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China Winds Shift for U.S., European Retailers
Published on: 2012-10-17
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altTesco, Carrefour, Wal-Mart and others roared onto the mainland but are now quietly adjusting to a changing market.
Major American and European retail chains, once rising contenders for China's highest consumer crowns, may be losing confidence on the mainland.
American home improvement retailer Home Depot recently pulled out of China, while its British counterpart B&Q and the world's largest retailer Wal-Mart have tapped the brakes on expansion projects.
Swedish furnishing and home products giant IKEA, the most profitable foreign retailer in China, is in hot water with some of its domestic suppliers, who accused the Swedish company of squeezing their profits and decided to terminate the partnerships.
And since August, global retail giants Carrefour of France and Britain's Tesco have been rattled by the industry rumor mill which, despite denials from each corporation, suggests each plans to give up in China.
Industry analysts say many of the world's biggest foreign retailers, after years of rapid expansion, now face a variety of hurdles in China. Key challenges are affecting procurement and supplier quality control mechanisms, sales strategies, internal management and online business. The immigrants are also seeing strong competition from Chinese rivals.
Moreover, Wal-Mart and Carrefour officials said a weak macroeconomic outlook for China has forced them to slow their respective development programs.
Changing Focus
En route to success in other countries, Carrefour relied on "manager-responsibility" store operations and Home Depot catered to do-it-yourself consumers. These unique retailing niches worked well outside China, but the companies struggled to apply these strategies on the mainland.
Home Depot Chief Financial Officer Carol Tome said her company failed to acclimate to China, where consumers prefer hiring tradesmen rather than installing kitchen cabinets or painting walls themselves. And the Chinese government's 2010 decision to rein in the real estate market with price control policies was apparently the straw that broke Home Depot's back.
A Guangdong Shunde-based construction materials supplier said Home Depot's global sourcing model could not stand up to China's construction materials producers, renovators and retailers who control the market.
Home Depot also apparently erred by changing leadership: The company replaced its CEO three times in six years. The company also changed its sales strategy often, and gradually shed outlets.
Meanwhile, a source at the investment firm Hony Capital said Carrefour's flexible manager-responsibility system has been given too much power to store managers, undermining executive control.
The system was expected to be the key to success for the French retailer during its rapid expansion phase in China. Advocates of the system noted a store manager with significant authority could respond best to local consumers given the differences in China from one region to the next. But local management authority has been blamed for Carrefour's problems with food safety and supplier issues.
Domestic retailers, on the other hand, have been growing. China Resources Vanguard, for example, announced in January plans to open 800 stores in 2012, including up to 90 major outlets.
Competition from Vanguard and other big domestic retailers such as the nation's largest retailer Yonghui and Taiwan-based RT-Mart has forced Carrefour, Wal-Mart and other non-Asian retailers to slow down in China, an analyst said.
"RT-Mart and Yonghui are doing particularly well in the fresh foods category," he said. "Foreign companies simply can't beat them."
Most American and European retailers are thus fighting to survive. But Home Depot, which came to China by buying a Tianjin-based chain for about US$ 100 million in 2006, has already thrown in the towel.
Home Depot announced September 13 it had closed its remaining seven stores in China. Indeed, the retailer has been scaling down since 2009, when it closed five stores in Qingdao, Shenyang, Beijing and Tianjin.
A number of Chinese media outlets reported in August, based on rumors circulating in the financial community, that Carrefour would also get out by selling its China operations. Potential buyers include China Resources, which owns Vanguard, and state-owned food conglomerate China National Cereals, Oils and Foodstuffs Corporation (COFCO).
A fund manager and a business acquisitions adviser said that Taiwan-based retail chain RT-Mart showed interest in buying Carrefour's China operations, but the French retailer wanted to sell to China Resources due to its higher offers. Officials at COFCO declined comment.
But in late August, Carrefour CEO Georges Plassat denied the company planned to sell its China outlets, calling the talk pure rumor.
"Carrefour has had robust development in China," Plassat said. "We are convinced the Chinese market has vast potential. And we will continue to be based in China and committed to the long-term development of the Chinese market."
The fund manager, however, said Carrefour has been contracting in Asian markets in recent years. This scaling back has led many to doubt the company's interest in the Chinese market.
Carrefour's "decline has been very clear," the manager said. "Right now, they could sell out for a good price. In the future, the brand value may decline."
Reuters recently reported that Carrefour may need 3 billion euros to support its European businesses. The money could come from selling stores in Turkey, Indonesia and Poland, the report said.
Tesco has also been the target of pullout rumors. But Tesco Senior Vice President of Public Affairs Lu Haiqing repeatedly stressed the British retailer would never leave China.
"In the future, neither Tesco nor any other retail giant will be willing to give up the Chinese market," he said.

No Denying It
Yet foreign retailers have undeniably run into a variety of problems in China, forcing change. For example, Carrefour, Wal-Mart, Tesco and the German retailer Metro separately overhauled their China management structures last year.
Tesco simply closed four stores since the beginning of this year, Lu said, calling the shutdowns part of the company's strategy adjustment which included better integration of regional procurement. And even the adjustments may be more difficult than anticipated: Tesco reported that as of August it had opened only four of the 16 stores planned for this year.
Non-Asian companies are coming to grips with the changes in the Chinese consumer market.
"China's retail industry development has entered a new stage," said Guo Geping, president of the China Chain Store & Franchise Association. "The rules, structure and market environment of the retail industry must be re-examined."
All retailers in China, for example, face fierce competition and rapidly rising business costs, said Guo.
Wal-Mart in recent years has opened more new stores than any other foreign retailer, including 51 in 2009, 47 in 2010 and 43 last year. This year, however, the American company said it would open only about 20 stores in China.
Wal-Mart (China) Department of Corporate Affairs Senior Public Relations Director Li Ling said the company would shift its China focus to improving quality in existing stores and no longer focus on opening more stores.
The struggles have lately stretched into China's fast-growing e-commerce arena. Wal-Mart, for example, is testing online sales and recently got government approval to take a 51 percent stake in the online supermarket The Store.
Existing Chinese e-commerce retailers, meanwhile, are competing robustly for consumers through price wars and for bank financing. It's unclear how well foreign retail companies will be able to compete.
While it is closing its big box stores, Home Depot said it starting a new team to continue research and development activities. The company is also "in the beginning stages of developing relationships with several of China's leading e-commerce operators, including 360Buy."
Yet even a dramatic shift from bricks-and-mortar to online sales may not be enough to save Home Depot's business in China, said an executive at a domestic building materials supplier, since cybershoppers shun do-it-yourself home projects as readily as other Chinese consumers. 
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