The now almost certain entry of a new retail chain store is expected to intensify the domestic competition further.

The Spain DIA Group, a subsidiary of French company Carrefour, signed a letter of intent with Beijing Shoulian Commercial Group on May 15 to open the city's, and the country's, first discount store.

The companies will set up a joint venture, Beijing DIA Shoulian Retailer Company, according to the contract, to open 500- 700-square-metre stores - like 7-Elevens - in the city's residential areas.

The deputy director of Beijing Commercial Commission, Lu Yan, said DIA wanted to open 20 to 30 discount stores by 2003, and 50 to 60 a year from 2004. "This means DIA will have about 100 discount stores in two-and-a-half years, five to ten times faster than local retailers."

The discount stores will mainly sell food products 10 per cent cheaper than those at Carrefour chain stores.

"The DIA brand brings together a raft of products from various suppliers under a single brand name: DIA products. This is how we can offer our customers the highest quality products at the lowest prices: up to 20 per cent less than other brands," a DIA official said.

Unlike the supermarkets that provide a full range of products, DIA focuses on food, he said, and that reduces the cost. "We will cut costs too in all procedures of purchasing, storage, delivery and package." For example, the decor of DIA stores will be very simple, and the products will carry the factory packages.

Moreover, 50 per cent to 60 per cent of the products are branded by DIA, that is, they are produced by DIA-selected manufacturers - another cost-cutting factor, he said. Local stores would not be able to match the up-to-50-per-cent price reductions foreign discount stores can offer.

Urban attack

Mingping Plaza, claiming to be Shanghai's first discount store, opened in November 2001 but got a cold reception. Its daily revenue has fallen from 90,000 yuan (US$10,870) to 55,000 yuan (US$6,643).

Lu said the discount stores would have a dramatic impact on China's retail industry, comparing the scene to the Nineties, when foreign supermarkets began coming to China. He said the discount stores' convenient locations, low prices, and emphasis on food products will prepare them for a direct attack on local supermarkets, hypermarkets and convenience stores.

And the Beijing Wanfang Supermarket general manger, Chen Yabin, agrees, saying DIA's entry into China will have a great impact on the domestic retail industry financially and managerially.

Foreign companies not only bring in capital, but also have advanced international marketing methods and management know-how, the deputy president of China Commercial Economy Research Institute, Yu Shuhua, said.

Convenient impact

In fact, a DIA discount store is like a convenience store, only that it focuses on food products, Yu said. The convenience store sector is expected to be the bulwark of retailing industry in the coming years.

Convenience stores are generally set up in neighbourhoods and are open 24 hours, selling a variety of daily-use commodities, food and drinks and sometimes books and magazines. They've become very popular in developed countries such as the United States and Japan.

But considering the variety of goods on offer, the relatively high electricity and labour costs and the convenience provided, the products in the stores are usually priced higher than those in regular supermarkets or stores. "But," said Yu, "because of the huge quantity involved, some convenience stores can offer attractive prices."

Fierce competition in the sector has already begun in Beijing and Shanghai, where a group of domestic and foreign chain stores have opened shop. Beijing Commerce Committee statistics show that a group of supermarket operators, including Price-Mart, Chaoshifa, Wu-Mart and Xidan-Hualian, have set up chain convenience stores and are striving to further expand their store networks soon.

Price-Mart plans to increase the number of its convenience stores to 300 by the end of 2003. Wu-Mart chairman Zhang Wenzhong said his company had set up about 150 convenience stores around Beijing and plans to capture more market share through franchising.

Eyeing the capital city's huge market potential, Shanxi Huayu Group, the largest private-owned commercial enterprise in North China's Shanxi Province, has agreed to co-operate with China Commerce Association and Beijing Commerce Association to pool 400 million yuan (US$48.2 million) to open 1,000 convenience stores in Beijing by 2008, the year the city hosts the Olympic Games.

Those chain operators boast of enjoying advantages in purchases, sales, logistics networks and management, essential for the convenience store business to expand, Yu said.

Shanghai cases

In Shanghai, the number of convenience stores jumped from 1,100 in 2000 to 2,000 last year and is predicted to surpass 3,000 this year. The five big players in the city are: Hualian Lawson, Lianhua, Liang You, Kedi and Meilin Zhengguanghe, all backed by powerful groups.

But the mushrooming of convenience stores has cut into each store's market share, said Zheng Zhenxiang, deputy general manager of Hualian Lawson, which introduced convenience stores to China. The rising number of convenience stores reduces the share per unit, though it does expand the market. That means convenience store operators will make less and less profit.

For instance, Hualian Lawson opened a convenience store in an upmarket Shanghai neighbourhood. A few days later, two other convenience stores had come up, one on its each side.

"Does one neighbourhood need three convenience stores?" Zheng said. Such a fierce competition does not bode well for the development of convenience-store sector.
Consolidation period

Battered by the winds of intense competition, thanks to foreign retailers, China's retail sector is undergoing great changes.

Surprisingly, an unprecedented number of supermarkets have gone bankrupt.

On April 1, Beijing Chengshi Zhi Guang supermarket suddenly shut down its more than 20 chain stores. Over 400 suppliers are still wondering if they would get the 50 million yuan (US$6.04 million) the supermarket owed them.

Statistics show that over the past 18 months, more than 150 supermarkets in the country have closed down.

Since the beginning of the year, news about the bankruptcy of supermarkets has kept filtering in and that includes Hongxiong (Red Bear), Baixingjia (Home of Ordinary People) and Chaolin in Beijing; Huarong and Dahua in Fuzhou; Zanmenjia (Our Home) in Inner Mongolia; and 12 supermarkets in Tianjin.

McKinsey & Co has said that in the next three to five years, China's retail sector will consolidate, leaving 60 per cent of the share in the hands of three to five world-class retail players. About 30 per cent will be controlled by national retailers and less than 10 per cent shared by regional retailers.

Shen Ming, employed by a US retailer in Beijing after serving as a Chinese supermarket manager, agreed with what Mckinsey has said. "The shutdown of the Chengshi Zhi Guang supermarket chain was a warning to supermarkets with weak capital strength and slack management that they too will be weeded out similarly," he said.

Besides the cut-throat competition, the shut-down of local supermarkets is closely related to the crazy expansion of supermarket enterprises in recent years, said Yu. "The threshold is excessively low. According to regulations, it takes about 300,000 yuan (US$36,232) to register a retail enterprise. There are few restrictive rules. The government still lacks a proper regulation in the sector."

Most local supermarket operators push for expansion once they go into business, thinking that a larger size will generate more profit. Local retailers do so to prevent the onslaught from international giants.

But blind development cuts the profit margin. And fund shortages make it impossible to guarantee the quality of goods purchased, that in turn leads to fall in sales, harming capital and turnover, Yu said.