Recognizing China's fortune - Supplement 4

Home Channel News, March 6, 2000

Ten years ago, Fengjiang Li looked at China's retail home improvement market and saw a dormant industry consisting of two uninspiring sectors -- small, street-front hardware shops and government-run building material facilities.

"It was a seller's market," Fengjiang recalled, succinctly. "You bought whatever was sold."

Now, as the managing director of OBI China, he is about to do his part to change the industry. This spring, OBI plans to open its first store in Wuxi, 50 miles west of Shanghai. In the process, Fengjiang and OBI China will join ranks with a group of international and home-grown companies that is actively and aggressively restructuring China's retail home improvement landscape.

The lure of China's vast, untapped market has attracted big-name international players like OBI and B&Q, and has prompted national firms and government agencies to band together as investors to open Chinese DIY outlets such as Home Way, Orient Home and Homemart. Separately, these companies are doing what any good entrepreneur does -- start new businesses and try to turn profits. Together, they are building an industry.

China's DIY market circa early 1996 had no large-scale retail home improvement warehouses, though there was a great deal of talk about potential. Four years later, the market's competitors include 16 DIY supercenters operated by seven companies -- several of which have many more units planned for 2000 -- and there's clear evidence that China's DIY potential is real.

"We're here now and we're here to stay," explained Steve Gilman, B&Q's director of international development. In June 1999, the U.K.-based dealer partnered with the Shanghai-based Home Dec Co. to open a 7,000-square-meter (75,320-square-foot) DIY warehouse in Shanghai. The store's main purpose, Gilman said, was to help the company learn how to run a successful DIY business in China. B&Q, however, is not the only dealer here trying to discover a winning formula for this market.

Homegrown competition

Home Way, a Chinese-owned and -operated DIY retailer based in Tianjin, pioneered the warehouse concept in China when it opened in late 1996. Since then, it has expanded to four stores in three cities, including Beijing.

Three other Chinese-owned warehouse chains have formed during the past three years. Two-unit, Shanghai-based Homemart is tailored toward a design-oriented, quality-merchandise store format with a focus on kitchen and bath. Xin Pin, a five-unit dealer based in Shanghai, was founded in 1997 by a U.S.-trained lawyer and businessman. In early 2000, China's newest DIY retailer, Beijing-based Orient Home, was set to acquire a controlling share in Xin Pin. Orient Home opened a modern, 15,000-square-meter home center in August 1999.

Two additional joint-venture companies have stepped into the ring. German franchiser OBI has partnered with the Wuxi municipality's official development corporation, and is working on a similar arrangement with the municipal counterpart in Shanghai. A Canadian investment firm called Intercap Enterprises Group teamed up with the Shanghai Land and Housing Development Corp. to open its first distribution center and retail warehouse in October 1999.

Several forces have led these companies to jump into the mostly uncharted waters of China's home improvement market -- and led countless other firms to consider joining them. Some of the reasoning is akin to the great worldwide rush to develop Internet and technology firms. People believe the market is too large, the population too ripe, the ceiling for growth too high and if the profits are not there yet, they will be, someday.

"If you're an international retailer, you can't not be in China," said Bob Wilkins, an assistant manager at B&Q's Shanghai home center. "It is too important to ignore." Also hard to ignore for many of these big retailers is the fragmentation in the marketplace.

Prior to the entry of the big boxes, Chinese shoppers typically bought home improvement materials from small specialty shops: a flooring store for tiles, a tool shop for drills, a plumbing dealer for bath supplies, and so forth. These stores continue to capture a large share of a market's sales, dealers say, but they do so as a group and not with one or two powerful stores. This diversified field means a quicker climb to the top of the market, says one Shanghai tool distributor.

"In the United States, you need a 30 percent market share to be the leader," explained Gangpu Lee, the general manager of Danaher Tool Group Shanghai. "But here you need only 10 percent or 15 percent because everything is so fragmented."

From a demographic viewpoint, China's statistics are also hard to resist. The country boasts a population of 1.2 billion people, two fairly advanced, large metropolitan cities in Shanghai and Beijing, and several second-tier cities such as Tianjin and Guangzhou with upwards of 10 million residents each. Though China's average household income is significantly lower than U.S. or western European standards, its people are able to save money for important purchases like homes or home renovations.