International Marketing in Southeast Asia

7/28/2019 International Marketing in Southeast Asia

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International marketing in

Southeast Asia

Retailing trends and opportunities in

China

The Authors

Saeed Samiee, College of Business Administration, The

University of Tulsa, Tulsa, Oklahoma, USA

Leslie S.C. Yip, Department of Management and Marketing,

Faculty of Business, The Hong Kong Polytechnic University,

Hong Kong, China

Sherriff T.K. Luk, Department of Management and

Marketing, Faculty of Business, The Hong Kong Polytechnic

University, Hong Kong, China

Abstract

The aim of this study is to highlight developments and opportunities

in the retail and distribution sectors of China. In particular, we focus

on the entry of international retailers into this rapidly growing

market and classify various forms of retailing in China. The

emerging Southeast Asian markets are still dependent on traditional

and inefficient distribution and retailing systems. These markets are

ripe for cultivation by international retailers whose advancedsystems, processes, and management and marketing skills can

bring added levels of efficiency and enhanced performance to these

markets.

Article Type:

General review

Keyword(s):


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Southeast Asia; China; Retailing; Distribution.

Journal:

International Marketing Review

Volume:

21

Number:

3

Year:

2004

pp:

247-254

Copyright

Emerald Group Publishing Limited

ISSN:

0265-1335

An increasing number of Asian countries have adopted economic

policies conducive to rapid growth and a presence in the

international marketplace. The policies instituted by most Asian

nations over the last two decades provided a variety of incentives

for multinational corporations (MNCs) to invest in the region. Much

foreign direct investment (FDI) was in the manufacturing and

financial sectors of Southeast Asian economies and, in China, FDI in


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the retail sector was not permitted until 1992. Since then, the region

has witnessed an increasing presence of international retailers.

Despite much interest on the part of academics and business

publications in Southeast Asia, a sharper focus on the distributionsector in China is timely, and is warranted for several reasons. First,

research on distribution in emerging markets is scant and, given the

enormous populations and size of these markets, closer scrutiny of

retail activities in these markets is warranted. Second, as Asian

markets are culturally and geographically removed from the

traditional business centers of North America and Europe, detailed

knowledge with respect to prevailing conditions in Asian markets is

often lacking. Indeed, this knowledge gap has contributed to the

occasional misinterpretation of reasons for retail successes and

failures in the region, and especially in China (see, for example,

Goldman, 2001; Luk and Yip, 2003). Third, information flow with

regard to social, legal, and technological progress in Asia remains

limited (Walters and Samiee, 2003). Fourth, Southeast Asian

markets are collectively the most populous nations of the world, and

possess enormous natural and human resources. Finally, key Asian

markets are developing at an accelerated rate, which is rapidly

expanding demand for all types of products and services.

According to an OECD report issued in 2001, nearly $3.6 trillion wasinvested in developing economies in 1998, with much of the

investment destined for Asian nations. Although the manufacturing

sectors remain the main area of focus for foreign investment, the

distribution and retail sectors have attracted an increasing

proportion of foreign capital. From an international marketing

standpoint, FDI in retailing in China is an appropriate strategic move

for a number of reasons. Incomes are growing rapidly in China, and

the region has virtually recovered from the economic downturn of

the late 1990s. Moreover, the retail and distribution sectors are

among the last industries that have remained largely local andsubstantially fragmented. Consider, for example, that the top four

retailers in China had combined sales of just over $2,057 million in

2000 (Fortune, 2002)[1]. Therefore, new entrants are unlikely to

face stiff competition from existing retailers. This condition, coupled

with easier access to capital for retailing MNCs, affords retailing

MNCs market expansion and penetration in a national sense.

A further reason for focus on retailing and distribution in Southeast

Asia is the rapid penetration and growth of the Internet and the

resulting development of e-commerce in these markets. Although
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the potential for e-commerce is currently unevenly distributed

across Asian nations, this is likely to change in the short term[2].

China, where Internet use is expected to grow by over 30 percent

annually, is perhaps the most promising market (Business Week,

2004). Although Internet use is still in its relative infancy, thenumber of Internet users in China far exceeds the entire population

of many of its neighboring nations. As infrastructure and usage rates

develop, e-commerce in China is likely to prove to be an important

force in the structure of retail and distribution in China.

Classifying retailers in China

Retail formats are officially categorized into eight groups by the

Chinese government. As shown inTable I, these classifications

consist of convenience stores, department stores, generalmerchandise stores, professional stores, shopping centers, specialty

stores, supermarkets, and warehouse-style supermarkets (Luk and

Yip, 2003). An understanding of and adherence to this classification

scheme by retailing MNCs planning to enter China is of critical

importance, since store opening applications are assessed and

approved in accordance with the official Chinese classification. The

intellectual contributions of other classifications notwithstanding

(e.g. Goldman, 2001), their use in official applications can lead to

bureaucratic delays and problems[3].

The Chinese government in Beijing has long adopted a classification

scheme to facilitate the screening of applications for the

establishment of retail joint ventures in China. Retail MNCs must

clearly identify the category to which the proposed retail

establishment (i.e. joint venture) belongs when submitting

applications for approval. This is an important stage which will have

serious implications insofar as the processing of the application and

the subsequent decision criteria are concerned.

Foreign competition in the retail sector in China

The influence of foreign retailers in China has grown rapidly since

1990. The major motivating factor for many foreign investors in the

retail sectors of Southeast Asia is their saturated home-market

conditions (see, for example, Sanchanta, 2004). Major players in the

region include such world-class competitors as Ahold, Metro,

Carrefour, and Tesco, which face mature home markets coupled with

cut-throat competition from local and other international firms.

Although Southeast Asia represents only one of the areas in which
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global retail competitors are active, in the long term it is the most

promising one. Not surprisingly, key international retailers have

already developed a foothold in the region.

Major international firms vying for a share of the Chinese marketinclude Tesco (UK), Wal-Mart (US), Carrefour (France), Metro AG

(Germany), and Makro (a unit of SHV Holdings NV, The Netherlands),

PriceSmart Inc., Ekchor Lotus, Fenglian, Parkson, Top Supermarkets,

Friendship Seiyu (Japan), Isetan (Japan), Lawson (US), Shanghai No.

1 Yaohan, Pacific, Seibu (Japan), Jusco (Japan), Ito-Yakado (Japan),

Park-N-Shop (Hong Kong), Trust Mart (Taiwan). Foreign investors use

a variety of entry modes to penetrate the region (Buckman, 2003).

For example, Tesco, Britain's biggest retailer, has entered China

through a 50 percent joint venture with Ting Hsin International, a

firm that owns 25 hypermarkets in China (Guerrera and Voyle,

2004). Although minuscule by Chinese standards, Ting Hsin is one of

the largest retail operators in the country. Recently, Metro

announced that it will open 40 new stores over the next five years.

The firm operates four divisions: Cash & Carry (a self-service retail

and food service warehouse operation), food retailing, non-food

specialty stores, and department stores. Metro's Cash & Carry

retailing in China is a joint venture with the Jinjiang Group (Duff,

2003). Metro has a 60 percent equity in the venture.

By most estimates, foreign competition in the retail sector in China

is quite small. Carrefour, for example, has only 40 stores in China.

Wal-Mart, the world's largest retailer, has only 30 stores in this most

populous country. A number of environmental differences make

China a very different market in which to compete.

First, Chinese consumers spend an average of about $317 a year on

retail (making the size of the retail market $412 billion). This is a

relatively small amount by regional standards, and only a fraction of

the retail market in Japan, which has a population which is only one-tenth that of China. Consumers in Japan annually spend an average

of $10,370 in stores (making a market size of $1.316 trillion).

Overall, international retailers control only about 1.5 percent of the

Chinese retail market. Although this is expected to grow fairly

rapidly in the intermediate term, Bejing intends to limit international

retailers' share of the market to about 8-10 percent during the next

decade.

Second, most retail expenditure by Chinese consumers is in small,

independent shops.
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Third, most retail spending is concentrated in such big cities as

Beijing, Shanghai, Tianjin, Guanhzhou, Chongqing, Shenyang,

Wuhan, Zhengzhou, Chengdu, Shenzhen, and coastal cities.

Therefore, current opportunities in larger cities in China are

somewhat limited. Finally, certain retail sales formats are not legalin China. Retail parties (i.e. personal selling coordinated through

in-home parties) and door-to-door selling, as practised by such firms

as Avon, Tupperware and Amway, are not currently permitted in

China[4]. However, under pressure from the World Trade

Organization, China is required to allow this form of retailing by the

end of 2004.

As a matter of policy, China wishes to demonstrate greater control

over the distribution and retail trades. In the past, the great majority

of permissions to open new stores were secured from local

governments without gaining approval from Beijing. For example,

only 28 international retail projects had been approved by the

central government by the end of 2000, whereas local governments

had approved 277 applications. However, large-scale national retail

formats are fairly new in China and have the potential eventually to

displace smaller independent shops. In the Government's view,

international retailers have caused competition in the retail sector to

become overheated. As a result, the central authorities in Beijing

have tightened the rules regarding store opening and have raisedthe penalties associated for non-compliance with these rules on the

part of international retailers (Buckman, 2003). Given the long-

running tradition of provincial autonomy and self-sufficiency in

China, gaining only a local permit was the logical approach for local

government as well as for retail MNCs. Furthermore, given the

fragmented supply market, localization makes strategic sense.

Indeed, local governments can regulate or hinder the interprovincial

transportation and distribution of products if they feel that the local

economy is likely to suffer a negative impact (Huffman, 2003;

Walters and Samiee, 2003). For example, Carrefour, one of the two

largest international retailers in China, has frozen its plans to open

new stores until the new regulations are more transparent.

State interference with the retail sector is certainly not new in

China. In August 1998, the State Council launched a re-certification

process to check the legal status of foreign-invested retail

establishments. As a result, only 42 were allowed to continue their

operations. The State Council cancelled 41 licenses and required

another 194 licensees to be restructured.
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Retail market entry models deployed by international

retailers

International retailers have typically relied on one of seven models

for cultivating the Chinese market (Luk and Yip, 2003; Davies andYahagi, 2000). These models consist of manufacturer-run shops,

retail shops as part of hotel or foreign residential facilities, retail

stores as tenants of shopping complexes, management companies

(or holding companies), joint construction projects, joint operations

and licensing agreements, single license-many outlet operations,

and miscellaneous types. Each model is discussed briefly below:

Manufacturer-run shops. Foreign manufacturers who establish

joint ventures in China open sale counters in department

stores or set up their own direct retail stores. For example,many fashion chains such as Benetton, Baleno and Batti have

adopted this approach to enter the Chinese retail market.

Retail shops as part of hotel or foreign residential facilities.

This model involves opening small shops affiliated with hotels

or residential facilities for foreigners. Isetan's first department

store in Shanghai was set up using this approach.

Retail stores as tenants of a shopping complex. Isetan's

second department store in Shanghai and Jusco's store in

Guangzhou are examples of this retail market entry format.Foreign retailers open outlets using a leased area inside a

shopping mall or a department store using their own name.

Management companies (or holding companies). Foreign

retailers are allowed to establish joint venture management

companies with Chinese partners and operate retail stores

under the joint venture's name. Carrefour mainly employs this

strategy to expand its business in China.

Joint construction project. This is not a common approach

today, and may only be viable when local builders have

financial difficulties and are unable to continue constructionprojects. Access by international retailers to China's market

through this model requires senior staff from the local

developer to join the management board of the retail

establishment.

Joint operation and licensing agreement. Yaohan and Price

Smart adopted this strategy to set up their outlets in China.

Single license many outlets. Some foreign retailers such as

Wal-Mart and Yokado obtained approval either from the state

government or from local government which was in principlevalid for the opening of only one retail outlet. However, many


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of these retailers continued to open many outlets with only

one state/municipal license. This entry mode faces the most

risk of confrontation with and closure by the central

authorities in Beijing.

Miscellaneous. Some foreign retailers, particularly those fromHong Kong, took advantage of loopholes in the existing

regulations on retail joint ventures to establish retail outlets in

China through special arrangements. For example, the local

partner could be a pseudo-partner, or the local partner could

be appointed as an agent to establish a chain of outlets, but

the equity structure of these outlets in fact requires prior

approval from the Government. Strictly speaking, these

approaches are considered to be illegal. Of late, these retail

outlets have come under close scrutiny from central

government.

Opportunities and implications for competing in China

International retailing firms have the advantage of possessing

systems and processes that are largely lacking in Southeast Asia,

notably in China. However, transforming these capabilities into a

sustainable competitive advantage demands adherence to a

number of factors and conditions that can easily steer a firm away

from a formula that has been a success in other markets. Clearly,China is a huge market, and international retailers have only

scratched the surface so far as cultivating the market is concerned.

Thus far, much of the investment has been in larger, metropolitan

areas. There are numerous medium-sized and smaller communities

that are increasingly wealthy and willing to trade up from the

traditional retail scene in local communities.

A closer scrutiny of the preferences and lifestyle of Chinese

consumers through meaningful segmentation strategies can serve

as basis for successfully competing in China's retail sector. Recenthealth-related concerns (e.g. the outbreak of SARS), coupled with

rising incomes in China, is prompting an increasing number of

customers to seek the more hygienic retail conditions for which

international retailers are known (Sanchanta, 2004). Ito-Yokado is

just one firm that is attempting to cultivate this segment of the

Chinese market by opening stores that focus exclusively on selling

fresh produce. Joining forces with its Chinese partner, Wangfujing

Department Store, and a minority Japanese partner, York-Benimaru,

Ito-Yokado plans to open a chain of 2,000-square-feet stores that

focus substantially on selling fresh foods.
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The emerging Southeast Asian markets are increasing the source of

high-quality brands which are price-competitive with their

developed-market counterparts. These brands have a wide appeal

and tend to be available in China. Thus, MNC retailers need to

incorporate local and regional brands in their merchandisingstrategies. For example, Haier and Legend of China, Samsung and

LG of Korea, Samling Malaysia and Malayan WTK, and Acer, a

Taiwanese firm with its headquarters in Singapore, represent a

growing number of locally developed and produced brands which

successfully compete for a share of global markets. Other top-rated

local brands include the Philippines San Miguel beer and

Singapore's Creative Technologies. Hong Kong's Lee Kum Kee, Hello

Kitty, Singha Beer and G2000, and Malaysia's Maggi and Royal

Selangor Pewter, are also strong regional brands that Chinese

consumers are increasingly familiar with and also demand

(Flannery, 2001). International retailers would be well advised to

devise a merchandising strategy that is consistent with local

preferences, including offering key local brands.

International retail firms competing in China must also remain

cognizant that environmental conditions are very different there

from developed markets, and that these conditions are likely to

remain volatile in the intermediate future (Samiee, 1993). In

particular, political, legal and regulatory and cultural conditions willchallenge both existing foreign competitors and new entrants. The

recent experience of Trust-Mart, a retailing firm based in Taiwan, in

the Chinese city of Xian demonstrates this issue. Trust-Mart entered

the Chinese retail market through a joint-venture agreement with a

local firm. The joint venture signed a rental agreement with a

Chinese landlord to rent a basement area for its discount store retail

format. The agreement stipulated that Trust-Mart would pay the

electricity as billed. However, after a period of time, it became

evident to the landlord that Trust-Mart's business was quite

successful. The landlord subsequently demanded that Trust-Mart

paid the monthly electricity bill as a percentage of its monthly retail

sales. When Trust-Mart refused to pay under this new scheme, the

landlord cut off the firm's electricity. Trust-Mart attempted to solve

this problem by installing its own generators, but ventilation within

the store was inadequate. Needless to say, the venture was

seriously affected by this unexpected demand and heavy-handed

treatment of Trust-Mart by its local landlord. The problem persisted

until local government authorities mediated a settlement (Luk and

Yip, 2003).
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These issues demonstrate that, while retail competition in China is

intensifying in some regions of the country, it remains a promising

sector of the economy which is yet to be fully cultivated. However, it

is also evident that China's retail environment is not an ordinary

one. Environmental conditions, even within China, can varyconsiderably from region to region (Walters and Samiee, 2003).

Retail MNCs must necessarily remain on guard and rely on

sophisticated market information systems and select reliable local

partners that can help them develop networks that can successfully

resolve the types of issues that hindered Trust-Mart. Indeed, a key

strength in Asian business practice is the reliance on personal and

business relationships and networks to accomplish business tasks

and consummate transactions. All firms possess some network in

managing their operations; however, Chinese firms have the added

advantage of more easily maneuvering around the regulatory and

bureaucratic requirements in their region (see Knowledge@Wharton,

2003). For example, local brands such as Legend Computers, in

addition to having the ability to adapt more easily to local needs,

tastes, and culture, have a significant competitive advantages over

foreign brands due to their local relationships and networks. While

MNCs can develop savvy marketing campaigns and heavily promote

their products in large Chinese metropolitan areas, local firms have

networks that reach deep not only into the cities but also the very

large rural regions where the mass media tend to be less effective.These networks can offer significant advantages to local Chinese

retailers once they are better organized and have adopted the

processes and strategies of their better-tooled retail MNC

counterparts.


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Table IClassification of retail formats in China

References

Buckman, R. (2003), "China may tighten retail rules", Wall Street

Journal, No.December 11, pp.B-7.

[Manual request] [Infotrieve]

Business Week (2004), "China.net", Business Week, No.March 15,

pp.22-8.

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ge=http://www4.infotrieve.com/gateway.asp?action=1&displayID=144476%09%09%09%09&DocTitle=Metro+lays+plans+to+triple+presence+in+China&JournalBook=DSN+Retailing+Today&Volume=42&Issue=22http://www.emeraldinsight.com/Insight/manulDocumentRequest.do?hdAction=ref_document_request&r_contentId=0%09%09%09%09&r_atitle=China+goes+global&r_jtitle=Forbes+Global&r_authors=Flannery%2C+R.+&r_year=2001&r_volume=&r_issue=August+6&r_publisher=&r_startpage=36-8&r_issn=&r_endpage=http://www4.infotrieve.com/gateway.asp?action=1&displayID=144476%09%09%09%09&DocTitle=China+goes+global&JournalBook=Forbes+Global&Volume=&Issue=August+6http://www.emeraldinsight.com/Insight/manulDocumentRequest.do?hdAction=ref_document_request&r_contentId=0%09%09%09%09&r_atitle=China%27s+100+largest+companies&r_jtitle=Fortune&r_authors=Fortune+&r_year=2002&r_volume=145&r_issue=2&r_publisher=&r_startpage=72-6&r_issn=&r_endpage=http://www4.infotrieve.com/gateway.asp?action=1&displayID=144476%09%09%09%09&DocTitle=China%27s+100+largest+companies&JournalBook=Fortune&Volume=145&Issue=2http://dx.doi.org/10.1016/S0022-4359(01)00044-6http://dx.doi.org/10.1016/S0022-4359(01)00044-6http://dx.doi.org/10.1016/S0022-4359(01)00044-6http://www.emeraldinsight.com/Insight/manulDocumentRequest.do?hdAction=ref_document_request&r_contentId=0%09%09%09%09&r_atitle=The+transfer+of+retail+formats+into+developing+economies%3A+the+example+of+China&r_jtitle=Journal+of+Retailing&r_authors=Goldman%2C+A.+&r_year=2001&r_volume=77&r_issue=&r_publisher=&r_startpage=221-42&r_issn=&r_endpage=http://www4.infotrieve.com/gateway.asp?action=1&displayID=144476%09%09%09%09&DocTitle=The+transfer+of+retail+formats+into+developing+economies%3A+the+example+of+China&JournalBook=Journal+of+Retailing&Volume=77&Issue=http://www.emeraldinsight.com/Insight/manulDocumentRequest.do?hdAction=ref_document_request&r_contentId=0%09%09%09%09&r_atitle=Tesco+in+talks+with+Ting+Hsin+Retailing&r_jtitle=Financial+Times&r_authors=Guerrera%2C+F.%2C+Voyle%2C+S.+&r_year=2004&r_volume=&r_issue=March+4&r_publisher=&r_startpage=19&r_issn=&r_endpage=http://www4.infotrieve.com/gateway.asp?action=1&displayID=144476%09%09%09%09&DocTitle=Tesco+in+talks+with+Ting+Hsin+Retailing&JournalBook=Financial+Times&Volume=&Issue=March+4http://www.emeraldinsight.com/Insight/manulDocumentRequest.do?hdAction=ref_document_request&r_contentId=0%09%09%09%09&r_atitle=Wal-Mart+in+China%3A+challenges+facing+a+foreign+retailer%27s+supply+chain&r_jtitle=The+China+Business+Review&r_authors=Huffman%2C+T.P.+&r_year=2003&r_volume=30&r_issue=5&r_publisher=&r_startpage=18&r_issn=&r_endpage=http://www4.infotrieve.com/gateway.asp?action=1&displayID=144476%09%09%09%09&DocTitle=Wal-Mart+in+China%3A+challenges+facing+a+foreign+retailer%27s+supply+chain&JournalBook=The+China+Business+Review&Volume=30&Issue=5http://www.emeraldinsight.com/Insight/manulDocumentRequest.do?hdAction=ref_document_request&r_contentId=0%09%09%09%09&r_atitle=Can+a+Chinese+legend+go+global%3F&r_jtitle=&r_authors=Knowledge@Wharton+&r_year=2003&r_volume=&r_issue=&r_publisher=&r_startpage=&r_issn=&r_endpage=http://www4.infotrieve.com/gateway.asp?action=1&displayID=144476%09%09%09%09&DocTitle=Can+a+Chinese+legend+go+global%3F&JournalBook=&Volume=&Issue=


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