He wants his employees to have the hunting skills of a wolf. He adopts unexpected strategies to hamstring his foreign competitors. He aggressively expands market share by every means possible. And he is determined to transform his conglomerate into the largest consumer goods company in China. He is Chen Lang, CEO since 2009 of China Resources Enterprise (CRE), China’s biggest supermarket operator and largest brewer.
With an annual turnover of US$8.24 billion, CRE produces 14 million liters from its 70 breweries nationwide, and its Snow beer is the top beer brand by market share in China. It also runs the country’s biggest grocery chain, with more than 2,800 stores operating under various brands and formats, including hypermarkets, supermarkets and convenience stores, some self-managed and some franchised. Aside from its core grocery and beer businesses, CRE has its fingers in many pies: It distributes pharmaceuticals, arts and crafts, and general merchandise; it makes and sells purified water; it is the largest supplier of meat products and other Chinese foodstuffs in Hong Kong; and it runs China’s largest deep-sea fishing company, among other businesses.
A state-owned enterprise, CRE falls under the umbrella of holding company China Resources National Corporation, which owns 51.43% of CRE, and employs 152,000 staff, 95% of whom are in mainland China.
In this rare, candid interview, Chen opens a fascinating window into the fiercely competitive, fast-changing world of China business, where only the strongest conglomerates survive. He explains why he is driven by market share, not profits, and he shares his views on a range of challenges growing companies in China face, from working with provincial governments and rising wages to deal-making in a fragmented market and adapting strategies to a vast range of consumers.
China Knowledge at Wharton: How strong is your beer business?
Chen Lang: In China, overall beer sales were about 49 million tons last year, and our Snow beer brand accounted for less than nine million tons. However, we are in a leading position in China, with a 20% market share. In the past five years, the beer market in China has grown at an average annual rate of [around] 8%. Looking at the next five years, we expect the growth rate to remain at 8%. Our goal is to double our average growth rate to 15%. As a market leader, we always hope to achieve a growth higher than the average industry rate, which means we need organic growth and at the same time grab market share from our competitors.
China Knowledge at Wharton: How strong is your supermarket business?
Chen: Supermarkets, or more specifically modern retail channels, remain fragmented in China. The road to development is very long. According to some rankings, the leaders in the supermarkets business in China are Suning and Gome, which both sell mainly electronics and appliances. We are ranked third, but are first among supermarkets selling general goods. However, it’s meaningless to look at overall market share in China if you don’t do a province-to-province comparison.
China Knowledge at Wharton: Why a province-to-province comparison?
Chen: A province in China is like a nation in Europe, with its own market logic, as well as a sizable population. The development of a retail business lies in the effectiveness of supply chain management. If we look at the supply chain, we find that all our major suppliers operate by province.
Another important aspect is tax collection in each province, and even in cities. Whenever we enter a new province, the local government always expects us to set up a new legal entity to make sure it can collect taxes locally. We’re fully aware that to set up this legal entity is costly. However, if we must set up a new company in each new provincial market, we will do that. Some of our foreign competitors have insisted on maintaining a broader legal structure and won’t do what local governments expect them to do. Now, however, many have realized that they need to adapt to the local environment to achieve growth.
It’s the same in the beer business. In one province, we had two plants in two cities 70 kilometers apart. We enhanced the capacity of one to produce one million tons a year. The other remained at 100,000 tons a year. In theory, with better logistics, we could have closed the smaller plant and used the bigger one to serve both cities. In practice, however, we need to retain the smaller plant and adjust production schedules so that the local government in the second city still receives tax revenue from sales at the smaller plant. So even internally, we run our beer business at the provincial level, and profitability is also monitored at the provincial level.
China Knowledge at Wharton: Why are you so focused on market share?
Chen: We’re operating in a developing market, so our focus is on market share. In the next five years in the beer market, we want to achieve a higher quality of market share, but we still make gaining market share a priority. The higher the market share in each market, the more integrated you are, and the higher your efficiency is. You don’t worry about delivering profit. For example, in Sichuan, we have 70% market share, and in Anhui, we have between 50% and 60% market share.
In the retail business, we also focus more on gaining market share than delivering higher profits. In the next five years, we will put most of our resources into driving sales growth, rather than profit growth. We expect the industry to grow 10% annually in the next five years. Our goal is to grow between 13% and 15% on average every year. To do so, we have to grow faster than our competitors.
China Knowledge at Wharton: In provinces that CRE has not yet entered, such as Henan and Shanxi, what is your development strategy?
Chen: We want to penetrate every market in China. We have also analyzed all our major competitors in each market. Our plans include greenfield investment as well as M&A deals. In provinces we haven’t penetrated, which have clear market leaders, we’ve been looking at acquisitions. For markets without a clear leader, we may move faster. We also need to be aware that market share won’t remain unchanged in each province. Quite the opposite; competition is fierce. There is no such a thing as sitting back and relaxing because we have a dominant share in a particular market. We need to attack all the time. I always expect my team to have the ambition of a wolf. In China, you either gain market share or you lose out.
China Knowledge at Wharton: In the past five years, CRE has achieved remarkable growth in both retail and beer markets. But how will you achieve higher growth than the industry?
Chen: In the past few years, everybody has been focused on M&As in the beer market in China. We’ve done the same. Of the 72 beer plants we have now, 70 were bought. After an acquisition, we may upgrade technology and increase capacity. In the future, there will be fewer opportunities for M&A. In the past, there were over 4,000 beer plants in China, and a fragmented market drives M&A.
However, now the market has consolidated into a handful of large players. Our growth will be mainly organic. We will also rely more on improving management, increasing efficiency and having better control of distribution channels.
Our supermarket business is the same. We’ve reached 35% average sales growth for the past few years largely because we’ve done quite a few large deals, such as the acquisition of Suguo Supermarket in Jiangsu province. its sales last year was RMB 68 billion. In the future, we will still pay close attention to M&A opportunities. However, we will place our focus on enhancing the management of our stores. In particular, we want to increase sales growth at our established stores. Last year, our average sales growth at established stores increased 8.4%, which is proof that our growth relies on not only opening more stores or M&A but also organic growth.
Also, we’ll pay more attention to improving per-staff revenue. We still lag foreign supermarket chains. We can learn quite a lot from them about human resource management and performance evaluation.
China Knowledge at Wharton: How do you compete with established companies in the supermarket sector?
Chen: At CRE, we have deep roots in certain provinces, such as Jiangsu, but our goal is to be a leader in all major markets in China. Second, we’re newcomers to the market compared with our established foreign competitors. We cannot simply follow. We need to use different technology to achieve market share growth.
In some markets, if we compete head on with our more established competitors, such as opening more traditional supermarkets, we will always be a follower. What we’re trying to do is use a different strategy. We will open not only hypermarkets, but also more community stores and convenience stores to compete with our competitors, whose strength lies in running big supermarkets, and try to gain market share.
For example, we once opened 10 convenience stores near one hypermarket run by our competitors. We call it the fortification strategy. In these small stores, we start selling products that normally are only available at a large supermarket, such as rice in five-kilogram bags and cooking oil in large barrels, at an even cheaper price. Of course, we are running these stores at a loss on purpose. But largely because of this strategy, we’ve made sure we don’t lose market share to our competitors.
China Knowledge at Wharton: What is your competitive strategy?
Chen: It is much more difficult to run a retail business with multiple types of stores rather than running only hypermarkets. Convenience stores cater to the needs of white-collar workers in major cities. The items sold there cost more but the stores require better logistical support and a higher quality of supplies. Hypermarkets, on the other hand, focus more on cost control and comparatively less on supply chain and logistics. The different types of stores put more pressure on our managers.
Some suggest that we need to improve our management capability before we go out and compete for market share. I disagree. China is now a fully competitive market with the most modern competitors. We have no time to reform and then compete. Up-and-comers in China must compete by all means, and we cannot wait until we get stronger.
From a strategy point of view, we need to adapt to local conditions. Whether we succeed depends upon whether we can use our comparative advantages in other markets and consolidate resources in regional markets. I expect in the supermarket sector, competition will be even fiercer in the future. I expect a faster pace of consolidation, with the losers quickly being phased out. We have always regarded the foreign supermarket chains as our main competitors. We need to learn from them.
China Knowledge at Wharton: What are other challenges do you face, apart from competition?
Chen: Our top three costs are rent, salaries and utilities. So our challenge for the next five years lies in controlling these three things. The government’s crackdown on high-flying real estate prices is a good thing, as we expect that rent increases will remain low. Staff salaries are also a concern. We have more than 150,000 employees, most of them working in stores. A significant increase in salaries will increase our costs. However, we do believe it is time to provide better salaries. We should improve our efficiency and productivity rather than relying on low salaries. But in the long run, rising salaries are still a major challenge. Utility costs are also a major challenge. If the state decides to raise the price of electricity and water, we will see significant increases in our costs.
Lastly, the challenge in the long run is whether we will be able to train enough skilled managers to realize our 15% annual growth rate in China. A prerequisite for any promotion is whether there is a suitable candidate to fill the post made vacant by the promotion. In some areas in which we have fast growth, we’ve already seen new store managers, who are not as capable and don’t have the skills as the previous ones. You can only grow as fast as you can train your talented managers.
China Knowledge at Wharton: What changes do you expect in consumer markets?
Chen: The tastes of our consumers have changed significantly in the past few years, especially in coastal markets, such as Beijing and Shanghai. We’ve seen the rise of the middle class in coastal markets associated with a change in demand. In the beer market, we’ve seen people turning to premium products as their salaries increase. In the past, we’ve focused on beer for the general public. Now, we’re increasingly focused on premium products as demand has shifted to this sector. It’s the same in the supermarket sector. For example, we’ve just opened one Ole store in Xujiahui in Shanghai in July, and sales at this store in its first month in operation were double that of the community store that was there before. Ole targets the affluent middle class in China. Even in supermarkets, the goods we sell in Beijing and Shanghai are different than in second-tier cities.
Also, we’ve seen consolidation in the supply chain. Now we only have about 50 large suppliers nationwide. Many suppliers are still regional suppliers. In the future, we expect our suppliers to grow much larger and become more efficient.
China Knowledge at Wharton: What trends do you anticipate in the consumer market?
Chen: One trend is food safety. It has become increasingly important to maintain food safety. That has placed even more burden on us when we source agricultural products. We’ve started to establish direct links with large farming enterprises to ensure quality and food safety. The other is the use of green technology to reduce energy consumption at our supermarkets. Since utilities are a large cost, we have incentives to adopt green technology to reduce costs. We’ve just launched 100 green stores in China.