January 4, 2008 -- Ever since China opened its doors to international retailers in 2004, the retail industry has been undergoing many changes. Foreign retailers have set up more branches in smaller cities and threaten the survival of some local retail enterprises.
Aside from Beijing, Shanghai, Guangzhou, and other first tier cities, the second and third tier cities in China have been attracting more international retailers, according to a survey released in local media by Taylor Nelson Sofres Plc. (TNS), a global research company, in November of this year.
Currently there are 273 secondary cities with a population of more than 1 million in China. The market share of superstores in second-tier cities was 12.9 percent, while in third-tier cities the market share was only 7.6 percent. International retailers are increasingly favoring consumers in these cities, according to the survey by TNS.
First tier cities, like Beijing and Shanghai are already saturated from the foreign retail market. There is not enough profit to be earned. In contrast, second and third tier cities are relatively underdeveloped and are better investments for future returns, TNS said.
"Due to the scarcity of resources and regional protectionism, some of the foreign investors prefer to avoid the fierce competition all over the [first tier] cities, like Beijing, Shanghai." said Zhongming Zhang, general manager of ProBIZ Software Technology Co., Ltd., a Guangzhou-based e-commerce technology company related to retail industry, told Emerging China.
They value the strong economic growth as well as the great consuming potential in those second and third tier cities, according to Zhang.
"Meanwhile, there is more space in second and third tier cities for the retailers to build up sufficient outlets," Zhang said.
Wal-Mart Stores, Inc., for example, opened its new supercenter in Loudi city of Hunan (a province located in eastern central China) on December 10.
"It is an example of how we are investing in smaller cities," Ed Chan, president and CEO of Wal-Mart China said in a statement.
Also in November, Carrefour China Inc. set up a new Changsha (the capital city of Hunan) superstore. This brings the total number of stores to 104.
"Both giant international retailers and small local retail groups are expanding their own territory in these second and third tier cities in China," Feiyan Lan, an analyst with Shenzhen-based China Jianyin Investment Securities, told Emerging China.
However, some of the foreign retail giants did have an impact on the local retailers quite a bit, especially for the supermarket retail industry, according to Lan.
"Foreign retailers, such as Wal-Mart and Carrefour, have had some impact on domestic supermarkets," Lan said. "Previously, a series of local enterprises were forced to shut down."
In 2007, some of the local supermarkets in Haikou, a third tier city located in the Hainan province of southern China, like Xijia supermarket and Wanfulong supermarket had to close several superstores in 2007. It is the same with two other supermarket chains of Shanghai`s Lianhua supermarkets, according to a report from the local media.