China POS Sales Soaring

As Chinese consumers suddenly start to embrace the retail store, orders for point of sale systems are soaring, according to a new study from IHL Consulting Group.

IHL is projecting that China's accelerating 20 percent annual growth rate last year will catapult it this year beyond the POS sales of Germany, which is Europe's largest POS market.

Like all statistics, these POS sales numbers look very different depending on context. Historically, China's POS sales have been very low despite a huge population. Just like a startup company, when a retail industry such as China's does start buying POS units, the initial purchases will likely be massive. After all, a developed retail infrastructure such as Germany's needs only replace aging POS units, not replace every single POS in every establishment. But China's need is much more extensive.

Also, many of the POS purchases that China is making are very low-end units, raising the question of whether it's a fair statement to compare the units with Germany's without factoring in price, said report co-author and IHL President Greg Buzek.

"It should be noted that more than 75 percent of the installed base of POS devices in China are actually PC-on-Cash-Drawer [PCOCD] devices," the report said. "This is much higher than any other country in the world and shows that, although the POS growth opportunities are huge, the traditional POS vendors will need to adapt their strategies to take full advantage in the region."

Although Chinese retailers are more willing than ever to embrace Western retail technology approaches, the IT environment is radically different.

"Fully 92 percent of the POS population used 486 or higher processors at the end of 2004, mainly due to the relatively young age of the modern retail landscape in China," the IHL report said. "There are still 36,000 older POS devices installed. The older technology's hold on the POS market is exacerbated by the food and specialty retailers using DOS terminals and showing little initiative to change."

Even though the typical U.S. retailer is technologically behind some of the more sophisticated Japanese and European retailers, China's current retail technology "is probably about 70 to 80 years behind" the United States, Buzek said in an eWEEK.com interview.

In China, POS systems?and low-end POS systems at that?are only in the larger retail chains. Small chains and single-store retailers rarely use POS, Buzek said.

"One interesting aspect of POS systems in China is the relative lack of scanners, even in new installations," the report said. "Simply, there are not that many products in Chinese retail locations that have barcodes. The retailers therefore rely upon time-honored price tags."

Cash systems dominate, with credit-card units rare, Buzek said.

Buzek paints China as an economy that is growing too quickly, potentially out of control. "Sixty percent of the [construction] cranes in the world are in China right now. Forty percent of the world's concrete is in China right now, too," he said.

What is fueling so much growth? Several factors, including China's becoming a leading global product supplier, its newly-won World Trade Organization member status and the upcoming Olympics games. Those are all elevating incomes and Western influence.

But oddly enough, Buzek argues that as far as brand preferences and shopping habits are concerned, a huge factor is the one-child rule in China, where parents are strongly discouraged from having more than one child.

This has resulted in two sets of grandparents and one set of parents bringing up one child. "One child supported by six adults," Buzek said. "Some of the most spoiled children in the world are growing up in China."

Buzek's rationale continues: The first generations of these children are now grown up and exhibiting "a level of entitlement and spoiling. We are seeing a very heavy influx of youth that are spending like crazy."

Add to that sense of entitlement a culture that is somewhat in between a communist society and a capitalistic one. That is a place where residents are guaranteed a place to live that is heavily subsidized by the state and where the cost of goods is also heavily subsidized, Buzek said, and yet there are no car payments and no saving for retirement.

"The Westernized view of shopping is coming into China like gangbusters," Buzek said. "In the international cities, there is this desirable branding of the haves and the have-nots. And there is a very strong desire to look like a have."

Beyond the slow modernization of Chinese retail operations, many of those POS purchases are going to come from European and U.S. retailers, who are expected to flock to China's streets after next year. That's because one condition of China entering the World Trade Organization is that it will lift restrictions on most foreign retailers.

As of 2007, limits will be lifted on the number of stores as well as on how much foreigners can invest in Chinese ventures and whether they can locate outside of the largest cities. The leading foreign retailers include France's Carrefour (240 stores), the American Wal-Mart (43 stores) and Germany's Metro (24 stores), the IHL report said.



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