New Competition
	Retail Wars
	By Michael Schuman

Posted Monday, May 9, 2005; 20:00 HKT
Over the next 15 years, according to consulting firm Bain & Co., China may account for as much as 20% of the world's growth in retail sales. Given how much slower growth will be in mature Western markets, European and American chains are looking to the East—and the stage is set for a long-running battle between some of the world's biggest retailers and a slew of lesser known but more entrenched Chinese competitors.

For years, China's shopping landscape was almost exclusively the domain of mom-and-pop shops and state-owned dinosaurs such as the Shanghai No. 1 Department Store. Foreigners were shackled by government barriers to entry, including a requirement that outsiders team up with Chinese joint-venture partners. The biggest companies managed to establish a presence: France's Carrefour is now the largest foreign retailer in China with 60 hypermarkets, while Wal-Mart has 45. But domestic competitors still hold more than 90% of the market.

This year, the gloves come off. Last December, the government lifted most restrictions on foreign retailers—a move required by the terms of China's entry into the World Trade Organization in 2001. Various behemoths have already revealed plans for a big China push. Wal-Mart wants to double its mainland outlets over the next two years; U.S. consumer electronics retailer Best Buy announced in April that it would open its first stores in China over the next 12 to 18 months; and American home-improvement chain Home Depot is looking for an opening, too, either by acquiring a Chinese retail chain or by building new stores. The size of the home-improvement market in China—currently estimated at more than $40 billion—makes the business opportunity irresistible, especially with home ownership on the rise. "We don't think we should wait any longer," says Bill Patterson, president of Home Depot in Asia.

One trend that attracts players like Home Depot and Wal-Mart: urban Chinese are working increasingly long hours, making big-box stores, which offer a wide variety of products under one roof, a more convenient alternative to traditional markets. But sophisticated inventory-management and cost-control systems that give these chains a competitive edge are harder to implement on the mainland because of Byzantine distribution networks and backward transportation operations. Established Chinese chains are also better at understanding local tastes and are learning fast—often by copying retailing concepts pioneered in the West. One of the largest domestic hypermarkets, for example, is Wu Mart. Likewise, Home Depot faces three major mainland do-it-yourself retailers: Home Mart, Home Way and Orient Home, each providing the kind of warehouse-style shopping offered by Home Depot. "It looks as if Home Depot is already in China," quips Patterson.

The competition can take a toll. In April, OBI, a German rival to Home Depot, exited China by selling its 13 stores to British player Kingfisher, which runs the B&Q chain. China is "one of the most important growth markets of the future," says Sergio Giroldi, CEO of OBI—but the German company has nonetheless decided to focus on Europe. Plenty of others will inevitably follow after discovering just how tough it can be to make money in China. But for now, almost all the traffic is heading in one direction.

With reporting by Ursula Sautter/Bonn

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