Market Status


You would hardly have thought of it 12 months ago. A power channel in China? Not a chance.
But times have changed. While no one would seriously claim a power channel is in place in China, the platform for its growth definitely exists. Compliance requirements as part of the WTO agreement have fused with an eagerness to attract investment in China as well as a customer awareness that brand does actually matter. It’s all adding up to a potentially powerful mix.
But back to reality. Currently, China’s distribution channels tend to rely on an informal network of relationships largely based on the concept of ‘guan xi’.
GBC Asia managing director Fred Moh says: "Distribution channels for office products in China are not well-defined and are, at best, fragmented in structure. The most important media in our industry is a weekly 3-inch thick catalogue sent to end users, with the names of many office product resellers advertised in the catalogue.
"Further to this, any outsider interested in making money in China will need to recognise the significance of good networking or guan xi. Fostering business relationships at the trade as well as the end customer level is vital."
That, up until now, has made doing business in China sometimes enormously frustrating. But it is precisely that lack of a proper distribution channel that presents potential resellers with their opportunity at least in urban China. Officemate CEO Martin Ma explains it succinctly.
He says: "When you are a two- or three- year-old child, do you think in terms of the end of your life? Not at all – the horizons are limitless. And in the same way, the OP market here is like a two- or three-year-old child and the potential seems limitless."
Ma is well placed to comment. His company has approximately 200 outlets in China serving 80 cities, and enjoyed sales in 2003 of $72.5 million. Yet, despite that sales figure, it only accounts for 0.2 per cent of the market, something he attributes in part to the lack of a sophisticated distribution network. That could change, he adds nevertheless, because the market "is undergoing a revolutionary change".
Most significantly, that revolutionary change has included a major shift in the retail laws. The new laws no longer require foreign operators to enter into joint venture agreements. Nor is there the stipulation that a company must have $2 billion in annual sales to set up shop independently. Add to that the fact that the government had to overcome significant domestic opposition to remove barriers, and it is clear that a concerted effort to make China a more attractive investment arena is developing.
For one, it has enticed Staples. The $18 billion-a-year reseller of office products swooped in August to conclude a joint venture agreement with internet player Staples has taken a 15 per cent share in the online retailer for a near $10 million price tag.
Little wonder that Staples spokesperson Owen Davis says: "Working with is an efficient way for Staples to gain a foothold in China and obtain a long-term view of its market potential."
The move has also received the seal of approval from Office 1 Superstore International, the ubiquitous global retailer with stores in more than 20 markets. CEO Mark Baccash says: "Staples did the right thing to get market intelligence at low cost. Additionally, the benefits in sourcing that it will accrue will more than pay for the acquisition."
Baccash of course is privy to more than just a basic understanding of the Chinese market. Office 1 International has been in China since 2003 and now has 11 stores all based in the Shanghai area. Plans are afoot to eventually establish stores in 27 key regions in China with regional developers appointed to run the show.
But it’s been a sometimes rocky road for Office 1. Baccash readily admits to having "made many mistakes" including starting with a master franchisee. He undoubtedly feels the benefit of experience nevertheless and is keeping all training in-house as his plans solidify.
Is it the right time? The rapid increase in the overall size of the Chinese retail market would suggest so. Although the market is worth an estimated $240 billion, the figure that will really have executives drooling is a predicted $2.4 trillion market by 2020.
Wal-Mart has taken notice. It famously held its annual board meeting in Shenzhen last spring as a clear signal of its intent. That paid off in 2004, with a 31 per cent jump in revenues to $918 million as store numbers in the country rose from 30 to 43. A further 15 stores in 2005 will take the total to 58. It has also just concluded a shrewd deal with Beijing-backed conglomerate CITIC Pacific to open hundreds more stores by 2010.
Carrefour, the French giant, has been there even longer and has also reaped the dividends. It posted sales of approximately $2 billion and doubled its stores to 62 in a bumper year. Others such as Metro are also keen to step up their Chinese operations.
Just as significantly, a powerful domestic retail sector is emerging. The Bailian group is China’s largest retailer with sales of $11 billion, according to the Ministry of Commerce. Furthermore, other powerful home players ensure that Carrefour only ranks fifth, while Wal-Mart just scrapes into the top 20 retailers in China.
But the big danger for office products resellers – both domestic and global – is that the mass marketers could claim the sector before they are even established. Wal-Mart’s sales figure of $4.7 billion in OP in 2002 caused consternation among the industry and a similar blanket approach in China might leave specialists gasping for air.
For now, as the mass marketers concentrate on more obvious consumer items, the danger is a distant one. And amid a slated growth rate of 10 per cent per annum for the retail market for the foreseeable future, local players are emerging in the race to establish a foothold in the domestic office products arena. Officemate’s potential has been well documented (see ‘infinity and beyond’, OPI October 2004, page 28) but others such as OfficeBox and O’Mart have also burst onto the scene.
To really head the mass marketers off at the pass, however, may take a bigger push from outside China’s borders. Baccash says: "You will see the eventual entry of all the major global players and market evolution will be similar to what we have seen before. There will be significant consolidation, the entry of contract dealers that will educate the customers plus the impact of retailers such as Staples which will also educate the consumer. It may take longer to consolidate here because of the role of guan xi, but it will happen nevertheless."
He adds: "Wal-Mart will be unable to corner the market particularly in city centres or in the back-to-school sector."
Clearly, China’s distribution channels remain fragmented. But the platform has been established for OP manufacturers to sell their wares via more sophisticated means. It will only get better over the next five years.