Despite a slower economic growth, China remains a key destination for international corporations' drive for growth. US retailers that have entered the market with a relatively longer-term establishment in China, in particular, are looking into further expansion in the world's No 2 economy, according to a recent study by credit-rating agency Standard & Poor's.
Among the 150 US retailers and restaurant companies that have operations in China S&P rates, five were studied in the recent report in terms of their exposure in China and the strategic importance that they have attached to China. Three out of five - WalMart, McDonald's, Starbucks, Yum! and The Gap - are restaurant companies.
Helena Song, New York-based director of Standard & Poor's corporate and government ratings, said US retailers that expand into China tend to be the "largest players in their category". Song, referring to the five sample companies in their study, noted that these companies have already penetrated the domestic US market, have experience in international expansion, and boast a strong global brand and solid cash flow to support meaningful and longer-term investments.
"As these companies establish a base and accumulate more experience in China, they develop more local operation knowledge and expertise," said Song, who led the study.
Most US fast-food restaurant companies have shown a big appetite in China and are among those early comers with some entering China as early as the 1980s. Yum! Brands, for example, entered China by opening KFC, the first quick-service restaurant, in Beijing in 1987. Yum calls China the "greatest restaurant opportunity of the 21 Century".
And for good reason.
After more than two decades' operation, KFC is the No 1 fast-food chain brand in China with more than 4,400 restaurants in some 850 cities across China and a new one every day. Just in 2012 alone, Yum's Shanghai-based China division opened nearly 900 new chains in China and generated more than $1 billion in profit.
Song said American quick-service restaurants' successful expansion in China reflects their "strong brand name appeal, solid financial resources, and experience in developing new international markets".
"Moreover, they have helped change and shape how younger generations in China eat, drink and live in modern day China," said Song, adding such expansion will continue as consumer spending continues to rise and as the taste profile of the Chinese population continues to evolve.
The past year may not have been a fruitful one for Yum, as the company saw a sharp decline - around 10 percent - in its China earnings for the first three quarters due to safety concerns over its poultry supply.
S&P in its study predicted that the negative trend for Yum in China will moderate in the coming year and store sales will "turn positive" in 2014 because of the company's commitment to localization in menu initiatives and customer outreach.
As many economists have pointed out, China's slower growth - currently at 7.8 percent compared to its one-time double digit pace - will be suitable for the country to reconsider its growth model. China, as many experts suggest, needs to shift from an investment economy toward a consumption-driven model. The S&P study points out that growing domestic demand will likely benefit Western retailers that execute successfully in China.
US retailers expansion in key international markets such as China is a supporting factor for S&P's ratings, as it strengthens the business risk profile through greater scale and geographic diversity, as well as better competitive advantage, operating efficiency, and profitability over time, according to the study.
But the future of these retailers in China does face challenges, both among themselves and among China's domestic brands.
"We believe opportunity remains in China for some US retailers, but we also believe competition will become increasingly intense," Song noted. "Local companies are growing and competing more aggressively, leading international players are expanding and fighting for market share, as operating costs and real estate costs continue to rise.
"Both Wal-Mart and Gap face tough competition, from competitive local players, such as China Resources Vanguard and Yonghui Superstores for Wal-Mart, to large international players such as Carrefour for Wal-Mart, and Zara, H&M and Fast Retailing for Gap," Song explained.
For retailers like Wal-Mart and Gap, e-commerce has also posed challenges in its sales figures, especially in China where e-commerce is taking off rapidly. China had a $200-billion sales record in e-commerce last year with companies such as Alibaba being the major boost to the online economy and the growing number of Internet users in China (which currently is around 590 million - more than the whole US population).
"We expect to see Wal-Mart and the Gap grow in China through both adding physical stores and expanding their online capability," said Song.
