Recruiting in China

SHANGHAI, China -- Toys "R" Us Inc., Best Buy Co. and Home Depot Inc. are part of a new wave of foreign retailers about to enter China's quickly developing consumer market.

Over the past year, Chinese authorities have approved more than 1,000 applications by foreign retailers and wholesalers asking to open wholly owned businesses in the booming country of 1.3 billion people. That number of approvals, a sharp surge from previous years, follows a long-awaited liberalization of China's retail sector in 2005. In line with pledges made when joining the World Trade Organization, Beijing stopped requiring foreign retailers to form joint ventures with local partners.

According to the Shanghai Foreign Investment Commission, the bulk of the new applications are from companies that have a China presence through local partnerships. But some prominent U.S. retailers will be new players in China's rapidly changing -- and increasingly competitive -- retail landscape. Closely held Toys "R" Us, for example, will be opening its first mainland China store, a 27,000-square-foot outlet in Shanghai's Superbrand Mall, in December.

"It's the start of our entry strategy to grow the market in China," said Pieter Schats, the company's Asia chief executive. Toys "R" Us executives said the company will formally announce details of its entry in coming weeks.

Toy "R" Us and others are coming in at a time when Chinese authorities are weighing whether to restrict large-scale expansion of chain-store outlets, which could affect major chains like Wal-Mart Stores Inc. that entered China more than a decade ago.

But because they are just entering the Chinese market, the new retailers aren't likely to be subject to any possible rule changes. And few plan to go into China's interior cities, where giants Wal-Mart and Carrefour SA are venturing.

Retail analysts say the newcomers' entry is likely to improve China's still-evolving mall industry, where high-end brands are lumped with unknown names and facilities and parking are frequently substandard. For example, Beijing's Golden Resources Mall -- which is larger than the Mall of America in Minnesota -- has pools of dirty water on bathroom floors even though it boasts shops selling $15,000 Italian leather sofas.

Although China has some of the world's largest malls, only about 10% of them are profitable, estimates Morgan Parker, president of shopping-center developer Taubman Asia.

Previously, foreign retailers would leave it to their local Chinese partners to handle real-estate decisions, which often hinged on price, he said. Foreign retailers "tend to be more holistic -- they want to know things like tenant mix and facilities, to protect their brand image," he said.

The 2005 rule change has prompted an influx of foreign retailers. About 80 to 90 foreign retailers applied to open operations in China in the first 20 years after China opened up its economy, according to Simon F. Huang, deputy director at the Shanghai Foreign Economic Relations & Trade Commission. But in 2005, 432 new retail applications were approved by the Ministry of Commerce.

This year, local governments were given the autonomy to approve retail projects, which accelerated the process. Shanghai, China's major retail hub, approved 496 projects in the past six months alone.

The newly entering retailers say they plan to go slowly, opening outlets only in major cities such as Shanghai or Beijing.

Bob Willett, chief executive of Best Buy International, told reporters in Shanghai this past week, "We're only going to open when it's right. This is not a race." The company will be opening its first outlet in Shanghai by December.