One of the biggest challenges facing home-improvement retailers in China is the fact that 90% of newly built Chinese homes are handed over as empty concrete shells. That leaves owners with the responsibility for wiring, plumbing, flooring, air conditioning, and even interior walls -- tasks better handled by experts than hammer- and wrench-wielding weekend amateurs.
That hasn't stopped B&Q China, a subsidiary of Kingfisher, a home improvement chain based in Britain and listed on the London Stock Exchange. The company opened a Shanghai store in 1999, and today it has 49 locations in China. By 2009, it aims to double that number. B&Q China President David Wei spoke with BusinessWeek correspondent Frederik Balfour about the challenges of operating a do-it-yourself retail chain in the Middle Kingdom. Edited excerpts of their conversation follow.
You were early to the Chinese market. Has that helped you gain better traction? Yes, in many areas, like government relationships. Though retail is fully open to foreigners, you still need approvals like zoning and licensing. Second, there aren't many available properties in big cities, and it's very difficult to find the right location at the right cost.
Also, we have had the opportunity to recruit the best people and train them. New entrants may nick a few people, but it won't damage our management team and forces. And we understand product mix. Building relationships with suppliers and getting the pricing and supply chain right takes time.
But Home Depot (HD) already has a sourcing office here. Aren't there synergies between buying goods for export and for stores in China? Yes, among the same suppliers who supply both. But Home Depot probably only sources 7% of its global products in China, while we have to source 95% of products locally for the local market. Anyone in DIY in China has to do 90% of their sourcing locally, so you won't have any global sourcing advantage at all. Home Depot may win on price for 5% to 10% of products, but on the rest they will have to compete to win the best suppliers in the local market (see BW Online, 5/1/06, "Home Depot: One Foot in China").
How much does it cost to convert a concrete shell into a dream home? Roughly 100,000 yuan [$12,500] for a 100-square-meter home, or 1,000 yuan [$125] per square meter in Shanghai. In Chongqing, it's only 500 yuan per square meter. But in Shanghai now we're trying to get people to spend 1,200 yuan per square meter. We need to drive customers to more fashionable products.
How have you done that? We have significantly improved our decorative-lighting section. We have a new range of Disney (DIS) products. We provide an entire solution for a kid's room. And Hong Kong design retailer G.O.D. [Goods of Desire] has rebranded some of its furniture, candles, cookware, and photo frames for sale in our stores.
How have government efforts to cool the property market affected business? The cooling has been mainly on high-end apartments, while low-end apartments are booming. We used to target the middle and upper market, but now we have launched entry level products and services. One is a 49,000 yuan ($6,125) solution to convert a shell to a fully decorated 90-square-meter two-bedroom apartment. These customers weren't targeted two years ago.
How are your margins in China? About half those in Europe. You can't have high margins in China, and you don't need to. China is the factory for the whole world, you can source directly, and the retail market is very competitive. Access to products is easy. In the U.K., mom-and-pop stores have no idea how to source sanitary-ware [toilets and sinks] because it's imported. In China, you could set up your own shop tomorrow. That's why you can't have high margins. You cannot kill small competitors.
But you don't need European margins. Below the margin line, costs are cheaper. Staff costs in Europe are 10% of total cost, vs. 2% to 3% in China. Property costs are lower. Europe has medium sales, high margins, high costs, and high investment for a reasonable return. In China, you have high sales, low margins, low operational costs, low investment costs, and still a reasonable return.
Does China have a do-it-yourself culture yet? You need time for DIY. There aren't many public holidays or paid leave. And you need the incentive to do it. Labor is so cheap in China there's no incentive to save money by doing your own work. Also, most new properties are sold as a concrete shell. That's too much work for DIY. It would take you three years working every weekend. So our idea is CIY -- Create-It-Yourself. You own the process of creation.
In Beijing and Shanghai, we will build a DIY culture starting with a DIY kids club. Lots of men don't have DIY skills, so at a kids club on the weekend they can come and do some basic painting or build a small wardrobe or a chair. It's a free service to attract parents to the stores.
Printer-Friendly Version