The world's second largest retailer, Carrefour, insists
it is not pulling out of the massive Chinese market. Still, a closer look at
the French company's struggles offers a window into how quickly things can
change when doing big business in today's China.
BEIJING – “Big” is the operative word for both
French-owned retail giant Carrefour, and the People’s Republic of China. So
when rumors began circulating last month that Carrefour was planning to pull
out of China and hand over its operations to the local China Resources Group
conglomerate, it made some big waves.
Carrefour immediately denied the rumors, and the public
relations spokesman of Carrefour China told the Economic Observer that the
company will maintain its rhythm of opening 20 to 25 new branches per year.
Yet behind the rumor lies the truth that Carrefour China
has seen much better days. Since July 2010, it has shut
down six of its stores. One source close to Carrefour pointed out that the
retailer has been suffering from severe staff turnover and increasing pressure
on its cost control.
The shining image of this retail giant’s entry to China
is in the process of being tarnished. Over the past two years, the
foreign-financed RT-Mart, as well as Vanguard and Dashang Group, have all
overtaken Carrefour in growth in the retailing business.
In recent years, Carrefour has lost all the privileges
that it enjoyed as a foreign enterprise when it first entered China, both in
terms of obtaining land and opening stores. The cost of stores and logistics
have greatly increased. “It’s very difficult to follow the previous mode of
operation for achieving the desired targets,” a source close to Carrefour said.
Carrefour is now adjusting its strategy, choosing to open
new stores in second and third-tier cities, and the suburbs and surrounding
satellites towns of first tier cities.
Carrefour closed four stores last year. It is said their
closure was all due to bad location choice and poor management. The Carrefour
China press office says that Carrefour currently has 180
stores, therefore the closing down of unprofitable ones is normal and in
accordance with its strategic adjustment.
But a well-placed Carrefour source said that because of
China’s change in policy to favor domestic enterprises, it is now impossible
for Carrefour to obtain locations in core business districts, particularly in
places like Shanghai and Beijing.
In addition, virtually all of the 180
Carrefour stores are rented, whereas Walmart and Tesco and other foreign
companies have all invested in real estate in China.
Trying to keep up with China's boom
Carrefour’s first stores in the country signed their 20-year lease contracts in 1995. This means
that it will face a huge cost rise in 2015. And the fact
that local governments no longer offer preferential policies for foreigner
investors makes all the difference.
Lars Olofsson, the chairman and CEO of Carrefour,
announced the company’s semi-annual
report in August. As the world’s second biggest retailer, it had a net loss of 249 million euros in the first quarter of 2011. The
French media quickly predicted that restructuring will be unavoidable for
Carrefour China.
Over the past year, Walmart has being expanding its
investment in China, while RT-Mart’s market share continues to rise.
Carrefour’s ranking of its sales in hyper-markets has been seriously affected.
In 2009, out of China’s top 100 chain
stores, the Brilliance Group, Dashang Group and Vanguard all exceeded
Carrefour.
Over the past two years, Carrefour China’s staff turnover
has been very high. In June last year, numerous manager-level employees of its
East China stores resigned en masse. It’s said the pressure on employees came
directly from Eric Legros, the current president of Carrefour China. Legros has
focused much of his attention on the connections between the farm and the
supermarkets, as well as food security. He is determined to reform Carrefour
China.
In an earlier interview, Mr. Legros confirmed that his
reforms did encounter quite a bit of controversy and questioning, but he is
seeking the balance point between the centralization and decentralization. All
he needs, he says, is time.
But the anonymous company source says that Mr. Legros has
had difficulty understanding Chinese customs. He thinks in a French way and
does not take into account “Chinese characteristics.” For instance, when a
Chinese development manager hands in an evaluation report about a new site,
very often the manager’s viewpoint would be at odds with his.
“He rarely listens to anyone. And so the next time, the
manager will not bother to give his opinion, but just listen to him and execute
whatever he wants,” the source said.
When foreign retailers first came to China, their
decisions about where to open stores were very different compared to what was
done back at home. At that time, Chinese customers rarely owned a car, so the stores
were not usually opened on the outskirts of a city, but rather in residential
areas and often crowded locations.
But these days, such locations cost too much and are
difficult to obtain. So the speed of opening new stores has been slowing down.
A store in Beijing which has a turnover of around 200
million RMB, of which between 5-10% goes to rent before
even counting the other costs in water and electricity etc., won’t be able to
make any profit, says one Chinese retailing expert
In this respect, Carrefour’s strategy of going into
suburbs and mid-sized cities is on target. Even Chinese companies are following
this trend. But compared to the increasing technological investment that
Walmart put into its logistics system and satellite information centers, Carrefour
lags behind, spending more resources on marketing, says the source. “If
Carrefour still counts on its human resources only, it won’t even be able to
compete with the local retailers.”
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