As the Chinese economy continues to surge ahead, the consumption power of the cities is rising steadily and retail is making up an increasingly larger share of the commercial distribution sector. In particular, the rapid expansion of large-scale supermarkets and hypermarkets in recent years underlines the growing importance of the retail sector.

China is a vast country with an unbalanced development of regional economy and diverse consumer preferences. Its retail markets in different regions differ significantly from one another. The hierarchy of retailers differs from city to city depending on its level of economic development. In economically more developed cities that command greater reach, the retail market can be divided into four tiers:

• National commercial districts -- featuring large department stores, supermarkets and specialised stores;
  
  
• Regional commercial districts -- mostly located near residential areas featuring large general merchandise stores;
  
  
• Community commercial districts -- featuring super- markets offering primarily food products and daily necessities;
  
  
• Residential districts -- featuring convenience stores and small retail outlets.

In second-tier cities with a relatively high level of consumption and economic development, the retail market can be divided into three tiers:

• Central commercial districts -- housing large department stores, different types of specialised stores and boutiques;
  
  
• Regional commercial districts;
  
  
• Community commercial districts.

In medium-sized cities, the retail market is mainly made up of small- and medium-sized commercial outlets in addition to several large-scale commercial facilities. In small towns and county-level townships, the retail market has only one tier comprising primarily of small commercial outlets such as supermarkets and convenience stores.

Today, state-owned, private and foreign-invested operations are the three dominant players in the retail sector. Prior to its accession to the WTO, China began to open up its retail sector to foreign investment. Nearly 70% of the world's top 50 retailers have now established sizeable networks in China. In fact, retail giants such as Wal-Mart of the US, Carrefour and Auchan of France, and Makro of Germany have already started to expand into second-tier small- and medium-sized cities. Meanwhile, large-scale indigenous retail enterprises have actively pursued merger and acquisition in a bid to expand their operation scale. The central government is also giving support to 20 large retail enterprises, helping them transform into China's flagship retailers. It can be expected that world-class retail enterprises, state-level retail enterprises and regional retail enterprises will dominate the mainland retail scene in future.

In the past, China's retail sector was dominated by a single store format -- the department store. Nowadays, a wide variety of stores have gradually come into play, including large shopping malls, supermarkets, chain stores, specialised stores, convenience stores, discount stores, hypermarkets, auction houses, online shops, mail order houses, TV shopping channels, and distribution centres. As the Chinese economy continues to develop, the diversification trend of retailers is set to continue over the long term. Supermarkets will become more and more consolidated, structured and modernised and will move towards the directions of chain operation, specialisation, differentiation and personalisation. Hit by the challenges brought about by the rapid growth of new retail channels, traditional department stores went downhill for some time. But now, some have undergone transformation and re-emerged as modernised department stores moving from general merchandise stores to theme stores. They have also experimented with the format of specialised chain store operation dealing primarily in stylish, up-market goods. Larger operation scale, organisational restructuring, and diversification into new retail formats are the development trends of department stores.

In recent years, with the rapid development of computer network technology and growing popularity of business and home computers, the retail system in China is switching to network operations in growing numbers. The internal systems of retail enterprises and B2B horizontal linkages are adopting the Intranet-based chain operation model, whereas B2C interactions are becoming Internet-based, vertical business operations.

Direct selling is another retail format that should be noted. Since the 1990s, as a new form of retailing, direct selling has undergone various development stages in China: from the introduction of pyramid sales, banning of pyramid sales, to the transformation of direct selling enterprises and the promulgation of a dedicated legislation. In August 2005, the draft Regulations on the Administration of Direct Selling was passed. The new rule stipulates that direct selling enterprises must establish provincial-level branch operations before applying for permission to launch direct sales in that province. Upon approval by the state, direct selling shops may open in the province concerned. However, such approval is not valid in other provinces. Cross-province operations without the required approvals are prohibited. While the new rule has lifted the restriction on the number of stores, direct selling enterprises must still operate under the "shop + sales personnel" mode.

Performance of Larger Retail Chains in 2004 (By Store Type)

 

Indicator	Total No. of Stores	Business Floor Area (sqm)	No. of Employees	Sales Revenue (Rmb 10,000)	Directly Operated Stores	Franchised Stores
Total	54,891	35,170,643	1,055,978	55,806,958	34,590	20,301
Department Store	2,637	6,110,570	139,048	7,447,315	997	1,640
Supermarket	14,073	15,943,112	510,827	24,099,401	9,107	4,966
Specialised Store	25,867	11,874,235	317,156	22,066,942	16,607	9,260
Specialty Store	4,493	393,422	32,588	796,661	1,797	2,696
Convenience Store	7,755	832,725	55,441	1,382,632	6,027	1,728
Others	66	16,579	918	14,007	55	11

Source: National Bureau of Statistics