More mergers and acquisitions are expected in China's retail sector in the near future, according to Ernst & Young.

Ernst & Young, one of the world's top consultancies, said China's retail sector is expected to grow 12 to 13 percent in 2006 to reach sales of 7.6 trillion yuan (950 billion U.S. dollars) as consumption hots up.

China saw a total of 417.6 billion yuan (52.2 billion U.S. dollars) of M&A (mergers and acquisitions) activity in 2005, but only 3 percent or 11.1 billion yuan in the retail industry, said the report Retail Revolution--A Look at Mergers and Acquisitions in China's Retail Industry published here on Wednesday.

The report said mergers and consolidation within the industry will reduce fierce head-to-head price competition among retailers.

China's top 100 retail companies currently only have 10 percent of the retail market. The vast majority of retailers in China are small family-operated businesses, fragmented and often inefficient, that keep costs low by using family labor.

Mergers and acquisitions would lead to a more rational and consolidated landscape and allow the bigger, better-organized groups to increase market share.

In developed countries such as the United States, 85 percent of retail activities are highly organized, but the equivalent figure for China is only 20 percent.

According to the report, domestic players Bailian and Gome and foreign retailers Wal-Mart and Carrefour will emerge as market movers and shakers over the next five years, upping their market share.

However, other voices suggest that foreign mergers and acquisitions may threaten domestic firms, and even pose threats to national security.

Concerns range from the dilution or demise of Chinese brands, reduced incentives for innovation among local retailers and domination by multinationals.

Carrefour hopes to acquire at least 10 local retailers as part of its expansion plan in China, but no specific targets or time frames have been given.

Best Buy, the largest consumer electronics chain store in the United States, acquired a 75 percent stake in China's fourth largest home appliance retailer, Jiangsu Five Star Appliance, in May earlier this year and is reportedly seeking to conclude an 800-million-yuan acquisition of Sanlian Commerce, a retailer in East China's Jiangsu Province.

The report said mergers and acquisitions enable retailers to reinforce their presence in markets where they do not currently operate or do not have significant market share.

Editor: Donald