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Taking China with Taiwanese Quality

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Taking China with Taiwanese Quality

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Despite a late start, Taiwan's leading retailer is already a respectable challenger in Shanghai. Now it plans to enter the fray in China's first- and second-tier markets, offering consumers the alternative experience of Taiwanese-style service.

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Taking China with Taiwanese Quality

By Yueh-lin Ma
From CommonWealth Magazine (vol. 447 )

At Expo 2010 Shanghai, President Chain Store Corporation is pulling out all the stops, with its own 600 square-meter retail sales space inside the centrally located "Urban Life Pavilion," where it is giving the Expo's 200,000 daily visitors first-hand exposure to the top 10 brands under its umbrella, including 7-Eleven, Starbucks, Afternoon Tea and Cold Stone Creamery.

With its major presence at the Expo, President is essentially declaring its entry into an all-out brand war across the entire Chinese heartland.

After a decade of market cultivation, President's China operations saw revenues break NT$10 billion, and following a reorganization of resources they expect to move out of the red and into the black this year. Richard Huang, President's China regional general manager, is already on record boldly stating that operating revenue will this year grow by 25 percent and that its China retail outlets will exceed 500 by year's end.

A decade ago, Starbucks (operating as a joint venture with President in China and Taiwan), opened its first outlet in Shanghai. Starbucks was President's first brand to enter the China market. Today, the corporation boasts 10 food and beverage-related retail brands in China and a retail chain totaling more than 400 outlets spread across Shanghai, Shandong, Wuhan, Sichuan, Shenzhen and other areas (See Table).

Changing Shanghai's Convenience Store Landscape

In May of last year, 7-Eleven, President's core business, formally entered China. Despite its relatively late entry, the chain's quality of service, and new services like its "fast food islands" offering hot meals, have already begun to put the heat on China supermarket leader Lian Hwa Foods Corp., which also operates a chain of convenience stores. Lian Hwa president Hua Guoping recently commented on how President Chain Store had "changed the outlook of Shanghai residents on convenience stores," adding that Lian Hwa was "continuing to monitor the activities of 7-Eleven, a respectable competitor worth learning from."

Despite operating a multiple-brand strategy, President Chain Store president Hsu Chung-jen recently displayed his China market savvy, noting: "You can't scatter too many seeds in China. It's too risky, because it's just too big." Consequently, President is currently pooling its China resources in Shanghai, striving to capture the hearts of that city's residents through their stomachs.

At Shanghai 7-Elevens, for example, sales of fresh foods account for 45 percent of operating revenue, offering not only higher profit margins but also attracting greater numbers of customers. That has been the key difference in 7-Eleven's operating strategy.

Continuous testing and rapid adjustment is the key to 7-Eleven's dynamic ability to react to the market. Seeking to improve the utilization ratios of its kitchens and kitchen personnel while catering to the tastes of Shanghai consumers, 7-Eleven has developed a line of fresh, made-to-order soymilk and milk tea products, stimulating demand during morning breakfast hours.

In operation for just one year, daily numbers of customers at Shanghai 7-Elevens are already on a par with their Taiwanese counterparts, with a daily average of about 900 customers, and operating revenues at individual outlets are twice that of competing individual outlets within the same retail sector. As 7-Eleven has not been able to acquire the necessary licenses to sell tobacco products, this demonstrates that food items are capable of compensating for the roughly 15 percent of revenue for which cigarette sales commonly account.

Despite high profit margins at its fast-food islands, Hsu Chung-jen has decided, based on cost considerations, that 7-Eleven will move in the direction of centralized kitchen operations for the supply of its fresh food products, delivering its boxed meals to various outlets at a temperature-controlled 18 degrees Celsius. "We're now testing consumer response," Hsu says.

The pace of opening new outlets can only be accelerated if reliance on the fast-food island products can be reduced and new outlets needn't come outfitted with a small kitchen in the back.

Replicating the Taiwan Model in Shanghai

"7-Eleven's biggest competitive edge lies in its service quality, with its large-scale employment of enthusiastic young clerks," Lin Chien-hsiung, head of the Yungho Soy Milk chain, observes. Given 7-Eleven's plans to expand its chain by 300 outlets within five years, and the personnel training challenge that represents, Hsu Chung-jen has decided to replicate Taiwan's "internal venturing" model in Shanghai.

Beginning last month, President Chain Store sent its first wave of Taiwanese store managers to Shanghai for three-month stints training staff at Shanghai-area outlets.

"Currently, in addition to training local store personnel, we also hope to find among the Taiwanese store managers some who might be interested in opening a franchise in Shanghai, so we'll be able to maintain service quality during any rapid future expansion," Hsu says.

Outside of Shanghai, President Chain Store is not paying short shrift to secondary markets. In fact, President has already opened 128 Uni-Mart supermarkets across Shandong, each with an average floor area of about 3,600 square feet.

"These are different in scale from wholesale hypermarkets and should be just about the right size given the trend toward small families in Chinese society," Hsu says.

The already-profitable Shandong Uni-Marts have now spread from Jinan to secondary cities across the province such as Zibo, Qingdao and Taian. President has plans for future expansion into Sichuan Province's Chengdu and other areas and cities across China, serving as its business model for entering secondary and tertiary cities through outlets other than its convenience stores.

From the highly selective, rapid-response product structure at its convenience stores to the diverse scale of its supermarkets, President Chain Store is simultaneously bringing an alternative, Taiwanese-style service experience into the retail markets of China's primary and secondary cities.

Translated from the Chinese by Brian Kennedy

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