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2011-03-07 | All chapters

Red carpet for foreign stores

BEIJING - Zhou Yue said local governments are often prepared to slash the taxes of European and other foreign retailers to lure them into second- and third-tier cities. The 31-year-old general manager of the Chengdu branch of the European Union Chamber of Commerce in China said retailers can sometimes pay half the taxes of local Chinese retailers.

"There are a lot of favorable policies. In Chengdu, for example, foreign brands pay tax of around 15 percent, whereas for Chinese retail companies it is often as high as 30 percent or more," she said.

Zhou was speaking in The Bookworm, a bookstore and restaurant favored by the relatively few European expats in Chengdu, the capital of Sichuan province in Southwest China.

The city, which has a population of around 11 million, is categorized as second tier, although it is remote from China's prosperous eastern seaboard.

It has seen a major influx of foreign retailers, many of them European, in recent years.

The checkout tills are certainly busy. Retail sales hit 240 billion yuan ($36.5 billion) in the city last year, an increase of 15 percent on 2009.

The number of members of the European Chamber alone has doubled to around 100 in the last two years.

"The commerce in Chengdu is outstanding compared to many other second-tier cities," said Zhou.

French jeweler Cartier's store in Chengdu was reportedly No 1 in the world in terms of sales in 2007, ahead of even Paris, New York and Tokyo.

Louis Vuitton recently opened its third biggest store in China on Renmin Road, one of the city's main shopping streets. Many other top European brands, luxury and otherwise, have stores in the city's many shopping malls.

Zhou said Chengdu people just love to shop and this may be related to deep-seated cultural reasons dating back 2,000 years.

This now translates into selling 1,000 cars a day, making car ownership in the city the third largest in China.

"I think compared to other cities people are more willing to spend money and enjoy life," she said.

"People are not too worried about savings and I think that is for historical and cultural reasons. Agriculture has always been well developed here compared to the north and people have had enough food and vegetables."

Zhou said the Sichuan government wants to attract European retailers not just to Chengdu but to third-tier cities within the province to drive up standards.

"They recognize the European retailers have more than 100 years experience, they have the global management capability and they want to bring this experience to the province. They see it as a way of developing the retail sector as a whole in the province and that it will also benefit Chinese retailers," she said.

Zhou said retail is also an integral part of real estate, which is one of the real drivers of the Sichuan economy.

European retailers deciding to become an anchor tenant in a mall can make or break a development.

"Retail is very related to real estate and it is the real estate sector which to some extent drives Chinese economic development," said Zhou.

"So when a foreign retailer comes in and becomes an anchor tenant in a particular development, other people also then tend to come in and it creates a lot of investment. It is a catalyst for growth certainly."

Government officials, according to Zhou, also have added incentives to bring in foreign retailers because their performance is measured by how much inward investment they deliver.

If they land a major European or foreign retailer, they will be seen to be performing well.

"Some of the officials' yearly-, three- or five-year performance is based on how much foreign investment they can bring into the region," she said.

Zhou herself was partly attracted back to her home city of Chengdu by the strong economic development in the region.

She left initially to study marketing at The Universite Robert Schuman in Strasbourg in France.

She worked initially for a French medical device company helping it enter the China market before setting up a consultancy helping small- and medium-sized enterprises build business links in China.

She carried out this work in France before relocating to Shanghai, where she joined the European Chamber two years ago.

"Economically, Southwest China was taking off very rapidly and aggressively and it was a perfect match for me with the chamber."

She believes some of the Sichuan retail habits are very similar to those of the French.

"I think Europeans and, particularly, the French, have the same understanding about what life is all about and they want to spend money and be comfortable."

Zhou said major foreign retailers are looking to establish a presence in the third-tier cities in Sichuan.

US retailer Walmart has already established in Yibin and French supermarket chain Auchan has been looking to open there also.

"I think the main problem with third-tier cities is that they are not well connected and have poor distributions links. There are, particularly, geographic problems in Sichuan since the province is surrounded by mountains which adds to the difficulty of traveling between cities," she said.

"The economies of certain third-tier cities are poor also and people may not have the money to buy whatever they want."

She said there is an interesting retail dynamic in Chengdu, where people who work in the city go off to the mountains at the weekends and people from the nearby third-tier cities come into shop.

"They rush into the city and fill all the shopping malls. They come to Chengdu and can buy whatever they want," she said.

Zhou said the European retailers sometimes go to extraordinary lengths to offer the products locals want.

"During the Spring Festival (Chinese New Year) some outlets were selling red underwear since someone born in the Year of the Rabbit needs to wear red underwear to bring them luck," she said.

"Localization usually means foreign retailers offering the type of food people want in Sichuan. The food sections will have cooked or semi-cooked spicy local dishes."

Zhou said European retailers tend to take a much more strategic view of the whole country than Chinese ones.

"There are a number of Sichuan brands which have developed in the Sichuan region which are unheard of in the rest of China. This also applies to retailers who have started out in Shanghai or Hangzhou and also remain in these areas. The likes of Carrefour, Auchan or Ikea have a particular strategy to enter the China market as a whole," she said

Zhou said local city chiefs are always very responsive to European retailers wanting to set up outlets and will often go out of the way to provide incentives.

"It is very difficult to give examples but everything is discussed."