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CHINA’S WUMART AIMS TO BE NEXT GLOBAL RETAIL BEHEMOTH

By Curt Hazlett

Zhang Wenzhong did not set out to become a retail baron. The onetime researcher for the Chinese government was taking postdoctoral classes at Stanford University in the early 1990s when he created a software system he said would streamline retail management. But there was a hitch: No one back in Beijing wanted to buy it.

So Zhang, who had never worked in retail, started his own supermarket to spotlight the system’s potential. The demonstration worked so well that 11 years later he is chairman of Wumart Stores, Beijing’s largest retailer. The chain operates 500 stores, which Zhang says he hopes to double within five years.

Wumart’s fast rise has been noticed beyond China. For one thing, Wumart is one of only a few Chinese retailers whose shares are publicly traded, giving Westerners an opportunity to invest directly in the red-hot Chinese market. Then there is the similarity of its name to Wal-Mart, which many assume is a marketing ploy, but which Zhang contends is merely coincidence.

A look at Wumart reveals a lot about the innovation and ambition that has transformed Chinese retailing in just a few years, and it also shows how fierce retail competition is becoming as Chinese and foreign companies battle for shares of the fast-growing market. “The frontier is open and there is a race going on,” said Merrill Weingrod, CEO of China Strategies, a Providence, R.I.-based consulting firm.

In terms of sales, China is the world’s third-largest consumer market, with retail sales of $628 billion in 2004. The only larger markets were the U.S., with 2004 retail sales of $2.6 trillion, and Japan. Some economists forecast that it will have the largest economy in the world within a decade.

That growth has made China one of the hottest retail venues on earth. Homegrown retailers such as the state-owned Bailian Group have dominated the national market, but China’s decision last year to allow increased foreign investment as part of its entry into the World Trade Organization has added even more energy to the competition.

France’s Carrefour is already the fifth-largest retailer in China, with 240 stores. Wal-Mart, No. 19, with 55 stores, says it plans to add 13 more this year through a push into smaller cities. Germany’s Metro is there, along with one of the newest foreign entrants, the U.K.’s Tesco, which last year acquired the Hymall chain from its Taiwanese owners.

What these foreign retailers are finding is a market already transformed by Chinese companies such as Wumart, which Zhang built by concentrating on the under-retailed Beijing, an increasingly prosperous city whose population is expected to top 15 million by 2008.

Like most Chinese cities, Beijing has long been the domain of mom-and-pop retailers, tiny establishments not necessarily known for variety or value. Zhang capitalized on that fragmentation by opening hundreds of convenience stores offering consistent quality and low prices. Of the 496 Wumart stores operating at the end of the third quarter, 377 were convenience stores, averaging just under 900 square feet.

Wumart’s expansion coincided with rising consumer demand for convenience throughout the country. “There has been an explosion of such stores,” said Weingrod. “You’re looking at a country that basically had no convenience stores eight or 10 years ago. Today there could be 20,000 of them, mostly in the biggest cities.”

Wumart supported the expansion with technology. It was among the first Chinese retailers to use management information systems such as the point-of-sale technology that links stores with distribution centers.

Along the way the company learned the value of marketing. It recently unveiled a program that gives monthly gifts of food to 100 elderly people in Beijing, a publicity move that received ample coverage from the local press. It also has begun sophisticated in-store promotions, including a month-long exhibition of Italian food products, titled “Marco Polo: Made in Italy.”

To many, Wumart’s name smacks of marketing too — a way of piggybacking on the fame of U.S. retail giant Wal-Mart. Not true, says Zhang. Zhang told Britain’s The Daily Telegraph in June that the chain was originally named Wu Mei (meaning “high quality”), after its parent company, Wu Mei Holdings. But Westerners had trouble with the name, sometimes mispronouncing it as “woman,” he said. “So I decided to change the name,” he told the paper. “I kept the first ‘Wu’ of Wu Mei but changed the ‘Mei’ to ‘mart.’ You know, ‘mart’ is a very common word.” Zhang could not be reached to comment.

Indeed, Wumart and Wal-Mart are competing in different arenas. “Wal-Mart’s strategy seems to be based on having big stores so that there is no need to shop anywhere else,” said Klaus Koehler, managing director of Klako Group, a Hong Kong-based consulting firm, in an August report. Wumart, on the other hand, has chosen “convenient locations for consumers,” Koehler wrote. “Combined with low prices, Wumart has a steady and returning customer base.”

And each appears to be going after a different class of consumer, says Kelly Tackett, a consultant at Columbus, Ohio-based Retail Forward, who recently completed a tour of retailers in China and India.

“Wal-Mart is targeting a higher income bracket,” said Tackett. She visited one of Wumart’s newer stores and says she was not impressed. “It was cluttered and dirty, and it seemed a lot more down-market than the Wal-Mart was,” she said. “In China Wal-Mart is more of a middle-market operator.”

To Tackett, the store’s appearance raises questions about Wumart’s ability to measure up to increasingly sophisticated retailers. “They’re now competing with some of the best in the world,” she said. “Competition is getting tough mainly because of where they are, in Beijing. China’s large first-tier cities have Carrefours, Wal-Marts, and now Tesco is coming in. They’re not going to be able to expand by growing their convenience-store base. They’ve got to grow the hypermarket and supermarket format.”

But Wumart says its future growth will come through acquisitions of existing small and medium-size retailers throughout the country. It says it will also consider buying complementary businesses, including those involved in real estate development and retail logistics.

Those pronouncements have played well in the financial community. The company’s shares, listed on the Hong Kong Stock Exchange, have risen 20 percent since August, and J.P. Morgan’s Hong Kong office recently raised its target price for the company. “Wumart’s strong balance sheet and negative working capital shall help the company to capture higher market share in the fragmented Beijing retail market,” a firm report said.

Of course, Wumart itself could wind up as a target rather than an acquirer. “We see Wumart as an attractive takeover target for larger players keen on the Greater Beijing market,” said Citigroup’s Hong Kong office in a June research report.

Whatever the future holds for Wumart, there is no doubt that Zhang’s supermarket experiment has changed the fabric of retailing in the Chinese capital. “I’ve been working in China for nine years, and I can’t remember when I saw my first Wumart,” said Danny Levinson, publisher of Chinafranchiser.com, which provides news and information for franchisers trying to crack the Chinese market. Now “they’re such a part of the landscape that I don’t notice them anymore.”