It's now or never for retailers seeking to cash in on the growing middle class in China, which is currently 300 million people strong. China retail sales increased 8 percent to $580 billion last year, and gross domestic product is expected to grow 7 percent in 2004, according to consultant A.T. Kearney. The U.S. economy is growing at half that rate.
Now that China has joined the World Trade Organization, the country will remove rules that had discouraged foreign businesses, such as the one stating that companies with less than $2 billion in market capitalization must have a Chinese partner.
Only 14 global retailers currently operate in China. Wal-Mart runs 31 stores and plans to open 50 more within five years. Home Depot is setting up a business unit to consider building and buying stores there. Costco and Office Depot are also pursuing opportunities.
The Body Shop paid $20 million to buy 75 percent of Mighty Ocean, the private company that runs 28 Body Shop stores in Hong Kong and Macau. The Body Shop says it will use its new Hong Kong operation as a base for expansion into mainland China. And Italian designer Giorgio Armani just opened its fifth Chinese outpost, a 10,760-square-foot store in Shanghai. It plans 20 to 30 new Chinese stores by 2008.
But retailers should be cautious, warns Ernst & Young analyst Jay McIntosh. Risks include intense competition, limited distribution infrastructure and a rapidly evolving legal, tax and regulatory environment.