麦肯锡-贝恩资本KKR Project Glory-Appendix-20090427

ConductingaSuccessful

BusinessDueDiligencefor

ProjectGloryApril2009CONFIDENTIALANDPROPRIETARYAnyuseofthismaterialwithoutspecificpermissionofMcKinsey&CompanyisstrictlyprohibitedAppendix1

AppendixChinaCE/HAmarketdevelopmentOverallmarketsizingMarketdevelopmentbycategoryChinaCE/HAmarketchanneldevelopmentHigh-levelGlorystoreeconomicsanalysis2

Emergingproductcategoriesandthematureoneshaveexperienceddifferentgrowthmomentuminthepast2003040506072008MarketsizeandgrowthBillionRMB,percentGrowthratePercentCategory

definitionEmergingproductcategoriesFlatpanelTVPCMobilehandsetSWGMatureproductcategoriesCRTTVWGHighlightsForemergingcategories,Chinahasbeenridingonthewaveofmajorglobaltech-nologybreakthroughs,andexperiencedleapfroggrowthAsformaturecategories,thegrowthrateshavebeenratherflatastherehaven’tbeenmajorproductinnovationstodrivethegrowthIn2006,mobilephoneisbecomingmatureproduct;demandformatureproductssuchasWGandTVaredrivenbytherealestatemarketboomEmergingproductsMatureproductsSOURCE:iSuppli;GFK;SinoMR;Zhongyikang;IDC;CCID;Gartner;Euromonitor;TeamanalysisEmergingMatureGDP2003-2008CAGREmergingMatureGDP22%-1%11%2293

MobilehandsetandPCwillcontinuetobethetwobiggestCEcategories,takingup~45%valueoftotalCE/HAmarketby2013;whilesmallwhitegoodswillbecomeamoresignificantcategoryChinaCE/HAmarketsizebreakdownbycategory

value,%SOURCE:iSuppli;GFK;SinoMR;Zhongyikang;IDC;CCID;Gartner;Euromonitor;Teamanalysis8%199820%8%16%3%8%27%13%200321%8%18%4%10%18%10%5%21%200816%8%22%4%9%3%21%2013E14%11%23%4%9%1%5%5%6070809008980313OthersMobilehandsetPCAirConditionerSmallWGWasherRefrigeratorCRTTVFlatpanelTV01004010203050ESScurrentlyisnotwellpositionedtocapturetheopportunitiesinPCandmobilehandsetPRELIMINARY0%3%12%12%EmergingproductsMatureproducts4

PenetrationofmajorCE/HAcategoriesinChinawillcontinuetoincrease,matchingorevenovertakingthe2007levelofdevelopedcountriesby2013(1/2)

227US131DE191JPPenetration%ofHHSOURCE:Gartner;NBS;Euromonitor;InsightsChinasurvey;interviews;TeamanalysisTVA/C88US83JPRefrigerator97US99DE100JP131200313820071511132013EUrbanRural200320071352013E200320072013ECTVisthefirstCEcategoryforChinesehouseholdstopurchase,aswatchingTVremainsasoneofthetoppastimesinChinaAsChinesehouseholdsenjoybiggerlivingspace,50%+ofthemtendtohave1CTVperroom–thisisinlinewiththetrendsobservedintheUSThereiscleartrendforconsumerstoupgradefromCRTtoflatpanelTV,howevertheytendtostillkeeptheoldCRTTVsiftheTVsarestillwithinlifecycleTheA/CsinChinesehouseholdsareoftensplitorstandtype,insteadofthecentralA/ClikeintheUS.Itiscommonforahouseholdtohave1A/Cforeachmainroomintheapartment–thistrendislikelytocontinuegivenChinawillstillhavemainlysmall-sizeapartments(<150m2)wherecentralA/CisnotmostefficientRapidincreaseofA/CpenetrationinChinainrecentyearswasalsoduetothatrecentyearsChinahascontinuouslyexperiencedrecordhotsummersRefrigeratorisalreadyaverymaturecategoryinurbanchinamarket,penetrationratesalreadyclosetomaturemarketsThegrowthpotentialmainlyexistinChina’sruralareaIthasbecomethemostpopularcategoryintherecent“AppliancesGoRuralProgram”lBACKUP5

PenetrationofmajorCE/HAcategoriesinChinawillcontinuetoincrease,matchingorevenovertakingthe2007levelofdevelopedcountriesby2013(2/2)Penetration%ofHH77USDE97JP95WasherConsumerPC78DE73JP76USMobilehandset187US125DEJP83RuralUrban200320072013200320072013E200320072013E1BasedonindividualpenetrationWasherisanothermaturecategoryinurbanChinamarket;penetrationlevelisonparwiththatofGermanyandJapan,andhigherthantheU.S.wheresomepeoplealsorelyonpubliclaundrymatsGrowthintheruralareaismainlydrivenbythechangesinlivingpattern–morewomeninruralareasarejoiningtheworkingforces,andneedtobefreedfromlabor-intensivehouseworkConsumerPCwillcontinuetopenetrateinurbanChina,catchingupwithmaturemarketsinthenext5-10years.Onekeydrivingforceistheintroductionoflow-pricepointentry-levelSKUs,e.g.,therecent“Netbook”(RMB2,000-3,000mininotebook)Recenttrendsshowthatmigrantworkershavebecome“ambassadors”todrivePCpenetrationinruralareas,whobringbacktheurbanlivingpatternstotheirhometownsChina’smajormobileoperatorsarestillpushingforhigherpenetrationesp.inruralareas,e.g.,in2008,50%ofChinaMobilenewaddsofsubscriptioncamefromruralmarketChinaTelecomaimsatdeveloping100mnsubscriberswithinnext3yearsMobilehandsethasalsobecomeapieceof“homeappliance”formigrantworkers–e.g.,theyuseinternetfunctionsofmobile,astheycan’taffordaPClSOURCE:Gartner;NBS;Euromonitor;InsightsChinasurvey;interviews;TeamanalysisBACKUP6

23%6%4%6%7%30%29%20%10%8%3%4%10%15%209Tier229%19%8%9%9%16%181Tier429%22%6%9%7%8%22%4%7%3%4%8%14%104Tier16%14%115RuralOthers112%PCconsumerSWGWasherRefrigeratorA/CCTV5%11%15%231Tier329%MobilehandsetBy2013,Tier-3&4citieswilltakeup~50%thetotalCE/HAmarket200812%9%3%4%9%28%12%142Tier128%20%12%10%3%4%10%13%302Tier228%19%10%11%3%5%Tier328%22%9%11%4%6%7%13%293Tier428%24%10%7%11%23%13%3646%6%6%12%199Rural2013ChinaCE/HAmarketbreakdownbyproductcategoryandbytierBillionRMB,%SOURCE:TeamanalysisPRELIMINARYWeightoftiermarketintotalChinamarket12%25%28%21%14%11%23%28%23%15%Total=1IncludeDVDandVCD,homeaudio,DC,camcorder,andPCbusiness,etc.7

AppendixChinaCE/HAmarketdevelopmentOverallmarketsizingMarketdevelopmentbycategoryChinaCE/HAmarketchanneldevelopmentHigh-levelGlorystoreeconomicsanalysis8

CTV–Marketsizeforecastbysub-categoryChinaTVmarketsizeforecastBillionRMBCAGR

(08-13)9%-22%5%SOURCE:iSuppli;Zhongyikang;Euromonitor;Wind;TeamanalysisPRELIMINARYHighlightsPenetrationofcolorTVisalready~100%in2008,andisexpectedtoreach~145%by2013FlatpanelTVstartedtotakeoffin2003andby2006hasovertakenCRTTVintermsofmarketvalue,whileCRTTVisgraduallyfadingoutby201398200310512820081597161652013FlatpanelCRTCTV239

FiercecompetitionhasledtopricedecreaseinTVmarketinthepastyearsLCDASPoftopplayersinChina‘000RMBLCDmanufacturersareloweringpricetowinM/SSOURCE:GFK;Consumersurvey(Dec,2008);Supplierinterview;Litresearch;TeamanalysisASPisalsodroppingasmanufacturersareexpandingtolowertiermarketSamsungSharpSONYHisenseSkyworthT1/2T3/419%16%26%25%14%9%12%28%33%17%LCDpricerangebytier‘000RMBMarketshareofthe5

manufacturersincreasedfrom~40%in2006to~55%in2008<44~66~88~10>10ManufacturersespeciallyMNCareincreasingtheircoverageinlowertiercitiesthroughreallocatingresourcesanddesigningvalueproducts -NewsCTV20062007200810

AlthoughASPforeachsub-categorywillcontinuetodecrease,ASPfortheoverallCTVmarketwillincreaseslightlyduetoproductmixupgrade4%3320034%34%3820082%73%422013ECRTPDP1LCD=100%MarketbreakdownMillionunits,%33.620032013E2008ASPtrend‘000RMBCRTPDPCRTpricehasbeendroppingquicklyasitisreplacedbyFPTVRationaleLCDLCDpricehasbeendrivendownbyfiercecompetitionPanelcostisdroppingduetoovercapacity,providingroomforsupplierstolowerprice(ledtopricewarin2008)ASPdropisslowerthanPDPaslargersizeLCDTVemerges200820032013ETotalASP‘000RMB12.0PDP’sASPishigherthanLCD’sasitssizeislargerduetotechnologyconstraintTechlimitofLCDsizewillfurthersqueezethemarketshareofPDPanddriveitsASPdowndramaticallySOURCE:iSuppli;Supplierinterview;TeamanalysisCAGR

(03-08)CAGR

(08-13)-17%-8%-11%-6%-25%-9%12003mainlyincludeprojector1~3%2~4%CTV24%11

Wedon’texpectasignificantchangeofwhitegoodsASPwithouttechnologybreakthroughexpectedA/CRefrigerator3~5%Inthelongrun,ASPisnotexpectedtochangemuchasenergystandardprovideopportunityforproductupgradeandconsumer’spreferencetopurchaselargerrefrigeratorwhilefiercecompetitiondrivingASPdownInnearterm,vendorsisunderpressureofovercapacityasoverseamarketishitbyfinancialcrisis(currently,~50%ofdomesticproductionisforexport,majoroverseamarketsincludeUS,DE,UK,etc.)-1~0%WasherSuppliersareactivelypushingforproductupgrade(fromtop-loadertofront-loaderwasher);Latestdatashowswasher’sASPstillgrows1%inFebduetoproductupgrade,whileotherHAhasbeenimpactedbyeconomicdownturnEnergyefficiencylabelalsohelppushforthemarketshifttohigherendproducts3~5%Inthelongrun,enactofenergyefficiencystandardwillpushproductupgradewhichwillleadtofutureASPincrease(It’srumoredthatproductundergrade4willnotbeallowedtosellafterJune)Innear-term,exitingofproductslowerthanenergystandard,andtopplayers’pressureofhighinventorymightleadtoASPdecrease(MideaandGreeaccumulatedlargeinventoryinlastlowseason)CAGR(08-13)KeybeliefsSources: Euromonitor;Supplierinterview;TeamanalysisWhitegoods12

PCmarketwillshifttobemorelaptopdriveninthenext5years;weightofconsumerpurchasewillrise,butbusinesssegmentwillstillkeep~60%shareoftotalmarketPCmarketinChinaBnRMB,%Laptop -ConsumerLaptop -Business3%80200318320083062013EDesktop -ConsumerDesktop -Business100%=SOURCE:IDC;TeamanalysisCAGR(08-13)CAGR(03-08)37%10%-4%18%11%12%1%71%24%22%18%OverallPCmarketwillstillhaverobustgrowthinthefuture,esp.forlaptops;desktopmarketvolumewilldropinthefutureConsumerpurchaseswillcontinuetogrowmuchfasterthanbusinesspurchases,howeverbusinesssegmentwillstillremainas~60%oftotalmarketinthenextfiveyearsHighlightsPC13

WithinPCBusinessmarket,SMEisthebiggestcustomersegment,whichcanpotentiallybeaddressablebyESSchainsSOURCE:IDC;Teamanalysis20035423645692008SME(<500)126111LargeBusiness (500-999)VeryLarge Business(1000+)GovernmentEducation2013E1786PCBusinessmarketBnRMB37%SMEisthebiggestcustomersegmentwithinPCBusinessmarket,itsweightisexpectedtoincreasefrom~40%in2008to60%+in2013Comparedwithotherbusinesscustomers,SME’spurchasingbehaviorisclosetoindividualconsumers–itpotentiallycanbeanimportantcustomertargetforESSchainsHighlightsPC14

ThebehaviorsofSMEsbeargreatsimilaritytothoseofconsumersintheiritpurchaseITbudget#ofdecisionmakersforITpurchase

PercentFixedpercentofthetotaloperatingrevenuesSetfixedannualgrowthratioofITinvestmentSetfixedITinvestmentforeachemployeeNoITbudgeting/noclearreferencetobudgetcompilation12-3≧416BACKUPSOURCE:2007SMEsurveyPC15

PC’sASPisdecreasingmainlydrivenbylaptop,withitspricedropprimarilycausedbyfiercecompetitionandemergenceofnetbook4%52003162008412013EDesktopLaptop1100%=MarketbreakdownMillionunits,%200320082013EASPtrend‘000RMBLaptopDesktop’sASPhasbeendecreasingrelativelyslowerasthemarginisalreadythinforsupplier(~8%grossmarginvs.10~15%forlaptop)RationaleDesktopLaptopASPhasbeendroppingquicklyunderfiercecompetitionwithpresenceofalargenumberofsmalllocalbrands(suchasHasee,Tongfang,Founder)EmergingofnetbookwillfurtherdriveASPdown(globallynetbookisestimatedtoreach15%oflaptopmarketvolumein2009)20032013E2008TotalASP‘000RMBSOURCE:IDC;Supplierinterview;Litresearch;TeamanalysisCAGR

(03-08)CAGR

(08-13)-6%-4%-13%-10%1Includenetbook-5~-3%-8~-6%3.2PC16

SOURCE:IDCHigherpriceerosionisattributedtotwomajorfactorsPresenceofalargenumberofsmalllocalbrandswithlowercoststructure(i.e.,lowR&D,lessupdatedtechnologies)LowerprofitexpectationofretailerswhichtendtobesmallerandmorefragmentedthantheonesinthedevelopedmarketsPriceerosioninlaptopmarketisalsoobservedinothermarketsWeightedaveragelaptoppriceUSDperunitRegionYoYPriceerosion,2004-08PercentWorldwide-6.6China-10.02US-5.2WesternEurope-6.812004ASPincreaseduetoappreciationofEuroagainstUSD2ConsideringappreciationofRMB,CAGRofASPinChinais-13%PC17

ASPofmobilephoneisexpectedtoslightlygainthroughproductupgrade100%6020035%19020083172013E3G2- 2.5G100%=MarketbreakdownMillionunits,%N.a.200320082013EASPtrend‘000RMB2-2.5GRationale3GPricedropisoffsetbyreplacementof2Gby2.5GwhichishigherinASPFuturedropisstillexpectedtobeslowasmarginbecomethin2013E20032008TotalASP‘000RMBSOURCE:Gartner(March2009);Supplierinterview;Litresearch;TeamanalysisCAGR

(03-08)CAGR

(08-13)N.a-2%-3%-3%-4~-2%0~3%3Gpricedeclinewillnotbeasfastas2-2.5Gbecauseitstechnologystandardiscontinuallyevolving(e.g.UMTStoHSDPAtoHSUPA)Mobilephone0.818

SWG–Marketsizeforecastbysub-categorySWGhasbiggrowthpotentialasChina’scurrentSWGpenetrationisstillsmall(~1/5comparedwithEurope)SWGdemandismorestablegivenit’slessvulnerabletofluctuationsinrealestatemarketESScurrentlyalsoenjoyshigherprofitmarginfromSWG(~20%)vs.brownandwhitegoods(~10%) Source:Euromonitor;Litresearch;McKinseyanalysis SmallcookingPersonalcare1MicrowaveLargecooking2013EOthers453520037702008138Penetrationrateofsmallwhitegoods%CAGR(08-13)CAGR(03-08)Total15%15%18%19%30%23%17%12%9%9%11%11%691Includehaircareappliances,bodyshavers,oralhygieneappliancesandotherpersonalcareappliancesSWG19

SubstantialovercapacitystillexistsinmajorityoftheCE/HA

categories,mountingpressureonASPtoremainlowSOURCE:YearbookofChinaInformationIndustry,CCID;TeamanalysisTotalcapacityMnunits226%Overcapacity/TotalsalesPercent47%42%27%ExportDomesticsalesOvercapacity111%22%9%55%Export/

TotalsalesPercent68%42%61%26%84%66%277CTV105A/C44Washer48Refrigerator72DesktopPC105Laptop595MobilephoneBACKUP2007CE/HAindustryvolumeoverviewMnunits,Percent31%20

OverviewofreplacementcycleestimatesCRTTVFPTVA/CRefrigeratorWasherLaptopDesktopMobilephoneReplacementcycle(year)Consumersurvey~7~7~7~7~7~4~4~2.2Domestic/Intl.

standard8~128~128~1012~168~1266N.aSupplierinterviewConsumersurveyDomestic/intl.standardConductedinterviewswithsalespersonormanagerfromsuppliertoverifyreplacementcycleindomesticmarketFurtherrefinelifecyclethroughconsumersurvey(CCCsurveyandupcomingnewsurvey)EstimatelifecycleofproductsbasedondomesticandinternationalstandardCCC1(purchasecycle)7~87~8xx7~107~93~44~62~2.5Supplierinterview~10~10~1010~1210~122~34~52~2.5SOURCE:CCCsurvey(Mar,2009);Litresearch;Supplierinterview;Teamanalysis1CCCsurveydataispurchasecycle,whichwouldbenolongerthanlifecycle12321

AppendixChinaCE/HAmarketdevelopmentChinaCE/HAmarketchanneldevelopmentOverviewofchannelevolutionChinachanneldynamicsChannelevolutionbyproductcategoryHigh-levelGlorystoreeconomicsanalysis22

OverallESSwillcontinuetogrowat11%annuallygoingforward,takingupover30%shareoftotalCEretailmarketby2013SOURCE:SinoMR;GfK;CCID;CMM;CEIC;Euromonitor;TeamanalysisTheESSchannel,growingat20%CAGRinpastfewyears,attheexpenseofdepartmentstoresandindependentstoresshareESSalready1/3oftheCEretailmarketBigboxESS,especiallyGlory,werethekeysharegainersinthelastfewyears,takingsignificantsharefromotherspecialtystorecompetitorsESSformatRMBBillion,Percent432420034371020082013OtherMom&popsCarrieroperatorPCdirectsalesHypermarketDepartmentstoreHandsetchainstorePCmallOtherspecialtystoreSuningGlory100%3CAGR2003-0820%12%CAGR2008-1311%9%ESSNon-ESSProductincluded(~85%ofthemarket):CRTTV,flatpanelTV,airconditioner,fridge,washingmachine,largekitchenappliance,personalcareappliance,smallcookingappliance,microwaveoven,mobilephone,consumerandbusinessdesktopandlaptopProductnotincluded(~15%ofthemarket):homeaudioandcinema,VCRandDVDplayers,PC/business,PCperipherals,portablemediaplayers,cameras1723

TheweightofESSinChinahasgrownsignificantly,onparwithmanydevelopedmarketstodaySOURCE:CCID;Gartner;Euromonitor;teamanalysisPercentU.S*.2007Japan*2007Germany2007Korea2007

*Amonginternationalbenchmarks,USandJapanrepresentsbestfuturetrendsforChinawiththeirsizeofpopulation,totalCEmarket,importanceofESSchanneltowholeCEmarketandprominenceofTVandinternetshoppingOthersMom&popsOtherDept/HyperCarrierOtherspecialtystoresBestBuyOthersCash&CarryBuyinggroupsMom&popsDept/

HyperCEspecialtystoresOthersHyperOtherspecialtystoresYamadaOthersTVhomeshoppingMom&popsDeptstoresLargespecialtystoresCircuitCity34324China

200343China2008OtherMom&popsCarrieroperatorPCdirectsalesHypermarketDepartmentstoreHandsetchainstorePCmallOtherspecialtystoreSuningGlory100%Wal-MartEdionMom&Pops22%ShareofESS28%35%64%30%27%1024

USChannelevolution:BestBuyandWal-Marthavebecometheclearwinnersintheirrespectivechannelsegmentsasthemarketconsolidates*Othersincludeonline,TV/MailshoppinganddirectsalesSOURCE: TWICEmarketresearchreportsandEuromonitordata21241998126200013320021551792006100%=2004USCEsalesbychanneltypeTotalESSstoreshareintheU.S.hasbeenstablewithitssharearound~35%since2002BestBuyhasdominatedtheelectronicsstorechannelandachievedstronggrowthattheexpenseofGloryCityWal-MarthasrapidlygrownshareinmasschannelthroughmorefocusedcampaignsinconsumerelectronicsproductsMomandpopsstoreshavebeenlosingsharetoWal-MartandotheremergingchannelssuchasonlinesalesBestBuyOtherhyper/SupermarketWal-MartCircuitCityOthers*MompopsOtherSpecialtyStoresUSDbillion,percentCarriers30%ShareofESS33%34%34%35%CAGR1998-200653-33-544-1119925

Japanchannelevolution:ESShasbecomeincreasinglydominant,withtop10ESStakingupnearlyhalfofthetotalmarket SOURCE:RIC;MinistryofEconomy;TradeandIndustryLargestoreformatsaremoresuitabletosellincreasingly

diversifiedCEproductsIndustryconsolidationamongspecialtystores,particularlylargeplayerslikeYamadaandEdionSpecialtychainstoresofferinglargediscounts58,03019984220*8,06813540320*7,76110441420008,6634111100%=YamadaEdionOtherspecialtystoresSuper/hypermarketMompops620067,6671810343Others**CAGR1998-2006-1-4-5-936JapanCEsalesbychanneltype*JPYbillion,percent18-2*Mobilephonedataisnotincluded**Othersincludehomecenters,electricalmaterial/equipmentstoresanddepartmentstores47%ShareofESS49%55%58%62%826

AppendixChinaCE/HAmarketdevelopmentChinaCE/HAmarketchanneldevelopmentOverviewofchannelevolutionChinachanneldynamicsChannelevolutionbyproductcategoryHigh-levelGlorystoreeconomicsanalysis27

BiggestnationalESSchains,GloryandSuning,haveexpandedrapidlytocapturemarketshareandbuildbrandequityinChina’sTier1/2citiesRevenueUSDbillionsNumberofstoresCitycoverage+36%+29%1,362820+12%200160+49%+26%812512+22%178120+22%200820062702008+9%20062292006+7%2008GloryismainlyexpandingthroughmorestoreswhilefocusinglessonperstoresalesincreaseSuninghasbeenmoreaggressiveinstoreexpansioninrecentyearstocatchupFiveStariscurrentlyadistantNo.3andisnotexpectedtorepresentamajorchallengeforGloryorSuningSOURCE:Clientinternaldata;CCFA;Annualreport;Companywebsites;Litsearch28

RegionalESSchainsarestillsignificantplayersinTier2~4citiesSOURCE:TwiceChina,CCFA,CompanyWebsite,LiteratureSearchTotalTier3/4presenceNumberofstoresinT3/42008FocusedareaTotalrevenue2008Revenuegrowth2007-08Totalstores

20085254932FocusinHubeimarketPlansfordeepdevelopmentofHubeiruralmarket12007revenueorrevenuegrowth2006-200710140114570StartedbusinessfromNortheastareasEnteredlowtiercitiesinmiddleandwestregions2.714.61251151FocusinHunanmarketPlantooccupyT3-4citiesmarketinHunan1.8101191191FocusindevelopingT3-5citymarketsinAnhuin/an/a4840+FocusinNingxiamarketAllstoresinT3-4citiesEXAMPLE29

ShenzhenShundianhavestartedtotestexpansioninBeijingandSuzhou;howevertheyarenotexpectedtobecomeameaningfulthreattonationalESSSOURCE:Literaturesearch;interviews;teamanalysisBeijingSanlitun2000sqm,3floorsSuzhouTimeSquare10000sqm,3floorsStartedin1992,ShenzhenRevenueRMB2.3bn,~30%localmarketshare(therearealready~50GloryandSuningstoresinShenzhen)Currentlyhave15stores10storesinShenzhen1inHuizhou2inDongguan1inBeijing1inSuzhouAveragestoresize:6,500sqmCategorydrivenformat,notconcessionDifferentiatedpositioningfocusingonhigh-endmarket,e.g.,40%revenuefrom3CproductsEnjoyshighconsumerloyaltyandconsideredoneofthemostfavoritelocalbrandsShundiantriedtoexpandbeyondShenzhenbeforebutfailedOpenedstoresinGuangzhou,Zhuhai,Huizhou,andZhongshanClosedall4storesinGuangzhouby2007Shundianstarted2ndattemptwithexpansionandopenedfirststoreinBeijingandSuzhouin2008Newstoresfocusmoreondigitalproductsandhigh-endhomeappliancesShundian’ssuccessinShenzhenismainly

duetoitsdifferentiatedpositioningShundianhasrecentlyopenedstoreinBeijing

andSuzhou30

OutsideofCEretail,nobigboxretailershaveestablishedsuccessfulmodelsforlower-tiermarketexpansioninChinayetSOURCE:Litresearch;expertinterviews;TeamanalysisExamplesoflower-tierexpansioneffortsbyCenturyMart（世纪联华）Challengesforbig-boxretailersinlower-tierexpansioninChinaSeeingTier-1citiesoccupiedbyCarrefourandWal-Mart,CenturyMartdecidedtotakethestrategyof“Countrysidesurroundingbigcities”

(农村包围城市)Initsearlydevelopmentstage(around2000-02),CenturyMartalreadyputatleast1/3ofitsnewstoresinTier-3citiesInsomeoftheseTier-3cities,theyevenhadlargerstorespaceperstorethanthoseinTier-1cities(e.g.,thestoreinHenanXinxianghad24,000sq.m.–2Xto3Xthenormalhypersize,butonly100mnRMBsaleswhichisonly1/3ofnormalhyperaverage)Localsupplycapabilitybecameaconstraint,bothintermsenoughassortmenttofillinthestoresaswellaslogisticssupportInrecentcoupleofyearsCenturyMartstartedtoshutdownalotofitsstoresLackofestablishedreferencecasesfromdevelopedmarketsBigboxretailerformatoriginatedfromsuburbanareasinEU/USandhavemainlydealtwithexpandingintourbanareasInChina,theexpansiongoesintheoppositedirectionTier4andbelowmarket’seconomicdevelopmentisnotenoughtosupportthescaleandROIrequiredTier4andbelowmarkets’sizehasnotbeenattractiveenoughtobecomeretailers’priority,andthereforenotmuchhasbeeninvestedinretailformatadaptationandinnovationPRELIMINARY31

Exampleoflower-tierexpansion–VirtualMagazineLuizainBrazildevelopedacommunityshoppingcenterwithinnovativeshoppingconcept Sources:HarvardBusinessSchoolcase;companyWebsite;pressclippingsInnovationinstoreformat:140m2vs.1,400m2foratraditionalstoreNoinventoryordisplayPresentincitiesofaround50,000inhabitantsSalesteammadeupof10salesstaff(20%thatofatraditionalstore)Tailor-madeserviceforlocalshoppers:StoreisacommunitycenterfreeInternetaccessCookingandEnglishlessonsVirtualMagazineLuizastore"Thecompany’sexpansionplans60newstoresin2007,15ofwhichwillbevirtualstores"March,200732

Asforfranchisemodel,bigboxretailersrequiresophisticatedfranchiseeswithrichexperienceinretailchainmanagementtobesuccessfulSOURCE:Litsearch;Expertinterviews;McKinseyanalysisIKEAleveragesDiaryFarm’sretailexpertisetogrowinlocalmarkets...DairyFarminHongKongOneofAsia’sleadingretailinggroupwithmultipleformatsStrongin-houseretailbrandsportfolio:Wellcome,Mannings,Maxim’s,Richexperienceinmanagingsupermarkets,cateringanddrugstorebusinessesTrust-MartfailedinitsfranchisebusinessinChinaTrust-Mart,nowacquiredbyWal-Mart,usedtobeaTaiwanese-ownedhypermarketchaininMainlandChinaItwasthefirsthypermarketchaintohittotal100storesinChina(in2005)Crazyopeningof50+storesovertheoneyearperiodof2003/4(Carrefour&Wal-Martat10-20stores/year)AlotofthestoreswerebasedonfranchisemodelTrust-Mart’sfranchisemodelwasmainlybuiltupontheexistinglocalsuper/hypermarkets,howeverthegrouplackedcapabilitytoremodelthestores,provideguidancetodailyoperations,andevennecessarylogisticssupportAsthebrandwasnotstrong,andlackofcontroloverfranchisees,intheend“fake”licensedTrust-Marts(山寨店）appearedincitieslikeNanjingVSOperatesstoresforawiderangeoffranchisersbesidesIKEA:7-ElevenandStarbucksinHongKong33

SuccessfulHAfranchiseretailersinChina’slow-tiermarketrelyonuniqueserviceandhighlocalincome,andhaveremainedverylocallyfocusedSOURCE:Litresearch;teamanalysisKeysuccessfulfactorsforregionalfranchiseleadersHighlocalconsumptionlevelandpopulationdensityRMB~5millionsales/storecovering~50thousandpeople,comparedwith~0.5m