A STUDY ON THE SINO-FOREIGN JOINT VENTURES IN THE SHANGHAI DEPARTMENT STORE INDUSTRY -
A STRATEGIC MARKETING PERSPECTIVE
by
LAU PUI-YIN & LEE HON-CHEUNG - 劉貝妍 李漢祥 .
«
MBA PROJECT REPORT „ ., 。 m 秦J
• Presented to
The Graduate School
In Partial Fulfillment,
of the Requirements for the Degree of
MASTER OF BUSINESS ADMINISTRATION •
TWO-YEAR MBA PROGRAMME
I THE CHINESE UNIVERSITY OF HONG KONG I .. May 1995
(t Hf 14 B m j| fif4r APPROVAL
Name: Lau Pui-Yin & Lee Hon-Cheung
Degree: Master of Business Administration
Title of Project: A Study on the Sino-foreign Joint Ventures in the Shanghai Department Store Industry - A
Strategic Marketing Perspective
f 11'' Prof. Lee Kam-Ho Ln a
Date Approved: j ^ j《； Dedicated to our beloved family members iv
ABSTRACT
From a strategic point of view, the Shanghai department store industry is not attractive at present.
The external environment is favourable because of the big size of urban population, steady growth in income of people, huge market potential, . good cultural background, pivotal geographic location, and relatively stable political environment. Nonetheless, the industry is suffering from high intensity of competition, great threat of substitutes and strong bargaining power of buyers. The. effects of competitive forces have outweighed the ones of the favorable external environment. The market potential is huge, but it is still a ''potential''. There is a long road for the market potential to be realized and exploited. In fact, the market is not enlarging very fast, but so many retailers have already rushed into Shanghai. It is believed that the positive effects of market potential have been actually over-emphasized by many publications. in addition, the existing regulations are so incomprehensive that retailers are operating in a volatile and an incomplete regulatory environment. V The overall effect of the above factors is not favorable to the existing foreign-invested department stores. Nevertheless, they should not retreat from the market. Rather, they should prepare sufficient financial resources for them to afford a short term loss. Long term strategies should be formulated for the bright future. Potential new entrants should better wait for several years for expansion and improvement of the retail sector. However, they should not stay and do nothing.
More preparation works such as market research should be done proactively in veiw of the promising long term prospects of the industry. vi
TABLE OF CONTENTS
ABSTRACT iv
TABLE OF CONTENTS vi
LIST OF TABLES
ACKNOWLEDGMENT ix
Chapter I. INTRODUCTION • 1
Retailing Trend in China 1 Research Objectives 4
II. METHODOLOGY 5
Primary Research 5 Secondary Research 7
III. LITERATURE REVIEW : 8
IV. ENVIRONMENTAL ANALYSIS 13
Political Environment 13 Historical Environment 14 Geographical Environment 16 Socio—cultural Environment 17 Regulatory Environment ‘ 18 Regulations for FIDSs 18 Tax regime for the FIDSs 2〇 Co-operative Joint Ventures Approved by the Municipal Government ‘ 23 ： Demographic Environment 25 Population 25 Working Population 32 Illiteracy Rate 33 Economic Environment 34 Economic Performance 34 Income Level and Living Standard 36 Market Potential 39 Infrastructural Environment 45 A Concluding Comment 43 vii
V. INDUSTRY ANALYSIS 49
Supplier 49 Buyer ； 55 Substitute 62 New Entrants 66 Intensity of Rivalry among Existing Competitors 70
VI. INDUSTRY ATTRACTIVENESS AND FUTURE TRENDS 79
VII. RESEARCH LIMITATIONS 85
VIII.FUTURE RESEARCH AREAS 87
BIBLIOGRAPHY 88 viii
LIST OF TABLES
TABLE 1 POPULATION AND POPULATION GROWTH IN SHANGHA1993 I AND CHINA FROM 198 9 TO 26
TABLE 2 BIRTH RATE, DEATH RATE AND NATURAL INCREASE OF SHANGHAI AND SELECTED REGIONS IN 1992 26
TABLE 3 POPULATION DENSITY IN SHANGHAI AND SELECTED REGIONS IN 1992 27
TABLE 4 HOUSEHOLD SIZE IN SHANGHAI AND SELECTED REGIONS IN 1992 28
TABLE 5 COMPOSITION OF POPULATION IN SHANGHAI AND SELECTED REGIONS IN 1992 3〇
TABLE 6 PERCENTAGE OF BIRTH BY BIRTH ORDER IN SHANGHAI IN 1992 31
TABLE 7 WORKING POPULATION BY INDUSTRIES IN CHINA IN 1993 33
TABLE 8 GROSS DOMESTIC PRODUCT (GDP) OF SHANGHAI AND ITS BREAK-DOWN BY INDUSTRIES IN 1980, 1990, 1992 & 1993 35
TABLE 9 GDP & GDP PER CAPITA OF SHANGHAI AND SELECTED REGIONS IN 1993 ‘ 36
TABLE 10 LIVING EXPENSE BREAK-DOWN OF AN AVERAGE CITY DWELLER IN SHANGHAI IN 1993 37
TABLE 11 OVERALL PRICE AND PRICE INDEX OF CONSUMER GOODS IN CHINA FROM JANUARY, 1994 TO FEBRUARY, 1995 38
TABLE 12 OVERALL PRICE INDEX AND PRICE INDEX OF CONSUMER GOODS OF SHANGHAI AND SELECTED REGIONS IN 1993 39 ix
ACKNOWLEDGMENTS
We would like to take this opportunity to express
our hearty gratitude to the following interviewees for
arranging interviews as their valuable information and
supports have contributed greatly to our successful
completion of this paper. .
Mr. Lee, Sidney of The Chinese Arts & Crafts (HK)
Ltd.
Mr. Yung , Sidney of IHD Holdings Ltd.
Miss Du, Yuan of The Shanghai Sincere Company Ltd. Mr. Omata of Shanghai Isetan Department Store.、
Mr. Ma, Dennis of Wings Department Store, The Adsale Group
Mr. Wu, Zhong Shang of Shanghai No. 1 Department Store.
Miss Lee, Rita of Jinj iang Dickson Centre.
Miss Leung, Phoebe of Hong Kong Trade Development Council.
Mr. Lam, Jackee of The Sincere Department Store (China). ’
Miss Wong, Miranda of Wings Department Store, The Adsale Group
Particularly, we would like to pay our special
tribute to Prof. Lee, Kam-Hon, our advisor for his prudent guidance and insightful comments that helped us
in enriching our research. 1
CHAPTER I
INTRODUCTION
Retailing Trend in rhina
Since 1979； following the implementation of the open
door policy, the skyrocketing growth of China‘s economy
has undoubtedly led to rapid increase in the income of
residents in the coastal regions. Comparing 1990 with
1978, the average annual income of urban employees rose
from RMB615 to RMB2,140, which was a 2.5 times increase.i
In fact, it is believed that people in China are more and more willing to spend their money on non-basic sufficing
items. Meanwhile, there are now many more occasions for
them to spend money than before. In fact, numerous
1、、A Full view over China's Recent Consumer Market, Part I", Standard China Trade, (August 1992), 38. 2 large foreign department stores have already opened their branches in large coastal cities in the form of joint
ventures with the Chinese enterprises.2
On grounds of the above-mentioned, it seems that there are great opportunities for foreign department stores to establish a foothold in China. In the first six months of 1993, retail sales in China totaled RMB96.3 billion, up 24 percent over the same period of 1992.3
Nevertheless, many obstacles are .hindering the development of the department store industry. According to our interviews with several local and mainland department stores practitioners and the secondary information gathered, several problems can be identified, to name a few: low profit margin, severe competition among the local and foreign retailers, the lack of managerial expertise and poor infrastructure, etc. Therefore, the big question is: Is the industry attractive? •
Traditionally, department store business has been dominated by state-owned and collectively-owned enterprises in China. in 1992, the State Council has made the first step in the trial liberalization of the
2T〇 name few examples, Yaohan in Beijing, Seibu in Shenzhen,工setan and Sincere in Shanghai, etc.
, 3h〇,. David and Leigh, Nancy, 、、Retail Revolution", The China Business -Review, (Jaunuary-February 1994}, 22. 3 retail sector. Foreign invested enterprises can now
cooperate with local enterprises to open department
stores in Beijing, Shanghai, Tianjin, Guangzhou, Dalian,
Qingdao and in the Special Economic Zones (SEZs) namely
Hainan, Shenzhen, Shantou, Xiamen and Zhuhai.4
Obviously, there are great differences among these cities
in terms of economic, demographic and cultural
characteristics. Therefore, it will be more realistic
and practical to define a geographic scope for our
project. Among these cities, we expect" that Shanghai
possesses the greatest potential for development in the
coining decade. In fact, according to the sales figures
in 1992, the first and the second largest state-owned
department store, namely Shanghai No. 1 Department store
and Shanghai Hualian Commercial Building are both located
in Shanghai. As a matter of fact, many foreign business
enterprises have already established their department
stores in the city, for instances, Lane Crawford,
Sincere, Isetan, Dickson Concepts, etc. Since the retail
sector of Shanghai is still at its infant stage, we are very interested in conducting an academic -research to diagnose the attractiveness as well as the threats for
future development of the aforementioned business. In sum, the scope of our project is confined to the study of
4ibid., 23. 4 department stores owned by Sino—foreign joint ventures
in Shanghai.
Research Objectives
In this paper, we would like to pursue the following objectives:-
i) To explore the recent development and the intensity of competition of the department store industry in
Shanghai; •
ii) To investigate the opportunities and threats in operating the business in the region;
iii) To examine the industry attractiveness and forecast the future development.
In order to achieve the above objectives, we have divided our analysis into two parts:‘ the Environmental
Analysis and the Industry Analysis. Basically, the Five-
Force Model proposed by Michael E. Porter^ will be employed in the part of Industry Analysis.
5 Porter, Michael E., 、、How Competitive Forces Shape Strategy," Harvard Business Review. (March-April 1979), 137- 14 5 • 5
CHAPTER II
METHODOLOGY
Primary Research ..
In order to get more first-hand information from the department store joint ventures, we have arranged personal interviews with those retailers who have opened stores in China or who are planning to go into the market. By interviewing with those who are really working in the field, we have obtained more up-dated market information as well as their business strategies.
Besides, we have collected their own opinions on the problems and opportunities so that our analysis will be more comprehensive.
Besides, we have visited some of the department stores in Shanghai in June 1994 and conducted interviews with the executives working in both the joint ventures and a state-owned department store. Through this visit, observations were made on several aspects, which 6 basically included the locations of the stores, the store layout, pedestrian traffic, promotional tools, point一of— purchase, the attitudes of the salespersons as well as the general profile of consumers. Thus, it is believed that the primary research can definitely help us in understanding more about the environment in which the stores are operating.
Interviews with the following organizations were conducted:- -
In Shanghai
Wings Department Store, The Adsale Group
Hong Kong Trade Development Council
Jinj iang Dickson Centre
The Shanghai Sincere Company Limited
Shanghai No.1 Department Store
Isetan Department Store
In Hong Kong •
• IHD Holdings Limited
The Sincere Department Stores (China) Ltd.
Chinese Arts and Crafts (H.K.) Ltd.
Wings Department Store, The Adsale Group 7 Secondary Research
Secondary information from various sources which include books, statistical yearbooks, journals, newspapers clippings were collected from the libraries,
Trade Development Council offices in Hong Kong and
Shanghai as well as the Asian Pacific Institute of
Business. This kind of information is used in the following areas of our project: i) Environmental information of Shanghai and China; ii) China's policies and regulations towards the retail sector and the impacts of those policies on the foreign- invested department stores (FIDSs); iii) Industry analysis which includes information about substitutes and potential new entrants and their impacts on the incumbent firms, and the bargaining power of suppliers and buyers as well as the existing competitors who are fighting in the battlefield. . 8
CHAPTER III
LITERATURE REVIEW
To date, several papers have been written on the retailing reform and trends after the implementation of the economic reform in 1979. However, owing to the rapid pace of changes in the retailing environment in China, some of the articles are outdated. In general, related literature can be broadly divided into two categories: the first category includes those which are generally descriptive in nature and mainly focus on the development of the retailing industry in China, while the second type includes the articles that discussed retail management under the scope of developing and sustaining competitive advantages.
Among the literature which focus on China's retailing industry, Mun (1988) gave a clear analysis on
Chinese retailing in a changing environment. In the article, trends in the retail market since economic reform were discussed. In essence, retail sales in the rural markets, individual traders and the 9 demand for quality children's products had been growing
rapidly. Besides, it was stated that consumers in China
tended to prefer old and well-known brands of Shanghai
manufacturers as their first priority. Consumers also
considered the imported goods a symbol of status and
modernity. Besides, the state-owned department stores
have started to up-grade themselves by establishing an
accountability system and improve their services. Also,
it was argued that the development of the Chinese retail market did not conform to the ''Wheel "of Retailing''
hypothes is, which stated that new types of retailers
generally enter the market as low-status, low-margin, and
low-price operators. Finally, future trends in Chinese
retailing were also discussed. The author believed that
the department stores in large cities would probably
increase their services to the customers and the use of
computer systems. Besides, non-store retailing methods
such as vending machines and mail-order would also have a potential to be developed in certain areas.^
Harris and Qiang (1990) addressed the issue from a
similar perspective in their article in which retailing reform and trends in China were discussed. Nonetheless, they emphasized on introducing the structure and patterns of retailing organizations and the reforms in the
6Mun, Kin-chok, "Chinese Retailing in a Changing Environment" in Transactional Retailing, Kaynak E., ed. (Berlin: Walter de Gruyter & Co. ,1988). ‘ . 10 retailing system in China. In particular, the issue of
the transfer of retailing know-how was discussed. In the
article, it was mentioned that the transfer of retailing
know-how from other countries, including the managerial and technical dimension, could be an important factor to the development of retailing in China. From the authors' point of view, one possible trend was that there would be gradual retail innovations in China because of three
factors: firstly, the growing level of education among city people enables them to welcome new ideas and a more
Western lifestyle has begun to be adopted. Secondly, the number of foreign retailers seeking to develop an international presence would continue to grow. Finally, the large state-owned department stores would be more likely to increase the use of computer systems and other advanced technology for their administration and selling in order to improve their efficiency. Basically, this was in line with the viewpoint of Mun (1988) as discussed above.， .
The second type of literature, which was written from- the perspective of strategic marketing, mainly concentrated on the discussion of developing and sustaining competitive advantages in the retailing business. Ellis and Kelley (1992) considered empirically
7gu〇, Qiang and Phil, Harris, "Retailing Reform and Trends in China", International Journal of Retail and Distribution Management, vol. 18, no. 5 (1990、31 --^q 11 Porter‘s conceptualization of competitive advantages and
its components in retailing. Notwithstanding, the
research identified and measured the differences between
a vertically integrated chain of drugstores and a group
of competing independent drugstores on the performances
of cost-based and differentiation-based variables.8
Maximov and Gottschlich (1993), on the other hand,
discussed the ways to gain a sustainable competitive
advantage in retailing. In their opinion, the attainment
of a permanent competitive advantage "required the
simultaneous optimization of three factors 一 time, cost
and quality. In addition, the ways to implement time-
cost-quality leadership strategies were also conferred.^
On grounds of the literature review, none of the
authors has chosen a regional analysis on the
attractiveness of the retail industry as the hub of their
articles. In particular, little research has been done
on the development of a particular retail organizational
‘type - foreign-invested department stores (FIDSs) - in
the China market. Therefore, we will try to address the
issue and analyze the industry attractiveness of the
^Ellis, Brien and Kelley, Scott W. , "Competitive Advantage in Retailing”， The International Review of Retail Distribution and Consumer Research, vol. 2,(1992), 381-395.
%azimov, Jurgeon and Gottschlich, Hendrik "Time-Cost- Quality Leadership - New Ways to Gain a Sustainable Competitive Advantage in Retailing", International Journal of Retail and Distribution Management, vol.~^~^~~4 (1993) 3-12. ； ‘ ‘ ‘ — 12 • • ！： ‘ “ Shanghai department store industry from a strategic ����� • - -f； ••• marketing perspective in this report. ；〜.„ ., v.. .. •.‘ -l .. ‘!. . , ••"• . • ‘ ‘•’ ‘ i •y 、. .. . .• • •i.-.s-'' •. .V • . i •, • ••‘ . « 、 ’摊’ ^ / . -. ^： . ..， . -v • .、.： • -' Ki ‘.：：，，...‘. “. •J.-..、. • .. A 'V . - ；；.••• - . t , • •OiKPTflli :.v , ‘ :.ff.- ...... •貧,• ’-、 ..... 、 ..，..'. ... �.'.•<...... ‘ . ....，： ；.,1.. .. I . . ‘ ...... 一• ； . .T. •. .n “ ： • . “ • ：I-• ‘• • •• • . “ • . r:： 4从 ....‘ . • “ 一 ^tmx^omtNrhi mhi：；]；；. - ‘ ‘ ‘• ； ： ：… i \ • . .；,；" [4 、’ . .. ‘ , ‘ Po i.itv/；a-i E；'； ！ -Mi-.^；'--‘ •• , ^ ^ ...... -I U ‘、 • - ： , ^fhm polxMcal en货；乂,.. ：：. Sr ij^ rf>. •
…丨,、 . - L po. it icaX fxqiu^^s 、；3j&二 、 ]」..、： •• .'• .V „ •,-..,.，... ‘ ‘ - • js；.. • • • • , i • . , - . . •
I rrin, Hoi.ujx, ^wiio. ’‘“... W- ，，，：.:、： 、 厂：二 « ‘ it•(夕.:.、’...：-:,...... ^J hh tnt.ixit.ir-.. •：； . ； • * r,.；： ^ y .,.纖 『力 - 、 、 vV：；； r . The-… qiv e‘,:::••."•,'…• i. . t. . , .::.-.:.:.. ；, 二 \ .乂 ..,?、,」 .’.”乂 . ‘ fe . r^^id t^nr n'e. ：； ..， ！ 二“. H^ ‘ fen • -ir ？.:i!;>‘,.t ‘：、；-：：.
K •^^^^^^；^^‘^^:’-—. .
葱, , ^ …， ‘ ： ^ 、、，、 ‘ 二一 “ ^ r ” ... 、 乂费、、‘ ：：：：：減遍 13
CHAPTER IV
ENVIRONMENTAL ANALYSIS
Political Environment' -
The political environment of Shanghai is believed to be relatively stable. More importantly, many influential political figures came from Shanghai. For example, Jiang
Zemin, Zhu Rongji, Wangju and Wu Bangguo^O. These people have widespread influence in both the communist party and the central government. In fact, many political analysts
said that the ''Shanghai Group" will be one of the dominating forces in Zhong Nan Hai.r 丄
-10 Zhu Rongji and Wu Bangguo are vice premiers while Jiang Zemin is the President of PRC.
11 It is the residence of central government and party leaders in Beijing. It is widely understood that the term represents the core of political power in China 14 Since Shanghai is the political root and foundation of these influential government and party leaders, it is reasonable for us to state that they are more willing to protect the interests of Shanghai. Relationships and affiliations are essential in the Chinese society.
Therefore, if Shanghai is ruined, the interests and future of these political giants will also be hurt. As a result, we believe that the central government will try their best to protect Shanghai's interests and stabilize its political environment. In fact, the •importance of
Shanghai can be reflected by Deng Xiao Ping's several visits to the city during the Lunar New Year iir the past few years.
In view of the above-mentioned, it is believed that the Shanghai's economy will be sheltered by those political leaders. In short, the FIDSs are facing a relatively stable political environment which facilitates the inflow of capital and technology. .
Historical Environment
The department store industry has a very long . history in Shanghai. For example, Sincere and wing On have established their operations in Shanghai in the early period of this century. Although Shanghai is always one of the important cities in the contemporary 15 Chinese history, the government leaders usually regard it as an ''economic'' city rather than a ''political" city according to some of our interviewees. Actually, if
Shanghai does not possess a sound historical record in economic development, the present Chinese government might not have put so much resources to develop the
Pudong area. With its own unique historical background in economic development, Shanghai does not have to start from scratch.
Furthermore, Shanghai is one of the most prosperous cities in China and contributed nearly 10 percent of the country's revenue in 199312, therefore, the central government is usually very careful in formulating economic policy for Shanghai. If we review the economic history of Shenzhen (or the Guangdong province) and
Shanghai, an interesting pattern can be observed.
Generally, Shenzhen (or the Guangdong province) is the laboratory for new ideas or concepts. .Once the ideas or concepts are tested, they will be improved, modified and implemented in Shanghai. The stock exchange -market and
Sino二foreign residential property projects are two of the examples. Consequently, the chances of failure will be lowered if Shanghai eventually is to implement similar kinds of projects.
12 Shanghai Tongjiju, Shanghai Tongji Nianjian 1994, (Shanghai : Zhongguo Tongji Chubanshe, 1994), 13. ‘ 16 Geographical Environment
Shanghai is a coastal city and is situated at the end of the Yangtze River. Traditionally, it is one of the important coastal cities for trading and transportation node. In addition to the inlanders, people from the eastern coast always go to Shanghai for business reasons. It is commonly believed that Shanghai is the entrepot in eastern China and it also has a huge transient population of about two million. The city is traditionally an important distribution centre of consumer products for many provinces, not only the nearby provinces, but also the interior, far-away provinces such as Sichuan and Yuannan.l3 The transient population may bring money to or make money in Shanghai. As a result, they will be the potential customers to department stores. In fact, some inlanders may go to Shanghai quite frequently since their home towns are less developed with rather limited supply of consumer products.
Consequently, the pivotal geographic location of Shanghai poses a natural advantage for the city to develop its retail sector. I
13 The China's Consumer Market, (Hong Kong: Trade Development Council,September 1993),~T. 17 Socio-cultural Environment
Traditionally, the Shanghai people have a greater exposure to new concepts. Relatively speaking, it is believed that they are also more receptive to western ideas. According to the managing director of the Joyce
Boutique Holdings, Roberto Dominici, 、、the people of
Shanghai have a higher understanding of fashion than those in other Chinese cities". Therefore, this kind of mentality of the citizens can definitely facilitate the development of the department store industry in the region.
Moreover, people in the coastal regions concern more about prestige. People in Shanghai like to show-off themselves. 、、N〇 one wants to buy a pair of Nike sneakers that cost RMB2 00 because they think they are fake''.
Owing to the economic development in recent years, corruption is a serious problem and some of the political leaders have shown their concerns towards this problem.
Nonetheless, some retailers believe that this social • « problem offers opportunities to the department store
l^wachs, Esther, 、、Born to Shop: Shanghai Consumers Keeps on Spending", Far Eastern Economic Review, (August 19, 1993) , 45. ~
15ibid., 44. 18 industry. In fact, alongside with the development of the cities and the entertainment businesses such a.s nigh 七 clubs, dance clubs and karaokes, the government officials have more channels to earn some so called ''pocket money" and those who are engaged in the entertainment businesses can also earn quite a large amount of income. Therefore, they will have a higher propensity to consume and those women who engaged in the entertainment industry are much more willing to purchase high-end clothing, cosmetics and jewelry. According to a retailer, their sale performance has dropped sharply after the anti-corruption and the anti-prostitution campaigns in Shanghai.
Regulatory Environment
Regulations for FIDSs
In October 1992, the State Council issued rules for foreign investment in the trial liberalization of the retail sector in Beijing, Shanghai, Tianjin, Guangzhou,
Dalian and Qingdao, and the five Special Economic Zones
(SEZs) . In principle, each of the specified cities and zones may recommend two large foreign-funded retail centers to the State Council for approval. The foreign partner may be the majority shareholder but wholly foreign-owned retail enterprises are not permitted. 19 FIDSs are established and operated under the same regulations as manufacturing foreign— invested enterprises
(FIEs) , with some exceptions!^:-
i) Those seeking to establish an FIDS must submit standard joint-venture documents for State Council approval via the local government. The Ministry of
Foreign Trade and Economic Cooperation (MOFTEC) will examine the qualifications of the Chinese and foreign joint-venture. •
ii) The business scope of FIDSs is limited to the selling of general merchandise. The FIDSs may not operate wholesale businesses or act as import-export agents, but can import and export goods to be sold in their own retail establishments.
iii) Central government-approved FIDSs, which is commonly called joint venture department stores may import general merchandise directly, although their annual import volume may not exceed 30 percent of total retail sales for that year. The impott of household electric appliances, cosmetics, cigarettes, and alcoholic and other beverages must be in accordance with relevant regulations.
16 Ho and Leigh, 23. 20 iv) Exports by FIDSs must also comply with relevant regulations. Exports of state一controlled merchandise such as petroleum are prohibited. FIDSs must report to
MOFTEC annually for examination and approval of any export licenses for merchandise under quota or listed under the State plan, such as livestock, seafood, fruit, rice, and barley. •
V) Except for items such as coal, gas, and minerals, the prices of which are controlled by national or local commodity price authorities, retail enterprises may set prices for their merchandise. -
Tax Regime for the FIDSs
Tax holidays granted to production FIEs under the
Unified Income Tax Law are not applicable to FIDSs, with exception of those locate in the SEZs. Foreign-invested enterprises in the service sector - including retail joint ventures 一 enjoy an one-year tax exemption followed by a two-year period at a 50 percent reduction. A local • « government can exempt or reduce a retail venture's local income tax. In Pudong, for example, local regulations stipulate that FIDSs are exempted from local income tax until the year 2000. Prior to January 1, 1994, FIDSs have been subject to Consolidated Industrial and 21 Commercial Tax (CICT) at the rate of 5.05% of gross sales receipts.
Under the new tax law which became effective from
January 1, 1994 onwards, both foreign and domestic enterprises are now subject to the same tax regime. ciCT has been abolished and replaced with a new value-added tax (VAT) and most goods are subject to a standard rate of 17%. For most companies, the tax reform will have a strong impact on compliance procedures. -According to
Chinese tax authorities, foreign firms must take a. nuitiJDer of steps to satisfy the new requirements. Firstly, all foreign firms operating in China must register with their local Chinese tax authorities to receive a VAT number and certificate. Unlike the situation in many Western countries, businesses in China are forbidden by law from printing their own VAT invoices. Instead, foreign companies must acquire VAT invoices from PRC tax authorities. The tax authorities will.record the total number of VAT invoices issued to each business; all unused or voided invoices must be returned to tax authorities periodically. Besides, there' will be random audits designed to check if the right amount of VAT is being paid to authorities on schedule.18
17 Ibid., 23.
18 Peck, Joyce, Kung, Peter and Ho, Khoon-Ming, ''Enter the VAT", The China Business Review, (January-February 1994) , 42. 22 Under the new VAT, FIDSs have been affected since
VAT is a tax ultimately borne by the final consumers of
each product. In fact, VAT is levied and collected based
on the value added to goods at each stage of the production cycle, except those businesses operating in
industries selling products for which the old CICT rate was lower than the new VAT rate, e.g. manufacturers of
electrical appliances, most other businesses, including
the retail FIEs are affected. In fact, previous mark-up
can be maintained only if retail prices' are- increased or
the companies can further decrease costs in other
aspects. But in order to stay competitive, some firms may choose not to increase the prices, so profit margins
will be further eroded, which reduces the attractiveness
of the industry.
Nevertheless, according to our primary research, VAT
is not the major concern of the FIDSs. According to one
of the retailers, the difference of tax payable by the
FIDSs under the old and new tax system is only about 7
percent, which does not lead to a significant rise in
retai-l prices. More importantly, their •concerns mainly
rest on the stability of the regulations imposed on the
retail sector. In fact,
since the retail sector has only
been liberalized for less than three years, many
executives believe that the government is still
''experimenting" different kinds of measures and they 23 expect that the rules and regulations for FIDSs will remain volatile in the coming few years. Besides,
Shanghai has been strict and prompt in applying the new rules. Foreign enterprises have no choice but to comply with the rules and this may affect their marketing strategies and plans for future development that are formulated beforehand. Under this circumstance, attractiveness of the industry is adversely affected.
Co-operative Joint Ventures Approved by the Municipal
Government
According to the rules issued by the State Council, only two foreign department stores can be opened in any- one of the trial cities. Nevertheless, all of the existing FIDSs in Shanghai were established in a form of co-operative joint ventures approved by the municipal government. In fact, the two State Council approved stores, namely Yaohan International and the China
Resources Group of Hong Kong, still have not yet commenced businesses. The municipal government can approve such kind of co-operative joint ventures if the total investment amount for the project does not exceed ten million US Dollar. Basically, this kind of stores have to obey the tax regime as mentioned in the previous section, but the major differences lie between the joint 24 ventures approved by the State Council and the municipal
government are that firstly, the latter ones do not have
its own import right and secondly, they cannot enjoy the
all tax exemption enjoyed by the former type of joint
ventures.
Since the municipal government has the right to
approve the co-operative joint ventures, we believe this poses opportunities for the foreign enterprises which are
interested in forming co-operative joint ventures in the
territory. However, there are several disadvantages in
forming such kind of department stores which curtail the
attractiveness of the industry. • Firstly, since the
stores will not have their own import rights, they have
to import the merchandise through the agents. This
definitely increases the cost of goods sold as the
companies have to pay for the agency costs.
Besides, their businesses are believed to be more
volatile since they are not formally approved by the
State Council. Thus in case if the State Council
realrzes any contradiction between the policies' of the
Council and the municipal government, or if there are
great deviations between operations of the stores and the
central government's expectations, this kind of co 一
operative joint ventures will be the first to be
affected. 25
Demographic Environment
Population
Population size and population growth rate
In 1993, population of Shanghai was about 12.9 million, a growth of 0.42 percent from the year before.
Population growth rates were all below 1 percent from
1989 to 1993 and were lower than the population growth rate of the whole country as depicted in Table 1.
Natural increase dropped from 0.54 percent in 1992 to negative 0.80 percent in 1993,20 and it was the lowest among other large cities and the country's average in
1992 as shown in Table 2.
«... , ‘
19 Shanghai Tongji Nianjian 1994, 20.
20 工bid., 43. 26
TABLE 10
POPULATION AND POPULATION GROWTH IN SHANGHAI AND CHINA FROM 1989 TO 1993
Year Shanghai's Shanghai's China's China's Population Population Population Population Growth Rate Growth Rate
(in million) (%) (in million) (';!>)
1989 12.7645 1127.04 1990 12.8335 0.54 1143.33 1.45 1991 12.8720 0.30 11.58.23. 1.30 1992 12.8937 0.17 1171.71 1.16 1993 12.9474 0.42 1185.17 1.15
Source: Shanghai Tongji Nianjian 1994, 20. Guojia Tongjiju, Zhongguo Tongjizheyao, (Beijing: Zhongguo Tongj i Chubanshe, 1994), 19.
TABLE 2
BIRTH RATE, DEATH RATE AND NATURAL INCREASE OF SHANGHAI AND SELECTED REGIONS IN 1992 (IN PERCENTAGE)
Region Birth Rate Death Rate Natural Increase
Beijing 9.22 6.11 3.11 Tianjin 12.50 6.00 6.50 Shanghai 7.28 6.74 0.54 Guangdong 19.31 6.17 13.14 Country's average 18.24 6.64 11.60
•• « '
Source: Guojia Tongjiju Renkou Tongjiju, Zhongguo Renkou Tongji Nianjian 1993, (Beijing: Zhongguo Tongjiju Chubanshe, 1993), 4.
All statistics in the yearbook were based on an annual national population sample survey conducted in 1992. 27 Population density and household size
Population density in Shanghai in 1993 was 2042 people per square meter.21 As shown in Table 3, the
city's population density was the highest in 1992 when compared with Beijing, Tianjin and Guangdong, and it
further climbed up in 1993. On the contrary, household size was 3.0 in 1993 and it was the lowest among the above-named cities in 1992.22
TABLE 3
POPULATION DENSITY IN SHANGHAI AND SELECTED REGIONS IN 1992
Region Population Density (Number of Person per Square Meter)
Beijing . 617 Tianjin 736 Shanghai 1612 Guangdong 363 Country's average 120
Source: Zhongguo Renkou Tongji Nianjian 1993, 405 .
t
21ibid., 13.
22 Zhongguo Renkou Tongji Nianjian 1993, 405. 28
TABLE 10
HOUSEHOLD SIZE IN SHANGHAI AND SELECTED REGIONS IN 1992
Region Heads Per Household
Beijing 3.32 Tianjin 3.37 Shanghai 3.05 Guangdong 4.41 Country's average 3.95
Source: Zhongguo Renkou Tongji Nianjian 1993, 31.
On grounds of the above figures, it is obvious that the city is in the process of urbanization.
Characteristics of the demographic environment in
Shanghai are that the population growth rate remains at a very low level with a shrinking family size, and this trend will persist if the government continues its one- child policy. One may argue that this -trend poses threats to retailers since their businesses‘ will be affected if patronage decreases. However, some of the existing retailers, as per our primary research, are very optimistic about the Shanghai market despite the trend of low population growth. Firstly, though population growth rate is low in recent years, there are still over 12 29 million people living in Shanghai, which is already a very large market. Secondly, population density remains high despite the low growth rate, and according to one of the senior executives 〇f a. department store # who is a.
Shanghainese herself, believes that this is favorable to the development of department store industry. According to her opinion, since population density is high and living area is usually very small per person, people do not spend money on decorating their houses and buy expensive furniture. Instead, they will tend to buy some high-end products such as clothing and cosmetics to reflect their status and allow them to show off, while these products are the bread and butter of most of the foreign invested department stores. Besides, it is believed that a high population density leads to the fact that retailers will, in general, find it easier to find suitable locations for the stores than those who operate in sparsely-populated regions, as the former ones will worry less on the pedestrian traffic in the areas around the stores.
-In addition, the shrinking household size is a favorable factor to the department store industry. The changing family structure, that is from the traditional extended family to the nuclear family, implies that the number of households will gradually increase. Therefore, each household will have to purchase its own necessities 30 and this increases the overall demand for products in the city. This will be an opportunity for the department stores to capture market shares in such a growing market.
f Age structure
The proportion of young people (0 to 14 years old) was the lowest among the selected cities. On the contrary, the proportion of those who was 65 years old or above was the highest.23
TABLE 5
COMPOSITION OF POPULATION IN SHANGHAI AND SELECTED REGIONS IN 1992*" (IN PERCENTAGE)
Region/Age group 0-14 Years 15-64 Years 65 Years Old • Old Old or above
Beijing 20.50 11.57 7.96 Tianjin 23.50 69.07 7.45 Shanghai 18.80 70.11 11.08 Guangdong 30.69 62.42 6.89 Country's average 27.60 66.32 6.07
Source: Zhongguo Renkou Tongji Nianjian 1993, 18.
b Percentage of each age group is calculated by dividing the number of population .in that particular age group by the total population in the region. All percentages were rounded up to two significant figures and so summation of the percentages does not end up in exactly 100 percent for each region.
23 ibicL, 18. 31 Among those who were born in 1993, 94 percent was the first child in the family, which was again the highest among the selected cities.24 with respect to this phenomenon, many of the retailers in the region believe that this is a 、、plus" factor to their businesses.
In fact, they believe that people are eager to purchase the best for the so called ''little kings', of the families. And when these little kings grow up, they will probably have enormous purchasing power. Thus, all these support the fact the future of the FIDSs is- promising.
TABLE 6
PERCENTAGE OF BIRTH BY BIRTH ORDER IN SHANGHAI IN 1992。 (IN PERCENTAGE)
Birth Order The First The Second The Third • Child Child Child or beyond
Beijing 88.51 10.55 0.94 Tianjin 80.00 17.42 2.58 Shanghai 94.00 5.11 0.81 Guangdong 46.46 31.08 22.47 Sample's average 58.79 . 27 . 43 13.78
Source: Zhongguo Renkou Tongji Nianjian 1993, c Percentage of each category for each region was calculated by dividing the number in that . category by the total number of new born babies in 1993 in each region.
24 工bid., 24-25. 32 Working Population
The total number of working population in 1993 was
7.56 million with an unemployment rate of 2.4 percent.
Among the working population, 9.57 percent was engaged in the primary industry, while 57.98 percent and 32.45 percent of them were engaged in secondary and tertiary industries respectively.25 For the country as a whole, over half of the working population was engaged in the primary industry though recent trend showed that the proportion of people working in the secondary and tertiary industries have been increasing as depicted in
Table 7.
Compared to the country's average, a larger proportion of the Shanghai population is engaged in the secondary and tertiary sectors. In contrast to those cities dominated by primary industry, it is expected that under the current open door policy, Shanghai's secondary and tertiary sectors will continue to flourish. This phenomenon poses an advantageous factor to the development of the department store industry since if foreign investments continue to grow, more and more people will have the chances to work in the foreign invested companies. In general, we expect that they can
25 Shanghai Tonqji Nianjian 1994, 41. 33 earn more than they did in the state-owned enterprises.
More importantly, the high growth rate in the sectors enables a faster rate of wealth creation and accumulation since they are higher value-added activities. In addition, as most of the foreigners invest in these two sectors, we believe that the inflow of capital will also be accelerated. These will definitely increase the purchasing power of the general public.
TABLE 7
WORKING POPULATION BY INDUSTRIES IN CHINA IN 1993 (IN PERCENTAGE)
Year Primary Secondary Tertiary Industry Industry Industry
1989 60.0 21.7 18.3 1990 60.0 21.4 18.6 1991 59.8 21.4 18.9 1992 58.5 21.7 19.8 1993 57.4 22.4 20.2
Source: Zhongguo Tonqj izheyao, 20.
•… I
Illiteracy Rate
In 1993, out of the population whose age were 6 years old or above, 13.11 percent among them were 34 illiterate, and the rate was lower than the country's average of 20.61 percent but was higher than those of
Beijing and Tianjin. Besides, there were 101 university students per every ten thousand people in Shanghai.26
Thus, with a relatively high education standard of the population in the city, FIDSs in Shanghai will have no big problem in employing capable employees who are more receptive to the western style training programs and the way of serving customers. On the contrary, it is beneficial for the department stores to have the kind of customers who are well-educated since it will be easier for them to accept new concepts and thus to patron the
FIDSs.
Economic Environment
Economic Performance
• Overall speaking, economic performance of Shanghai shows a healthy trend in recent years. Gross National •‘ • I
Product (GNP) of RMB196.67 billion was recorded in
1994, 27 which rose from RMB150.99 billion in 1993. This
26 Ibid., 215 . 35 was a 14.3% growth^S and it was a bit less than the 14.9 percent growth of the year before. Gross Domestic Product
(GDP) was RMB151.16 billion, 4.8 percent of the country's
GDP. GDP per capita was RMBll, 686, which increased by
14.6 percent and is ranked the highest in 1992 among the selected regions as depicted in Table 9.
TABLE 8
GROSS DOMESTIC PRODUCT (GDP) OF SHANGHAI AND' ITS BREAK-DOWN BY INDUSTRIES IN 1980, 1990, 1992 & 1993 (IN RMB BILLION)
GDP 1980 1990 1992 1993
GDP 31.19 74.47 111.43 151.16 GDP contributed by 1.01 3.21 3.42 3.82 Primary Industry GDP contributed by 23.61 48.27 67.74 90.03 Secondary Industry GDP contributed by 6.57 22.94 40.28 57.31 Tertiary Industry
Source: Shanghai Jinqj i Nianjian 1994, 551.
« *
27"zhongguo Shangpin Shichang Zhongti Pingwen, Fan Tongzhang Jiangwei Xianian Shouwu", Express News, 25 January 1995, 18.
28shanghai Jingji Nianjian 1994, 551. 36
TABLE 10
GDP AND GDP PER CAPITA OF SHANGHAI AND SELECTED REGIONS IN 1993 (IN RMB MILLION EXCEPT FOR GDP PER CAPITA)
Region GDP GDP from GDP from GDP from GDP primary secondary tertiary capita industry industry industry
Beijing 709.1 48.67 345.91 314.87 6805 Tianjin 411.24 30.26 230.61 41.05 4695 Shanghai 1065.94 34.16 677.39 354.39 8276 Guangdong 2293.54 465.83 1053.63 774.08 3575
Source: Zhongguo Tongji Nianj ian 1993 , 228..
Income Level and Living Standard
Income per capita of the city dwellers and farmers in 1993 was RMB4, 297.44 and RMB2, 727 per year, a growth of 18.8 percent and 4.3 percent (net of inflation) from
1992 respectively. Deposits in banks per person was recorded at RMB791.52, an increase of 32 percent from
1992. For the city dwellers, living expense per year was recorded at RMB3,530.04 in which over half of the expense was spent on food.Table 10 shows the breakdowns of the living expense of an average city dweller in 1993.
29 工bid., 570. 37
TABLE 10
LIVING EXPENSE BREAK-DOWN OF AN AVERAGE CITY DWELLER IN SHANGHAI IN 1993
Living expenses Amount (in RMB) Percentage
Total 3530.04 100.00 Food 1867.92 52.92 Clothing 413.76 11.72 Household goods 307.32 8.71 Medical 67.92 1.92 Transportation 199.32 5.65 Entertainment & education 301.08 8.53 Rent and utilities 195.84 5.55 Miscellaneous 176.88 5.01
Source: Shanghai Jingji Nianjian 1994,570.
In spite of the satisfactory economic indicators and increasing income of the Shanghai people, which are favorable factors to the growth of the retail sector, one should not neglect the problem of inflation. For the country as a whole, overall inflation rate and inflation rate of consumer goods reached their peaks in October,
1994 but have been decreasing gradually since then. For
Shanghai, inflation rate was even higher than Beijing,
Tianjin and the country's average in 1993 as depicted in
Table 12. As shown in Table 10, over half of the income of an average city dweller was spent on food, and in 1993 alone, prices of food has increased by 21.1 percent than
1992.30 Thus, it is believed that business of FIDSs would
30 Shanghai Tongji Nianjian, 570. 38 have been adversely affected since less money is available for the spending on the more expensive imported goods.
Besides, high inflation rates pose difficulties on the retailers as pricing strategies will be much more difficult to be formulated. Operating in an economy with a constantly high inflation rate, retailers may need to increase the prices of merchandises quite often so that they do not have to swallow the increased operating costs. But if prices are not increased, profit margins will be further eroded and this undoubtedly affects the attractiveness of the industry unfavorably.
. TABLE 11
OVERALL PRICE AND PRICE INDEX OF CONSUMER GOODS IN CHINA FROM JANUARY, 1994 TO FEBRUARY, 1995 (IN PERCENTAGE) Month Overall Price Index Price Index of Consumer Goods January, 1994 19.5 ‘ l^To February 22.1 20.9 March 24.5 ‘ 21.2 April 23.2 19.5 May 21.8 18.9 June 22.7 20.0 July 24.2 ^ 21.4 . August 25.8 23.5 September 27.4 , 24.6 October 27.7 ‘ 27.0 November 27.5 26.4 December 25.5 23.2 January, 1995 24.1 21.2 February 22 . 4 19 . 7
Source: 、、Changshi Tongzhang Huiluo, Nongcun Rengbu Leguan", Mingpao Daily News, 18 March 1995, B2. 39
TABLE 10
OVERALL PRICE INDEX AND PRICE INDEX OF CONSUMER GOODS OF SHANGHAI AND SELECTED REGIONS IN 1993.
Region Overall Price Index Price Index of Consumer Goods Beijing 119.0 116.9 Tianjin 117.6 114.3 Shanghai 120.2 117.5 Guangdong 121.6 118.2 Country's average 114 . 7 113.2
Source: Zhongguo Tongjizheyao, 46.
Market Potential
Despite the fact that many retailers are eager to
get a foothold in the Shanghai retail sector, some may
cast their doubt" on whether the retailers have in fact
miscalculated the buying power of Chinese residents.
According to an investigation, with the advance of
the housing reform, more than 60 percent of urban
residents plan to spend their money on housing and save
money for this purpose. Besides, the pattern of spending •••• I
within Shanghai's retail sector is an indication of the
fact that until recently disposable income of the average
citizens have only been sufficient for the purchase of
.essentials as depicted in Table 10. Food accounts for a
high proportion of retail expenditure in Shanghai and 40 expenses on non-commodity items, such as medical treatment, education, tourism and recreation has been increasing.For instance, it is widely known that there are now more and more karaokes and night clubs in the city and they are very much welcomed by the Shanghai citizens. Besides, since the number of children in an average family is decreasing, it is natural that people are willing to spend more on educating their children, such as sending them to some non-state-owned and modernized kindergartens and primary schools. Thus, the money that they are willing to buy things in the department stores may be lowered since their spending in other items increase.
Nevertheless, it is believed that there is a high potential for the market to grow in the long run.
Firstly, if China is to enter the World Trade
Organization, imported goods will be subject to lower tariffs and prices are expected to be lower. Therefore, those who cannot afford or do not have the willingness to buy under high prices will consider to purchase the.items and thus consumer spending is expected ‘ to rise accordingly.
31、、Forecast of China's Retail Market", Economic Report, no.5, (1993), 33. 41 Secondly, the Chinese people's consumption habit has changed dramatically in recent years. People are in general becoming more quality- and brand-conscious. As per an interviewee from a state-owned enterprise in
Shanghai, the residents' consumption on ready-made clothes have jumped up and the pursuit of name-brand products will be dominant, which supports the fact that there is room for the department stores to grow.
Besides, many consumers come to the FIDSs to look for upscale merchandise, big-tickets items like major home appliances and electronic entertainment systems. As mentioned by the ex-president of Sincere Company Ltd.,
Mr. Selwyn Mar,、、…Especially TV sets,... I can't keep them in stock. We sold 20 of them in an hour and a half one morning.
In fact, a recent newsletter issued by Jardine
Fleming Unit Trusts estimated that 、、… 1.5 million people come to shop on Nanjing Road daily. The stores stay open roughly 12 hours a day, seven days a week.
Sales are estimated at US$10,000 a minute, that's
US$-600, 000 an hour, or US$7.2 million a day, or US$50.4 million a week."33 Actually, many of our interviewees believe that the real income of the Shanghai people is
32、、china's Emerging Big Market", Hong Kong Business, (14 July 1994), 23.
Ibid.. 42 probably higher because much of it is believed to go unreported.
In addition, the number of high-income earners has been increasing. According to a survey carried out by the Finance and Trade Office, People‘s Government of
Shanghai, these high income earners can be classified into the following categories^^:-
i) Private-business operators .and private- enterprise owners. Since 1980, when central government introduced its policy of encouraging private business, a great number of entrepreneurs have emerged, capitalizing on the nations ‘ move towards a market economy. It is estimated that there are around 180,000 to 190,000 such high-income earners in Shanghai.
ii) Media stars. This celebrity set includes famous actors who fetch thousands of Yuan for each appearance and the organizers of these performances, TV shows and advertisements. It is estimated that there are about 10,000 in this group. ,
-iii) Brokers and agents facilitating business deals and receiving commissions, rebates and margins as their reward.
34 Leung, Phoebe, 、、Shanghai's Big Spenders", International Market News, vol. 105 (1994), 10-11. 43 iv) Dealers of treasury bills, bonds, foreign exchange and postage stamps etc.
V) Certain employees, especially those at management level, of foreign-owned enterprises.
vi) Operators and contractors of ownership enterprises.
vii) Tour guides, who usually receive rebates from shops catering for foreign tourists.
viii)Taxi drivers. Many hire car companies operate on contract basis and under this arrangement, the harder the drivers work the more they earn.
ix) Returnees from overseas appointments, and those with relatives doing business abroad.
X) Certain stock speculators. In 1992, many of those who speculated in stock warrants in the Shanghai stock market made big. Those who managed to speculate cleverly could make a profit of about RMB5,000 per warrant and total of 2.07 million warrants were sold in shanghai in 1992. •
xi) Double-income, second-job holders.
xii) Salesmen and senior management personnel..
-xiii)Specialty chefs and technicians.
xiv) Crew members of ocean-going vessels.
XV) Employees on overseas postings.
Though it is reported that the above groups only add up to about 3 percent of Shanghai‘s population, it is 44 believed that they are definitely not the only target
customers of the FIDSs. As per our primary data, many
retailers mentioned that they are targeting on the middle-income group, who are believed to have the willingness and ability to purchase the merchandises sold
in the department stores.
With an increasing number of high income earners,
Shanghai will become a more attractive location for the
department store industry. These people .are willing to
spend on the non-sufficing items and thus the fashionable
products sold by the FIDSs will certainly be welcomed by
them. For instance, per capita expenditure on jewelry
such as ear-rings, necklaces was RMB4 5.3 6 in 1993, which
increased by 24.3 percent than the year before, while the
expenditure on golden jewelry constituted 94 percent of
the amount.^^
Nonetheless, it will always be wise for the
retailers to break down the population into segments in
order to assess the market potential more accurately. As
per. the primary research, target segments of the co-
operative joint ventures at present include the following
groups:-
35 Shanghai Jingji Nianjian 1994, 302. 45 i) Those engaged in the entertainment industry;
ii) The middle-age group who have accumulated a
certain amount of wealth in previous years;
iii) The expatriates;
iv) Those young and educated people who work in
foreign joint ventures or tertiary industries, and;
V) The entrepreneurs,
Alongside with the growth of the economy as a whole,
it is believed that the size of the above-mentioned
segments will continue to expand in the coming future,
which undoubtedly poses a credit to the market potential
for the FIDSs in the Shanghai department store industry.
And among the above groups, FIDSs can further identify
the relevant target segments on grounds of the
positioning of their stores in the market. By estimating
the growth rate of the identified target segments, FIDSs
can therefore forecast the sales potential in a more
precise way.
Infrastructural Environment
— .
Transportation-wise, the city has been spending
money on improving both its internal and external
transportation network. The Shanghai Container Terminal
.Co. Ltd. was established in 1993 and the number of berths
will be increased from seven to twelve at the end of 46 1995. Internally, Yangbao Daqiao has commenced service at the end of 1993 which further improved the transportation link between Pudong and the Shanghai's city center.
Route No. 1 of Shanghai underground railway, an investment of RMB53.9 billion, has already commenced service on the 10th of April, 1995. Trains run from six o'clock in the morning til.l nine at night, while total length of the railway is 16.1 miles and one needs to take about 28 minutes for the whole journey. There are altogether 13 stations and some of the stations are located in the most prosperous areas in the city such as
Huaihai Road.
In view of the improvement of the transportation system, it is believed that the retail sector will be one of the beneficiaries. According to our observation, traffic congestion is a serious problem in the city.
Therefore, with an improvement in the transportation network such as the introduction of the underground railway, many retailers believe that people will be more willing to go outside for shopping and they will, have more time to spend in the stores, which is favorable to the business of the department stores. On the other hand, this is also a good news to department stores as naturally there will be more locations along the route of
36 Zeng, Hua, 、、Shanghai Shixian Diteimeng, Yihaoxian Quanxian Tongche", Tai Kung Pao, 11 April 1995, 5. 47 the underground railway for them to choose to open the stores.
Nevertheless, there are other probleitis stemming froiti
China's underdeveloped and overstrained infrastructure.
On grounds of our primary research, retailers are awaiting improvement in other infrastructural aspects.
For instance, most of them have mentioned that power shortage was a serious problem in the city. In fact, this may force some large retail complexes to install expensive backup systems.Besides, telecommunication facilities are far from satisfactory. Generally speaking, telephone line is a、、scarcity" in the city and the companies have to wait for a very long time, which can be as long as half a year, to have one more telephone line. As information is one of the keys to success in today's business world, poor telecommunication facilities will definitely undermine the efficiency of the retail operation. Therefore, the inadequacy of infrastructural supports can be a hindering factor for the industry growth in the region. • .
37h〇 and Leigh, 25. 48 A Concluding Comment
In sum, the political, historical, geographical and
socio一cultural environment can be considered as favorable
factors that help in building up an approving environment
and posing opportunities for further growth of the
department store industry. Nevertheless, the volatile
government policy towards the industry is at present the most troublesome obstacle facing the FIDSs. According to
one of our interviewees, their senior executives have to
allocate on average 70 percent of their regular working
hours in dealing with the government officials since
there is no definite set of rules or guidelines for the
operation of co-operative joint-venture department stores
< in China. Therefore a lot of operation details are not
clear and different officials may interpret them in
different ways.
Nonetheless, as far as the economic indicators of
the cities and the market potential are concerned, it can
be concluded that these factors, which affect the
attractiveness of the industry in a more significant and - . •
direct way, are of no doubt encouraging. Therefore, the
environmental factors in general are considered to be
favorable to the development of the industry. 49
Chapter V
INDUSTRY ANALYSIS
In this section, we are going to employ the Five-
Force model proposed by Michael E. Porter to analyze the
intensity of competition in the Shanghai department store
industry. ''The intensity of competition in an industry
is neither a matter of coincidence nor back luck.
Rather, competition in an industry is rooted in its
underlying economic structure, and goes well beyond the
behavior of current competitor. The state of competition
in an industry depends on five basic competitive
forces."38 The five forces are namely, supplier, buyer,
new entrants, substitute and industry rivalry. According
to Porter, any incumbent firms of a particular industry
.... .
38p〇rter, Michael E., Competitive Strategy: Techniques for Analyzing Industries & Competitors, (New York: Free • Press, 1980), 3 50 are facing pressure from these five intervening forces.
、、The collective strength of these forces determines the ultimate profit potential in the industry. if all of
them exert a low level of pressure, the industry will become more attractive.
Suppliers
''Suppliers can exert bargaining power over
participants in an industry by threatening to raise
prices or reduce the quality of purchased goods and
services. Powerful suppliers can thereby squeeze
profitability out of an industry unable to recover costs
increase in its own prices."40 in the following
paragraphs, the • bargaining power of suppliers will be
investigated with the significant assistance of our
primary research.
Unlike other retailers, department stores are bulk
purchasers, they seldom buy their inputs (consumer goods)
from the wholesalers. Rather, they always purchase — . ‘
directly from manufacturers. Under the existing
government regulations, retailers have the rights to
39ibid.
40ibid., 27. 51 source their inputs directly from manufacturers without going through intermediary wholesalers.
Basically, major suppliers to department stores are leather products, stationery, accessories, clothing, kitchen-ware, interior decorative goods, cosmetic, electrical appliances and footwear manufacturers. Though they can be divided into local and foreign suppliers, we believe that their bargaining power can be measured under the same framework. If there _ is., any special characteristics of foreign or local suppliers which will significantly affect their bargaining power, we will address them specifically. In general, we are not going to discuss their bargaining power separately.
In order to examine the bargaining power of suppliers, several factors should be considered which include switching cost, potential threat of forward integration, degree of concentration, etc. In general, we believe that the bargaining power of suppliers is moderate. .
— .
Since the switching costs of suppliers are low, their bargaining power is relatively strong. Although a department store is a bulk and frequent purchaser of suppliers, there are so many department stores and individually-owned enterprises who possess great demand 52 for the suppliers' products. As a result, it is easy for
the suppliers to switch to other bulk purchasers. It is
especially true for the foreign suppliers as they have a
larger international clientele base. Besides, each bulk
and frequent purchaser does not contribute to a very high percentage of a supplier's total sales. In short,
suppliers do not depend on any particular department
store very much.
In addition, the potential threat of forward
integration of some of the suppliers are great. This is
especially true for some famous brands producers, e.g.,
Cartier, Pierre Cardin, Reebok, Panasonic, etc. In fact,
famous brands producers can set up their own retail
operations in China if they can obtain the approval from
the government. Nike, Montagut, Mexx have already set up
retail outlets in Shanghai.
On the other hand, it is quite difficult for the
department stores to integrate backward to develop the
manufacturing or wholesaling business. At present,, most
of -the cooperative joint ventures are newly formed within
the past two or three years. They have already tied up
their capital in the retail operations. It is quite
risky for them to further invest in manufacturing or
wholesaling business before they obtain profit from the
retail business. More importantly, retailers need to 53 obtain licenses for manufacturing or wholesaling business. Thus, the threat of backward integration of
retailers is low.
Among suppliers, it seems that the bargaining power
of famous brand manufacturers is strong. In fact, famous brand products are highly differentiated inputs to
department stores. Famous brand names are unique because
they have their own image and position in the consumers'
minds. They are also important inputs to retailers as
the demand for famous brand products is great in
Shanghai. As per our interviewees, some of the
department stores are indeed depending on several famous
brands to help them to boost up the total sale
performance of the whole store.
In fact, the more famous the brands are, the
tighter are the control on retail prices exerted by
manufacturers. Besides, the retail profit margins of the
famous brand products are generally higher. This is
especially true for clothing, footwear, accessories,
cosmetics and leather products. Thus, many department
stores are actively seeking exclusive selling rights.
Bargaining power of the local producers of foreign famous
brand products are even higher than the foreign producers
of famous brands. The local producers of foreign famous
brand products can only sell a small proportion of their 54 products domestically because of the restriction of the joint venture contracts. Normally, they are required to export most of their products. Since the prices they offered are usually significantly lower than the ones of their parent companies in other countries, the demand for the local famous brand products is very high. As a result, local suppliers of foreign famous brands have high bargaining power.
The strong bargaining power • of . suppliers is neutralized by the wide product assortments of department stores. Department store do not need to depend on any particular supplier to survive because they have so many products to sell. If a supplier terminates the relationship with a department store, the store will still be able to continue its business by selling many other products. Moreover, the scattered nature of suppliers is another factor which reduces the bargaining power of suppliers. It is unlikely that the suppliers will cooperate together to increase their profit.
For some department stores which have more branches in different parts of China, the bargaining power of
suppliers will be reduced slightly. For example,
Dickson, Sincere, Shui Hing, Yaohan, etc. Their purchasing volume will be higher than an independent
department store which does not have branches. 55 Therefore, it can be easier for them to bargain for more
favorable terms with suppliers. With reference to some
of our interviewees, the Shanghai stores may borrow goods
from other branches in other parts of China occasionally.
Consequently, the reliance on suppliers can be reduced
slightly when some products are out of stock. Moreover,
most of the foreign retailers in Shanghai are aiming at
the whole China. As a result, they are willing to set up
more branches and thus the bargaining power of suppliers
will be further decreased. . . 广
According to our interviewees, more. imported
products can be freely flown into China if the country
can enter the World Trade Organization. Therefore, the
bargaining power of suppliers may be lowered in the
future.
As a result, ws think that the bargaining power of
supplier is moderate and it still poses threats to the
industry attractiveness.
Buyers
、、：Buyers compete with the industry by forcing prices
down, bargaining for higher quality or more services, and
playing competitors against each other all at the 56 expense of profitability. In general, the bargaining
power of buyers in the Shanghai department store industry
is high.
Buyers of department stores are usually end-users of
the products and so they will not make profit by
reselling the products. As a result, they would like to
ask for the lowest prices for products which are used for
private consumption. Besides, the prices of the products
sold in the FIDSs are not low. Buying an item from an 广.
FIDS sometimes accounts for a high proportion of a
buyer's income. As per one of our interviewees, Shanghai
people may use most of their savings to buy an expensive
belt. Then, they will start to save money again.
Therefore, people are very cautious in choosing among
alternatives. Naturally, they will become more
demanding.
The cultural characteristics of Shanghai people also
make them more price-conscious and demanding. According
to a department store executive who is a Shanghainese and
the director of the Trade Development Council o.f Shanghai
office, Shanghai people have a tendency to protect
themselves seriously and make the most efficient use of
their money. There are many people living in Shanghai
41ibid., 24. 57 and so life pressure is high as they need to compete and advance. Self-protection is always reminded subconsciously. Shanghai people tend to think that businessmen are cheating in many transactions.
Consequently, they would like to use their money very carefully and buy products which can generate the highest value for money. This is, indeed, not favorable to the department store industry.
Although some rich people may ‘ be . loya.1 to some prestigious brands, many customers do not have strong identifications with brands. In fact, there are so many famous brand products sold in Shanghai, people can switch from one brand to another which will also enable them to show off. Besides, the effect of brand loyalty is only high for luxury clothing, cosmetics and accessories in
Shanghai. For some less expensive items, brand loyalty may not be high. According to a consumer survey about the concepts of brand-name products in China, only 11.5% of urban cloth buyers regarded trademark as the first three purchasing standard.42 Other products . like electrical appliances, stationery, household appliances, toys, etc., the effect of brand loyalty is not high. In
short, the propensity for buyers to switch from one brand
to another is not low.
42Deng, Zhongyuan, �� SurveA y of Consumption and Brand- Name Products", China Market, no. 1, (1992), 21. 58
As buyers are quite willing to switch from brand to brand, it is reasonable to state that customer loyalty to a particular store is low. In fact, many department stores executives have mentioned that the department store industry is an industry which can hardly obtain a high level of customer loyalty to any particular store unless those stores are specialty stores. Actually, the switching cost of a buyer from one brand to another or from one department store to another is very low. There is no financial loss of buyers to stop purchasing from a department store or a particular brand name. The large number of department stores and famous brand products in
Shanghai do further lower the switching costs of buyers.
In sum, it is quite difficult for a department store to log-in its customers.
Moreover, it is not difficult for buyers to obtain much product information. It is easy for buyers to find out information concerning price, product quality, after- sale services, etc. Since the searching cost for
information is low, people will try to obtain as much
information as possible. Obviously, price will usually be the prime consideration for most of the buyers. If
the price of a particular product is higher in one
department store, buyers will naturally go to another 59 department store. Therefore, the department store industry is facing a price competitive market.
On the other hand, there are some neutralizing factors which would reduce the bargaining power of buyers. Buyers are scattered in nature, i.e., they will not form an organization and bargain with department stores collectively. Besides, there are so many customers that individual purchase volume only contributes to a very small proportion, to the total business of department stores. Therefore, losing any particular customer will not significantly hurt the profitability of a department store. Finally, the potential threat of backward integration by end-users is very low. It is very unlikely that buyers will set up a department store because they think that they are squeezed by the retailers.
Although there are some neutralizing factors to balance the bargaining power of buyers, government regulations further strengthen the bargaining power of
the Shanghai consumers. In fact, all. our interviewees have complained about the excessive government protection
of consumers and abuse of consumer rights in many
occasions• 60 On October 31, 1993, the Standing Committee of the
National People,s Congress passed a new set of consumer protection laws which was enforced on January 1, 1994.
Under the new laws43, any sellers are required to repair, refund and accept goods returned if buyers request. Any
failure to comply is an offence to laws.
The Shanghai buyers frequently use this、、right'' even though there is nothing wrong with the products
Sometimes, a buyer would ask for refund -if his or her mother disliked the goods purchased. Sometimes, a buyer would ask for a new one after he or she had mis-treated a delicate shirt. In fact, they would even destroy the goods deliberately because they might think that the department stores would not refund to them if the goods are in good conditions. There are so many unacceptable and unreasonable customers' requests for goods refund and return that the consumers have in fact abused their rights. •
However, the government and the so called ''Consumer
Council" will usually make arbitration in favor of buyers. This, in fact, has furthered strengthened the psychological motive of consumers to continue to abuse their rights for refund and goods return.
43The name of the new laws is Xiaofeizhe Quanyi Baohufa. 61
Finally, some consumers are also skillful at mobilizing the mass media to mis-report that a department
store is exploiting the consumer rights if their request
for refund or goods return are rejected.If the report went public, the government would start to give more pressures to the department store and obviously a negative corporate image would be resulted. It seems unbelievable, but all of our interviewees agreed that this is a major problem of the FIDSs in Shanghai.
In Britain and the United States, the general practice of retailers is to refund and accept goods return without asking questions. One can absorb this in the operation cost and budget it in the pricing process.
Regrettably, most of the FIDSs cannot forecast and calculate this cost accurately because they have started their operations recently. At present, they still do not have any strategies to tackle this .problem which has directly hurt their profitability. Nevertheless, it will be easier for them to follow the western practice if they can - accumulate more experience and market information in the future.
^^According to our interviewees, such kind of mobilization is.sometimes assisted by government officials. 62 In conclusion, the bargaining power of buyers in the
Shanghai department store industry is high which is
unfavorable to the retailers.
Substitutes
''All firms in an industry are competing, in a broad sense, with industries producing substitutes products.
Substitutes limit the potential returns of an industry by placing a ceiling on the prices firms in an industry can profitably charge.we believe that the threat of substitutes is strong in the Shanghai department store industry.
In terms of substitutes, some individually-owned enterprises sell products similar to the cooperative joint ventures. For example, boutiques, electronic stores and footwear shops. In addition, some chain stores and monopoly stores like Benetton, Espirit,
Giordano, Hitachi, etc. are substitutes. More importantly, big shopping malls will be major substitutes 1 to department stores.
45porter' Michael E., Competitive Strategy： Techniques for Analyzing Ir^dustries & Competitors, 23 ^ 63 Actually, there are numerous substitutes to department stores in Shanghai. According to our
interviewees, several big shopping malls will be opened
in coining years. For instance, Shanghai Buyecheng in
Meiguo Road, Shanghai Xiehe Guangchang in Nanjing Road and Ruian Guangchang in Huaihai Road. Many big shopping malls attached to commercial buildings are expected to be built in the near future. Besides retail outlets, entertainment centres and restaurants are tenants of big shopping malls. So, much pedestrian traffic can be attracted.
We think that big shopping malls are very close substitutes as they can provide a variety of product choices as well as entertainment and dining facilities to shoppers. Basically, the difference between a big shopping mall and an independent department store is slight. Actually, some shopping malls are very successful in attracting shoppers, and generating revenues, e.g., the Shanghai Orient Shopping Centre has reported daily revenues topping RMB2 million while the
Sunrise department store has reported a -inonthly sales of over RMBIO million.46
46bow, Josephine, 、、Shanghai's Department store Explosion", International Market News, vol. 105, (1994), 8. 64 The foreign famous brand chain stores and monopoly
stores are also strong substitutes to department stores.
、、The tasteful style and reliable quality of their
commodities, and their first-rate service and pleasant
shopping environment, plus the attraction of their brand
names undoubtedly make them more competitive".47
Huangpu, the largest commercial area in Shanghai, there
are more than 25 such shops. They are really great
threat to the department stores.
Moreover, there is an increasing trend for the
famous brand chain stores to expand their operations.
Last year, the Huangpu district government has given priority to the introduction of monopoly shops.48 There are three channels for them to enter Shanghai. Firstly, those with representative offices in China may open exclusively foreign-funded shops. Under this policy, foreign retailers can set up their outlets without scarifying their autonomy and dealing with the tough
Chinese partners. Secondly, to work in cooperation with domestic commercial groups. Thirdly, to be introduced by the., government's commercial department. since the switching of buyers to substitutes is low, it is commonly
47pan, Qing, ''Name-Brand Shops Mushroom in Shanqhai" Economic Reporter, no. 10, (1993), 24. ‘
48ibid., 25. 65 believed that the threat of this kind of substitute is
great.
On the other hand, the individually-owned
enterprises will sell products which are price-
competitive. The overhead costs of the individually-
owned enterprises are low, so they can sell the products
at lower prices. In some occasions, individually-owned
enterprises may gain access to some famous brand
( suppliers. According to our intervi-ews with the
department stores' executives, buyers do not mind where
they buy the products but they only concern the brand
names of products. As the individual-owned enterprises
can offer a higher price-performance utility to
customers, they are good substitutes to department
stores. This situation is especially true to apparel,
footwear and electrical appliances.
Nevertheless, individually-owned enterprises are not
perfect substitutes, people can only obtain the core
product in the individual-owned enterprises, .they cannot
obtain the augmented products, such as ‘ shopping
atmosphere, packaging service, after-sale service, etc.
However, the famous brand chain stores and big shopping
malls can match the department stores in terms of the
augmented products to a great extent. 66 In short, because of the threat of big shopping
malls, and to a lesser extent, the foreign famous brand
chain stores and monopoly stores, we believe that the
threat of substitutes is great in the Shanghai department
store industry. This is absolutely unfavorable to the
industry attractiveness.
New Entrants
、、New entrants to an industry bring new capacity, the
desire to gain market share, and often substantial
resources. Prices can be bid down or incumbents' costs
inflated as a result, reducing profitability."49
According to Porter, the threat of new entrants can be measured mainly by two factors, namely, barriers to entry and the reaction from existing competitors. In the
following paragraphs, we are going to examine the threat of new entrants by addressing the effects of these two
factors.
Regarding to the characteristics of the department store industry per se, the entry barrier is not very high. Generally speaking, it is_ not difficult for new entrants to gain access to suppliers who are not
49porter, Michael E., Competitive Strategy： Techniaues for Analyzing Industries & Competitors, T. ^ 67 controlled by the existing players. The required level
of initial capital is not high. In short, cost
requirement will not deter the entries of new retailers.
Furthermore, the existing department stores have no
collective action to block new entrants. Individual firm
also does not use any pre-emptive strategies to build up
entry barrier. Besides, the expected intensity of
retaliation is quite low. According to our interviews,
no interviewee has mentioned that they would employ any
pre-emptive strategies to deter the entries of new firms.
Moreover, most of the Sino—foreign cooperative joint
ventures are losing money. Consequently, they cannot
further lower the entry-deterring price so as to threaten
new entrants.
For most of the cooperative joint ventures, they do not have any absolute cost advantage. In contrast, some
state-owned department stores possess absolute cost
advantages, e.g., low rent, low labor costs. However,
these costs are not sufficient enough to block new
entrants. Otherwise, there will not be.so many- FIDSs in
Shanghai.
The existing players do not obtain any proprietary
knowledge and technology. it is very easy for an new
entrant to learn the knowledge and technology of 68 operating a department store. For instance, the parent
company of the Wings department store is the Adsale Group who does not have any experience in the department store
industry before it goes to Shanghai. It is not difficult
for new entrants to employ some retail experts to help them to start from scratch.
On the other hand, the effect of economies of scale may help to build up an entry barrier. As mentioned in the section of suppliers, more branches ‘ in China can allow the department stores to transfer products internally. Therefore, the stock-out cost of any particular store may be lowered. Besides, more branches mean a higher purchasing volume and so lower average unit costs and more favorable terms can be obtained easier
Moreover, some overhead and administrative costs can be decreased by a centralized system, e.g., staff training materials, ordering costs of inputs, employee uniforms, etc. In addition, the competitive power for highly demanded products will be strengthened by establishing more branches. An independent department store will stand at an unfavorable position in gaining supply of some very popular items if excess demand exists. 69 Finally, an effect of a nationally well-known
reputation can be established by setting up more branches
in different parts of China. Although this is an
intangible effect, it can be regarded as a result of
economies of scale. In sum, economies of scale is one of
the contributors that constructs an entry barrier.
Government regulation is the major entry barrier of
the Shanghai department store industry. The central f government has only issued two licenses for Sino—foreign
joint-ventured department stores in Shanghai. It is
commonly expected that the central government will not
issue more licenses until the effects of these two
licenses are fully evaluated. In fact, Yaohan and the
CRC Group have not yet started their operations, so, the
central government will not issue more licenses in the
near future.
As mentioned before, the municipal government has
discretion to issue licenses to co-operative joint
ventures. According to our interviewees, the Shanghai
government has issued more than fifteen bf such licenses.
Therefore, there was a drastic growth in the number of
department stores in the past few years. The Shanghai
government has realized that the market and people need
some time to absorb so many department stores. Besides,
the Shanghai government needs to examine the existing 70 market and re-evaluate the policies. As a result,
according to our interviewees, it is difficult for
foreign retailers to obtain a department store license in
Shanghai in the near future.
Although the characteristics of the department store
industry per se are quite favorable to new entrants,
except the effect of economies of scale, government
regulations form a solid and high entry barrier to new
entrants. As there are already so ina.ny players in
Shanghai, new comers will proceed with cautions. Many of
them will try to consider more seriously before they
really move in the market. In short, the mentality of
becoming a fast follower has been reduced. in sum, we
believe that the threat of new entrants to the Shanghai
department store industry is low in the near future.
Intensity of Rivalry among Existing Competitors
''Rivalry among existing competitors takes the
familiar form of jockeying for position - using tactics
like price competition, advertising battles, product
introductions, and increased customer service or
warranties. Rivalry occurs because one or more
.competitors either feels the pressure or sees the
opportunity to improve position. In most industries, 71 competitive moves by one firm have noticeable effects on
its competitors and thus may incite retaliation or
efforts to counter the move; that is, firms are mutually
dependent. This pattern of action and reaction may or many not leave the initiating firm and the industry as a whole better off. If moves and countermoves escalate,
then all firms in the industry may suffer and be worse off.〃
In our opinion, though there are opposing factors that, to a certain extent, counterbalance the vigor of competition in the department store industry in Shanghai, it is believed that the intensity of rivalry among existing competitors is a great force that undermine the attractiveness of the department store industry in
Shanghai, and the reasons will be given as follows.50
One of the determining factors of intensity of competition is the degree of differentiation. According to Porter, when the product or service is perceived as a commodity or near commodity, choice by buyer will be largely based on price and pressures for intense price competition will result, which eventually lead to a more volatile competition•51 According to our primary
50 Porter, Michael E., Competitive Strategy： Techniques for Analyzing Industries & Competitors,~iT^
Ibid. 72 research, among the co-operative joint ventures, buyers
do have certain preferences to particular stores as the
incumbent firms try to differentiate oneself from the
others in terms of product assortments. In fact, many of
them are exclusive sellers of certain high-end brands.
When customers have loyalties to these particular brands,
they have to go to the particular stores to purchase
them, and this inevitably helps the stores to secure
loyalties from the customers. Therefore, product differentiation helps creating layers .of insulation against competitive warfare.
Slow industry growth turns competition into a market share game for firms seeking expansion. Therefore, market share competition is a great deal more volatile than is the situation in which rapid industry growth insures that firms can improve results just by keeping up with the industry.52 in Shanghai, this factor tends to lower the intensity of competition since the city has attained high growth rate in retail sales volume in the past few years. Shanghai's retail sales totaled RMB48 billion in 1992, up 19.4 percent on 1991.53 工打 1993, retail sales volume reached RMB62.43 billion, which was a
34.3 percent increase of 1992.^4 Thus according to these
52 Ibid., 18.
53 China's Consumer Market, (Hong Kong ： Trade Development Council), 8.
54 Shanghai Tongji Nianjian 1994, 184. 73 figures and the primary research data, it is believed
that the industry will still experience a relatively high growth rate in the coming few years. Taking into account of this factor per se, intense competition is unlikely.
Nevertheless, there are other factors that intensify the competition and counterbalance the above-mentioned ones. One of them is the level of fixed and storage costs relative to value added. Basically, high fixed costs create strong pressures for all -firms to fill capacity and this situation often leads to price cutting when excess capacity is present. Among the FIDSs, the most significant fixed cost is rent. Regarding to one of the interviewees, rental payment, is about one-third of the total costs of operating a department store in the city. Since it is believed that this fixed cost is high relative to the value added, firms may feel enormous pressures to increase sales volume so as to break even.
On the contrary, as the state-owned department stores do not have to bear the high rental .cost, FIDSs will probably be the losers if the state-owned stores sell similar kinds of merchandises as they do. In fact, these state-owned stores do determine to catch up. For instance, Shanghai No. l,s new outlet next door to Isetan sells its most up-market lines on open shelves .55 And
Leung, Phoebe, 9. 74 according to our primary research, these stores will also try to upgrade their images by providing a better shopping atmosphere and selling more high-end products.
Therefore, it is likely that there will be more duplication on the product assortments among the retail
FIEs and the state-owned enterprises, and the retail FIEs will be at a disadvantageous position.
Another kind of cost that affects the intensity of competition is storage cost. Storage cost 'of merchandise does not constitute a high proportion of the firms' costs since most of them only store inventory for around half一 a-year and secondly, they do not have to store the goods at. prime locations. Nevertheless, another source of pressure comes from the nature of the products. since some of the products such as clothing and shoes are seasonal and highly dependent on the recent trends, firms will be vulnerable to temptations to shade prices in order to insure sales. •
Rivalry in an industry becomes even more intense if a number of firms have high stakes in Achieving success there .56 According to our findings, goals of all co- operative joint ventures are expansionary in nature and so they have the willingness to sacrifice profitability
56 Porter, Michael E., Competitive Strategy: Techniques for Analyzing Industries & Competitors, ^ 75 in the short run. In fact, many of the interviewees have explicitly mentioned that they have prepared to lose in few more years as their primary goals were to build up their image and capture market share.
"Competitors diverse in strategies, origins, personalities, and relationships to their parent companies have differing goals and different strategies for how to compete and may continually run head on into each other in the competition."57 工打 general, there lacks a great deal of diversity among the strategies of competitors in the industry. Though FIDSs position themselves as either middle- to high-end or high-end retailers, there is in fact a large duplication on their target customers, mainly being those who work in foreign joint ventures and earn a higher income than the average workers. With most of them located in prime locations, they try to create a comfortable shopping environment, provide better services and sell the goods at high prices. Technically, it is easy for competitors to imitate strategy in the department store industry; a department store seldom owns very critical and proprietary knowledge or resources which will insulate competitors from imitation. Rather, successful strategies are usually copied promptly by competitors who may sometimes further refine the strategies imitated. In
57 Ibid., ]9. 76 sum, there is no significant discrepancy among the strategies adopted by FIDSs and this definitely fosters the intensity of competition in the industry.
There are numerous department stores in Shanghai.
The number of all co-operative joint-ventures, including the Taiwan-based ones, are already over twenty. Besides, there is a large number of small- and medium-scale state- owned departments. For large-scale state-owned ones, ina(inly there are three, namely Shanghai Na. 1 Department
Store, Shanghai Hualian Commercial Building and Shanghai
No. 11 Department Store. All of these three stores have their branches and it is most likely that they will renovate and open more branches in the future.
Basically, there is a great difference between the co- operative joint-venture and the state-owned enterprises in terms of sizes, number of employees and sales volumes, however, the FIDSs themselves are much similar to each other. According to Porter's argument, since the industry is dominated by one or a few firms, the leader (s) can impose discipline as well as .play a co- ordinative role in the industry through devices like price leadership. However, the case is different in the context of the department store industry in Shanghai.
Since there is in fact a great difference between the state-owned enterprises and the joint ventures in terms of target market, product assortments, pricing and 77 promotion strategies, the two different kinds of stores are in fact competing in virtually two different markets.
Therefore, only the co-operative joint ventures are much similar with each other, and the situation will lead to instability only because the competitors may be prone to fight each other and have the resources for sustained and vigorous retaliation. Nevertheless, one should not neglect the fact that the state-owned stores are up- grading themselves in terms of service quality, shopping atimosphere, product varieties and quality, it is foreseeable that competition in the industry will become bitter and bitter in the coming future. •
Exit barriers are high in the industry. It is believed that government discouragement of exit out of concern for job loss is an important exit barrier.
Actually, it will be dangerous for a firm to take the risk as this may ruin its relationship with the government. As 、、guanxi,, , i.e. relationship, is commonly regarded as an important factor in doing business in
China, it may be difficult for a firm to re-enter the field or develop other businesses in the country if it quits. Therefore when exit barriers are high, companies that lose cannot give up but they may have to resort to extreme tactics. Eventually, this may lead to persistently low profitability of the entire industry and reduce its attractiveness. 78
To conclude, each of the five competitive forces has its own effects to the industry attractiveness of the
Shanghai department industry. The bargaining power of supplier is moderate and not very unfavorable to the industry attractiveness. Nevertheless, the bargaining power of buyers, threats of new entrants, substitutes and rival competitors are great. These four factors are adversely affecting the industry attractiveness. In sum, tlie five competitive forces make ‘ the • industry not attractive.
•‘ « 79
Chapter VIII
INDUSTRY ATTRACTIVENESS AND FUTURE TRENDS
In this section, we are going to analyze the attractiveness of the Shanghai department store industry by integrating the impacts of the external environment and the five competitive forces. Implications can be concluded for the existing FIDSs and the potential entrants who are planning to enter the Shanghai's market.
Although the external environment is favorable to the Shanghai department store industry, the competitive forces are negatively influencing the attractiveness of the industry. From a strategic point of view, we still think that the industry is not attractive in the near future.
It is true that the market potential is huge because of the economic development of Shanghai and its abundant urban population. However, we think that there is a long way to go before the market potential can be fully realized and exploited. That means a big market potential is there, but the purchasing power of 80 Shanghainese is still not sufficient enough to accommodate so many retailers who sell quite expensive products in the market.
We think that the market potential is being exaggerated by many publications. Therefore, many retailers have rushed into the market. We are not saying that the retailing prospect is dim, however, if the present market is so attractive, most of the FIDSs will be己 profitable. In fact, no retailer can make profit at present. Even Sincere, the first retail FIDS in
Shanghai, still suffers loss. All of our interviewees agreed that they are losing money but are willing to wait for the long term returns.
According to our analysis of the competitive forces, intense competition is there since there are so many capable competitors and close substitutes. indeed, we think that these two factors have contributed so much to our conclusion that the industry is not attractive in the near future. Besides, the numbers of potential, new entrants are not few. Many big shopping malls, famous brand-name monopoly stores and department stores will be opened. Competition is expected to be more and more intense while close substitutes will also impose a higher degree of pressure to the survival of FIDSs. The size of the cake is not enlarging at fast manner, but many 81 people are very hungry. They will try to use whatever means to fight for survival. This is definitely not favorable to the existing players.
Moreover, the future competitive power of the state- owned department stores cannot be ignored. Shanghai No.
1 Department Store has formed a joint venture with Yaohan and the new store will be opened in the second half of this year. By learning the experience from the foreign retailers, many state-owned department. stores have reformed themselves. For example, the new Hualian department store opened several months ago. In addition to a new supermarket, the store has improved so many aspects in response to the market needs, e.g., product assortments, interior decoration, open-shelves displays, etc.
We expect that there will be more and more pressure for those state-owned department stores- to move upward as government subsidy will be reduced along with the development of the market mechanism. Since those state- owned stores possess some absolute advantages, e.g., prime location, big shopping areas, preferential treatments by some suppliers, etc., they will be capable competitors if they can upgrade themselves properly. 82 In addition, existing regulations are not comprehensive. The FIDSs are facing a volatile regulatory environment. It is expected that the Shanghai government will modify the existing retail policies because the development of the retail sector is at its embryonic stage. Nonetheless, modifications may not be favorable to the existing players. In fact, the existing regulations are quite tough. Owing to the difference in business mentality between the Chinese officials and th《eir western counterparts, changes in regulations may not be so favorable to the FIDSs.
As a result, we would recommend the potential new entrants should better wait for several years for improvement and expansion of the market. Potential entrants should then possess sufficient preparation and knowledge to exploit the market potential.
On the other hand, the long term prospect cannot be ignored. The strengths of the retail sector, together with the characteristics of Shanghai, suggest, that there is a real opportunity to develop the city as one of the biggest and best shopping centres in the region. The scale and quality of demand, the extent of competition and international interest in the sector, all suggest that expansion and improvement of sectors is likely there over the next few years. 83 Besides, the market situation changes so fast and we believe that the existing players can make profit in the long run if they can formulate appropriate strategies.
As a result, we would not suggest the existing retailers to retreat from the Shanghai market. They should prepare sufficient financial resources to enable them to lose money for several years. They should formulate long term strategies which can effectively exploit the huge market potential.
In the future, competition will definitely be more and more intense, but the retail market will be more developed with a better set of regulations. with the accumulation of success and failure experience, it is reasonable to anticipate that, the government will formulate more comprehensive rules and regulations in governing the department store industry. Clearer guidelines and a lower level of uncertainty can be expected. •
〇n the other hand, more western retail concepts will also be landed and thus the industry will continue to grow. Sluggish condition is very unlikely to be resulted. In fact, there are so many western style supermarkets in the territory. The Yaohan Group has claimed that all of its supermarkets are profitable in
Shanghai. Besides, we believe that more western 84 marketing concepts such as direct selling, tele-
marketing, mail-ordering etc., will be introduced to
Shanghai. Retailers like general merchandise store,
.discount stores will also turn on their fluorescent tubes
in shopping districts. Actually, Wal-Mart is planning to
invade the Shanghai retailing market.58
There are also opportunities for major retailers in
Shanghai to expand into other parts of China. Because
Shanghai is in the vanguard of modernization in China,
both local and overseas firms can use the city as a
stepping stone to major expansion throughout the country.
Finally, FIDSs should reconsider their investment
intentions if operating costs, e.g., rent, salary, etc.,
continue to rise as fast as they did over the last few
years, because the purchasing power of the local population is not yet sufficient to justify such high
costs. At present, most overseas firms justify their presence in Shanghai as being an essential part of
learning process in China, but they will not do this
indefinitely. •
58 Bow, Josephine, -Shanghai Department store Explosion", 10. 85
Chapter VIII
RESEARCH LIMITATIONS
In conducting the study on the selected topic, there
are several limitations that we would like to pinpoint.
Firstly, though we have conducted a field-study on
the environment, there have been great changes in the
city from time to time and there is difficulty for us to
keep track on the most up-dated changes. For instance,
Sincere has now completed phase two of the department
store and the underground railway has already commenced
service. Therefore, we will have no way to assess the
impact of this change by observing the environment again
due to the time, human resources and financial
constraints.
- >
Secondly, we have only conducted interviews with
some of the co-operative joint ventures. In fact,
information collected through these interviews serves as
.an important source of information for the part of .
industry analysis, however, this kind of primary 86 information is rather subjective in nature in some occasions.
Finally, as per our discussion, government policy is one of the important factors that affect the attractiveness of the industry. However, no interview could be arranged with the government officials concerned, and thus the impacts of the policies can be assessed only based on the opinions of the retail and the secondary information. ‘ 87
Chapter VIII
FUTURE RESEARCH AREAS
(In this paper, we have studied the department store
industry in Shanghai from a strategic marketing point of view. Nonetheless, there are several areas that can be
focused for future research. For instance, industry attractiveness is chosen as the hub of this paper but researchers can go into the company level analysis and suggest strategies for the practitioners. Besides, as far as operational issues are concerned, studies can be conducted from a retail management perspective. Last but not least, one can also carry out longitudinal studies from a similar perspective as the 'authors so that interested parties can keep track on the speedy changes that go on in the industry. ,
In order to understand more about the retail sector, several other aspects can be examined such as consumer behavior and attitudes, the development of the wholesale system and its impacts to retailers. 88
BIBLIOGRAPHY
Books
Aaker, David A., Strategic Market Management. 3rd ed The United States of America: Richard D. Irwin, Inc., 1991. ‘ 丄丄丄L .,
China:s Consumer Market, Hong Kong: Trade Development Council, September 1993. •
Cravens, David W., Strategic Marketing, 2nd ed , The United States of America: John Wiley & Sons Inc., 1988.
Guojia Tongjiju, Zhongguo Tongjizheyao, Beijing: Zhongguo T〇ng〕i Chubanshe, 1994.
Guojia Tongjiju Renkou Tongjiju, Zhongguo Renkou Tongji 溫〕lan 1993, Beijing: Zhongguo"-T^j ij u Chubanshe；
Michael E., Competitive Strategy： Tect^gnP.^ for Analyzing Industries & Competitors, Npw Ynr-v- tt^^^ Prr^：^?, 198 0. ,
Shanghai Tongjiju, Shanghai Tongji Nianjian 1994 Shanghai : Zhongguo Tongji Chubanshe, 1994 ,
Zjiongjiua —Renmin Gonqhequ卫——Xiaof eizhe Quanyibaohuf a, Shanghai: Xiaoya Dianqi Jituan, 1994. —
~ Periodicals ., .
二frei，r,. Nora Karch, Nancy and Shi, Christiana Smith, The Engine of Success in Retailing", The McKinsev Quarterly, no. 3, (1993), 101-116.
Blass, Anthony, 、、Tracking Consumer Tastes", China TradP Report, (July 1993) , 10.
•ook, Esther Wachs 、、Born to Shop", Far Eastern Economic Review, (19 August) , 44-45. 比 89 Bow, Josephine,、、Shanghai's Department Store Explosion", International Market News, vol. 105, (1994), 5-io.
• 、、Suiting up the Fat Cats", China Trade Report, (June 1994) , 2. — ‘
、、Brand Names for Peking", China Trade Report, (April 1992) , 4 . , \八]^^丄丄丄
^^Changshi Tongzhang Huiluo, Nongcun Rengbu Lequan'' Mingpao Daily News, 18 March 1995, B2.
Chen, Gang, 、、High Grade, High Price, Yet Acceptable Management Strategy of Shanghai Oriental Emporium", Economic Reporter, no. 7. (1994), 10.
^hen, Kekun, 、、Shanghai, The Dragon Head is Swayinq", Economic Reporter, n〇.8, (1993), 25-27.
Cheng, Elizabeth, 、、New Opportunities", China Trade Report, (May 1992), 6-7. ^^^^^^^^^^
Big Market"' Hong_j^ Business, (19
二ow Clement Kong-Wing and Tsang, Eric Wing-Kwong, 、、Distribution Reform in China, an Analysis of the Private Sector Development-, & Distribution Management, vol. nn 9」2， 33. Clifford, Mark,、、Consuming Passions, Retailers Beain to 〒冗 1 二 Their二na Dream", Far__Ea5^ Economic Review, (11 February 1993), 44-45. ‘
，二lis B”en and Kelly, Scott I, ^Competitive Advantage r、/e斤ling"' p of RetaU Distribution & Consumer Resear^vol.- 2,(1992) , 3 9 6 •
二二,Targets the Affluent、ChHl^^
Retail Market", —mic
二二 p 〜。ver China's Recent Consumer Market", Standard China Trade, (August 1992), 38-49.
Gavin, Meredith, 、、China's Super Spenders", The china Business Review, (May-June 1994), 5.
Guo, Qiang and Harris, Phil,、、Retailing Reform and Trends 二n China , Internation^Journal of Retail ^JH^ihnM.. Management, vol. 18, no. T, (1990) , 31-39. 90 Helsell, Tina and Reinganum, Julie, 、、To Market, to ^e China Business Review, (January-February 丄yy4t), JO-J4 .
Hendry, Sandy, 、、（：onsumer Revolution", China Trade Report (February 1993), 5. ‘
H^ David and Leigh, Nancy,、、A Retail Revolution", The China Business Review, (January-February 1994), 22-28.
Hu, Feng, 、、China, s Economy Continues Steaming Ahead Problems Arise in the Continued Heating of Economy, Would Deepening Reform Find a Way Out?", Economic Reporter, no 6, (1993), 34-35. ^ ‘ •
、、三mpending Store Wars", China Trade Report, (July 1992), 2 3 • < Jian, Chuan, 、、F〇reign Businessmen Explore China, s Consumer Goods Market", China Mark^, no. 8, (1992), 5-8. h“i,、、reking ^ Guarantee", giina_^de Report, (January
Leung, Pheobe, "Shanghai's Big Spenders", International Market News, vol. 105, (1994), 10-11. 〇己丄
二A Market You Can't Afford to Ignore", Honq Kong Business, (Annual 1994) , 58-60. ^^^^^
=az，r, Jurgeon and Gottschlich, Hendrik "Time-Cost- Quality Leadership - New Ways to Gain a Sustainable Competitive Advantage in Retailing", International ^^ur^al of I^tai) ^^^^ no. 4,(丄yyj), d-丄“ i^TrrL'a'ct.'o^a• Retailing in a Changing Environment" 广 Transactional Retailing, Kaynak E., ed., Berlin: Walter de Gruyter & Co., 1988, 211-226. vva丄ner ae
Qing, 、、？ ame-Brand Shops Mushroom in ’ Shanghai", Economic Reporter, no. 10, (1993), 23-25.
；?=。% Kun^ Peter and Ho, Khoon-Ming,、、Enter the V^T , The China Business Review. (March-April 1994), 40-
【7t,r, Michael E., 、、How Competitive Forces Shape 【芸二 t^y' Harvard (March-April 1979),
^Retail Trade: Problems and Prospects", Honq Koncr Business (Annual 1994), 54-56. ^^^~~^^ 91 =bins, Gary, 、、Shui King Expands into Mainland China, P^ns Combo Stores, Shanghai Celebration", Stores, (January 994), 74-76. ，【y^^e + l; J二sh;、、Not Just Skin Deep", China Trade Report, (April 1994), 6.
fender, Henny, 、、No Bed of Roses, Yaohan Discovers the
S^ytt，， Hans 、、Developing and sustaining competitive advantages through interorganizational relations between retailers and suppliers^, The International Review nf Rggl tirifution Research, vol. 2. (丄yyj), ibi-i64.
二?:卜严'/、5 Flourishing Consumer Goods Market and the gj^stable Factors", no. 9, (1993), 35-
；；二ef r^s^ ,、、L5e.arning Fast",
！^uly "994)? Big on China", Business.
Wortzel, Lawrence H.,、、Retailing Strategies for =ur 零 Marketplace", vol. 1, no. 4, (Spring 1987) , 45-56. g 土扣'Y 肌、、T[rencis of China's Consumer Goods Market", Economic Reporter, no. 6, (1994), 14-15. ,
Zeng Hua,、、Shanghai Shixian Diteimeng, Yihaoxian Ouanxian Tongche", Tai Kunq Pao, 11 April 1995, 5 Quanxian
"Zhongguo Shangpin Shichang Zhonqtr Pinawen =二nri Xia-n Sh_u", F2，
Interviews
= t ^.Chinese Arts & crafts (HK)
笠 —y. IHD Holdings Ltd.
The^shangha. Sincere Conpany 92 Mr. Omata. Shanghai Isetan Department 14 June 1994. Store.
Mr. Ma, Dennis. Wings Department Store 14 June 1994. (The Adsale Group)
Mr. Wu, Zhongshang. Shanghai No. 1 Department Store 15 June 1994. ‘
Miss Lee, Rita. Jin Jiang Dickson Centre. 15 June 1994.
Miss Leung, Phoebe. Hong Kong Trade Development 16 June 1994. Council
Lam, Jackee, The Sincere Department Store 15 & 16 February 1995. (China) Ltd.
Miss Wong, Miranda. Wings Department Store 7 March 1995. (The Adsale Group)
‘ • -.r .:丨..:..丄 - ‘ ...... 貪:r.:,;：；^:;:、：....麵.. • ‘ ’ ...... …厂：;...： “ ‘ -..-...- .:...:::...‘:.;.，-一.汤、憑急為紀../M-'：•‘ ... - . 、• • .、,.'：： 卜..’〜；,• ‘• ，. • . •.... -•••....-〜，、. .- •. . •. • • • -
... 一…. ， -•
.‘ -• -
• - . . V - .
f
• • • f » t ‘‘
• » * .
•； -. f ： ： i 3. r . - , - -<0 ,
、•^戴 . .. . • •
缺、.- ：• . -
好 \ V 、 、 . • . •. . • . ； V CUHiMMtmK Librari丨 DaaET3T0D