PHILADELPHIA-Following a rule-change that takes place on December 11, Wal-Mart plans to add 15 stores in 2005 alone to its existing 40 units already operating in China. Other US companies big and mid-size, from Best Buy and Staples to Hooters, announce plans to set up shop there, as do retailers based in other parts of the world.

Several restrictive regulations governing the entrance of foreign retailers in China are eased or eliminated under The Administration of Foreign Investment in Commercial Sectors Measures, or the so-called “new measures,” which were agreed upon in 2001 between China’s ministry of commerce and the World Trade Organization. “For the first time, foreign investors, including small ones, will be able to establish trading entities in China . . . and also able to establish retail/wholesale operations without large-scale investment,” says Mark Schaub of the Shanghai office of Beijing-based King & Wood, a leading law firm in China.

Under the previous restrictions, foreign wholesale/retail firms could only operate in designated major cities in China and only under joint-venture with a China-based partner. A US partner in a retail JV was required to have annual sales volume of at least $2 billion and assets of at least $200 million. Under the December 11 new measures, there is no geographic restriction regarding where foreign retail firms can locate, and no annual sales or asset minimums are required for entry. These restrictions on “foreign invested enterprises (FIEs)” that enter through a JV-partnership, were dropped this June. On December 11, the easing of those restrictions will also be extended to foreign retailers that establish “wholly foreign owned enterprises (WFOEs),” permitting them to go it alone. The new measures stipulate that both FIEs and WFOEs have a “good reputation” and have never breached laws of the People’s Republic.

Schaub acknowledges that much depends on how the new measures will be implemented. There is an application process that calls for, among other things, a feasibility study, audit report of investors, and a planning compliance report. In addition, more specific regulations, such as quotas and licenses, exist for retailing certain “sensitive” items, which include pharmaceuticals, automobiles, and even fertilizer. There are also restrictions on foreign retailers that want to open multiple units. For example, those opening more than 30 outlets in certain (as yet not fully specified) product areas will be required to limit their share of capital in their China venture to 49%.

Applications for entry will have to initially be submitted to the provincial authority in the retailer’s planned location and, on approval, passed on to the Ministry of Commerce in Beijing. There are no time limits on approval decisions and Schaub says, “delays are highly likely.” He also believes that although the earlier capital requirements have been dropped, “we understand that in practice the authorities will decide on policy grounds what a suitable amount of registered capital will be.” Nevertheless, Schaub says, “we believe that the new measures will see a retailing sector boom within China.”

With a population of 1.3 billion, China is the world’s most populous country, and the World Bank estimates that by 2025 it will account for 25% of the world economy. China’s ministry of commerce estimates that retail sales there will reach $963 billion by 2010 with an annual growth rate of 8.5%. China’s domestic retailers expect to participate vigorously in the home market. China has announced a goal of owning Fortune 500 retail firms by 2010.

Retailers in other countries are also expected to pick up the pace of entry. Schaub tells GSR, “a number of European retailers, such as Versace, Armani, and Boss, among others, have or are planning to open in the coming year.” Sweden-based Ikea operates stores in Hong Kong, Beijing and Shanghai and expects to expand there “a lot,” Joseph Roth, director of public affairs tells GSR. “The China, Russia, and the US are seen as our prime growth areas.”

Last September Best Buy established Asia-Pacific offices in Shanghai. It has been studying the consumer market in China and strengthening ties with local suppliers. Although it has no stores there yet, China.org.cn, which tracks that market, reports that area insiders expect it to expand rapidly once a unit does open.

Wal-Mart, which has 35 supercenters, three Sam’s Clubs and two Neighborhood Market grocery outlets in 20 major cities in China, has announced plans to open as many as 15 new stores in China in 2005. According to Joe Hatfield, the company’s chief executive for Asia, they will be primarily in second-tier provincial cities. Germany’s Metro, and France’s Carrefour, two of Wal-Mart’s toughest competitors worldwide, also operate in China and have announced expansion plans. Metro will add 12 units this year, taking its total to 24 and plans to have 40 there over the next five years.

Staples Inc., announced plans to enter the Chinese market during the company’s third-quarter report and 2004 financial forecast. No timeframe for entry was given, rather the intent to do so “as improved operating performance and strong cash flow allowed.” Lehman Brothers’ analyst Alan Rifkin reports that Staples took a stake in Shanghai-based OA365, which is one of China’s largest office products company, which gives Staples “an immediate foothold into the highly fragmented $25-billion office products market there.”

This June Home Depot, which operates only in the US and Mexico, created a new position and appointed William Patterson president of Home Depot Asia without pinpointing a timeframe for its entry.

Beyond the world’s global giants, a franchised unit of Atlanta-based Hooters, is opening in Shanghai this month, and company spokesman Mike McNeill says, “the franchisee plans to open between five and 10 locations in China in the next five years.” While he concedes that company’s US menu may be somewhat altered in China, “the waitstaff apparel will be the same.” The Shanghai Hooters joins Pizza Hut, KFC, McDonald’s, and Dominos, which are already doing business in China.

In a recently released consumer outlook survey for China, Mohan Komanduri, a principal of Kurt Salmon Associates and regional director of East Asia for the New York-based consulting firm, says the study “found that specialty retail and lifestyle brands can carve out a significant niche among the rapidly growing urban middle and upper class with the right strategy and disciplined execution.” He warns throughout the study, however, that these Chinese consumers are highly discerning, “moving rapidly from the paradigm of finding the best price to seeking the best quality.”

Despite his prediction of a “retailing sector boom” as a result of the new measures, Schuab tells GSR, “most foreign retailers that are not here will probably sit tight until 11 December when the rules come in. Assume that most still do now know of the rules,” he adds.

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