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      Evolving market puts global retail giants to the test

      2014-10-22 11:25 Global Times Web Editor: Qin Dexing
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      E-commerce, interior cities seen opening new avenues for business growth

      In its Chinese market debut, US warehouse club operator Costco Wholesale Corp announced on October 14 that it will open an online flagship store on Alibaba's Tmall e-commerce platform. Despite the success of its big-box model in the US, Costco believes that operating on Tmall will lower logistics expenses and help it deliver quality, low-priced imported items to online shoppers in China.

      Despite their existing inroads in the country, China still represents a vast untapped market for global retailing giants like Costco, Wal-Mart, Metro, Carrefour and others. This is especially true given market saturation and stuttering retail sales growth in many of the world's advanced economies.

      China, by comparison, is booming. By nearly all reckoning, the country is home to one of the world's fastest growing consumer markets. According to PricewaterhouseCoopers' 2013 outlook for the retail and consumer products sector in Asia, China's retail market is on track to grow by an average rate of 10.4 percent between 2013 and 2016, by which point the country is expected to overtake the US as the world's single largest retail market. Looking closer ahead, China's Ministry of Commerce announced this month that retail sales in China are expected to expand by 12 percent in 2014.

      It is obvious that China has become a lifesaving straw which many of the world's leading retailers are eager to grab. Unfortunately, many of these same businesses have failed to adapt to conditions in the Chinese market. Indeed, recent years have seen no shortage of costly blunders and setbacks. What's more, even brands with established footholds are slowing their expansion efforts in the country.

      Wal-Mart, the world's largest retailer, opened just 26 new stores in China last year; compared with 30 and 42 in 2012 and 2011 respectively. In terms of closures, the company reportedly shuttered 19 stores in 2012 and another seven this year as of April. Meanwhile, French peer Carrefour opened 20 new stores in China last year, compared with 29 in 2011.

      Outside of the hypermarket space, European consumer electronics retailer Media Markt pulled out of China in 2013. Earlier, in 2011, US peer Best Buy famously yanked the plug on all nine of its branded stores in the country. In 2012, home improvement chain Home Depot bowed out of the market as well.

      Such disappointing outcomes have been attributed to a number of factors. For starters, rising rental and labor costs have been ratcheting up pressure across the retail landscape for years. Such costs can account for as much as 70 percent of a retailer's total operating expenses, according to industrial experts. For foreign retailers specifically, rents have tripled in many cases over the past 15 years.

      Meanwhile, Chinese authorities are no longer offering the same sorts of generous tax breaks and policy supports that they did a decade ago. Overseas brands are also facing fierce competition from flexible, innovative Chinese retailers, many of which have grown quickly over recent years thanks to technological breakthroughs and brand building efforts.

      Nowadays, many retailers in China are looking to third- and fourth-tier urban markets for their next big growth opportunities. In these places, China's fast-moving urbanization strategy is adding to the country's population of middle-class consumers. At this point though, retailers - both foreign and domestic - looking beyond affluent coastal cities will have to focus on strengthening their supply chains. This will help them stay competitive in interior markets where regional brands and conservative shopping habits prevail.

      Cooperation with e-commerce companies could also open new opportunities, especially as fast, reliable Internet access spreads into rural areas. Even this year though, e-commerce turnover in China is expected to total 2.76 trillion yuan ($450 billion), up 45.8 percent from the previous year, according to a forecast from iResearch. Jumping onto the country's popular e-commerce platforms could help retailers expand their sales in China without the hassle and expense of operating bricks-and-mortar locations.

      Foreign retailers are now confronting challenges in China that few could have imagined just a couple of years ago. As always though, those who adapt to changing times and can spot promising new opportunities stand to benefit the most.

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