PESTEL analysis: Chinese Retail Sector

The following is a PESTEL analysis in order to understand the forces of change in the Chinese retail sector.

1. Political:

* Trade Regulation: the retail sector in China is not considered to be a prestigious industry by the Chinese government and is therefore not sanctioned like the heavy industry sector. For instance the French hypermarket Carrefour, that ignored or bent the rules and was not pushed for it, exemplify that China does not see a need to restrict the development of this industry.

* Modernization: the local government is changing the shape of traditional street markets (so-called wet markets) and converting them to supermarkets. The main reason for doing so is to expand retail networks of chain supermarkets into the Western provinces of China.

* Open Market system: China’s economy during the past 30 years has changed from a centrally planned system that was largely closed to international trade to more market oriented economy that has a rapidly growing private sector and is a major player in the global economy. Since 2001 the Chinese retail market has been open to foreign MNEs due to China’s entry into the WTO which removed trade barriers for foreign investors. At present only one third of the companies are state controlled.

2. Economic:

* Economic Growth: GDP growth is expected to drop from 11.9% in 2007 to 8.2% in 2012, however domestic demand is to remain strong in the next few years as consumption will rise due to overall wage growth.

* Taxation: The rate of corporate income tax in China is 25%. There are however special tax rates available for companies which are making investments in preferred sectors and regions, such as the Western provinces.

* Suppliers: Since most of the fresh products originate from China, it is therefore very important to find local suppliers capable of providing goods according to international quality standards.

3. Social:

* Demographics: the population growth rate of China is 0.655% estimated in 2009 with an average life expectancy of 73.18 years. Age distribution in China is characterized by a small youth group (0-14 years 19.8%, 15-64 years 72.1% and 65 years and over 8.1%) due to the one child policy introduced by the government in 1979.

* Health Awareness: Chinese customers are more concerned about product safety because of bad previous experience e.g. thousands children were poisoned by milk contaminated with the industrial chemical melamine.

* Cultural Norms: there is a danger of forcing and implementing foreign format onto Chinese consumers as it might result in rejection of foreign supermarket chain.

4. Technological:

* Distribution: because of vast landmass and poor infrastructure it is essential to establish a net of warehouses at strategic locations and to outsource distribution to a strong distribution partner with extensive local knowledge.

* Supplier: Finding suppliers with the necessary IT capabilities to be integrated into an existing distribution system can prove to be a challenge.

* Living Standards: Few Chinese households are equipped with a refrigerator so the shopping behaviour is not likely to shift quickly to one big weekly shopping trip.

5. Environmental:

* Waste: The Chinese government has recently abolished plastic bags, an illustration of environmental decision making in China which can happen quickly and involve radical changes.

* Recycling: The Chinese government made continuous efforts to introduce recycling programmes through its National and Social Progress Plan.

* Controls: Due to international pressure China has become sensitive to the issue of pollution and there is a trend towards stricter controls of firms in recent times.

6. Legal:

* Impacts of government legislation: various government legislations and policies have a direct impact on the performance of foreign companies operating business activities in China.

* The government’s policies of monopoly control and reduction of buyers’ power can limit entry to the sector with such controls as license requirement and limits on access to raw materials.