Group purchasing may be a handy way to save money for a young man like Zhang Quan, but it could be the only hope for China's small retailers.

Zhang normally joins in a group purchase when he wants to buy expensive goods such as construction materials and electronics. These group purchases are normally organized by a professional company or one of his neighbors.

Having greater purchasing power, this way of shopping can help lower prices by an average of 15 percent.

As they snap up the bargains, what Zhang and his fellow shoppers are unaware of is that group purchasing may present China's small retailers with their only means of survival.

December 11 last year was a date greeted by foreign investors, as it marked the end of all geographic, equity ratio and business scope restrictions on their activities in China's retail sector, leading to full market liberalization.

But it is a day that China's small retailers remember with very little cause for celebration, as they will lose their advantages on locations as these retail behemoths open more stores in smaller cities and local communities.

What is worse is that these small retailers have to sell goods at prices higher than the giants because it is hard for them to bargain with powerful suppliers such as Procter & Gamble and Coca-Cola.

This means that some of them are looking at the possibility of forming purchasing alliances such as those established by the likes of Zhang in order to buy goods at lower prices.

First attempt

China's first such group, Shanghai Jialian Company, was established in September last year.

The group has four members in four provinces - Jiajiayue Supermarket Co Ltd in East China's Shandong Province, Sanjiang Shopping Club Co in East China's Zhejiang Province, Bubugao Supermarket Co in Central China's Hunan Province and Jiayong Commercial and Trade Co in South China's Guangxi Zhuang Autonomous Region.

The four companies have combined annual sales lower than 6 billion yuan (US$725 million), even smaller than French retailer Carrefour's sales in China, Wang Peiheng, president of Jiajiayue, the largest company in the group with an annual sales of 2 billion yuan (US$241.6 million), pointed out.

"We have no other way to go. If the small companies cannot unite, many of them will simply collapse," Wang said.

Unity has already paid dividends, according to Ding Zhiwei, general manager of Shanghai Jialian.

The company will bargain with suppliers after the four firms in the alliance have sent their purchasing agents to put their orders together.

"For the more than ten brands we buy through group purchases, costs have been lowered by 6 or 7 percent," Ding said.

The lower costs enable the four retailers to offer prices on a par with their giant competitors.

In addition, the four retailers can help order local specialities for each other at lower prices, Ding said.

For example, Jiajiayue in Shandong offer apples, which are cheaper in the province due to their plentiful supply. Similarly, Jiayong in Guangxi can help buy lychees for its partner firms.

If more retailers join the group, Ding said they will have an even greater advantage when it comes to prices. 4

"If we require a large quantity, we can even directly order the goods from manufacturers and use our own brands," Ding said.

Voluntary chain

Experts said Shanghai Jialian is an early example of a voluntary chain store, which has a history of more than 50 years in Europe and the United States.

These chains developed in the late 1950s in Europe and United States when several independent grocery shops realized that they were unable to compete with the big supermarkets, according to Yu Shuhua, a researcher at the China Commercial Economy Research Center.

So they organized themselves into groups and bought in bulk at discount prices from a central marketing organization and were then able to pass on this discount to their customers.

Although the shops took the title of the group's chain and carried "own brand" goods they were independently owned.

Voluntary chain stores have really provided a lifeline for many grocery shops in the United States and Europe which would otherwise have had to close down, Yu said.

Examples include the Independent Grocers Alliance (IGA), Sentry Hardware, and Western Auto.

With voluntary chains, member enterprises may collaborate in commodity procurement and distribution and in business operation, while retaining the ownership of their assets and independently conducting financial audits.

Yu pointed out that Jialian still has some way to go before it becomes such a voluntary chain, as the firms so far only cooperate in terms of purchasing, rather than distribution and management.

Time for China

Yu said it is time for Chinese small retailers to consider forming voluntary chain as their very survival is under threat.

Small retailers are going bankrupt in unprecedented numbers, battered by the winds of intense competition brought by increased foreign involvement in the sector.

Statistics show that more than 150 supermarkets closed down across China in the 18 months up to the end of last year.

This fear of bankruptcy intensified as China fully opened its retail market.

The full opening of the sector could see the expansion of the foreign conglomerates to small and medium-sized cities, the entry of brand new foreign retailing conglomerate, and an increasing number of mergers and acquisitions.

Wal-Mart, the world's biggest chain retailer is to set up a supermarket in the city of Yuxi in Yunnan Province, and Taiyuan, the capital of North China's Shanxi Province as a part of its 15 new stores in China this year, kicking off Wal-Mart's penetration into medium-size cities.

German-based Metro said it will increase its current 21 stores by 50 percent this year.

B&Q, which has opened outlets in Beijing, Shanghai, Suzhou, Kunming, Shenzhen and Hangzhou, plans to open 10 to 15 shops annually in China.

Domestic giants, facing this aggressive challenge from foreign counterparts, will follow by opening more stores.

"With big retailers opening more stores and extending their networks to every corner of the country, small retailers will have two choices - be acquired or close down," said Yu.

But most small retail firms are owned by private persons, who would like to have their own business, Yu said.

More than 99 percent of Chinese retailing enterprises are small or medium-sized enterprises.

Even in big cities such as Shanghai, Beijing, Tianjin and Guangzhou, where the retail business has developed most quickly, small retailers account for 60 percent, 68 percent, 85 percent and 75 percent of the market.

IGA's Asia-Pacific General Manager Ye Minzheng said the market situation in China is similar to that in the United States when voluntary chains were taking shape.

"Most of the small retailers were kicked out of the US market in 15 years. But those who chose to set up voluntary chains or had a clear market position survived," Ye said.

But in China the time span will be shorter, and could see small retailers forced out of the market within seven years, Ye said.

"It is time for them to look at some practical choices."

Concerns to be addressed

But China's small retailers are reluctant to join voluntary chains, although they have high expectations about this business mode.

"We know the mode is efficient in the United States. But we will not take part in it until it is proven to be successful in China, which has many special features," said a manager of a small supermarket in Beijing.

The key to the successful operation of voluntary chains lies in group purchasing and central distribution, which applies to 90 percent of the goods for IGA, but only accounts for a very small percentage at Shanghai Jialian.

"China's logistics industry only gained its development momentum in recent years. When the logistics industry matures in China, the conditions will be ripe for large numbers of small retailers to join voluntary chains," said Yu.

China also lacks a credit system, which makes it difficult for the organizers of voluntary chains to collect money from small retailers if they fail to pay, Yu said.

The entry of global leaders in running voluntary chains will help establish standards for the industry in China, according to experts.

IGA, the world's largest voluntary supermarket chain, has signed co-operative agreement with the Sanjiang Shopping Club based in Ningbo in coastal Zhejiang Province, a member of Jialian.

IGA, with global sales of more than US$21 billion in 2003, includes over 4,000 independent supermarkets in 48 states in the United States and 42 foreign countries.

The European giant SPAR entered the Chinese market after signing a deal with Shandong retailer Jiajiayue Supermarket Co, another member of Shanghai Jialian.

The agreement will result in the opening of 15 new SPAR supermarkets in East China's Shandong Province over the next three years.

SPAR, the biggest chain of this kind in Europe, has 15,000 members in 34 countries and recorded total sales of 26.8 billion euros (US$35.1 billion) in 2003.

(China Daily January 18, 2005)