide

Sales GrowthNo of Store Growth


36

Figure 11. Sales Growth of the Top 100 (%), by Sector, 2009

Source : CCFA

Profile of the Top 100 by Sector, 2009

Number of Companies

Average Sales（10k）

Average Store number

Sales per store（10k）

Top 100 100 1,357,871 1369 992

Multi-sector 35 1,583,304 3169 500

Supermarket 28 1,224,555 275 4,453

Department Store 17 692,333 47 14,879

Convenience Store 1 238,673 1006 237

Electronics Store 6 4,576,077 689 6,638

Home improvement

store 3 274,000 15 18,682

Drug Store 4 241,591 1622 149

Food and beverage 5 914,147 1039 880

Others 1 260,064 616 422

Source: CCFA

13.9

-41.8

6.1

-22.2

21.3

6.6

-50 -40 -30 -20 -10 0 10 20 30

Drug Stores

Home Improvement Stores

Home Appliances Stores

Convenience Stores

Department Stores

Supermarkets


37

4.4.1 Multi-sector Retailers Retain Dominant Market Position

The largest sector in the Top 100 was the multi-sector group, consisting of 35

chain retailers. The average sales volume of retailers in this category reached

15.8 billion RMB (2.31 billion USD), second only to that of electronics/home

appliance retailers. Most of the multi-sector retailers were state-owned

enterprises, usually retailers that had been owned by local governments

before being merged into sizeable regional retail groups by overseeing

government entities.

To a certain extent, multi-sector retailers maintained the ability to offset

economic volatilities, as they could reach across industries and product lines

to meet the demands of varied consumer groups. Additionally, these retailers

enjoyed significant advantages from their cost structure and broad product

coverage, helping them to reduce risks and maintain steady growth.

There were 28 supermarket chains in the Top 100, which was the second

largest sector by number of companies after the multi-sector group. The

average annual sales of supermarket chains were 12.2 billion RMB (1.79

billion USD), with a year-on-year growth rate of over 10 percent. Among the

supermarket chains in the Top 100, although foreign retailers accounted for

only about half overall, among the top ten, seven were foreign. Most of the

foreign supermarkets had nation-wide coverage, whereas more than half of

the domestic supermarkets operated only regionally, contributing to the

success of these foreign chains.

4.4.2 Electronics Retailers Maintain Strong Performance

Although there were only 6 electronics/home appliances retailers in the Top

100, their average annual sales were 45.7 billion RMB (6.69 billion USD), far

above the volumes demonstrated in other sectors. The high aggregate

revenues in this niche were sustained by the government's stimulus plans and

subsidies promoting home appliance sales in rural areas and encouraging


38

replacement of used, inefficient appliances nationwide. Also, given the capital

intensity and high barriers to entry of electronic retailing competition is

intense but pricing less volatile than other retail categories. The average

sales per store stood at 66.38 million RMB (9.72 million USD), below the rate

for department stores and home building retailers. All 6 major home

appliances retailers were regional or domestic retailers, with the exception of

Best Buy, which rose to the third spot in this category after acquiring Jiangsu

Five Star Appliance Co., Ltd. All 6 retailers had already established nationwide

sales coverage at the time of the survey.

While Suning Appliance Group continued to expand its network, Gome

Electrical Appliances Co., Ltd. put an end to its expansion plans, closing

almost 200 stores, due to internal shake-ups within the firm. Nevertheless,

the total number of stores of home appliance retailers remained the same as

in 2008.

The government's stimulus plans provided important support to this category,

which would be very susceptible to the economic downturn and decline in

consumer confidence. But it did not drive exceptional growth rates. The

growth rate of total sales was only six percent, and other indicators such as

sales per store saw no apparent growth.

4.4.3 Convenience Stores, Supermarkets, and Home Appliance Retailers Struggle

Hit hard by the financial crisis, convenience stores suffered, taking Shanghai

Liangyou Jingban Convenience store out of the Top 100. Additionally, the

ranking of SanXi TangJiu Supermarket, another convenience store retailer in

the Top 100 in 2008 fell dramatically in the rankings. Together, the

performances of these two struggling companies reduced revenue growth

rates of convenience stores in Top 100 by about 20%.


39

In addition, the growth rates of both home appliance retailers and

supermarkets fell, with home improvement goods retailers down 3 percent

year-on-year. Supermarkets suffered an even more drastic slow down, with

growth rates decreasing from 18.9 percent in 2008 to 7 percent in 2009.

The dramatic negative sales growth of home improvement stores (-42%) in

2009 made evident in Figure 11 stands in stark contrast to the sharp increase

in retail sales of construction materials that began in early 2009, seen in

Figure 1.

It is important to note that B&Q fell from the Top 100 list between 2008 and 2009, and no retail chain in home improvement entered the Top 100 to take its place last year, resulting in a statistically glaring drop in the apparent growth of this sector. This elimination, however, does not tell the whole story.

The statistics still seem contradictory—how can there be an increasing

number of homes built but a decreasing number of homes decorated?—we

suggest that the market for home improvement goods is still struggling to

recover from the downturn while the property and construction sectors have

already pulled out of it. There exists a lag of at least two quarters between

when a property is constructed and when it is furbished (that is, if it is

immediately bought and decorated at all). Given this inherent lag time, the

construction market began to improve with rising GDP and consumer

confidence in early 2009, while the market for home improvement goods is

still waiting to catch up. It continues to suffer from the lingering effects of the

market downturn during the remainder of this "lag period" before purchased

homes are decorated. We will continue to see the home improvement sector

impacted by the prior downturn in the property market through the rest of

2009.

Additionally, we note that overall, the home improvement industry did grow last year, but retailed chains faced stiff competition from malls and other retailers. The growth of mall-style retailers far outstripped any gains chian retailers may have made. The number of home improvement supermarkets in TOP 100 retailers decreased from 4 to 3 with B&Q's departure and closure of more than 20 shops. The remaining three in the Top 100 realized only moderate growth.


40

Rank Company Revenue in 09 Growth rate 64 Oriental

home Co., Ltd. 3.5 Bil 21.6%

68 IKEA 3.1 Bil 15.6% 100 Home Depot

Investment Management (Shanghai) Co, Ltd

1.6 Bil 4.6%

Mall-style store, in contrast, grew at a much more rapid pace.

Company Revenue in 09 Growth rate Redstar (红星美凯龙) 31.3 Bil 18% Juran(居然之家) 10.5 Bil 31%

Home improvement products are very diverse in China. For instance, dozens of brands exist for a single product such as a sofa. Such diversity confuses consumers, making it hard for them to decide which brand they should buy. Thus, a mall format becomes a more attractive shopping experience to consumers because malls normally offer introduction by a salesperson from suppliers, which facilitate consumer's decision-making process. As a result, home improvement malls have grown more quickly than other retailing formats.

4.4.4 Drug Store Growth Rate Rise

With further market expansion, drug retailers performed well in 2009,

showing growth rates reaching 14 percent. This is a small increase compared

to that of 2008 (10.8%), but still comes in just behind growth rates of multi-

sector and department store retailers.


41

Figure 12. Growth Rate of Revenue vs Store Number in the Top 100, by Sector, (%), 2009

Source: CCFA

Significant changes in rankings were only observed for a small number of

retailers. Among the Top 10 multi-sector chain retailers, Anhui Huishang

Group Co., Ltd., rose to third place, while Wenfeng Great World Chain

Development Corporation dropped out of the Top 10. In the home appliance

sector, Best Buy moved up to the third place after acquiring Jiangsu Five Star

Appliance Co., Ltd. There were no significant changes in rankings in other

retail sectors besides changes due to member participation in the CCFA. For

instance, Luohe Shuanghui Commerce Chain Store Co., Ltd. was used in the

calculation of the Top 100 in 2008 but was omitted in 2009. Similarly, Ito

Yokado was not in the calculation for department stores in 2008, but was in

the tenth place this year.

Leading Companies by Sector

Top 10 Multi-sector Chain Companies, 2009

No Rank Company Sales （100M）

Country

1 3 Bailian Group 979 China

24

721

-22

6

-42

14 1320 14 10

-8

0

-60

1025

-70-60-50-40-30-20-10

0102030

Multi-sector Supermarket Department Store

Convenience Store

Electronics Store

Home improvement

store

Drug Store Food and beverage

Sales Growth Rate


42

2 4 ↑ Dashang Group Co., Ltd. 705 China 3 8 ↑ Anhui Huishang Group Co,Ltd 344 China 4 10 ↓ Wumart Holding Group Co., Ltd 327 China 5 11 Chongqing General Trading (Group) Co., Ltd 300 China 6 12 ↑ New Cooperation Joint-stock trade chain CO., Ltd. 300 China 7 14 ↓ NGS Supermarket Group 267 China 8 16 ↓ Shandong Commercial Group Cooperation（Yinzuo

Group） 256 China

9 17 ↓ Hefei Department Store Group CO., Ltd. 209 China 10 19 ↑ Wuhan Zhongbai Group Co., Ltd. 169 China

Source: CCFA

Top 10 Supermarkets, 2009


Country

1 5 ↓ Vanguard Co., Ltd 680 China

2 6 ↑ RT-MART International Co.,Ltd 404 Taiwan

3 7 ↓ Carrefour (China) Management Consulting Services Limited 366 France

4 9 Wal-Mart (China) Investment Co.,Ltd 340 US 5 18 ↓ A Best Supermarket Co.,Ltd 172 China

6 20 ↓ Trust-Mart Management Consulting Services (Shanghai) Co Ltd 165 Taiwan

7 27 ↓ TESCO(China） 133 UK 8 29 ↓ Shanghai Lotus Supermarket Chain Store Co., Ltd 130 Tailand 9 31 ↓ Metro Jinjiang Cash & Carry Co.,Ltd 120 Germany 10 37 ↓ Renrenle Commercial Group CO.,LTD. 100 China

Source：CCFA

Top 10 Convenience Stores, 2009


Country

1 86 ↓ Shanxi Taiyuan Tangjiu Supermarket Co. Ltd 24 China

2 Dongguan Sugar & Liquor Group Meiyijia Convenience Store Co.,Ltd 17 China

3 Shanghai Buddies Convenience Store Co.,Ltd 14 China

4 Shanghai Jieqiang Tobacco Sugar & Wine (Group)Co.,Ltd 12 China

5 Hebei Guoda Chain Commerce Co.,Ltd 9 China 6 Dongguan Sun-High Trades Co.,LTd 6 China 7 Shanxi Jinhu Convenience Chain Store Co.,Ltd 3 China 8 Gongguan Xiyangyang Convenience Store Co.,Ltd 2 China 9 Hangzhou Huachen Chain Store Co.,Ltd 2 China 10 Guizhou Baihui Store Co.,Ltd 1 China

Source：CCFA

Top 10 Department Stores, 2009


Country

1 24 ↓ New World department store China.Co, Ltd 150 China


43

2 28 Beijing Wangfujing Department Store CO.,Ltd.(GROUP) 133 China

3 30 Parkson Retail Group Ltd. 124 China 4 33 ↑ Rainbow Department Store Co.,Ltd 116 China 5 40 Shandong Wuifang Department Store Group Co ,Ltd 95 China 6 41 ↑ Golden Eagle Retail Group Limited 94 China 7 45 ↓ Intime department store(Group) Co, Ltd 76 China 8 48 ↑ Beijing New Yansha Holding (Group) Co.,Ltd 69 China 9 51 ↑ Guangzhou Grandbuy Co, Ltd 64 China 10 60 Nanjing Central Emporium.Co,Ltd 45 China

Source: CCFA

Top 10 Electronics/Home Appliance Stores, 2009


Country

1 1 ↑ Suning Appliance Group 1,170 China

2 2 ↓ Gome Electrical Appliances Co., Ltd 1,068 China 3 15 Best Buy China Co.,Ltd 257 China 4 21 ↓ Hisap High Technology Corporation 159 China 5 49 ↓ Beijing D Phone Co. Ltd 69 China 6 88 ↓ Telephone World Digital Chain Group Co.,Ltd 23 China 7 Sanlian Commerical Co.,Ltd 14 China 8 Huiying Household Appliances (Holdings) Co.,Ltd 12 China 9 N/A 10 N/A

Source：CCFA

Top 10 Drug Stores, 2009


Country

1 70 ↓ Shenzhen Nepstar Chain Drugstore 31 China

2 79 ↓ Hunan Laobaixing Drug Store Co., Ltd 27 China 3 92 Chongqing Peace Drugstore Co. Ltd 20 China 4 95 ↑ Shanghai Hsdrug Pharmacy Co.,Ltd 19 China 5 Yunnan Jianzhijia Health Drug Store Co.,Ltd 7 China 6 Beijing Jinxiang Drug Chain Store Co.,Ltd 7 China 7 Shanxi Wanmin Pharmacy Co.,Ltd 7 China 8 Guangdong Accordance Pharm Chain Store 7 China 9 Xian Yikang Drug Store Co.,Ltd 6 China 10 Sichuan Derentang Drug Store Co.,Ltd 6 China

Source: CCFA

4.5 The Fastest Growing Retailers

In 2009, the average growth rate of annual sales of the Top 100 chain

retailers stood at only 13 percent, while the fastest-growing 20 retailers

demonstrated an average growth rate of 37 percent. Among the fastest


44

growing 20 retailers, 10 were multi-sector retailers, 11 were regional, and 8

were multi-sector, regional retailers. These fastest growing 20 retailers in

2009 included only two supermarket chains compared to seven in 2008, while

department stores rose from 3 to 5.

In 2009, foreign retailers exhibited relatively weak performance when

compared to domestic companies; amongst the 20 fastest growing companies

there were only three foreign retailers, Wal-Mart, food retailer Ajisen, and

Chengdu Ito-Yokado. Wal-mart was able to achieve continuous and rapid

growth by employing an aggressive expansion strategy, building out new

stores in second and third tier cities. However, as discussed above, this

probably due to the fact that foreign companies have different growth models

than Chinese firms and prefer, slow steady growth over the long term to high

top-line growth now.

Meanwhile, hypermarket competitors like Auchan and RT-Mart were knocked

out of the top 20 list of the fastest growing retailers by virtue of the fact that

they moved sluggishly in a quickly-evolving marketplace in 2009.

Programs across the country to link farmers' cooperatives to large retailers

have brought direct benefits to domestic regional retailers. For instance, New

Cooperation Joint-stock Trade Chain and Yonghui Supermarket are two

representative examples who engaged in this practice, ranking first and the

third respectively in the Top 20 Fastest Growing Companies list, with sales

increasing 76.5% and 45.6%.

Top 20 Fastest Growing Companies, 2009

Rank of

Top 100

Company Country Sector Coverage

Geographical Coverage

Sales Growth（%）

12 New Cooperation Joint-stock China Multi-sector Nationwide 76.5


45

Rank of

Top 100

Company Country Sector Coverage

Geographical Coverage

Sales Growth（%）

Trade Chain CO., Ltd.

99 Jinan Hualian Supermarket Co.,Ltd China Multi-sector Single

province 61.1

34 Yonghui Group Co.,Ltd China Multi-sector Nationwide 45.6

82 Home Inns & Hotels Management Inc. China Other Nationwide 39

32 ShijiaZhuang Beiguo Renbai Group corp China Multi-sector Single

province 37.3

16 Shandong Commercial Group Cooperation（Yinzuo Group） China Multi-sector Regional 37

81 Shandong Quanfuyuan Commerce (Group) Co.,Ltd ( Shouguang Department Store)

China Multi-sector Single province 36.3

91 Ajisen (China) Holding Limited Hongkong Food and Beverage Nationwide 35.7

45 Intime department store(Group) Co, Ltd China Department

Store Single province 34.9

95 Shanghai Hsdrug Pharmacy Co.,Ltd China Drug Store Inter-

regional 34.9

41 Golden Eagle Retail Group Limited China Department

Store Nationwide 33.9

47 Fujian NewHuaDu Supercenter Co, Ltd China Multi-sector Single

province 29.2

94 Guangxi Nancheng Department Store Joint-Stock Co.,Ltd China Supermarket Regional 28.5

87 Changsha Tongcheng Holdings Co.,Ltd China Multi-sector Single

province 27

67 Beijing ShunYi Guotai Plaza China Department Store

Single province 25.1

77 Handan Yangguang Department Store Group China Multi-sector Single

province 23.9

33 Rainbow Department Store Co.,Ltd China Department

Store Nationwide 22.7

9 Wal-Mart (China) Investment Co.,Ltd US Supermarket Nationwide 22.2

72 Jiabei Logistic Co. Ltd China Multi-sector Regional 22

62 Chengdu Ito Yokado Co.,Ltd Japan Department Store

Single province 21.9

Average Growth Rate of Top 20 36.7

Source: CCFA


46

5. Retailers' Counter-Crisis Measures

In response to the recession, retailers developed many strategies to minimize

the impact of the economic downturn. The most common of these measures

include purchasing directly from producers, creating private brands, and

upgrading, renovating and restructuring stores.

5.1 Purchasing Directly from Producers

Retailers of agricultural products have increased profitability by purchasing

directly from farmers' cooperatives. Encouraged and promoted by the Ministry

of Commerce, this practice has been tested in many provinces and cities

across the country, enabling many retailers to streamline procurement of

produce. This in turn reduces costs, improves overall operational standards

and increases profit margins.

5.2 Private Brands

Launching private brands also opens up new areas for growth. Typically, the

profitability of private brands is between 13 and 18 percent, although it can

reach as much as 30 percent for groceries, a significant profit margin that is

not achievable by name brands. Both domestic and foreign retailers have

increased their investment in private brands. For example, TESCO launched

its first private label for a vegetable product line in Shanghai. As well, Beijing

Chaoshifa Supermarket Co., Ltd., a Beijing-based domestic retailer, showed a

faster growth rate as a result of the success of its private brands.

5.3 Store Upgrades, Renovations, and Restructuring

Retailers across sectors, most specifically supermarkets, department stores,

and home appliance retailers, have focused on upgrading their branches and

improving store layouts as a way to increase sales. For example, Gome

Electrical Appliances increased its revenue per store by closing nearly one


47

hundred stores and upgrading many other stores in 2009. Intime Department

Store and Beijing Chaoshifa Supermarket Co., Ltd., also did large scale store

renovations in 2009, for instance implementing energy-saving technologies to

reduce operating costs for retailers.

Additionally, retailers increasingly recognize the need to reduce costs and

improve their competitiveness within their industry. As such, many have taken

steps towards these goals by improving their supply chains, establishing

logistics and distribution centers, optimizing human resources structures, and

managing budgets prudently, reducing losses and minimizing unnecessary

expenditures.


48

6. Major Retail Trends

6.1 Integrating Channels to Promote Sales

According to iResearch, a provider of research, data products, and consulting

services to customers in the internet industry and traditional industries, the

turnover of China's eBusiness market reached 2.43 trillion RMB (356 billion

USD) in 2009 with a year-on-year growth rate of nearly 90 percent.

Specifically, B2C showed an increase of almost 200 percent. As a result of the

rapid development of online retailing, sales of leading B2C retailers increased

dramatically.

The explosive growth and huge market potential of online retail, combined

with the frenzied push by existing market leaders to acquire market share,

have helped traditional retailers begin to overcome their concerns about

online shopping diverting customers from using conventional retail channels.

As a result, more and more traditional retailers have begun to engage in

eBusiness, accelerating their investments in online retail channels and

operations. Many industry leaders of department stores, supermarkets and

home appliance chains recently launched or upgraded their online shopping

malls in order to remain competitive in the online shopping war. Statistics

showed that retailers across all sectors, with the exception of convenience

stores and pharmacy chains, demonstrated a strong presence in the online

marketplace. Of the top eight home appliances chain retailers, five had online

stores. For department chains and multi-sector chain retailers, more than half

of the top ten players offered online shopping options for consumers.

Similarly, in the supermarket sector, half of the top ten operated online stores.

When entering the online retail market, leading retailers set high growth

targets for the development of their digital shopping channels.

With the exception of a few retailers that offer a limited range of products or

product categories, most leading online retailers offer a wide, comprehensive


49

selection of products in their dot com stores, and are careful to include most

of the products sold in real stores.

Multi-channel retailers have had to update and amend their operating models

when developing online retail networks and integrating these into their

existing businesses. Most use online channels as the initial interface by which

customers purchase goods; physical stores then function as delivery terminals.

The companies normally continue to rely on their own logistics networks for

delivery to warehouses, while outsourcing last-mile distribution to customers

to logistics service providers. In other words, retailers with both physical and

online stores would offer in-store pick-up and door-to-door delivery service

options for product distribution. Door-to-door delivery services may include

delivery fees if the delivery location is outside of the complimentary delivery

zone. Delivery costs differ by delivery destination, purchase quantity, cost of

the product, and weight. Multi-channel retailers with this operating model

have made significant progress in coordinating the operations of their physical

and online stores, online and offline payments, and distribution and post-

purchase services. Furthermore, in addition to direct online marketing, multi-

channel retailers can use online channels as important means for product

display, publicity and data collection on consumer behavior.

Integration of supply chain management, information management systems

and other back office infrastructure must also be carefully coordinated by

multi-channel retailers to reinforce the integration of online and offline

shopping channels.

In the future, online shopping channels will continue to become increasingly

important with the rapid, continuous development of the online marketplace,

the growth of which is constantly prompting more retailers to participate. In

order to tap into online channels from conventional channels most effectively,

it will be particularly important to leverage physical stores to maximize the

logistical efficiency and achieve economies of scale, and to provide a unique


50

shopping experience to customers. Meanwhile, leading e-commerce-only

companies, having investing heavily in infrastructure development, have

strengthened their logistical and service capabilities, and are now focusing on

product diversification with the goal of becoming large integrated websites

with a multitude of product offerings.

6.2 Mergers and Acquisitions

In 2009, mergers and acquisitions (M&A) continued to boom in two traditional

segments of China's retail industry: supermarkets and department stores.

Among the nearly 40 M&A deals that took place in China's retail industry in

2009, supermarkets accounted for nearly 40 percent, and department stores

close to 30 percent. For the supermarket and department store sectors, M&A

remained one of the established and proven strategies for market leaders to

increase market share in 2009. In China, M&A activities were often initiated

by national chain leaders which merged/acquired regional chain retailers, or

by regional chain leaders which merged/acquired local retailers of the same

industry or sector.

Private equity focused on B2C online retailing as the hotspot among China's

retailers in 2009; there were six deals involving B2C online retailers in that

time, with total financing reaching USD 110 million (751 million RMB). Besides

B2C online retailers, chain supermarkets were also a major focus for private

equity investment.

The main reason for companies to conduct M&A is to achieve scale effects,

and thus reinforce their operational and geographical advantages. Compared

to the retail industry in developed countries, China's market concentration is

relatively low. This leads to fierce competition, resulting in much lower

average profit margins relative to those seen by companies operating in more

developed markets. Through M&A, retailers may quickly increase industry

concentration to achieve scale and capitalize on synergies after consolidating


51

the businesses, both of which lead to higher profit margins. Additionally,

companies may eliminate potential competitors in the region as a result of

their M&S activities, thus strengthening their market position. Finally, M&A

may help buyers to rapidly enter new regional markets, saving costs and time,

as stores, management, market resources, distribution channels, and

customers are all already established in the target market.

Although there are many advantages associated with M&A, many players

remain conservative on conducting deals, because there are major challenges

inherent in implementation.

(1) Difficulty obtaining financing. Among the 59 retailers currently listed on

the Shanghai and Shenzhen stock exchanges, most are small or medium face-

value stocks difficult to finance through the stock market. Many retailers in

China use large amounts of the supplier's capital, resulting in high current

liability and low liquidity and profits. Therefore, these retailers find it difficult

to accumulate funds to support M&A deals, and are often forced to use loans

to support such activities. This increases the risk associated with M&A and

corporate growth.

(2) Difficulty in integration. Integration is crucial in determining whether or

not an M&A deal will be successful. Often after the deal is completed,

consolidation of resources of the two companies becomes problematic.

Although the logo and stores might change physically, the two companies

could still be operating independently and wasting significant resources. The

remains a persistent fear of the difficulties involved in integrating

management teams. This may be particularly true when one of the companies

is a foreign entity with widely different corporate culture, employee

expectations, corporate governance, and business models.

(3) Inappropriate choice of the target company. This is mainly due to (a)

unclear M&A objectives: M&A deals are not aligned with corporate

development needs, but rather the result of pressures from imitation or

competition; (b) inadequate due diligence; and (c) directionless pursuit of


52

M&A to achieve scale and quantity, causing a scarcity of corporate resources

and barriers to smooth operations.

Because the retail industry is a classical example of economies of scale and

economies of scope, increasing market concentration for China's chain retail

market is inevitable in the next few years as it is currently not as

concentrated as the developed markets. As a result of increasing competition

and rising costs, shake-outs in the Chinese retail industry will be accelerated,

and M&A deals initiated by market leaders will become a norm. Foreign

franchise companies will also increase their M&A activities in China, especially

after certain government restrictions have been lifted, particularly those that

pose barriers to developing in certain geographic regions, to how equity may

be used in M&A deals, and to the number of M&A deals involving a specific

buyer that are allowed take place. Foreign firms are developing rapidly and

are quick to adapt their expansion strategies, meaning that M&A of domestic

firms is not only an important way to swiftly expand their scale of operations,

but also one of the most powerful means to compete with domestic retailers.

Finally, in terms of geography, more deals are taking place in developing

regions of China as M&A competition increases. Because the growth potential

of retailers in tier-2 and tier-3 cities is greater than that of those in large cities,

where markets are mature and often in the midst of price wars, retailers have

larger profit margins in developing markets. These markets will likely become

a major focus of M&A activities in China's retail industry in the near future.

6.3 Supply Chain Management

6.3.1 Expanding retail networks

A growing number of companies are attempting to enlarge their retail

network to increase market penetration. Retailers have begun to increase

focus on third tier markets in order to tap into the significant growth potential

in these areas. To match this expansion of retail networks, retailers need to


53

increase their investment in logistics infrastructure to establish a logistical

network appropriate to the expanded scale of their operations. In the overall

framework of logistics infrastructure, distribution centers are essential to a

logistics network and important to the integration of information management

systems and product quality control. Thus, effective management of

distribution centers is a core competency for retailers. Leading retailers use

personalized methods to establish distribution centers in markets second-tier

and below to increase their own network coverage. However, transportation-

wise, tier-3 cities are farther away from primary cities, and moreover, these

markets are spread out across the country, so the distance between the two

terminals of the supply chain is increased, leading to increasing logistical costs.

Chain retailers might not be able to use their own transportation systems to

distribute products because of the high logistical costs associated. However,

they may be able to centralize distribution and make use of direct supply

structures. Direct supplying (i.e. suppliers deliver to retail stores

independently or via their distributors) is frequently utilized for goods

purchased in local markets, for goods supplied by suppliers in local markets to

other retailers/channels, and for goods supplied by a supplier with its own

sales network, for instance, by specialty stores. For other products,

centralized distribution is used whereby suppliers deliver to retailers'

distribution centers, which gather products and make deliveries to stores.

6.3.2 Efficiency and cost-cutting through consolidation and information management

In addition, because retailers manage products through product

categorization, they may achieve consolidation, more efficient use of

resources, and reduced logistical costs through collaboration with other

retailers of similar products. Retailers are particularly likely to use these

consolidated logistics in rural markets. For instance, through cooperation

between different home appliances retailers, different products are batched

together into full truck loads for shipment to reduce logistical costs. Other

retailers cooperate with local dealers and stores in rural areas to reduce these

types of costs.


54

Looking at supply chain optimization, retailers and suppliers employ

information alignment to improve information transparency and availability

throughout the supply chain, reducing the probability that incorrect or

distorted information will produce a bullwhip effect (refers to the tendency of

the variability of demand to increase as it passes through the strata of a

supply chain towards end users and suppliers). As a result, overall operating

costs and inventory levels will be reduced, making the overall supply chain

more efficient. Information alignment also ensures that customers receive

their products in time. In addition to information sharing, leading retailers

work to move one step ahead of the market, and partner with strategic

suppliers to research and analyze customer demands, as well as to develop

corresponding supply strategies and plans.

Moreover, leading retailers are devoted to shortening their supply chain to

improve its responsiveness, and also to reduce intermediates and thereby

decrease supply-side costs. In 2009, many retailers of agricultural products

achieved this goal by purchasing their goods directly from producers.

6.3.3 Collaboration directly with suppliers and manufacturers

Leading retailers continued to improve their relationships with suppliers in

2009. Cooperation with suppliers and manufacturers was strengthened to

generate more mutually beneficial business arrangements.

In the home appliances sector, many leading retailers designated specific

market segments or geographical areas as test regions within their own retail

network to conduct high-end product trials. This helped suppliers to enhance

customers' familiarity with high-end products and to promote product sales.

Suppliers offered these products exclusively for specific chain retailers, which

use well-known brand names to increase customer visits and sales.


55

In another example, supermarket chains cooperated with farmers and

farmers' cooperatives for a mutually beneficial outcome. In 2009, the Ministry

of Commerce facilitated collaboration between these two parties to reduce

the intermediate steps in the product procurement process, and hence

decrease costs. This in turn improved the freshness, quality, and profit

margins of produce for retailers, and helped suppliers see tangible benefits.

Customers had lower end costs. As a result, farmers, retailers, and consumers

all benefited from the collaboration. Leading supermarket chains also

improved their partnerships with suppliers of certain commodities, including

the aforementioned farmers, to help these suppliers obtain formal financing

from banks.

On the marketing side, manufacturers have increasingly cooperated with

retailers to increase the effectiveness of sales promotions and attract more

customers. For example, in the department store sector, retailers usually take

advantage of common cultural occasions such as anniversaries or Mother's

Day to conduct promotional activities, and use coupons to attract customers.

The scale of coupon promotions can be further enlarged with the participation

of brand name manufacturers. Similarly, home appliances retailers also use

holidays as the basis for promotions, in conjunction with large price

reductions or discounts from manufacturers. Supermarkets, in comparison,

organize products of the same brand together in a designated area for

product exhibition, where the manufacturer can conduct promotional events.

For home building retailers, companies invite manufacturers with products of

the same category to specific product exhibitions and sales fairs, during which

special product packages are offered. Such activities help establish the

reputation and scale of retailers and offer a wider variety of options for

consumers.

Finally, in terms of the value chain, retailers can build win-win partnerships

with real estate developers through inter-industry cooperation. Retailers and

investors (developers) invest in commercial real estate together, creating


56

growth opportunities for local retailers. Using business development in

residential areas as an example, chain retailers may develop business

objectives and plans according to the shopping patterns of local consumers

prior to launching a commercial real estate development project. This prior

knowledge makes them more likely to succeed in their investment. Moreover,

the partnership can help to more accurately position and more

comprehensively plan commercial facilities; for instance, planning the design,

location and choice of stores and businesses within an integrated, multi-

purpose residential park including shopping, recreational activities, fitness,

entertainment, residential services, etc. Such a partnership model can help

retailers become more competitive, increasing customer satisfaction and

loyalty.


57

7. Contact Information

For more information, please contact:

Eric Tang China Consumer Business & Transportation Industry Leader Tel: +86 755 8246 3255 ext. 8085 E-mail: [email protected] Norman Sze Managing Partner Consulting China Tel：＋86 21 6141 2388 E-mail：[email protected]

Jerry Li Partner Strategy & Operation Tel：+86 21 6141 2230 E-mail：[email protected]

Peter Dai Senior Manager Strategy & Operation Tel：+86 6141 8888 E-mail：[email protected] For further information, visit our website at www.deloitte.com/cn Special thanks and appreciation to the contributors to this report for their advice, assistance and participation. The contributors to the report are: TIAN Qingyun

Shawn XIAO

Marcia MAO

Vicky HUANG

mailto:[email protected]




http://www.deloitte.com/cn

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