I am arriving in Nanchang on a night flight from Shanghai. At night, from the plane, Nanchang reminds me of a big theme park: a great spectacle of coloured lights. The banks of the Ganjiang, the river that crosses the city, are glowing with illuminations. The bridges over the Ganjiang are also lit up. The skyscrapers of Nanchang’s financial centre are framed by red and yellow lights. On the top of these buildings, the names of banks and insurance companies are flashing on and off. The plane, in the meantime, is weaving left and right in search of the landing strip.
On the ground, Nanchang shows some of the typical status symbols of a provincial capital city: a great glass airport and a wide highway connecting the airport to the city centre, with well-maintained foliage along its sides.
We are now in the city centre, already half deserted save for some itinerant sellers of fried noodles and dumplings and their customers. Looking out from the taxi window, my Chinese colleague complains that Chinese cities are losing their distinctive urban, architectural features and are all starting to look the same.
As in all provincial capital cities, there is a wide central avenue along which the important governmental buildings are ranged, and a huge imposing square that people say is second only to Tian An Men square in Beijing. Away from this, Nanchang’s commercial district is being renovated. Alongside office buildings and shopping centres built up relatively recently, there two enormous sites that herald the arrival of a number of vast multifunctional shopping centres.
Nanchang is the capital of Jiangxi, a province to the south-west of Shanghai, just west of the coastal provinces of Zhejiang, Fujian and Guangdong. Nanchang lies between Shanghai and Guangzhou, the capital of Guangdong province. As a provincial capital, Nanchang should have the status of at least a second-tier city. However, being relatively far away from the coastal areas and belonging to a province that still mostly relies on agriculture, has seen Nanchang slipping down towards the third-tier cities.
For foreign investors, engaging in western product (or western-branded product) retail in Nanchang poses issues similar to those encountered in doing business in all China’s second- or third-tier cities.
The potential customers
In order to establish whether a Chinese second- or third-tier city is a mature market for western (or western-branded) products, with certain quality and price standards, there are at least two aspects to consider.
The first factor to evaluate is the spending power of the local consumers. I suggest that the following aspects are indicative of spending power: the local consumers’ current financial possibilities, as shown by local salary levels, the presence of luxury brands, and the life styles of the local population.
The average monthly salary as published by the local labour bureau is the first indicator of spending power. (This amount is also used for the computation of the statutory compensation for employment termination). The average monthly salaries (in Chinese RMB) of the Nanchang, Shanghai and Hangzhou working populations are:
- Nanchang: RMB 3.318 (Euro 400);
- Shanghai: RMB 4.692 (Euro 567); and
- Hangzhou: RMB 3.541 (Euro 428). (Note: Hangzhou is the capital of Zhejiang province, the richest province in China whereas Shanghai is a municipality, not a province, and is directly subject to the Central Government);
A further indicator of spending power is the presence of luxury brand shops (both the type and location of such shops).
Local consumer life styles also indicate a willingness to purchase western products. Some second or third-tier cities, on the one hand, have residents with a substantial purchasing power and luxury brand shops have opened to accommodate this. On the other hand, however, the local life style is often fairly traditional. Where this is the case, it could be rather difficult to sell western products or services, especially in the food and beverage industry where Chinese people have very traditional and deep-rooted tastes. A factor that may indicate a westernization of the life style (at least in part of the population) could be the presence of Starbucks coffee shops. Starbucks’ customers are mainly young Chinese and, among them, especially white collar workers. Their life style has some western traits such as drinking a coffee (or other beverage) on the way to work or during a break from work. The on-going exposure of the Chinese urban population to western life styles (also through studying or travelling abroad) provides more opportunities to experiment with western products.
We should probably acknowledge that, as a result of recent years’ deep urban and architectural transformation, Chinese cities tend to develop some recurrent distinctive characteristics.
More and more often, in the commercial area of a city, even of third or fourth- tier cities, there is at least one big shopping centre (usually a Wanda Plaza, Wanda Group being one of the biggest real estate developers in China) where you can find western brands well-known to the Chinese consumers.
These brands are, among others: KFC, Pizza Hut and McDonald’s (the food chains); Walmart (large retail industry); Zara, H&M, Adidas and Nike (fashion industry). Among the successful non-western brands, the Japanese Uniqlo, a fashion retail giant, is also worth mentioning.
For a brand it is very important to open a store in a successful shopping mall. This will grant greater visibility to the brand and more exposure to the Chinese consumers. However, it is not easy to get a location in a well-known shopping mall unless the brand in question has acquired wide success not only in its home country but also internationally.
In Shanghai, for instance, shopping mall owners do not merely require guarantees and assurances from the prospective tenants that the business is viable from a financial point of view. They also want information on the history of the brand and its experience and track records abroad.
As you can see, being a foreign brand alone is not enough to open the doors of a well-appointed shopping mall in a Chinese city.
The Chinese regulatory environment on foreign investments in the retail sector is substantially the same throughout the country. There are some local peculiarities in respect of, for instance, the standard language adopted for the company business scope, the minimum registered capital required for foreign-invested projects, and the application documents necessary for the company registration. The most notable difference could be that regarding the local tax regulations or practices adopted by the local tax bureaus.
In this respect, the main difference between the first-tier cities (Shanghai, Beijing, Guangzhou and Shenzhen) and the other Chinese cities lies in the application of the rule of law and the implementation of administrative transparency. In other words, the local authorities in lower-tier cities tend to use their discretionary powers to a larger extent. This may cause delays in the project approval process.
It is common to stress the importance of personal relationships (“guangxi” 关系) as a key factor in doing business in China. It is undeniable that personal relationships are important. However, at the same time, ”guangxi” could potentially lead to damaging shortcuts. At first sight, shortcuts may help to quickly solve a problem. However, they also expose foreign investors to risky situations and uncertainties if some other problems arise in the future.
In the early morning I left Nanchang for a train ride to Xinyu, the most industrialized city of the Jiangxi province with a population of about 1.100.000 people.
On my way to the railway station, I stopped at a KFC to pick up my breakfast. The menu in English was: rice soup with chicken and egg (pidan shourou zhou 皮蛋瘦肉粥), fried bread (youtiao 油条) and soya milk (doujiang 豆浆). I had to queue for several minutes at the counter as the KFC was crowded with young and not so young people, as is often the case in China.
The success of KFC in China is a classic example of localisation, the capacity of a foreign brand to adapt products and services to local tastes and eating habits. KFC manages to combine dishes that meet local tastes, cleanliness and hygiene standards that satisfy those of the west, and very competitive prices. KFC achieves this in the rather sensitive food and beverage sector where food safety and hygiene issues are not unusual. KFC is, without doubt, a case that should be studied by any foreign investor wishing to undertake expansion, within the food and beverage sector, into the Chinese interior.