Foreign retailers feel the pinch of rapid expansion

Updated: 2012-07-20 11:15

By Li Woke (China Daily)

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Foreign retailers feel the pinch of rapid expansion

A Wal-Mart China supercenter in Fuzhou. Experts say that China's high population and rising GDP make the retail market extremely attractive to global supermarket chains. [Photo/China Daily]

The buzz of fast expansion in China comes with a hefty price tag for foreign retail giants.

Only two decades after China opened up its retail market, foreign players have set up their operations among dozens of Chinese counterparts.

Wal-Mart Stores Inc, the world's largest retailer by sales revenue, entered China in 1996. Nine years later, the US retailer had more than 70 stores.

Since 2007, Wal-Mart China maintained double-digit growth, said Ed Chan, former Wal-Mart China's president and chief executive officer, last year.

The company now has more than 376 outlets and more than 95,000 employees in China.

French retailer Carrefour SA, the world's second-largest retailer by revenue, entered the Chinese mainland in 1995. In April, Carrefour had 206 stores in 64 Chinese cities.

UK's Tesco Plc, the world's third-largest retailer by revenue, entered the Taiwan market in 2004. It now has 110 supermarkets and 14 convenience stores in the Chinese mainland.

Experts said that China's high population and rising GDP make the retail market extremely attractive to global supermarket chains.

Euromonitor International, a London-based consumer market research firm, said the Chinese retail industry is expected to have a market value of more than $1.4 trillion this year. Also, personal disposable income and consumption are expected to keep increasing.

"Following the fast development of the Chinese retail industry, the fast expansion of foreign retailers will benefit their Chinese counterparts as they learn from 'more efficient' business models," said Shi Yongheng, a professor at the School of Economics and Management at Tsinghua University. "They can learn advanced logistics, and the procurement, efficiency and management systems of foreign companies," Shi said.

However, along with the fast network expansion and business success, foreign supermarkets also have to deal with some food safety scandals and other thorny issues.

In March, China Central Television said that Carrefour deceived consumers by selling expired meat and normal chicken as free-range chicken with inflated prices at a store in Henan province.

In January last year, the National Development and Reform Commission, the country's top economic planner, fined 11 Carrefour stores in six cities 500,000 yuan ($78,440) each for overcharging customers. At the same time, some Wal-Mart stores were also caught using illegal pricing methods.

"I am very disappointed with the foreign supermarkets, they should be models in the Chinese market," said Zhao Qi, a 35-year-old hotel employee. "The 500,000 yuan fine was far from enough to punish them."

A 2011 investigative report on business fraud by large supermarkets in China, released by the China Market Order Website, which belongs to the Ministry of Commerce, showed that the annual sales revenue of just one Carrefour store in 2010 was about 230 million yuan, or 460 times the 500,000 yuan fine.

Chinese analysts attributed the recent scandals to bad management and shortage of senior-level staff.

In October, Wal-Mart closed more than a dozen stores in Chongqing following allegations that it had labeled regular pork as organic pork in some stores. Two employees were arrested, another 35 were detained, and the company was fined 2.69 million yuan.

Only hours after the problems, Wal-Mart released a statement saying that it had set up a special team to carry out comprehensive and detailed inspections and that it would strengthen supervision of pork products.

At the time, national and local media reported that the US retailer doesn't pay enough attention to food safety issues and that the company has been penalized many times for food safety problems in China over the last years.

"First a sincere apology, and then they continue to make mistakes. Are these the principles that Wal-Mart has always insisted on in the Chinese market?" said the China National Radio website at the time.

"Foreign supermarket chains did not react well after the scandals," said Li Yaru, an expert with Tongji University in Shanghai. "The scandals could cause serious damage to their corporate reputations. If a company does not enhance management after they happen, it could mean much bigger troubles later on."

Shortly after, more than 100 Tesco employees went on strike in eastern China. The employees blockaded and prevented shoppers from entering a Tesco store due to a labor dispute.

"Tesco's management and operation models have long caught the attention of retail insiders," said Liu Hui, an analyst with Beijing Uni-Retail Business and Management Co Ltd. "But the recent problems showed a relatively slow-paced management, as the British retailer expanded too fast in the past year."

Peng Jianzhen, deputy secretary-general of the China Chain Store & Franchise Association, said that retailers need to slow their growth to better control the supply and distribution channels.

James Sinclair, managing partner and consumer and retail specialist at InterChina Consulting, a strategy and M&A advisory firm headquartered in China, said that international chains used their joint venture partners to leverage local relationships and gain access to good locations in the past.

"At present, we are seeing the chains forming strategic relationships with property developers, or investing in commercial complexes - all with the intention of their stores becoming anchor tenants," he said.

Meanwhile, in sharp contrast with foreign retailers, the Fujiian-based Yonghui supermarket has achieved stunning development over the past years.

CTR, a Chinese research firm, said that Yonghui emerged as the fastest-growing retailer in the first quarter of the year, while the overall grocery market is showing signs of slowdown.

By the end of 2011, the number of Yonghui stores was 204, a year-on-year increase of 31 percent. In the latest quarter, the retailer has grown 69 percent compared to the same period a year ago.

"The success of Yonghui is mainly due to our own business model, focusing on the fresh products section, which occupies around 40 to 50 percent of store areas," said Ye Changqing, a representative of Yonghui's chairman office. "In order to save costs, we are selling fresh goods directly from the production bases.

"Compared to local retailers, the foreign retailers have better logistics and management skills, but they have less resources in regional areas," said Peng.

Industry experts said many foreign-owned companies operating in China are used to preferential policies provided by the local governments, lack of serious domestic competition and government supervision, which makes them arrogant and leads them to not respect customers.

In addition, the vulnerable position of Chinese consumers makes it difficult to protect them - filing a lawsuit against foreign retailers is both time- and money-consuming - which encourages big companies to not correct their bad business practices.