China Food & Drink

The news that the Chinese government is considering introducing new legislation to control the spread of large-scale modern retail outlets in the country has caused a stir this quarter. With bans on foreign direct investment (FDI) in retail in India continuing to frustrate, China remains one of the world's most explosive growth prospects for expansion-oriented multinationals. Business Monitor International (BMI) forecasts retail sales growth of a phenomenal 89% to over US$400bn by 2010. French retail major Carrefour has supported this outlook, revealing that it expects China to account for its strongest sales growth ever in the coming years. How, though, would the enactment of such regulations impinge on BMI's forecast?

Recent trends witnessed in other regional markets suggest that the threat of restrictive legislation would prompt retailers to consider taking their investment funds elsewhere. BMI has recently reported on both Carrefour and Tesco issuing this veiled threat in Thailand. However, in China it is difficult to see such a hard-line approach paying off. The potential of China's vast consumer base and its increasing affluence, thanks to its 1.3bn-plus population and annual GDP growth of 9.9%, mean that there is no comparable opportunity to act as leverage in negotiations with government officials.

While legislation remains an option rather than a certainty, retailers look set to continue their expansion and BMI's latest report provides further analysis on the strategies of multinationals Carrefour, Metro and SPAR International for the country. However, of more interest are the implications of this latest development for the country's local retail operators. Perceived favouritism to multinationals has left local market leaders, such as Lianhua and China Resources Enterprise, crying out for a little protectionism. Should the government choose to address these concerns, the impressive effectiveness with which local operators have competed with multinationals to date might further develop. One particularly innovative example is Beijing market leader WuMart, who is adopting traditional multinational techniques - such as private labelling and loyalty cards - in a bid to make its transition from regional player to national major. Beneficial terms for these retailers would put multinationals at a disadvantage, but just how serious would this inequality be?

In BMI's Q306 Retail Business Environment Rankings, China fell in sixth place, with its very low per-capita food consumption levels offsetting the attractiveness of its burgeoning and still spacious retail sector. However, another crucial inhibitor of China's investment potential was its average Barriers to Entry score. Presently it is largely infrastructural problems that account for this moderate rating, yet should legislation be introduced, China's score could be expected to drop further still. Fortunately for China's FDI balance the country's potential is such that BMI expects retailers to tow the line and seek means of overcoming any barriers that comes their way. Threats and tantrums would merely see an aspiring local player fill the void.