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By Liu Jie (China Daily)
Updated: 2008-07-21 10:38

Second-tier cities

"It is not an easy (developing) route in China, but it is real exciting," G L Shereau, former president of Carrefour China, said, when he left the eight-year position in January.

The French retailers' law-breaking expansion was on the rocks by 2002. The Ministry of Commerce urged Carrefour to overhaul 27 chains in China, and said that only if it slashed its stakes in China to abide by government caps on foreign ownership would it be allowed to open new stores.

The two-year overhaul that followed made Carrefour postpone development while competitors such as archrival Wal-Mart made fast progress.

But Carrefour recovered fast and began its second and third-tier city expansion.

Besides serving relatively wealthy clientele in Shanghai, Beijing and Guangzhou, both Carrefour and Wal-Mart have also expanded into less prosperous regions in central and western China.

Carrefour opened a store in Urumqi in China's westernmost Xinjiang Uygur autonomous region that borders Central Asia in 2004 and located its 1,000th outlet in the world in Tongzhou in rural Beijing.

Carrefour's Legros says nearly 40 percent of Carrefour stores are in secondary regions in China.

"Since the beginning we have developed stores in both the richer coastal zones as well as in the interior zones where urbanization trends are stronger," Legros says. "This has allowed us to build our expansion toward the future."

US-based Wal-Mart's second-city accession started in Nanchang in Jiangxi province in 2003 and, in December of 2006, it opened its 100th global superstore in the city of Loudi, in the impoverished province of Henan.

"First-tier cities are obviously a very important marketplace, but they are becoming very saturated," says Shawn Gray, vice-president of operations of Wal-Mart China, adding that the second- and third-tier cities present a very good growth opportunity for Wal-Mart in China and Wal-Mart will, where appropriate, expand into these markets.

Though some insiders have predicted that many foreigners would seek independence after full market liberalization, most foreign retailers maintained their existing relationships with local partners.

"More foreign retailers opened new stores through M&As with local partners because of the good locations they have," points out Li Fei, a professor with the School of Economics and Management at Tsinghua University. He adds that foreigners may depend on their Chinese partners to gain low-risk and low-cost access to business networks.

"The Chinese market is a mix given its vast territory. Thus, it is more efficient and safer for foreigners to obtain help from their local partners," he says.

Many foreigners are looking to expand through the acquisition of other retail chains, as Wal-Mart did early last year when it acquired a 35 percent share in 101 Trust-Mart stores owned by a Taiwan retailer.

In 2006, 18 foreign retailers enjoyed an average growth rate of 15 percent in the number of new stores opened in China. Carrefour featured a 53 percent rate, the highest among all foreign peers.

Wal-Mart last year earned 15 billion yuan sales in China and the number of Chinese stores climbed to 71.

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