WTO opens up China retail markets

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Hoards of determined Chinese shoppers packed the aisles this week in the run up to the Chinese Spring Festival in Wangfujing, Beijing's up-market main shopping street, symbolic of opportunities in the burgeoning retail market.

With its accession to the World Trade Organization, China is widely perceived as the world's greatest retail opportunity. WTO membership will mean not only lower duties and taxes, thus reducing the price advantage of duty-free shops, but also a rush of new retailers in the domestic market as restrictions ease.

Confronted by the competitive shock of foreign operators, many local Chinese store chains and department stores have begun to merge and take steps to improve their management. Under agreements relating to China's WTO entry, the situation is set to open further for foreign retailers clarifying licensing procedures, streamlining company structures and distribution. According to Xinhua, the official news agency, competition in Beijing's retail market has reduced profit margins to less than 4% in some sectors.

But while it is easy to be dazzled by a population of 1.3bn and the highest growth rate in world tourism, the reality is that less than 10% of Chinese citizens have incomes that can afford Western products. For luxury goods, the current market volume is equivalent to that of a small EU state. And on the issue of duties, China's general tariff level dropped to 12% from 15.3% in January 2002. Tax reform is likely to be gradual rather than revolutionary and tariffs are scheduled to fall further to an average of 9.4% and 7.1% by 2004.

"There's something new and big happening in the Chinese psyche. It's quality-of-life improvements," said one analyst quoted in the South China Morning Post. According to a 1999 Government survey, China's richest 3% earn more than Rmb500,000 ($60,500) a year, and the top 0.8% earn more than Rmb1m ($120,800). The average Beijing salary is only slightly above Rmb1,000 ($121) per month. Foreign luxury goods still sell at foreign prices and sometimes higher because of high taxes.

Within two years of accession to WTO foreign retailers will able to take a majority stake in joint ventures. International brands have already made inroads into China's domestic retail scene. And with foreign companies paying salaries up to ten times the local level, this is set to fuel a new consumer boom. Japanese retailers Isetan and Seibu, Lane Crawford of Hong Kong and Printemps have been present in China since the early 1990s. Cartier is planning to open ten new boutiques in China, mainly in hotel malls, over the next three years. Korean duty-free and hotel operator Lotte, Gucci, Louis Vuitton, Ferragamo and others are following with expansion into China.

"An increasingly large part of the population don't mind spending if they find the right product. We find that price will not be an issue," said Estée Lauder Asia Pacific senior vice-president Michel Grunberg. "China is a small market in terms of numbers, but consumer spending has never declined in China."