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The Nightmare Of China Retail. It’s All Good. And Damn Hot.

By Dan Harris on Posted in China Business

I have a client/friend going into China retail in a BIG BIG way. I wish I could be more descriptive of what he and his company are doing, but about all I can tell you is the following:

1.  His company is moving faster than I have ever seen a company move. Their plans are to open more stores in less time than I have ever seen. Despite this, my client has nightmares they are not moving fast enough. He really does.

2.  My client sees China retail as THE biggest thing he has ever seen in his 30+ years in business and he is of the view that it is absolutely critical to gain first mover advantage. He thinks that whoever gains first mover advantage in his company’s quasi-niche will be the leader in that niche for the next fifty years and that the niche will be profitable “beyond belief” during that span. He says China retail is where US retail was in the 1940s and 1950s and that anyone who is not trying to get in there now to take advantage of this is making a huge mistake. 

3.  My client seems impervious to costs and losses over the next 1-5 years. As he is always saying, “we are building a business here, short term losses be damned.” They are getting expensive leases in top locations.  

4.  He says most high end retailers are, at present, “losing their shirts” in China and they just don’t care. He thinks they are on the right track with this and that they will start swinging to huge profits within a few years.    

Is he right? 

  • http://www.dragonbn.com Carey Chambers

    Sounds like a smart entrepreneur who goes where he sees the opportunity for maximum reward. And whether he’s 100% right, half-right or completely wrong, he’s surely better off placing his bet on emerging China than scrambling to eke out a buck in a mature Western market.

  • qingdao

    no

  • hanmeng

    I have no idea whether he’s right, but it’s risk-takers like him who ultimately benefit those of us who don’t take risks.

  • Jerome Cole

    He is right! Retail is very, very primitive and inefficient in China. If you can provide quality products and good service, standardize your operations at multiple locations, and are willing to shoulder losses for several years you can make big money.

  • http://www.3q2u.com Corbett

    1) Sounds like a disaster waiting to happen. Think economies of scale. Look at what’s happened to much bigger retailers.
    2) Can’t compare to the US 60 years ago. Another mistake. New market, new economy, new rules.
    3) As one very successful Chinese tycoon said – “The best long term China strategy is a good short term strategy.” There’s a lot more to those words than meets the eye. The only way to go out of business is to run out of money. I think a crash course in cash flow 101 is in order.
    4) Most hi end retailers I know are in the business of making hi end money.
    Taking risks – fantastic, hi risks, hi reward. Sometimes.
    Long term strategy – fantastic. But however you slice it the Chinese will be still be here when he’s gone.
    Retail – absolutely – No one apparel brand has more than 1% of market share, and the top 100 retailers combined hold one-tenth of total market share.
    Something to think about.

  • Haley R.

    He’s absolutely right. Retailers need to get into China now and build up their brand now. Those who do that will prosper and those who don’t are going to be left behind. This is really just retailing 101.

  • http://adamdanielmezei.com Adam Daniel Mezei

    Forgive me if this comes off reading something like groupthink, but I do have to agree: anyone who steps into the breach, ships their “art” (http://www.amazon.com/Linchpin-Are-Indispensable-Seth-Godin/dp/1591843162/ref=tmm_hrd_title_0), and closes deals is multiples times more enterprising, forthright, and commendable (and praiseworthy) than those in the community who would prefer to sit like fungii on logs, on the sidelines, taking ample potshots, grousing, or hyperanalyzing her/his business strategy and apparent foolishness/brilliance to death.
    I can only wish this man the best, and to the risk-seeking, to the winner goes the spoils!

  • Steven

    I don’t see what your client has that hundreds of others don’t. Of course, that’s cause I don’t know who your client is.
    It doesn’t seem to me like China is short on retail.

  • http://www.3q2u.com Corbett

    1) Sounds like a disaster waiting to happen. Think economies of scale. Look at what’s happened to much bigger retailers.
    2) Can’t compare to the US 60 years ago. Another mistake. New market, new economy, new rules.
    3) As one very successful Chinese tycoon said – “The best long term China strategy is a good short term strategy.” There’s a lot more to those words than meets the eye. The only way to go out of business is to run out of money. I think a crash course in cash flow 101 is in order.
    4) Most hi end retailers I know are in the business of making hi end money.
    Taking risks – fantastic, hi risks, hi reward. Sometimes.
    Long term strategy – fantastic. But however you slice it the Chinese will be still be here when he’s gone.
    Retail – absolutely – No one apparel brand has more than 1% of market share, and the top 100 retailers combined hold one-tenth of total market share.
    Something to think about.

  • Inst

    Imo, the only thing scary about him is how fast he’s moving. The locals and overseas Chinese typically use trial balloons when attacking a new market; the trial balloons inevitably screw up, then management gets together to figure out why they screwed up, what they can derive from their experience, then send in their version 2.0 to hopefully get it right, and if not, check whether they have the capital to work on a version 3.0.
    The key thing about this is that a trial balloon is a trial balloon. You don’t bet the farm on a trial balloon; the entire point of a trial balloon is to both enable you to take risks and enable you to modulate the risk so if you fail, while it will hurt, you’ll still have enough capital/revenue leftover to buy a whiskey on the rocks and figure out whether to try again in the same place or try again in a new place.
    I’m also somewhat doubtful of your friend emphasizing speed (and most likely scale); the Chinese market is quite prone to flux. 10 years ago Jianlibao was still around and making adequate honey-soda with comparable market share to Pepsi and Coca Cola, now they’ve gone bankrupt. Part of the reason Chinese companies may seem so short-sighted is because the situation just evolves so rapidly that long-term planning becomes futile.
    I think that your friend should either call up some quants to figure out how to hedge the risk from his overly aggressive expansion, become a weekly churchgoer or if agnostic, start shopping for deities to pray to, or both.

  • Chris

    Who goes into a business determined to lose money at the fastest possible pace? Insane.
    Surely rule 1 of business is to set up profitable operations. Yes, set up costs, brand building, marketing, logistics and driving traffic to a site costs money that can only be recovered over time. But a business model designed to lose money for the forseeable future is not business.
    The business model needs to identify how set up / start up costs will be recovered and each and every site will become profitable. Business plans, with tactical funds available, need to be in place to expand and grow as do plans to cut costs when needed.
    Hordes of foreign business have come into China prepared to lose money. They have succeeded, then left.
    Others have had a plan for profit and succeeded.
    Your friend / client on the path to bankruptcy.

  • cm202bc

    Interesting. The PRC consulting company I work at recently lost a market research bid for a large western high end retailer because they thought our timeline was too slow. Wonder if they are one and the same. If so, the word ‘rush’ may not be adequate to describe their pace. Best of luck to ‘em, it will be interesting to see how that strategy works out.

  • Ted

    I would tell your client to invest his money in a democracy where property rights and human rights are both guaranteed by law and an effective independent judiciary, and where consumers benefit from supervision of government by an independent media.
    But maybe that would not be as sexy as investing in a dictatorship.

  • PB Johnson

    Your client is smart. I too am convinced China retail will be THE place to be in 5-10 years and I too am convinced that those companies there now will be have such a first move advantage in 5-10 years they will be nearly unstoppable. KFC makes for a great example of this.