China’s Retail Invasion

Over the past few years, since the opening of China’s door to foreign capital, the country has steadily attracted significant capital in numerous areas, including industrial and high technology.

The country has also seen the emergence of numerous mainstream U.S. retailers in China, including Wal-Mart Stores, Inc.(NYSE/WMT), Kentucky Fried Chicken, which is owned by YUM! Brands, Inc. (NYSE/YUM), McDonald’s Corporation (NYSE/MCD), Best Buy Co., Inc. (NYSE/BBY) and Starbucks Corporation (NASDAQ/SBUX).

But this has been only the start, as the country is exploding on the retail front. The Chinese retail sector is on a major upward trend after opening up its retail sector to foreign retailers in 2006. The new structure means that foreign retailers wanting to enter China will no longer need to align in a joint venture with local partners.

The structure change should open up the floodgates for retailers into China. The growing interest in China should not be a surprise, given that you have a massive middle class that is larger than the entire population of any other country in the world, with the exception of India. The middle class has ample money to spend, and they want to spend it. Chinese consumers are also in love with foreign brands, as they are a sign of quality and distinction compared to domestic brands, which continue to have inferior perception and are generally not as good in quality, either.

Over 1,000 applications submitted by foreign retailers have been approved, according to The Shanghai Foreign Investment Commission.

Powerhouse Wal-Mart, which has been struggling with growth in the U.S., is already in China, and is betting on growth in China, saying that it will expand in China at over 30% annually. Wal-Mart currently has 94 stores in China and has approval to open six more stores. The expansion process should not hit any hurdles, as Wal- Mart is a major buyer of local Chinese goods both in China and for stores outside of China. We like this strategy, and believe that Wal-Mart continues to be a decent long-term dividend holding.

Another major U.S. retailer that’s planning to get a piece of the Chinese consumer is The Home Depot, Inc. (NYSE/HD). I believe that this is only the start of the retail invasion, as foreign firms set up shop in China and attract consumers who have money to spend.