Economic development zones across the Chinese mainland have risen rapidly over the past 20 years, as has the migration of people to cities looking for work. The pace of urbanisation itself has accelerated the growth and number of medium- and small-scale cities. Just two years ago there were 264 cities with populations under 200,000, and the number is still rising. In 2008, there were also 41 cities with populations of more than two million. This interdependent urban network evolution is likely to precipitate the world's fastest-growing urban consumer market.
Economic interaction among cities has increased because of industrial division and extended industrial chains. In places where cities are clustered, areas in which people can travel within an hour have emerged, thanks to improvements in intercity railway networks and highways.
Currently, there are three extended urban areas that deserve the "megalopolis" epithet: Beijing-Tianjin-Hebei in the northeast of the country, the Yangtze River Delta in the east and the Pearl River Delta in the southeast.
There are also what could be described as smaller "city clusters," such as central-southern Liaoning (encompassing Shenyang, Dalian and Anshan), the pairing of Chengdu and Chongqing in Sichuan Province, the Shandong peninsula, the central China plain, which brings together Zhengzhou, Luoyang and Kaifeng, as well as Changsha-Zhuzhou-Xiangtan in Hunan Province and Wuhan in Hubei Province.
Spurring Regional Distribution
One of the factors limiting growth in the mainland's distribution industry has been the marked disparities in economic development between cities and towns, and between first-tier, second- and third-tier cities.
There are wide differences in consumer income and spending; the degree of market homogeneity is low, and retail enterprises within the same region struggle to expand and develop chain-store networks and franchises.
Retail chain Parkson, for example, has 40 mainland outlets, the largest number nationally among department-store groups. Compared with European and American department stores such as M&S, with more than 600 stores in the United Kingdom, and JC Penney, with more than 1,100 stores in the US, mainland department stores fall short in overall size and regional development density.
When it comes to large-scale supermarkets, Wal-Mart has the most outlets among foreign-invested enterprises on the mainland, but even it counts only 180 stores. That's very different in scale to the 4,364 Wal-Mart stores in the US.
Similarly, there are 2,270 Carrefour stores in France and 2,482 Tesco outlets in the UK. In terms of size or development density, their mainland presence is only at the starting line.
Granted, some mainland-invested small-and mid-sized supermarkets have seen significant growth in store numbers and density, but the operational scale of these enterprises remains relatively small compared to mature markets in Europe and the US. Since the operational scale and purchasing volume of retail enterprises are not high, their purchasing costs and gross-profit margins can't compare to those of large-scale chain stores in Europe, the US and Japan.
By the end of 2009, Wal-Mart's US market operation had 1.4 million employees working in 4,364 stores, with a turnover of US$255.7 billion and a gross profit of 23.7 per cent. In comparison, Lianhua Supermarket, China's largest local retailer, has 4,930 stores across the country, with about 53,000 employees; yet turnover was about US$3.5 billion in 2009 on gross profits of 13.1 per cent.
Spending on the Rise
Nevertheless, consumer spending is on the rise, led by the development of areas surrounding first-tier cities as well as second- and third-tier cities. Expansion towards district-level commercial centres is now more feasible for chain store and franchise operations, including supermarkets, convenience stores and household appliance stores.
For the three mainland megalopolis, for example, the 2008 per capita GDP in cities at and above the prefecture level stood at Rmb37,494, Rmb56,566 and Rmb56,000 respectively, showing robust spending power.
The non-agricultural populations in cities under the jurisdiction of the three major megalopolis were, respectively, 20.3 million for Beijing-Tianjin-Hebei, 30.9 million for the Yangtze River Delta and 18 million for the Pearl River Delta in 2008.
Government initiatives such as the "thousands of villages' market project," the "appliances to the countryside" and the "connecting farms with supermarkets" campaigns have also created huge development opportunities for some large retail enterprises and their suppliers.
Retail Enterprise Expansion
Urbanisation has enabled megalopolis circles and city clusters to break free from regional administrative restrictions, forming huge economic zones. These, in turn, promote close collaboration between urban and rural areas.
Retail enterprises have been opening chain stores and franchises in peripheral locations in recent years. Such groups and wholesale distributors are fast expanding across geographic regions and in greater scale.
Carrefour is a case in point. In 2004, the French retail giant opened two stores in Beijing, located on the Third Ring Road and Fourth Ring Road respectively. Since 2006, Carrefour has expanded its business reach in Beijing towards large, distant residential areas such as Tongzhou and Tiantongyuan.
New World Shopping Mall is another example. The retailer saw the saturation of department stores in Beijing's city centre and decided to expand operations into the neighbouring areas of Beijing - at the Apple Community on East Third Ring Road, to attract new customers.
Intense market competition has also prompted more retail enterprises to expand into second- and third-tier cities. According to data from the China General Chamber of Commerce, trends for mergers and acquisitions on a regional basis and expansion towards second- and third-tier cities were well defined among the top 100 retail enterprises in 2009.
For retail enterprises intending to expand within a region, chain store and franchise operations boost operational efficiencies of scale, but also raise cost efficiencies in logistical support as the number and density of stores continue to grow.
Most retailers use centralised purchasing, which helps boost operational scale, market coverage and the capacity of regional wholesale distributors. Although there are only a few nationwide wholesale distributors on the mainland, regional wholesale distributors show tremendous potential. Compared to nationwide wholesale distributors, regional distributors are more knowledgeable about local markets and have better relations with them. This is particularly useful for further development and expansion.
