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Li & Fung Research Centre Member of the Li & Fung Group

LI & FUNG RESEARCH CENTRE

China Distribution & Trading Issue 62 October 2009

I. Background

II. General wholesaling

landscape in China

III. Types of wholesale and

distribution channels

IV. Challenges

V. Latest developments

VI. Conclusion

Li & Fung Research Centre

13/F, LiFung Centre

2 On Ping Street

Shatin, Hong Kong

Tel: (852) 2635 5563

Fax: (852) 2635 1598

E-mail: [email protected]

http://www.lifunggroup.com

IN THIS ISSUE:

Selling to the source: a closer look into wholesale distribution

landscape in China

Types of wholesale and distribution channels

� Distributors and agents; wholesale markets; manufacturer

direct-sale; warehouse-style supermarkets; online wholesale channels

Challenges

� Fierce competition � Disintermediation � Less demand for distributors to assume a significant national

role from sizable brands � Industry malpractices � Inconsistent commercial regulations � Strained relationship between players along the supply chain

Latest developments

� The financial crisis has limited impact on China’s distribution

sector � Wholesaling still plays an important role; players though have

to constantly reinvent themselves under huge competitive pressure

� Retailer-supplier relationship is beginning to get real attention� Government pays great efforts to improve distribution

environment in China � Foreign participation expects to climb

� Many brand owners have chosen 3rd and 4th tier cities as expansion targets


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China Distribution & Trading ��

Selling to the source: a closer look into

wholesale distribution landscape in China

Introduction

China’s wholesale distribution landscape has witnessed significant transformation over the past years. Eyeing the huge

potential of the burgeoning consumer market, many manufacturers and retailers have in recent years strived their best

to expand distribution network as well as improve supply chain efficiency. The Chinese government has also launched a

series of initiatives to support the distribution sector, hoping to help boost domestic consumption. There are

opportunities abound.

Rapid retail chain operation, on the other hand, has also posed tremendous survival pressures for a number of

traditional wholesalers and distributors; there is much discussion about disintermediation. Nonetheless, given the vast

geographical span and huge regional differences, distribution in China remains a complicated task. Often times, goods

have to pass through multi-layers of distributors before reaching the hands of consumers. In this newsletter, we will give

you a general overview of China’s wholesale distribution sector and in particular, we will focus on the distribution of

consumer goods.

I. Background

Wholesaling generally refers to the resale (sale activities without transformation) of new and used goods in bulk at

discount prices to retailers, or wholesalers, agents, distributors, other industrial, commercial, institutional and

professional users. Wholesaling plays a crucial intermediate role between manufacturers and retailers in the value

chain.

Prior to the economic reform in 1978, China’s wholesale sector was regulated and controlled by the Chinese

government, in order to secure rationing of a wide range of food and consumer goods then in short supply. Most of the

consumer goods were delivered through the Supply and Marketing Cooperatives (��

) or government-controlled

wholesale and retail systems. Product distribution was primarily supply-pushed. After 1979, the degree of central

planning has been gradually reduced. China’s entry to the World Trade Organization (WTO) in 2001 brought further

market liberalization. In 2004, foreign distribution companies were allowed to obtain national wholesale licenses.

Foreign enterprises can today set up wholesaling joint ventures; dealing in all locally produced or imported products

except salt and tobacco.


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Today, distribution modes in China are much diversified (see Exhibit 1). Given the complexity of the Chinese market,

companies in China adopt a combination of distribution modes. And in the face of abundance of consumer goods and

intensifying market competition today, effective management of distributors holds the key to business success.

Businesses are striving to build responsive demand-driven supply chains.

Exhibit 1: Distribution in China

Source: Li & Fung Research Centre

II. General wholesaling landscape in China

According to the National Bureau of Statistics of China (NBS), total sales value of wholesale trade in China reached

10,039.2 billion yuan in 2007; of which domestic wholesalers, led by state-owned enterprises (SOEs), had huge market

share. SOEs above designated size1 captured 25.7% of total revenue in 2007.

However, the SOEs were not as profitable as foreign-funded companies. Return on equity (ROE) of state-owned

enterprises was just 18.5% in 2007, well below the Hong Kong-, Macau- and Taiwan-funded wholesalers by 10.4

1 Designated size: with annual sales of 5 million yuan or above and with an employment of or over 60.


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percentage points and foreign-funded wholesalers by 16.2 percentage points.

Having said that, there are many different sub-segments within the wholesale distribution sector. It is noteworthy that the

wholesaling of mineral products, building materials and chemical products has a heavy weight in the government

wholesale statistics, with a stunning share of 54.7% in 2007. Statistics on the distribution landscape of consumer goods

in China, which is the focus of our newsletter, are however few and scattered. No one has a yet precise picture but

according to industry experts, the landscape is highly fragmented with industry concentration in northern China higher

than in the south. Sourcing channels and supplier arrangements vary greatly among different product categories;

consignment sales are common as well.

III. Types of wholesale and distribution channels

There are many different types of wholesale channels engaging in the distribution of consumer goods in China.

1. Distributors and agents

Distributors and agents are authorized by production enterprises to distribute their products and typically do not involve

in manufacturing and retailing of the products. Some of them are obliged to the buyout of these products, thereby taking

on the inventory risks; whereas some do not and instead get paid a certain amount of commissions.

Domestic agents and distributors

Many of the domestic players come with state-owned background and have operated since the pre-economic reform era,

giving them an edge in terms of scale, established infrastructure, government guanxi and network reach (especially in

towns and counties). And undoubtedly, there is an increasingly number of domestic private players as well, offering

highly price-competitive services.

However, compared to their foreign counterparts who try to offer a broader menu of services (e.g. merchandising, trade

marketing and business intelligence), quite a number of domestic wholesalers focus mainly on the selling and logistics

aspects in product distribution. Many offer simple lines of services such as warehousing and transportation; value-added

services such as product tracking and cold-chain logistics are few, if not none.

In the past decade, domestic agents and distributors have been under a great deal of pressure with growing competition

from foreign players as well as other format wholesalers; many traditional players have been phased out. Nonetheless,

some domestic distributors have strengthened themselves and modernized over the years; a number of them are now


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run by the younger and more aggressive managers. For instance, Beijing Chaopi Trading ( �� ) and Nanpu

Food Group Co. Ltd ( �� ) are learning fast from foreign rivals and evolve into strong players in the

field. Beijing Chaopi Trading, for instance, now serves over 300 foreign and domestic brands.

Compared with their foreign rivals, domestic players tend to be more confined in their service networks. For instance,

Beijing Chaopi Trading operates chiefly in northern Chinese cities such as in Tianjin, Tangshan, Qingdao, Shijiazhuang

and Taiyuan etc. Local protectionism is probably one of the reasons behind difficulty in extensive regional expansion.

Foreign agents and distributors

Foreign distribution companies were allowed to obtain national wholesale licenses upon the liberalization of the

commercial sector in 2004. Since then, foreign agents and distributors have been expanding quickly. Some prominent

names include IDS under the Li & Fung Group, Sims under Dah Chong Hong Holdings, Jebsen & Co. and DKSH.

Foreign agencies and distributors tend to have wider footprints. For instance, IDS has a national network covering 150

cities in China; Sims Trading also has distribution coverage of around 40 Chinese cities. Often, foreign players distribute

directly to key modern trade accounts and work with a myriad of sub-distributors in China to reach traditional format

retailers such as mom-and-pop stores as well as shops in more remote areas.

Foreign players have an edge in management expertise and state-of-the-art facilities and are less willing to compete on

price. Besides, they tend to be more service-oriented and offer services such as promotion and marketing, which are

great added value for many brand principals. They are posing great challenges to domestic players.

Indeed, many foreign players have grown with international retailers in China. Today, many international retailers have

widespread store presence across different provinces. Servicing these stores (at store level) is a great people

resources challenge. Many times, it has to be done by either the brand owner or national distributor with world-standard

management and compliance level. Domestic regional wholesalers or city wholesalers are less able to provide

resources to support.�

2. Wholesale markets

Allowing groups of merchants to display and sell their goods on site, wholesale markets are often regarded a distinct

feature of China’s distribution landscape. Mushroomed in the 1980s-90s, wholesale markets have been playing a

significant role in channeling products of the country’s countless number of small-and-medium-sized manufacturers into

the hands of urban and rural consumers. According to the National Bureau of Statistics, there are 4,567 wholesale

markets in 2008 with transaction value over 100 million yuan, up by 10.82% yoy (see Exhibit 2).


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Exhibit 2: Statistics of wholesale markets in China with sales revenue over 100 million yuan, 2004-2008

Number of wholesale

markets with sales revenue

over 100 million yuan

yoy growth

(%)

Sales floor area

(meter square)

yoy growth

(%)

Sales revenue

(billion yuan)

yoy growth

(%)

2004 3,365 3.1 124,774,690 13.6 2,610.3 21.3

2005 3,323 -1.3 131,408,239 5.3 3,002.1 15.0

2006 3,876 16.6 180,723,148 37.5 3,713.7 23.7

2007 4,121 6.3 198,146,314 9.6 4,408.5 18.7

2008 4,567 10.8 212,252,204 7.1 5,245.8 19.0

Source: Statistical Yearbook of China Commodity Exchange Market, 2009

Exhibit 3 demonstrates the top 20 wholesale markets of industrial goods in China. Many of them are located in or nearby

China’s industrial clusters in Shandong, Zhejiang, Guangdong, Liaoning and Hebei provinces, as well as regional

transportation hubs throughout the country.

Exhibit 3: Top 20 wholesale markets of industrial goods

2008 Sales revenue

(billion yuan) ��! #"�$ ��#%�&��'�( Jinhua China Commodity City 38.18 )�*#+ ��,#- $ ��.�/�0 Shijiazhuang South 3 Road Commodity Market 35.45 1�2�3�4�5 /7698�/�0 Baoding Gaobeiding Baigou Market 25.80 :#;�<�= �.�/�0 Dalian Shuangxing Market 15.01 >�?�@ ��%�/�0�A�B�� Wuxi Zhao Shang Cheng Market 10.21 C�D��E�F�G�: /�0�A�B��#H#I�� Anhui Hefei Xindi Market 8.56 J %�K�L�M�N : /�0 Liaocheng Xiangjiang Guangcai Market 7.32 O�P�P�C�Q�R�S�T�U�V ��%��!� Shaanxi Xian Kafulu Danier Commodity Market 6.81 W�X�Y L��%�� Yangzhou Qujian Commodity Market 6.20 Z�[ ,�\��.�/�0 Yantai Shanzhan Wholesale Market 5.99 ]�^`_�a�$ ��#% Qingdao Jimo Commodity Market 4.96


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O�P�P�C�P ��b�&��.�/�0�c�d�A�B�� Shaanxi Xian North West Commodity Market 4.90 e�f b�g�%�/�0 Ningbo Light Textile Market 4.84 h X �� % Wenzhou City Commerce and Trade City 4.80 e�f�i�j /�&�k��.�/�0 Ningbo Xici Industrial Goods Wholesale Market 4.08 l�m�l�n &�k��/�0 ShaoYang Shaodong Industrial Goods Wholesale Market 4.01 o�prq�s /�0 Zhuokuo Hehua Market 3.96 t#u�v�w :#xzy ��k �{ Tianjin Wanlong Dahutong Commercial Centre 3.84 |�X#}�~�n \ $ ��#/�0��!� Hangzhou East Bus Station Commodity Market 3.29 ��[��#��#�� /�0 Xingtai Qinghe Rongmao Market 3.10

Source: Statistical Yearbook of China Commodity Exchange Market, 2009

A lot of people view that wholesale markets in China are disorganized with most of them selling low-ended and

unbranded products. In recent years, however, some large-scale wholesale markets have been upgrading themselves

with centralized management, modernized hardware, increasing specialization and better brand positioning. On the

other hand, some wholesale markets located in major cities have also tried to ride on China’s burgeoning consumer

market, with their tenants increasing the proportion of retail businesses. Bai Rong World Trade Centre ( �� % ) in

Beijing is an example; it is reported that retail businesses now account for half of the revenue of the wholesale market.

Indeed, with small-and-medium sized enterprises forming the backbone of China’s manufacturing sector, it is widely

believed that wholesale markets would continue to be an important player in China’s wholesaling landscape.

3. Manufacturer direct-sale

Facilitated by improving logistics infrastructure in China, some established manufacturers or brand principals have set

up their own wholesale and retail arms to try to conduct wholesaling and retail activities. Indeed, these enterprises,

mostly home appliances and branded apparel players, view distribution of own products as an effective way to keep

abreast with latest market developments. Typical example includes home appliance manufacturer Haier Electronics

Group, which participates in different stages of business operations such as manufacturing, logistics, distribution and

retailing. It recently plans to establish a wholly owned subsidiary to further expand the sales, logistics and services

networks in 3rd and 4th-tier markets.

But on the whole, manufacturers trying to sell directly to consumers in China are still rare; nonetheless, manufacturers

trying to sell directly to retailers is definitely a trend to be watched (e.g, P&G selling to hypermarkets and many home

appliance brand-owners selling to Gome). There are more incidences of manufacturers selling directly to consumers in


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apparel and footwear industries (e.g. Lining Sports Wear and Belle footwear), yet a lot of them use a combination of

directly-owned stores and licensee-run stores.

4. Warehouse-style supermarkets

Metro and Sam's Club are typical examples. Metro today has 38 carry & trade stores in 31 Chinese cities. It adopts a

membership system and sells goods in bulk at wholesale prices to its members. Only cash payment is accepted.

Targeted at the intermediaries and commercial customers, Metro today has 3 million registered members in China. The

primary groups of Metro’s customers include “HoReCa” (hotels, restaurants and catering businesses), small retail

outlets and kiosks, and other business users (offices, service companies and government agencies). Only registered

commercial customers can visit the store; registration is free-of-charge but documents including business license,

identity card and introduction letter have to be submitted. Metro China generated net sales of 1,052 billion euros in

Chinese market in 2008, up by 15.0% yoy.

However, performance of warehouse-style supermarkets in China is relatively lackluster. Indeed, CTA Makro, which

operated eight warehouse-style supermarkets in China under the Chinese brand name Wankelong ( �� ) was taken

over by the Lotte Group in 2008. After acquisition, all outlets will be renamed under the Lotte Mart brand; and more

importantly, they will target the retail customers instead.

5. Online wholesale channels

Online wholesale channels are gaining attention. Alibaba.com.cn ( ��!�� ) is one of the popular B2B platforms in

China. The export-trading-oriented company has already developed online wholesale channel targeting at the domestic

market. However, most of the platform operators are in fact online transaction facilitator (match-makers) without

engaging in real wholesale businesses. For instance, many online portals mainly charge suppliers membership fees for

listing on their websites and do not involve in suppliers nor clients’ businesses.

Indeed, despite rapid growth in recent years, online wholesaling in China is not without its challenges. Many are still

reluctant to place huge orders online, worrying about fraudulent activities and credit defaults. Besides, growing calls for

monitoring third-party online payment platforms in China, which is critical for the developments of online businesses in

China, is noteworthy as well.


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IV. Challenges

1. Fierce competition

China’s distribution sector is highly fragmented. There are countless number small-sized players; most of which are with

rudimentary infrastructure. Competition is intense (particularly so in the lower end markets) and many who cannot offer

higher value-added services to clients often have to resort to price cuts, eroding these players’ profitability. Besides,

business costs such as labor, energy, raw materials and logistics costs have also been rising over the past years.

Indeed, many players just have razor-thin margin and this further hurts their ability to invest in upgrading.

2. Disintermediation

Disintermediation refers to the removal of intermediaries in a supply chain, i.e, the cutting out of the middlemen. Indeed,

in order to streamline their supply chains, some big-name retailers such as Wal-Mart have leveraged on their scale and

set up their own merchandizing and sourcing departments in China to source directly from manufacturers. They source

mainly daily necessities, consumer durables and foodstuff; in recent years, direct purchase of fresh agriculture produce

is also becoming more popular. On the other hand, some established suppliers such as Haier have also taken initiatives

to setting up their own retail outlets, in order to reduce their reliance on retailers. Disintermediation threatens the

bargaining power and survival of distributors, especially those traditional players serving solely as a middleman between

manufacturers and retailers without much value-added services.

3. Less demand for distributors to assume a significant national role from sizable brands

In the past when China represented just a small sales share of many international brands, foreign brand principals were

willing to grant national distributorship rights (often times exclusive) to wholesale players in China. Business was relative

easy - as Chinese consumers then had limited choices, sales were virtually guaranteed. Those who were granted the

rights often enjoyed lucrative profits. At that time, businesses were easy and wholesales players had developed a

tendency to hoard as much inventory as they could as usually the more they got, the more they sold.

However, as China becomes a growingly important market, many brand principals now want to have a better grip of the

market and are much more willing to have their own sales and distribution personnel. There is less demand for

distributors to assume a significant national role; in many cases, brand owners just want the wholesalers to perform the

invoicing and selling functions. Many brand owners now have the infrastructure to deal with other things

themselves. There is obviously less margin to be offered to intermediaries. Besides, many brands also see granting


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non-exclusive distributorship rights a way to foster competition and expand market network. All in all, it is growingly

difficult for wholesale players to assume significant national roles in China, especially for better-known brands.

4. Industry malpractices

Malpractices are commonplace in China. For instance, price differentiation of same products in different regions could

lead to arbitrage (for example, wholesalers sell the products outside designated regions); this affects brand owners’

pricing strategy and obfuscates market information. To ensure wholesale players selling only within their designated

territories, extra efforts have to be spent on monitoring. For instance, some brand owners or suppliers use markings or

stamps to trace products flowing out of their designated territory. Counterfeiting is another problem due to poor piracy

laws enforcement and disrespect of intellectual-property rights among public. The problem is particularly serious in

some wholesale markets. In some cases, those counterfeit products may also pose serious safety and health risks for

public.

Indeed, quality of distribution partners can be very diverse in China and their service levels are mostly sales-driven.

Brand owners have to be very proactive in checking the quality of distributors.

5. Inconsistent commercial regulations

Besides, practitioners have also reflected that inconsistent commercial regulations and different interpretations and

enforcement of the regulations across the country pose challenges as well. There were cases that entrance fees and

promotion expenses legitimate in some cities are considered as bribery in others. Distributors must study carefully

China’s commercial regulations and communicate with relevant officials closely to avoid misunderstanding.

6. Strained relationship between players along the supply chain

Modern format retailers in China are becoming growingly powerful in the value chains. According to a recent study by

the China Suppliers Research Centre, 78% of suppliers said that retailers have an absolute advantage during price

negotiation. Indeed, many retailers have taken advantage of their strong market power – many introduce cumbersome

charges such as entrance fees, promotion and marketing charges, listing fees for new products and launch different

rebate and commission schemes to maximize their interests. Many wholesale players have reflected huge cost of entry

into modern trade retailers - it can easily cost brand owners million dollars for just entering a few big cities such as

Beijing, Shanghai, Chengdu and Guangzhou. This not only eats into the profits of wholesale players, but also makes

lesser-known brands harder to compete for shelf space and may lead to fraudulent activities as well.


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Some retailers in China frequently extend the account payable terms to suppliers, using it as a major source of funding

for working capitals. Many suppliers are wary of buyers defaulting; in order to control credit risks and avoid bad debts,

some wholesalers only accept cash in exchange for goods on the spot.

The mistrust among supply chain members in China has hampered information exchange in the entire value chain, led

to bullwhip effects and posed major barriers in enhancing supply chain efficiencies.

V. Latest developments 1. The financial crisis has limited impact on China’s distribution sector; opportunities

continue to grow as China’s consumer market expands China is more fortunate for being less affected in the global financial crisis, although its export sector has witnessed

negative growth. During the past year, many FMCG brand owners have been conducting more aggressive trade

promotions (offering deeper price cuts or launching bonus packs and premiums) to drive consumer sales. Besides, the

Chinese government has made unprecedented efforts to rebalance its economy towards being more

consumption-driven. A lot of consumer goods sectors have managed to maintain a steady sales growth or just

experience only a slight drop in businesses. Surely, many experience their margin being eroded by the offering of more

frequent and deeper price cut promotion in order to sustain sales; but on the whole, the majority of practitioners are

optimistic towards the opportunities of the Chinese market. �

2. Wholesaling still plays an important role; players though have to constantly

reinvent themselves under huge competitive pressure

Rapid developments of retail chains are putting tremendous pressure on the wholesale sector in China. As retailers seek

to streamline their supply chains, say dealing directly with key suppliers and expand online sales, there is growing

discussion about disintermediation. Nonetheless, we believe the demise of distributors in China is off the mark – firstly,

despite rapid growth of chain operation in the past decade, China’s retail market is still highly fragmented with the Top

100 retailers achieving just slightly over 10% of the market share in 2008, according to the China Chain Store and

Franchise Association. Second, the vast geographical span of China offers a lot of development room for distributors,

especially in some inner regions and the rural hinterland; many companies simply do not have the resources in

developing own distribution channels in these regions. Besides, as brands rush selling in China like bees to honey,

many do not have the know-how in marketing and distribution and still need a distribution partner. Indeed, China is both

a fast-growth and high-risk market. As brand principals seek to manage their fixed costs, there is still huge room for

wholesale players to grow.


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However, it is true to say that the traditional middlemen’s “buy and sell” model is under a great deal of pressure as

market competition intensifies. To survive in the market, wholesale players must constantly reinvent themselves. Today,

a lot of wholesale players are becoming more sophisticated. Some players have expanded their business offerings to

include value-added customer services such as market analysis, inventory management and goods tracking. IDS has

gone a step further and created “a menu of services” years ago – indeed, many distributors in China have a

one-size-fits-all offering and set a single margin for an all-in bundled services such as selling, marketing, logistics, credit

control, billing and collection. IDS has unbundled the multitude of activities along the distribution chain. Not only does it

charge services with different risks accordingly, it also offer better flexibility for clients. Besides, some wholesale players

are becoming more specialized, or targeting specific and niche segments. For instance, many wholesale markets now

specialize in one or a few industry sectors, such as textile and clothing, leather and accessories, electronics and

hardware.

Information technology applications are becoming much more widely used as well. The advancement of information and

communication technologies has enabled more efficient flow of goods and services. For example, modern tracking

technology facilitates suppliers to track their goods and sales with much greater accuracy. Platforms such as electronic

data interchange also help enhance inventory management and improve supply chain visibility. Besides, with increasing

Internet penetration and better online security, online wholesaling is increasingly popular. Some wholesale markets in

China have sought to develop their own e-commerce websites or partner with e-commerce platforms such as Alibaba to

increase their access to market.

3. Retailer-supplier relationship is beginning to get real attention

Retail-supplier relationship is notoriously bad in China. Big-scale retailers charging suppliers numerous types of fees

and extending payment terms to get extra working capital are pretty common. Nonetheless, retailer-supplier relationship

is beginning to get real attention these days. Not only because of growing government concerns in the past few years,

the fact that retailer-supplier collaboration is more conducive to businesses is also a major driving force.

In fact, there is growing reflection among retailers in China that poor trust between retailers and suppliers has

undermined players’ ability to deliver customer-driven responses, wasting a great deal of resources along the value

chain. Players increasingly hope to have better collaboration with their supply chain partners; some also suggest that

retailers should pay more attention to merchandising as their core competence, to better cater to customers’ needs and

differentiate from the rest.

And there are some signs of improvements. According to a recent study by the Shanghai Business Information Centre,


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which samples 100 established suppliers in China, suppliers are more satisfied with retailers in 2009 than in previous

years; retailers’ various charges on suppliers such as entrance fees, management fees and promotion fees have

decreased by 21%, 19% and 11% year-on-year for hypermarkets, supermarkets and convenience stores respectively.

Indeed, growing number of retailers has vowed to strengthen relationship with suppliers to achieve sustainable growth.

Recent examples include Carrefour, which has partnered with Deutsche Bank to launch a trial supportive financing plan

for small- and medium-sized suppliers in Jiangsu province. Suppliers can apply for loans based on the value of

Carrefour receipts held, at an annual rate of 9.82%; Carrefour hopes that this will help the company improve relationship

with quality suppliers in China.

4. Government pays great efforts to improve distribution environment in China

China has sought to rebalance its economy to a more consumption-led model. Recognizing the importance of

distribution sector in boosting domestic consumption, the government has launched a series of measures to foster the

developments of the sector. For instance, to improve rural retail infrastructure and facilitate rural distribution, the Rural

Retailing Network Project ( �� ) and the Agricultural Produce Wholesale Market and Distribution Company

Development Project ( �� ) were launched by the Ministry of Commerce (MOFCOM) respectively in 2005 and

2006. In December 2008, the MOFCOM and the Ministry of Agriculture jointly issued the Pilot Scheme Notice of

Promoting Closer Cooperation Between Farmers and Supermarkets ( ��!�#�� ¡#��¢�£#¤�¥ ), hoping to

flatten the agricultural produce supply chains.

To promote healthy and sustainable developments of the distribution sector, the Management Rules on Fair Transaction

between Retailers and Suppliers ( ¦�§�¨�©�ª�¨�«�¬��®�¯�°�±�² ) was launched in 2006. The rule is applicable to

retailers with annual sales over RMB 10 million and their respective suppliers. Under the management rules, retailers

could not charge suppliers additional fees unless agreed by the parties in concern and specified in the contracts.

Moreover, retailers should also pay for all ordered items, even if they are not sold; and the payment must be made no

later than 60 days upon receipt of goods. On the other hand, there are provisions to protect retailers ³ interests; for

instance, suppliers are prohibited from practicing tie-in selling. To further improve the long-run health of China’s

commercial sector, the government has launched the Credit Management Technical Specification for Commercial

Enterprises ( ¨�´�µ�¶�·�¸�¯�°�¹�º�»�¼ ) in May 2008, introducing standard commercial transaction practices widely

adopted in other markets. Through developing sound credit management systems, it is hoped that retailer-supplier

relationships in China can improve.

The launch of the Industrial Standards of Technical Rules for the Construction and Management of Professional Textile

and Garment Markets ( ½�¾�¿�À�Á�Â�Ã�Ä�Å�Æ�Ç�È�É�Ê�Ë�Ì�Í ) by the MOFCOM which become effective in July 2009

also sets operation standards for China’s textile and garments wholesale markets, with an aim to enhance the


14


operational environment of wholesale markets in China.

5. Foreign participation is expected to climb

Foreign participation has increased significantly since the granting of wholesale right to Holland Markro in 2004. Eyeing

the huge potential of China’s expanding consumer market, many foreign wholesale players have viewed China as one

of their top investment destinations. Many foreign distributors win business from overseas principals, riding on the trend

of overseas consumer brands rushing to build a presence in China. With competitive operational ability, foreign players

are posing increasing pressure on domestic enterprises.

Indeed, as mentioned, many foreign players have grown with international retailers in China. Today, many international

retailers have widespread store presence across different provinces. Servicing these stores (at store level) is a great

people resources challenge. Many times, it has to be done by either the brand owner or national distributor with

world-standard management and compliance level. Domestic regional wholesalers or city wholesalers are less able to

provide resources to support.�

For instance, the IDS Group has expanded quickly in China in recent years. In 2008, revenue has grown by more than

90%, fueled by the organic growth of key customers as well as winning new contracts. Last December, the company

was also granted the official approval to commence distribution of pharmaceutical products in China, representing a

significant breakthrough for foreign players to set foot in the highly regulated industry.

6. Many brand owners have chosen 3rd and 4th tier cities as expansion targets

Today, more and more brand owners and retailers are attracted by opportunities in China’s 3rd and 4th tier cities. Indeed,

retail sales growth in China’s lower-tier cities has been more resilient in the past months of 2009. The rural market is not

to be ignored neither. The government has launched a series of initiatives such as “household appliances to the

countryside” to boost rural consumption. As China strives to build a consumption-led economy, looking ahead, inland

regions and the rural market are expected to continue better growth momentum.

China’s wholesale and distribution players are responding to these changes. Growing number of brand owners and

retailers eyeing opportunities in China’s hinterland will definitely transform the distribution landscape in these regions;

we expect industry consolidation to accelerate. Nonetheless, expansion into these regions is costly for many distributors

and does not guarantee immediate returns in the short run. In fact, the vast geographical spread of China makes

distribution and wholesaling very complicated for all.


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VI. Conclusion

China’s distribution landscape has witnessed significant changes over the past few decades. Gone are the days when

wholesale players can earn big money easily simply serving as middlemen between manufacturers and retailers.

Wholesale players today must offer more added values to succeed.

Despite the fact that there is still huge development room for wholesale players in China, as China moves to becoming a

more consumption-led economy, we should expect consumers and retailers to continue to have stronger power in the

value chains. Wholesale players in China have to constantly reinvent themselves to respond to the challenges.

© Copyright 2009 Li & Fung Research Centre. All rights reserved.

Though Li & Fung Research Centre endeavours to have information presented in this document as accurate and updated as possible, it accepts no responsibility for any error, omission or misrepresentation. Li & Fung Research Centre and/or its associates accept no responsibility for any direct, indirect or consequential loss that may arise from the use of information contained in this document. Reproduction or redistribution of this material without Li & Fung Research Centre’s prior written consent is prohibited.

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