The retail industry in China - Essay Example

? Business Economics Table of Contents Business Economics 1 Table of Contents 2 Introduction 3 Porter’s Five Forces Model 3 Bargaining Power of Buyers 4 Bargaining Power of Suppliers 5 Threat of New Entrants 5 Competition among the Existing Players 5 Threat of Substitutes 6 Barriers to Entry 7 Conclusion 7 Recommendations 8 References 9 Introduction The age of globalization has opened up a plethora of opportunities for business organizations operating in the present world. Globalization has rendered the entire world into a boundary less market with organizations trying to establish their presence in the market. The growth of free trade as well as emergence of developing economies like China and India also have opened up new vistas for firms trying to expand their business in the wake of saturation of the traditional markets of Europe and USA. However international expansion also involves considerable planning as there are considerable entry barriers in new markets as well as other forces that affect the business prospects of firms. The present study would try to analyze the retail industry in China with the aspect of foreign company trying to enter the retail industry in the nation. Porter’s Five Forces Model The analysis of the competitive framework of any industry can be done using the framework of the Porter’s five forces model. As shown in the figure below, the five forces include bargaining power of buyers, bargaining power of suppliers, threat of new entrants, threat of substitutes and competition among the exiting players. Figure 1: Michael Porter’s Five Forces Model (Source: Hill & Jones, 2007, p.45) Bargaining Power of Buyers Buyers have a higher bargaining power when they have a large number of options available before them. Traditionally, the Chinese retail industry was a seller’s market and with few retailers consumers had a low power. However since 1978, with competition growing and a large number of stores opening up including store based organized retail, the number of options has increased considerably for the consumers. Moreover with international retail chains like Wal-Mart and TESCO making their foray in the nation, the consumer’s choices have increased significantly. Consumers are also becoming more aware of various consumer protection legislations like 1993 Chinese Consumer Protection Laws and others that have resulted in high bargaining power of consumer in the Chinese market (Zhuang, Herndon & Zhou, 2003, p.42). Bargaining Power of Suppliers In the past history Chinese suppliers had an edge over the retailer primarily due to legislative policies like the planned price based system. This helped the suppliers to have greater bargaining power. However with the abolition of this policy has led to suppliers in a situation of overstocking that has forced them to lower prices that has in turn heavily reduced the bargaining power of the suppliers. In addition to this the emergence of private label brands and supermarkets has also considerably dented the bargaining power of the suppliers. Hence it can be easily stated that the extent of this force in the Chinese retail industry is low (Zhuang, Herndon & Zhou, 2003, p.40-41). Threat of New Entrants The Chinese retail industry was initially highly protected by the government that made it difficult for new players to enter the market, however with liberalization coming in a step by step manner, the entry barriers have decreased owning to smaller economies of scale in the retail industry. However, the coming up of international supermarkets has also threatened the existence of small individual retailers and has also increased the entry barriers for the new players (Bird et. al, n.d., p.44). Competition among the Existing Players The opening up of the Chinese economy and its liberalization has increased the number of competitors in the market. The emergence of international retailers has further increased the extent of the competition in the retail market. The figure below shows the list of top ten retail brands in the multi brand retailing. The local Chinese retailers are also registering growth in the range of 40 percent with regards to the number of stores in the country. The emergence of foreign players has also increased the service delivery standards and has also initiated predatory pricing that has given this competitive force a high impact in the industry (China Chain Stores and Franchisee Association, 2011). Figure 2: Top ten Multi Brand Retailers in 2010 (Source: Deloitte, 2010, p.33) Threat of Substitutes Substitutes for the retail industry in China include online stores that have gained considerable popularity in the recent years. However this format is still in its nascent stage and there is still sometime before which it can offer competition to brick based retailers However in the area of wholesaling the aspect of backward vertical integration can offer suitable competition to the wholesalers. Therefore it can be safely concluded that the threat of substitutes is medium to low in the Chinese retail industry (Zhuang, Herndon & Zhou, 2003, p.40). Barriers to Entry In spite of the huge opportunities in the Chinese markets, there also exists considerable number of entry barriers that mainly include government restrictions on foreign players. There are considerable numbers of restrictions of non public foreign firms that operate in the market. The communist regime in the nation also has a policy of asking foreign players to leave if it feels that these companies are inducing capitalism in the market. The areas of supply chain management also has certain entry barriers with government polices like unified procurement of products and planned pricing strategy that give considerable bargaining power to the suppliers. The price rationing system prevalent in China also cuts down the freedom of companies to use a pricing strategy to generate advantage and thwart of the competitors in the market. This is extremely critical as most of the foreign retail brands draw their competitive advantage on the basis of a competitive pricing strategy. The policy of competition in the market is also highly regulated with the government keeping tabs on the level of competition especially with the foreign players in order to ensure that the interests of the domestic retailers are safe in the nation. However, other than legislative aspects the retail industry in China is characterized by low economies of scale making it easy for new entrants to establish their presence in the market (Zhuang, Herndon & Zhou, 2003, p.30). Conclusion The analysis of the Chinese retail market shows considerable advantage considering the rapid economic growth of the nation. The analysis of the five forces model reveals that the competitive landscape is very congenial for investing in the market. However certain entry barriers like government regulations can emerge as a considerable source of barrier for new foreign players to establish their presence in the market. However since the competitive landscape of the market has become extremely competitive hence, it has become somewhat difficult for new market payers and instantly grab the market share. The key lies in formulating an optimum service mix that can help in generating competitive edge for an organization. Recommendations A suitable market entry strategy for a foreign retailer should be based on a partnership format. A local partner should be chosen as the strategic partner though the joint venture route. This would help in understanding the market in a better way as the local player would have a better knowledge of the local market conditions. The area of supply chain management that is highly regulated and crucial can be handled by the local partner more effectively. Most of the goods would be sourced locally through the local partner. Packaging and store displays should be made in the local language. In addition to this an integrated marketing communication strategy should be used including all channels like electronic, print media and online channel. Finally a strategy of thinking globally and acting locally should be used in order to take care of the strong cultural views and sentiments of the target market so as to help make better connect with the customers and help generate sustainable competitive edge in the market. References Bird, B. et. al. (No date). Retail in China. [Pdf]. Available at: http://www.wtcbn.com/public/userfiles/ChinaRetailIndustry%281%29.pdf. [Accessed on December 17, 2011]. China Chain Stores and Franchisee Association. (2011). 2010 China Top 100 Chain Retailers Unveiled. [Online]. Available at: http://www.chinaretail.org/shownews.asp?id=1986. [Accessed on December 17, 2011]. Deloitte. (2010). China power of retailing 2011. [Pdf]. Available at: http://www.deloitte.com/assets/Dcom-China/Local%20Assets/Documents/Industries/Consumer%20business%20and%20transportation/cn_cbt_ChinaPowersRetailing2011_181011.pdf. [Accessed on December 17, 2011]. Hill, C.W.L. & Jones, G.R. (2007). Strategic Management: An Integrated Approach. Cengage Learning. Zhuang, G., Herndon, N.C. & Zhou, J.N. (2003). The Transforming Structure of Competition in China’s Retail Industry. [Pdf]. Available at: http://mkesrm.cityu.edu.hk/zhounan/The%20Transforming%20Structure%20of%20Competition....JMC.pdf. [Accessed on December 17, 2011]. Journal of Marketing Channels, Vol. 11 (1) 2003. Read More