LI & FUNG RESEARCH CENTRE China Distribution & · PDF fileLI & FUNG RESEARCH CENTRE China...
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Li & Fung Research Centre Member of the Li & Fung Group
LI & FUNG RESEARCH CENTRE
China Distribution & Trading Issue 62 October 2009
I. Background
II. General wholesaling
landscape in China
III. Types of wholesale and
distribution channels
IV. Challenges
V. Latest developments
VI. Conclusion
Li & Fung Research Centre
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IN THIS ISSUE:
Selling to the source: a closer look into wholesale distribution
landscape in China
Types of wholesale and distribution channels
� Distributors and agents; wholesale markets; manufacturer
direct-sale; warehouse-style supermarkets; online wholesale channels
Challenges
� Fierce competition � Disintermediation � Less demand for distributors to assume a significant national
role from sizable brands � Industry malpractices � Inconsistent commercial regulations � Strained relationship between players along the supply chain
Latest developments
� The financial crisis has limited impact on China’s distribution
sector � Wholesaling still plays an important role; players though have
to constantly reinvent themselves under huge competitive pressure
� Retailer-supplier relationship is beginning to get real attention� Government pays great efforts to improve distribution
environment in China � Foreign participation expects to climb
� Many brand owners have chosen 3rd and 4th tier cities as expansion targets
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Selling to the source: a closer look into
wholesale distribution landscape in China
Introduction
China’s wholesale distribution landscape has witnessed significant transformation over the past years. Eyeing the huge
potential of the burgeoning consumer market, many manufacturers and retailers have in recent years strived their best
to expand distribution network as well as improve supply chain efficiency. The Chinese government has also launched a
series of initiatives to support the distribution sector, hoping to help boost domestic consumption. There are
opportunities abound.
Rapid retail chain operation, on the other hand, has also posed tremendous survival pressures for a number of
traditional wholesalers and distributors; there is much discussion about disintermediation. Nonetheless, given the vast
geographical span and huge regional differences, distribution in China remains a complicated task. Often times, goods
have to pass through multi-layers of distributors before reaching the hands of consumers. In this newsletter, we will give
you a general overview of China’s wholesale distribution sector and in particular, we will focus on the distribution of
consumer goods.
I. Background
Wholesaling generally refers to the resale (sale activities without transformation) of new and used goods in bulk at
discount prices to retailers, or wholesalers, agents, distributors, other industrial, commercial, institutional and
professional users. Wholesaling plays a crucial intermediate role between manufacturers and retailers in the value
chain.
Prior to the economic reform in 1978, China’s wholesale sector was regulated and controlled by the Chinese
government, in order to secure rationing of a wide range of food and consumer goods then in short supply. Most of the
consumer goods were delivered through the Supply and Marketing Cooperatives (���������
) or government-controlled
wholesale and retail systems. Product distribution was primarily supply-pushed. After 1979, the degree of central
planning has been gradually reduced. China’s entry to the World Trade Organization (WTO) in 2001 brought further
market liberalization. In 2004, foreign distribution companies were allowed to obtain national wholesale licenses.
Foreign enterprises can today set up wholesaling joint ventures; dealing in all locally produced or imported products
except salt and tobacco.
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Today, distribution modes in China are much diversified (see Exhibit 1). Given the complexity of the Chinese market,
companies in China adopt a combination of distribution modes. And in the face of abundance of consumer goods and
intensifying market competition today, effective management of distributors holds the key to business success.
Businesses are striving to build responsive demand-driven supply chains.
Exhibit 1: Distribution in China
Source: Li & Fung Research Centre
II. General wholesaling landscape in China
According to the National Bureau of Statistics of China (NBS), total sales value of wholesale trade in China reached
10,039.2 billion yuan in 2007; of which domestic wholesalers, led by state-owned enterprises (SOEs), had huge market
share. SOEs above designated size1 captured 25.7% of total revenue in 2007.
However, the SOEs were not as profitable as foreign-funded companies. Return on equity (ROE) of state-owned
enterprises was just 18.5% in 2007, well below the Hong Kong-, Macau- and Taiwan-funded wholesalers by 10.4
1 Designated size: with annual sales of 5 million yuan or above and with an employment of or over 60.
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percentage points and foreign-funded wholesalers by 16.2 percentage points.
Having said that, there are many different sub-segments within the wholesale distribution sector. It is noteworthy that the
wholesaling of mineral products, building materials and chemical products has a heavy weight in the government
wholesale statistics, with a stunning share of 54.7% in 2007. Statistics on the distribution landscape of consumer goods
in China, which is the focus of our newsletter, are however few and scattered. No one has a yet precise picture but
according to industry experts, the landscape is highly fragmented with industry concentration in northern China higher
than in the south. Sourcing channels and supplier arrangements vary greatly among different product categories;
consignment sales are common as well.
III. Types of wholesale and distribution channels
There are many different types of wholesale channels engaging in the distribution of consumer goods in China.
1. Distributors and agents
Distributors and agents are authorized by production enterprises to distribute their products and typically do not involve
in manufacturing and retailing of the products. Some of them are obliged to the buyout of these products, thereby taking
on the inventory risks; whereas some do not and instead get paid a certain amount of commissions.
Domestic agents and distributors
Many of the domestic players come with state-owned background and have operated since the pre-economic reform era,
giving them an edge in terms of scale, established infrastructure, government guanxi and network reach (especially in
towns and counties). And undoubtedly, there is an increasingly number of domestic private players as well, offering
highly price-competitive services.
However, compared to their foreign counterparts who try to offer a broader menu of services (e.g. merchandising, trade
marketing and business intelligence), quite a number of domestic wholesalers focus mainly on the selling and logistics
aspects in product distribution. Many offer simple lines of services such as warehousing and transportation; value-added
services such as product tracking and cold-chain logistics are few, if not none.
In the past decade, domestic agents and distributors have been under a great deal of pressure with growing competition
from foreign players as well as other format wholesalers; many traditional players have been phased out. Nonetheless,
some domestic distributors have strengthened themselves and modernized over the years; a number of them are now
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run by the younger and more aggressive managers. For instance, Beijing Chaopi Trading ( �������� ) and Nanpu
Food Group Co. Ltd ( ������������������� ) are learning fast from foreign rivals and evolve into strong players in the
field. Beijing Chaopi Trading, for instance, now serves over 300 foreign and domestic brands.
Compared with their foreign rivals, domestic players tend to be more confined in their service networks. For instance,
Beijing Chaopi Trading operates chiefly in northern Chinese cities such as in Tianjin, Tangshan, Qingdao, Shijiazhuang
and Taiyuan etc. Local protectionism is probably one of the reasons behind difficulty in extensive regional expansion.
Foreign agents and distributors
Foreign distribution companies were allowed to obtain national wholesale licenses upon the liberalization of the
commercial sector in 2004. Since then, foreign agents and distributors have been expanding quickly. Some prominent
names include IDS under the Li & Fung Group, Sims under Dah Chong Hong Holdings, Jebsen & Co. and DKSH.
Foreign agencies and distributors tend to have wider footprints. For instance, IDS has a national network covering 150
cities in China; Sims Trading also has distribution coverage of around 40 Chinese cities. Often, foreign players distribute
directly to key modern trade accounts and work with a myriad of sub-distributors in China to reach traditional format
retailers such as mom-and-pop stores as well as shops in more remote areas.
Foreign players have an edge in management expertise and state-of-the-art facilities and are less willing to compete on
price. Besides, they tend to be more service-oriented and offer services such as promotion and marketing, which are
great added value for many brand principals. They are posing great challenges to domestic players.
Indeed, many foreign players have grown with international retailers in China. Today, many international retailers have
widespread store presence across different provinces. Servicing these stores (at store level) is a great people
resources challenge. Many times, it has to be done by either the brand owner or national distributor with world-standard
management and compliance level. Domestic regional wholesalers or city wholesalers are less able to provide
resources to support.�
2. Wholesale markets
Allowing groups of merchants to display and sell their goods on site, wholesale markets are often regarded a distinct
feature of China’s distribution landscape. Mushroomed in the 1980s-90s, wholesale markets have been playing a
significant role in channeling products of the country’s countless number of small-and-medium-sized manufacturers into
the hands of urban and rural consumers. According to the National Bureau of Statistics, there are 4,567 wholesale
markets in 2008 with transaction value over 100 million yuan, up by 10.82% yoy (see Exhibit 2).
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Exhibit 2: Statistics of wholesale markets in China with sales revenue over 100 million yuan, 2004-2008
Number of wholesale
markets with sales revenue
over 100 million yuan
yoy growth
(%)
Sales floor area
(meter square)
yoy growth
(%)
Sales revenue
(billion yuan)
yoy growth
(%)
2004 3,365 3.1 124,774,690 13.6 2,610.3 21.3
2005 3,323 -1.3 131,408,239 5.3 3,002.1 15.0
2006 3,876 16.6 180,723,148 37.5 3,713.7 23.7
2007 4,121 6.3 198,146,314 9.6 4,408.5 18.7
2008 4,567 10.8 212,252,204 7.1 5,245.8 19.0
Source: Statistical Yearbook of China Commodity Exchange Market, 2009
Exhibit 3 demonstrates the top 20 wholesale markets of industrial goods in China. Many of them are located in or nearby
China’s industrial clusters in Shandong, Zhejiang, Guangdong, Liaoning and Hebei provinces, as well as regional
transportation hubs throughout the country.
Exhibit 3: Top 20 wholesale markets of industrial goods
2008 Sales revenue
(billion yuan) ���! #"�$ ���#%�&���'�( Jinhua China Commodity City 38.18 )�*#+ ��,#- $ �����.�/�0 Shijiazhuang South 3 Road Commodity Market 35.45 1�2�3�4�5 /7698�/�0 Baoding Gaobeiding Baigou Market 25.80 :#;�<�= �.�/�0 Dalian Shuangxing Market 15.01 >�?�@ ��%�/�0�A�B�������� Wuxi Zhao Shang Cheng Market 10.21 C�D���E�F�G�: /�0�A�B����#H#I���� Anhui Hefei Xindi Market 8.56 J %�K�L�M�N : /�0 Liaocheng Xiangjiang Guangcai Market 7.32 O�P�P�C�Q�R�S�T�U�V ��%������!� Shaanxi Xian Kafulu Danier Commodity Market 6.81 W�X�Y L�����%�������� Yangzhou Qujian Commodity Market 6.20 Z�[ ,�\��.�/�0 Yantai Shanzhan Wholesale Market 5.99 ]�^`_�a�$ ���#% Qingdao Jimo Commodity Market 4.96
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O�P�P�C�P ��b�&��.�/�0�c�d�A�B�������� Shaanxi Xian North West Commodity Market 4.90 e�f b�g�%�/�0 Ningbo Light Textile Market 4.84 h X �� �% Wenzhou City Commerce and Trade City 4.80 e�f�i�j /�&�k����.�/�0 Ningbo Xici Industrial Goods Wholesale Market 4.08 l�m�l�n &�k���/�0 ShaoYang Shaodong Industrial Goods Wholesale Market 4.01 o�prq�s /�0 Zhuokuo Hehua Market 3.96 t#u�v�w :#xzy ��k �{ Tianjin Wanlong Dahutong Commercial Centre 3.84 |�X#}�~�n \ $ ���#/�0������!� Hangzhou East Bus Station Commodity Market 3.29 ��[��#���#��� /�0 Xingtai Qinghe Rongmao Market 3.10
Source: Statistical Yearbook of China Commodity Exchange Market, 2009
A lot of people view that wholesale markets in China are disorganized with most of them selling low-ended and
unbranded products. In recent years, however, some large-scale wholesale markets have been upgrading themselves
with centralized management, modernized hardware, increasing specialization and better brand positioning. On the
other hand, some wholesale markets located in major cities have also tried to ride on China’s burgeoning consumer
market, with their tenants increasing the proportion of retail businesses. Bai Rong World Trade Centre ( ������ ���% ) in
Beijing is an example; it is reported that retail businesses now account for half of the revenue of the wholesale market.
Indeed, with small-and-medium sized enterprises forming the backbone of China’s manufacturing sector, it is widely
believed that wholesale markets would continue to be an important player in China’s wholesaling landscape.
3. Manufacturer direct-sale
Facilitated by improving logistics infrastructure in China, some established manufacturers or brand principals have set
up their own wholesale and retail arms to try to conduct wholesaling and retail activities. Indeed, these enterprises,
mostly home appliances and branded apparel players, view distribution of own products as an effective way to keep
abreast with latest market developments. Typical example includes home appliance manufacturer Haier Electronics
Group, which participates in different stages of business operations such as manufacturing, logistics, distribution and
retailing. It recently plans to establish a wholly owned subsidiary to further expand the sales, logistics and services
networks in 3rd and 4th-tier markets.
But on the whole, manufacturers trying to sell directly to consumers in China are still rare; nonetheless, manufacturers
trying to sell directly to retailers is definitely a trend to be watched (e.g, P&G selling to hypermarkets and many home
appliance brand-owners selling to Gome). There are more incidences of manufacturers selling directly to consumers in
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apparel and footwear industries (e.g. Lining Sports Wear and Belle footwear), yet a lot of them use a combination of
directly-owned stores and licensee-run stores.
4. Warehouse-style supermarkets
Metro and Sam's Club are typical examples. Metro today has 38 carry & trade stores in 31 Chinese cities. It adopts a
membership system and sells goods in bulk at wholesale prices to its members. Only cash payment is accepted.
Targeted at the intermediaries and commercial customers, Metro today has 3 million registered members in China. The
primary groups of Metro’s customers include “HoReCa” (hotels, restaurants and catering businesses), small retail
outlets and kiosks, and other business users (offices, service companies and government agencies). Only registered
commercial customers can visit the store; registration is free-of-charge but documents including business license,
identity card and introduction letter have to be submitted. Metro China generated net sales of 1,052 billion euros in
Chinese market in 2008, up by 15.0% yoy.
However, performance of warehouse-style supermarkets in China is relatively lackluster. Indeed, CTA Makro, which
operated eight warehouse-style supermarkets in China under the Chinese brand name Wankelong ( ����� ) was taken
over by the Lotte Group in 2008. After acquisition, all outlets will be renamed under the Lotte Mart brand; and more
importantly, they will target the retail customers instead.
5. Online wholesale channels
Online wholesale channels are gaining attention. Alibaba.com.cn ( ���!��� ) is one of the popular B2B platforms in
China. The export-trading-oriented company has already developed online wholesale channel targeting at the domestic
market. However, most of the platform operators are in fact online transaction facilitator (match-makers) without
engaging in real wholesale businesses. For instance, many online portals mainly charge suppliers membership fees for
listing on their websites and do not involve in suppliers nor clients’ businesses.
Indeed, despite rapid growth in recent years, online wholesaling in China is not without its challenges. Many are still
reluctant to place huge orders online, worrying about fraudulent activities and credit defaults. Besides, growing calls for
monitoring third-party online payment platforms in China, which is critical for the developments of online businesses in
China, is noteworthy as well.
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IV. Challenges
1. Fierce competition
China’s distribution sector is highly fragmented. There are countless number small-sized players; most of which are with
rudimentary infrastructure. Competition is intense (particularly so in the lower end markets) and many who cannot offer
higher value-added services to clients often have to resort to price cuts, eroding these players’ profitability. Besides,
business costs such as labor, energy, raw materials and logistics costs have also been rising over the past years.
Indeed, many players just have razor-thin margin and this further hurts their ability to invest in upgrading.
2. Disintermediation
Disintermediation refers to the removal of intermediaries in a supply chain, i.e, the cutting out of the middlemen. Indeed,
in order to streamline their supply chains, some big-name retailers such as Wal-Mart have leveraged on their scale and
set up their own merchandizing and sourcing departments in China to source directly from manufacturers. They source
mainly daily necessities, consumer durables and foodstuff; in recent years, direct purchase of fresh agriculture produce
is also becoming more popular. On the other hand, some established suppliers such as Haier have also taken initiatives
to setting up their own retail outlets, in order to reduce their reliance on retailers. Disintermediation threatens the
bargaining power and survival of distributors, especially those traditional players serving solely as a middleman between
manufacturers and retailers without much value-added services.
3. Less demand for distributors to assume a significant national role from sizable brands
In the past when China represented just a small sales share of many international brands, foreign brand principals were
willing to grant national distributorship rights (often times exclusive) to wholesale players in China. Business was relative
easy - as Chinese consumers then had limited choices, sales were virtually guaranteed. Those who were granted the
rights often enjoyed lucrative profits. At that time, businesses were easy and wholesales players had developed a
tendency to hoard as much inventory as they could as usually the more they got, the more they sold.
However, as China becomes a growingly important market, many brand principals now want to have a better grip of the
market and are much more willing to have their own sales and distribution personnel. There is less demand for
distributors to assume a significant national role; in many cases, brand owners just want the wholesalers to perform the
invoicing and selling functions. Many brand owners now have the infrastructure to deal with other things
themselves. There is obviously less margin to be offered to intermediaries. Besides, many brands also see granting
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non-exclusive distributorship rights a way to foster competition and expand market network. All in all, it is growingly
difficult for wholesale players to assume significant national roles in China, especially for better-known brands.
4. Industry malpractices
Malpractices are commonplace in China. For instance, price differentiation of same products in different regions could
lead to arbitrage (for example, wholesalers sell the products outside designated regions); this affects brand owners’
pricing strategy and obfuscates market information. To ensure wholesale players selling only within their designated
territories, extra efforts have to be spent on monitoring. For instance, some brand owners or suppliers use markings or
stamps to trace products flowing out of their designated territory. Counterfeiting is another problem due to poor piracy
laws enforcement and disrespect of intellectual-property rights among public. The problem is particularly serious in
some wholesale markets. In some cases, those counterfeit products may also pose serious safety and health risks for
public.
Indeed, quality of distribution partners can be very diverse in China and their service levels are mostly sales-driven.
Brand owners have to be very proactive in checking the quality of distributors.
5. Inconsistent commercial regulations
Besides, practitioners have also reflected that inconsistent commercial regulations and different interpretations and
enforcement of the regulations across the country pose challenges as well. There were cases that entrance fees and
promotion expenses legitimate in some cities are considered as bribery in others. Distributors must study carefully
China’s commercial regulations and communicate with relevant officials closely to avoid misunderstanding.
6. Strained relationship between players along the supply chain
Modern format retailers in China are becoming growingly powerful in the value chains. According to a recent study by
the China Suppliers Research Centre, 78% of suppliers said that retailers have an absolute advantage during price
negotiation. Indeed, many retailers have taken advantage of their strong market power – many introduce cumbersome
charges such as entrance fees, promotion and marketing charges, listing fees for new products and launch different
rebate and commission schemes to maximize their interests. Many wholesale players have reflected huge cost of entry
into modern trade retailers - it can easily cost brand owners million dollars for just entering a few big cities such as
Beijing, Shanghai, Chengdu and Guangzhou. This not only eats into the profits of wholesale players, but also makes
lesser-known brands harder to compete for shelf space and may lead to fraudulent activities as well.
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Some retailers in China frequently extend the account payable terms to suppliers, using it as a major source of funding
for working capitals. Many suppliers are wary of buyers defaulting; in order to control credit risks and avoid bad debts,
some wholesalers only accept cash in exchange for goods on the spot.
The mistrust among supply chain members in China has hampered information exchange in the entire value chain, led
to bullwhip effects and posed major barriers in enhancing supply chain efficiencies.
V. Latest developments 1. The financial crisis has limited impact on China’s distribution sector; opportunities
continue to grow as China’s consumer market expands China is more fortunate for being less affected in the global financial crisis, although its export sector has witnessed
negative growth. During the past year, many FMCG brand owners have been conducting more aggressive trade
promotions (offering deeper price cuts or launching bonus packs and premiums) to drive consumer sales. Besides, the
Chinese government has made unprecedented efforts to rebalance its economy towards being more
consumption-driven. A lot of consumer goods sectors have managed to maintain a steady sales growth or just
experience only a slight drop in businesses. Surely, many experience their margin being eroded by the offering of more
frequent and deeper price cut promotion in order to sustain sales; but on the whole, the majority of practitioners are
optimistic towards the opportunities of the Chinese market. �
2. Wholesaling still plays an important role; players though have to constantly
reinvent themselves under huge competitive pressure
Rapid developments of retail chains are putting tremendous pressure on the wholesale sector in China. As retailers seek
to streamline their supply chains, say dealing directly with key suppliers and expand online sales, there is growing
discussion about disintermediation. Nonetheless, we believe the demise of distributors in China is off the mark – firstly,
despite rapid growth of chain operation in the past decade, China’s retail market is still highly fragmented with the Top
100 retailers achieving just slightly over 10% of the market share in 2008, according to the China Chain Store and
Franchise Association. Second, the vast geographical span of China offers a lot of development room for distributors,
especially in some inner regions and the rural hinterland; many companies simply do not have the resources in
developing own distribution channels in these regions. Besides, as brands rush selling in China like bees to honey,
many do not have the know-how in marketing and distribution and still need a distribution partner. Indeed, China is both
a fast-growth and high-risk market. As brand principals seek to manage their fixed costs, there is still huge room for
wholesale players to grow.
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However, it is true to say that the traditional middlemen’s “buy and sell” model is under a great deal of pressure as
market competition intensifies. To survive in the market, wholesale players must constantly reinvent themselves. Today,
a lot of wholesale players are becoming more sophisticated. Some players have expanded their business offerings to
include value-added customer services such as market analysis, inventory management and goods tracking. IDS has
gone a step further and created “a menu of services” years ago – indeed, many distributors in China have a
one-size-fits-all offering and set a single margin for an all-in bundled services such as selling, marketing, logistics, credit
control, billing and collection. IDS has unbundled the multitude of activities along the distribution chain. Not only does it
charge services with different risks accordingly, it also offer better flexibility for clients. Besides, some wholesale players
are becoming more specialized, or targeting specific and niche segments. For instance, many wholesale markets now
specialize in one or a few industry sectors, such as textile and clothing, leather and accessories, electronics and
hardware.
Information technology applications are becoming much more widely used as well. The advancement of information and
communication technologies has enabled more efficient flow of goods and services. For example, modern tracking
technology facilitates suppliers to track their goods and sales with much greater accuracy. Platforms such as electronic
data interchange also help enhance inventory management and improve supply chain visibility. Besides, with increasing
Internet penetration and better online security, online wholesaling is increasingly popular. Some wholesale markets in
China have sought to develop their own e-commerce websites or partner with e-commerce platforms such as Alibaba to
increase their access to market.
3. Retailer-supplier relationship is beginning to get real attention
Retail-supplier relationship is notoriously bad in China. Big-scale retailers charging suppliers numerous types of fees
and extending payment terms to get extra working capital are pretty common. Nonetheless, retailer-supplier relationship
is beginning to get real attention these days. Not only because of growing government concerns in the past few years,
the fact that retailer-supplier collaboration is more conducive to businesses is also a major driving force.
In fact, there is growing reflection among retailers in China that poor trust between retailers and suppliers has
undermined players’ ability to deliver customer-driven responses, wasting a great deal of resources along the value
chain. Players increasingly hope to have better collaboration with their supply chain partners; some also suggest that
retailers should pay more attention to merchandising as their core competence, to better cater to customers’ needs and
differentiate from the rest.
And there are some signs of improvements. According to a recent study by the Shanghai Business Information Centre,
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which samples 100 established suppliers in China, suppliers are more satisfied with retailers in 2009 than in previous
years; retailers’ various charges on suppliers such as entrance fees, management fees and promotion fees have
decreased by 21%, 19% and 11% year-on-year for hypermarkets, supermarkets and convenience stores respectively.
Indeed, growing number of retailers has vowed to strengthen relationship with suppliers to achieve sustainable growth.
Recent examples include Carrefour, which has partnered with Deutsche Bank to launch a trial supportive financing plan
for small- and medium-sized suppliers in Jiangsu province. Suppliers can apply for loans based on the value of
Carrefour receipts held, at an annual rate of 9.82%; Carrefour hopes that this will help the company improve relationship
with quality suppliers in China.
4. Government pays great efforts to improve distribution environment in China
China has sought to rebalance its economy to a more consumption-led model. Recognizing the importance of
distribution sector in boosting domestic consumption, the government has launched a series of measures to foster the
developments of the sector. For instance, to improve rural retail infrastructure and facilitate rural distribution, the Rural
Retailing Network Project ( ����������� ) and the Agricultural Produce Wholesale Market and Distribution Company
Development Project ( ����������� ) were launched by the Ministry of Commerce (MOFCOM) respectively in 2005 and
2006. In December 2008, the MOFCOM and the Ministry of Agriculture jointly issued the Pilot Scheme Notice of
Promoting Closer Cooperation Between Farmers and Supermarkets ( ���!�#���������� �¡#��¢�£#¤�¥ ), hoping to
flatten the agricultural produce supply chains.
To promote healthy and sustainable developments of the distribution sector, the Management Rules on Fair Transaction
between Retailers and Suppliers ( ¦�§�¨�©�ª�¨�«�¬��®�¯�°�±�² ) was launched in 2006. The rule is applicable to
retailers with annual sales over RMB 10 million and their respective suppliers. Under the management rules, retailers
could not charge suppliers additional fees unless agreed by the parties in concern and specified in the contracts.
Moreover, retailers should also pay for all ordered items, even if they are not sold; and the payment must be made no
later than 60 days upon receipt of goods. On the other hand, there are provisions to protect retailers ³ interests; for
instance, suppliers are prohibited from practicing tie-in selling. To further improve the long-run health of China’s
commercial sector, the government has launched the Credit Management Technical Specification for Commercial
Enterprises ( ¨�´�µ�¶�·�¸�¯�°�¹�º�»�¼ ) in May 2008, introducing standard commercial transaction practices widely
adopted in other markets. Through developing sound credit management systems, it is hoped that retailer-supplier
relationships in China can improve.
The launch of the Industrial Standards of Technical Rules for the Construction and Management of Professional Textile
and Garment Markets ( ½�¾�¿�À�Á�Â�Ã�Ä�Å�Æ�Ç�È�É�Ê�Ë�Ì�Í ) by the MOFCOM which become effective in July 2009
also sets operation standards for China’s textile and garments wholesale markets, with an aim to enhance the
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operational environment of wholesale markets in China.
5. Foreign participation is expected to climb
Foreign participation has increased significantly since the granting of wholesale right to Holland Markro in 2004. Eyeing
the huge potential of China’s expanding consumer market, many foreign wholesale players have viewed China as one
of their top investment destinations. Many foreign distributors win business from overseas principals, riding on the trend
of overseas consumer brands rushing to build a presence in China. With competitive operational ability, foreign players
are posing increasing pressure on domestic enterprises.
Indeed, as mentioned, many foreign players have grown with international retailers in China. Today, many international
retailers have widespread store presence across different provinces. Servicing these stores (at store level) is a great
people resources challenge. Many times, it has to be done by either the brand owner or national distributor with
world-standard management and compliance level. Domestic regional wholesalers or city wholesalers are less able to
provide resources to support.�
For instance, the IDS Group has expanded quickly in China in recent years. In 2008, revenue has grown by more than
90%, fueled by the organic growth of key customers as well as winning new contracts. Last December, the company
was also granted the official approval to commence distribution of pharmaceutical products in China, representing a
significant breakthrough for foreign players to set foot in the highly regulated industry.
6. Many brand owners have chosen 3rd and 4th tier cities as expansion targets
Today, more and more brand owners and retailers are attracted by opportunities in China’s 3rd and 4th tier cities. Indeed,
retail sales growth in China’s lower-tier cities has been more resilient in the past months of 2009. The rural market is not
to be ignored neither. The government has launched a series of initiatives such as “household appliances to the
countryside” to boost rural consumption. As China strives to build a consumption-led economy, looking ahead, inland
regions and the rural market are expected to continue better growth momentum.
China’s wholesale and distribution players are responding to these changes. Growing number of brand owners and
retailers eyeing opportunities in China’s hinterland will definitely transform the distribution landscape in these regions;
we expect industry consolidation to accelerate. Nonetheless, expansion into these regions is costly for many distributors
and does not guarantee immediate returns in the short run. In fact, the vast geographical spread of China makes
distribution and wholesaling very complicated for all.
Li & Fung Research Centre Member of the Li & Fung Group
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China Distribution & Trading ��������� ����� �����
VI. Conclusion
China’s distribution landscape has witnessed significant changes over the past few decades. Gone are the days when
wholesale players can earn big money easily simply serving as middlemen between manufacturers and retailers.
Wholesale players today must offer more added values to succeed.
Despite the fact that there is still huge development room for wholesale players in China, as China moves to becoming a
more consumption-led economy, we should expect consumers and retailers to continue to have stronger power in the
value chains. Wholesale players in China have to constantly reinvent themselves to respond to the challenges.
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