British chain Tesco has been forced to take a new tack with its China operations

Although Tesco Plc's spacious stores are well-lit and spotlessly clean with wares tastefully displayed, Helen Wang seldom shops there. Wang, 32, of Beijing, prefers to buy most of her groceries at Wumart Stores Inc, a Beijing-based chain, where she can easily find fresh delicacies including raw chicken feet, which are always heaped on a table, or cheap vegetables.

"It is close to home, the food is fresh and prices are wonderfully low," says Wang on her way home after work and shopping. "For large daily necessities I always shop online," she says.

Shoppers such as Wang are making life extremely difficult for big international retailers including Tesco. The rapid rise of e-commerce firms in China has compounded their problems in a market once seen as full of potential.

Since the early 1990s, foreign supermarket chains from Carrefour SA to Wal-mart Stores Inc have waded into the country, desperate to win over its burgeoning middle class, but lack local expertise or are short of capital.

After nine years of independent operations in China, Tesco, Britain's largest retailer, announced on August 9 that it was in exclusive talks with the State-owned China Resources Enterprise Ltd for a joint-venture agreement merging their Chinese operations.

The proposed deal, following Tesco's decision to quit the United States and Japan, represents a significant scaling down of the UK company's Chinese operations. Under the deal, Tesco's 131 supermarkets, hypermarkets and shopping mall businesses in China would be combined with the Hong Kong-listed CRE's almost 3,000 stores.

CRE, a major supermarket operator in the country that includes the Vanguard chain, would control about 80 percent of the venture. Tesco, the world's third-largest retailer, would have the rest.

It would bring together "a deep understanding of local customers, an established nationwide infrastructure and proven track record with Tesco's global retail expertise, international sourcing scale and supply chain capabilities", CRE said.

Retail analysts said the decision seemed to be good for both sides, but it was essentially a lost battle for Tesco, which failed to make much headway in the Chinese market.

Oceanne Zhang, head of Market Insights China, a division of the consulting and research firm Kantar Retail, said the root of Tesco's retreat from China was a failure to understand how to build strong relationships with suppliers and give first-class customers a unique shopping experience.

"Chinese retailing is very different to markets elsewhere and it is very fragmented," Zhang says. "The Chinese want high-quality, cheap products but they also want convenience."

The main difference between the shopping habits of the Chinese and Westerners is that the former tend to buy their food daily rather than weekly, she says.

"But Tesco's supermarket stores and hypermarkets are sometimes too spacious and have for years have concentrated too much on perfecting the mixture of items, which makes it difficult to change direction when needed." For example, store displays should be such that Chinese customers can easily find what they want rather than having to wade through a myriad of goods. Snacks should mean chicken feet, not sausage rolls. And wet-market sections should allow customers to pick out fish from a tank.

"Foreign retailers need to be more flexible because large scale is no longer a recipe for sustainable growth," Zhang says.

Tesco has been in China since 2004 and until recently had very aggressive expansion plans. In the past couple of years it said it would spend billions of pounds and open about 300 stores and scores of shopping malls.

But those plans crumbled as it slashed its exposure in China following big losses. It closed four stores last year and another this year. Last year its sales were about 1.4 billion pounds ($2 billion), a small slice of China's 190-billion-pound modern grocery market, an earlier report by the UK's Financial Times said.

Tesco is now the world's third-largest retailer by revenue behind Walmart of the US and Carrefour of France. Observers forecast the new venture that combines both formidable scale and local access together will enable CRE to imitate the multi-format model of Walmart and Carrefour.

The deal also comes as Asia's richest man, Li Ka-shing, considers selling his Hong Kong supermarket business, worth up to $4 billion. Walmart plans to put in a bid, Reuters has reported.

The glory days when Walmart stores drew a rush of more than 80,000 shoppers on the opening day of its first supermarket in China in the 1990s are well and truly gone. Many other foreign supermarket chains have also lost money in the world's most populous country, territory that once seemed to hold the prospect of rich and easy pickings for the top global retailers.

Under a major assault from e-commerce firms, the profit margin of the physical retail market in China fell from 5 percent in 2005 to nearly 2.5 percent last year. Tesco, Carrefour and Walmart have all remained below that benchmark, a Kantar Retail report says.

After two years of testing, Metro AG of Germany said in January it was pulling out of the Chinese consumer-electronics business under the Media Markt brand. Home Depot Inc announced last year that it would shut all seven of its big-box home improvement stores in China.

Earlier, the Southern Metropolis Daily reported last year Carrefour shut two stores and Walmart shut five.

Against a backdrop of declining sales of big foreign retailers last year, Chinese supermarket operators have been aiming high and have had strong performances in recent years.

Yonghui Superstores Co Ltd, the Fujian-based supermarket chain, said earlier that it plans to have 350 stores and 50 billion yuan ($8.1 billion) in sales revenue in China by next year.

In its first-quarter report, net profit attributable to shareholders surged 133.5 percent year-on-year to 276.14 million yuan. Operating revenue for the first three months grew 20.79 percent year-on-year to 7.52 billion yuan.

Liu Hui, chief consultant at the Beijing Uni-Retail Business, says that the last few years have been tough for foreign supermarket chains because of fierce competition from Chinese domestic rivals, which have gained rapidly by drawing on advantages in sourcing and distribution.

"Because of soaring operational costs such as rent and personnel, foreign retailers have been losing money in the market," Liu says. "On the other hand, domestic companies have better weathered the downturn. With subsidies and favorable conditions given by local governments such as better locations and low rent, domestic supermarket chains such as Yonghui and Wumart have been able to promote growth very quickly."

Sun Art, a joint venture between the Ruentex Group of Taiwan and the privately held French retailer Group Auchan SA, now has a 13.6 percent market share in China, generating high profit on its expertise in maintaining competitive prices with local suppliers.

lvchang@chinadaily.com.cn

(China Daily USA 10/01/2013 page15)