The Retail Market of China - Case Study Example

Global Retailing In this era of globalization and international trade, many companies are aiming to stretch their business beyond local barriers. In this paper, market plan will be outlined for a western retailing company so that it can enter the retail market of China easily and efficiently. After performing segmentation, targeting and positioning, macro and micro environmental factors will be analysed and recommendations will be provided so that it can mitigate risks arising out of expanding its business in global framework. Contents Abstract 2 Introduction 4 Discussion 4 Segmentation Targeting and Positioning 5 External Environment Analysis 6 Porter’s Five Force Model 7 PEST Analysis 10 Internal Analysis 12 Ansoff Matrix 12 Recommendations and Conclusion 13 Reference List 15 Introduction Globalization in retail industry is a contemporary phenomenon that has unlocked sales opportunities for many big retailers of the western countries in the markets of emerging nations through a blend of exporting best practices and modifying existing standards to meet local demands. As a result of globalization, the companies operating in the matured western market got an opportunity to expand their businesses beyond the domestic market. In fact, when the BRIC (Brazil, Russia, India and China) nations opened up their economies and exposed the immense potential of such markets, the western giant retailing companies gained additional incentives to expand their overseas operations (Bisley, 2007). In this paper, a report will be prepared for a large western retailer, showing the opportunities that the company should capture through expanding its business into the large emerging markets, in response to the shareholder’s wishes. Discussion As a result of rapid globalization as well as economic integration, more and more companies, including retailers, are inclining towards cross border trade for enhancing their sales through addressing the huge demand from emerging nations. Such activities of the retail companies help them to maximize the value of the companies. In fact it has become necessary for all organizations operating in the global platform to expand their business in order to confirm their subsistence. Many large retailers such as Tesco Plc, Vodafone etc has gained substantially by capitalizing the advantages of globalization successfully. As the profitability is also boosted to a great extent, the shareholders also influence associated companies to establish their existence in the emerging markets. However, before stepping forward into global market, it is important of the retail companies to assess the present situation of the internal and external environments of emerging nations so that the company can identify entering which market will be profitable for them. For the simplification of analysis, the emerging market of China will be considered and it is assumed that the retailing company is engaged into the business of supermarkets and groceries (Aaker and McLoughlin, 2009). Segmentation Targeting and Positioning Before expanding the business of the retailer globally, the company should identify in which market segment it can establish their expertise and accordingly it should target the market and pose its products or services in order to attain maximum advantages from making their business global. Segmentation Market segmentation concentrates on dividing the whole consumer group according to their common needs. Taste and preferences of such consumer segments tends to be distinct to each other and these groups are expected to respond differently for different marketing mix strategies. The retailing company is expected to examine all such consumer segments, segregated on the basis of their demographics, psychographic behaviour as well as geographic location. Analysing all such consumer segment of emerging nations, the retailing company has identified that the business strategies and products of the company will be able to satisfy highly to the consumers of China (Murrry, 2006). Figure 1: Segmentation Targeting Positioning (Murrry, 2006) Targeting Once the consumer segment and potential market has been recognised, the company now should strive to formulate and develop strategies for targeting the market, identified for business expansion. For this purpose, the western retailer should opt for concentrated targeting technique in which a single segment of consumers will be targeted and the marketing mix strategies will be moulded in such a way that will satisfy the need of the particular consumer. Another important consideration in this regard is that, as the marketing strategies vary for different consumer segments, the company must carry out cost-benefit analysis before targeting a particular segment in order to evaluate whether it is cost effective for them to invest time and money in this segment (Proctor, 2014). Positioning After defining the target market, it is important for any organization to pose its products and services in the complex mind of consumers so that the target consumers can shift their buying pattern towards the company’s products. In order to institute the products of the western retailer into the perception of Chinese consumer, massive promotional activities should be conducted. The scope for competitive advantage should also be analysed in this regard so that the company can come up with most unique though relevant strategies for capturing consumers’ attention (Proctor, 2014). External Environment Analysis For expanding business in the emerging nations such as in China and India, the retail companies are required to understand the prevailing condition of the retail industry of those countries. It is also important for the companies to comply their business according to the existing economic, political, social and technological preferences of the company. For understanding the retails industry of these nations, Porter’s Five Force Model will be incorporated and for analysing the external environmental factors the strategic marketing technique of PEST analysis will be adopted. Porter’s Five Force Model Porter’s five force model shows the extent of competition prevails within an industry segment and how all the stakeholders of the industry interact among each other. The five constituent forces of the economy will be analysed in the next segment with respect to retail industry of China. Competitive Rivalry The retail market of China is characterised by existence of more than 23,663 retail firms as on 2014 among which participants in the supermarket and hypermarket is also huge. Therefore, the level of competitive rivalry in the retail market of China is very high with the existence of large companies such as Carrefour China Inc., Walmart, and Tesco China etc (Harrison, 2009). Figure 2: Existing Supermarket Retail Industry of China (Cheng, 2014) Threats from New Entrants Though a large number of big brands already exist in the Chinese retail market, attracting by the uniform economic growth of the country and the further scope existing in the market, many foreign investors have shown their interest for investing more into the retail segment of China. Therefore, threats from new entrants are always very high in the retail market of China. In 2009, more than 2400 foreign investors invested approximately $4.8 billion in China’s retail sector and the sector is expecting an augmentation in fresh foreign capital by 2016 when the government announced that the Foreign Direct Investment (FDI) will increase by 16% by the same year. Therefore, the sector holds substantial capability for attracting foreign retailers with potential of giving the existing firms tough competition. From the concerned firm’s perspective, the company will also have to face tough competition for making its place into this most attractive retail platform of China (Atherton, 2008). Bargaining Power of Suppliers The bargaining power of supplier in China retail industry is company specific. The larger the market share of the company is, lower is the bargaining power of the supplier. To be more specific, in the retail supermarket and hypermarket industry of China, the giant retailers tend to establish long term relationship with the suppliers for receiving bulk of quality materials at the right time and at a competitive cost. For all such companies, bargaining power of suppliers is low. However, bargaining power of supplier increases when new firms, especially foreign companies enter the industry for setting up business (Harrison, 2009). Figure 3: Porter’s Five Force Model for China Retail Industry (Harrison, 2009) Bargaining Power of Buyers As a large number of competing supermarket and hypermarkets are available to the consumers of China, the bargaining power of buyers is very high. Therefore, the supermarkets are required to diversify their product basket as much as possible and modify their pricing and promotional strategies from time to time. More importantly, the company should also strive to establish customer satisfaction in order to retain their customer base and attract new customers as well. As all the retail supermarkets put considerable effort to capture larger proportion of the consumer base, the newly established foreign country should infuse innovative ideas and products into its superstores to gain the attention of the consumers (Morrison, 2011). Threats from Substitutes Considering substitutes, Auchan, Carrefour, Tesco, Lotte Mart, Walmart, JUSCO etc are the some of the existing giant retail chain of supermarkets in China operating successfully in the industry segment. Therefore, any company interested in establishing business in the Chinese supermarket retailing industry, will have to encounter severe threats from all these substitute organizations (Morrison, 2011). From the above analysis, it is prominent that the retail market of China is one of the most competitive industries in the world. However, the underlying scope for further expansion in the supermarket retail industry is also very high because of a series of FDIs that the industry is expecting to experience. Therefore, expanding business in this market segment, the western country will still be able to gain huge profitability if it can devise the marketing and distribution strategies appropriately. In fact, the goodwill of the firm in western countries will automatically fetch customers in China market as well. However, retention and enhancement of the consumer base will totally depend on the ability of the firm. PEST Analysis PEST analysis will expose the existing condition of Chinese retail market in order to evaluate the relevance for the western company for expanding the business in the supermarket retail industry of the country. Political Factors The retail market of China is one of the most lucrative and fast growing industry in the world. The favourable political considerations of the country have enabled numerous large and medium scale domestic and foreign retail firms to establish and expand their businesses. Presently, only 5% of the Chinese retail enterprises are invested by foreign entities. The retail industry, being one of the prominent industries of the country has accounted for 12% of such foreign investments. The country used to impose strict restrictions on foreign investments before joining World Trade Organization (WTO) in 2001. After this period, China has highly liberalised the scope of foreign investment. According to the reports from 2013, China has become the largest recipient of FDI by managing total of $64.1 billion which is 34.7% of the total Asian FDI. In fact the industry is also expecting to flourish further through relying on the expectation of 16% increment of FDIs by 2016. The political regulations of China has become so encouraging that it will be easier for the western company in concern to establish its business as the country is inviting foreign investors to establish joint ventures or wholly foreign-owned retail companies at large scale (Cheng, 2014). Economic Factors The prevailing economic condition of China is also favourable for a western company to establish its business in this segment. The second largest economy of the world has been showing a uniform growth rate of 10% since decades. The inflation also shows a low rate of 2% as per the statistics of 2014. Both these parameters indicate the signs of a stable economy with sound purchasing power and disposable income. Therefore the associated level of risk will be very low for the western retail company if it establishes its business in China. Considering the unemployment rate of the company, China has experienced that a large chunk of technically efficient labour force of the country has been emigrating mainly to western countries due to lack of suitable job opportunities in China. Therefore, the western retail country will gain access to this skill enriched source of local population for employing them in different position in their supermarkets, according to their knowledge and skills (Cheng, 2014). Social Factors Considering the social factors, the consumer behaviour of China is moderately predictable. The consumers of China are highly information oriented. Therefore, they mould their purchasing pattern based on the complete information obtained from various reliable sources. Chinese population puts relatively less reliance on brand considerations and tend to opt for the products of that company that serves the need and purpose of the consumers. This is the main reason of the small scale retailing enterprise to still survive in this era of cut throat competition. Therefore, if the company in discussion can procure right product to the right customer at the right time and meet the requirements of the targeted consumer base of China, it will definitely be able to sustain its business in this country (Griffin and Moorhead, 2014). Technological Consideration As China has an established retail supermarket industry, a new entrant can gain competitive advantage and differentiate its business from other existing companies through incorporating latest technologies. Moreover, in order to meet the demand of the sophisticated and premium consumers implementation of technology is must to succeed in long run. Considering the supermarket retaining business, the western country should export the innovative ideas such as establishment of eCommerce as well as mobile commerce and digital marketing instead of traditional physical retail outlets. Promotional activities should be done by using social media marketing tool. Concentrating on the technological integration in the physical outlets, Electronic point of sale system, close circuit cameras etc should be incorporated for attaining customer preference as well as for the benefit of the company itself (Griffin and Moorhead, 2014). Internal Analysis For analysing existing potential and capabilities of the western company the strategic tool of Ansoff Matrix will be incorporated. The matrix will elucidate explicitly whether the company is in a position to expand their retail business in the emerging market of China. Ansoff Matrix Market Penetration Market penetration shows the current position of the market in which the company is operating and the company’s internal strength to enter into new market. Analysing the western retail company it has been experienced that the company has been operating in the matured retail market for very long. Hence, the scope is very less in the existing market segment for the company to grow and expand its business. As the internal resource and capabilities are very high for this company, it is justified for it to penetrate into the emerging markets to tap lucrative business opportunities. Market Development As discussed earlier, due to maturity of western market, the retail company must consider the scope of market development for expansion of business and create global presence of the company. Product Development As the company will penetrate into the emerging market of China, it will be able to derive the consumer needs and preferences of China region and accordingly they will concentrate on further product development. Diversification Diversification of products and services is inevitable for the company to ensure sustainability its business in China’s supermarket retail industry because of presence of a large number of supermarket brands. Therefore, in order to ensure consumer preference and to enhance customer base in China, the company is bound to diversify its product portfolio in order to address the demand of customers across all segments. Among the four strategies suggested by Ansoff, the company should concentrate on market penetration strategy during their initial phase of expansion. Once, the company penetrates the China market successfully they should shift their concentration towards market development and product diversification for business success. Recommendations and Conclusion Companies consider the opportunity of penetrating into new market and expanding globally by attracting to the immense scope of earning profits in the global business place. Though it is true to a great extent, global business expansion also inherits huge scope for underlying risks. Therefore, recommendations must be provided to the company so that it can optimize the adverse effects of such risks on their business and successfully operate in the global circumstances. For instance, the companies do not spend much time to understand and analyse the characteristics of the market in which it is going to penetrate. This results in formulating defective marketing strategies which in turn leaves a negative impact on the company’s financial statements (Scase, 2008). Therefore, the western retailing company must conduct explicit research on the prevailing economic and political condition of China. Legal aspects of the country should also be analysed in terms of trade restrictions, liberalization and inclination of the country towards foreign investment. Emphasise should be given on finding reliable source of supplies and establishing well-defined relationship with suppliers well in advance so that once started, business operations can be executed smoothly without any interruption (Waddock, and McIntosh, 2010). The risk of involvement of local people and cross cultural integration should also be managed by setting up similar rules for all employees of the organization and addressing regional demands (such as holidays on China’s cultural festivals) of local employees. Considering financial risk, as global business largely involves transactional and translational risks, the stability of Shanghai Exchange Rate Market and their exchange rate with Pound Sterling should also be analysed (Dunning, 2009). If all these factors are taken into consideration, the western retailing company will be able to expand and establish its business successfully and will also ensure long term sustainability of their global business. Reference List Aaker, D. A. and McLoughlin, D., 2009. Strategic Market Management: Global Perspectives. New York: John Wiley & Sons. Atherton, J., 2008. Transfiguring Capitalism. London: SCM Press. Bisley, N., 2007. Rethinking Globalization. Basingstoke: Palgrave. Cheng, C. Y., 2014. Chinas Economic Development, 1950-2014: Fundamental Changes and Long-Term Prospects. Lanham: Rowman & Littlefield. Dunning, J.H., 2009. Globalization, Governments and International Business. Oxford: Oxford University Press. Griffin, R. and Moorhead, G., 2014. Retail Market Study Worldwide 2014. London: Location Group AG. Harrison, A., 2009. Business Environment in a global context. Oxford: Oxford University Press. Morrison, J., 2011. International Business: Challenges in a Changing World. Basingstoke: Palgrave. Murrry, W.E., 2006. Geographies of Globalization. London: Routledge. Proctor, T., 2014. Strategic Marketing: An Introduction. London: Routledge. Scase, R., 2008. Global Remix: The fight for competitive advantage. London: Kogan Page. Waddock, S., and McIntosh, M., 2010. Change: The Transition to the New Sustainable Enterprise Economy. London: Greenleaf Publishing. Read More