China Retail

Notes from Shaanxi

I've spent most of the week in Shaanxi province looking at retail development opportunities. My first stop was Hanzhong, a small working city in a pretty green basin surrounded by mountains. Small, meaning only about 4 million people. I asked the taxi driver waiting under the hot sun how many flights were coming in today. "Only you," he said.

Hanzhong is definitely out in the sticks. A couple flights in and out a week, and if you're in a hurry, there's a winding four hour bus ride north to Xian.

What I saw there really surprised me. I was expecting a lot of dust, thick pollution, and a scream of motorbikes and peasants. What I saw instead was a comfortable easy going city powered by a strong aviation industry, clear blue skies, and fast retail expansion. Within 500 meters of the city center there were a half dozen or more malls and department stores (current or under construction), a busy pedestrian street, and a dozen or more mobile phone retailers selling the latest Motorola or Nokia handsets. I didn't see any other foreign brands except for sport shoes, the ubiquitous KFC (which was busy), and an empty Starbucks knockoff.

If you wanted to settle down in Hanzhong you could pick up a newly fitted out apartment for less than RMB3000psm, but a pair of Adidas would still cost you RMB650.

It was obvious Hanzhong was on the to-do list of some major developers. Four new malls were sprouting up within shouting distance of each other, strata titled of course to ensure quick returns for the developer but long term chaos for the retailers. Good luck there guys.

My next stop was Xian, historically known as one of the ancient capitals of China for over thirteen dynasties, dating back to 1122BC. Everything in Xian was moving fast, and the pollution was worse than I've seen in Beijing. This was a city overflowing with Chinese tourists and way too many places to spend that slippery tourist money. There were even dueling multi story KFCs right across the street from each other. Along the main strip, you found malls on each corner, along the corridor, and even underground. One hi-end Plaza 66 style mall even parked their customer's BMWs, Mercedes, and Audis out front in a row, luring you in with ostentatiousness. This was all within a 1km radius.

At night it was another form of consumerism. There was an intoxicating giddiness in the air at local clubs, where the under thirty crowd were definitely out to party. This was the kind of partying where people were almost gushing "We're in the money!" No worrying about inflation or the price of oil here. Bartender, open another bottle of Chivas and green tea!

So what does this mean to someone wanting to get in on the action? If you are a foreign retailer entering Xian, you need to ask yourself, isn't it too late already? You could start focusing on defining local sub-markets, building brand loyalty, and really start thinking about getting into the smaller cities now. You also need to tell yourself, HQ, and anyone involved in the decision making process, that Western China is developing faster than you can even plan your China entry or expansion.

July 27, 2008

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China Retail

Gone Fishing

In my line of business I'm learning something new everyday - thanks to our group's clients. They always come up with interesting problems to wrangle with. Recently I was examining a large amount of China city data for an international customer who required insights on how to build up their network. I was looking at different ways of modeling potential target customers for retail development. What does that mean? Well, say you are a fast food chain, or QSR as they prefer to be called, and you are thinking of expanding into China at 100 stores/year. What are you going to do? Start playing Monopoly with real money? More likely you will try to map what has worked for you in other territories into the one you are entering. You will make assumptions about customers, preferences, spending, take into account what you can learn locally, and create a profile for what the average customer is and how much they might be willing to spend.

Internally it actually works more like this: your operations will probably begin a discussion with international, then bounce over to the data people, then bounce over to finance, then up to management, then back to international. You get the picture. Lots of bounce. By the time the ball has stopped bouncing, the landscape you are looking at has completely changed. But has the target customer changed? Most likely not. They just have more choices, and you as the QSR have to deal with more competition.

In Econ 101 we were taught that competition is a good thing for all the standard reasons - lower prices, better product, more selection, etc. But actually, I'm learning that competition is good because you can actually count it. If you can count it, then you can map it. If you can map it, then you can make predictions. If you can make predictions, then you can model it, and if you can model it, you can build a financial analysis.

So, I was thinking about all this while looking at target customers in terms of how banks, car dealerships, QSRs, appliance stores, sports outlets, etc, were spreading out in different cities to try to reel them in, like fish in a net. Retail naturally follows the movements of the target customer, and in China, as cities expand so quickly, people are really moving around. By following the growing shape of the competitive landscape, you can gain some insight into the way city areas are developing, and most importantly - where the fish are.

After spending all day looking at all these little consumer fishies swimming around my excel sheet, I started playing with different data layers, or sticking with the fishing analogy - trying out different line and lures. I also had access to different types of boats with interesting names. One was Brand Recognition. Another was Social Development. A third was Lifestyle Indicators.

So for my particular experiment, here's how the fishing stacks up around different smaller cities in China. Sorry, I can't tell you what kind of fish or the exact lure I was using. That would be cheating! But we are available for chartered tours.

Small boat, faster lure, light line:

1. Fuzhou
2. Kunming
3. Zhengzhou
4. Wuxi
5. Ningbo
6. Fushan
7. Changsha
8. Qingdao
9. Suzhou

Big boat, slower lure, heavy line:

1. Xiamen
2. Changchun
3. Changsha
4. Ningbo
5. Zhengzhou
6. Qingdao
7. Fushan
8. Xian
9. Wuxi

Medium sized boat, flashy lure, mid-weight line:

1. Qingdao
2. Shijiazhuang
3. Changsha
4. Wuxi
5. Yangzhou
6. Xiamen
7. Dalian
8. Ningbo
9. Changchun

July 05, 2008

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