Taking Stock of Retail Strategies.

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There are many ways to skin a cat, as the saying goes. But how do you develop a successful strategy for China? Repeat what works globally, adapt around the edges, or create a new model?

These are big questions for many corporates with many differing approaches. Two very different cultures – US and French ones – provide an interesting comparison (via the FT) in the context of China’s hypermarkets – but with much relevance to the wider business environment. Step up Carrefour and Wal-Mart…

• Wal-Mart, for their part, are focusing on centralised supply-chain management, and investment in a national network of distribution centres, such as the 40,000 square meter facility in Kengzi near Shenzhen.

• Carrefour, on the other hand, is building local supply networks, with local stores retaining a lot of autonomy – on the basis that, in the words of outgoing China chief executive Jean-Luc Chereau: “in China you don’t have a logistics system – its dislocated, so we adapt to working to the local economy”.

The impact of these differing strategies? Carrefour is profitable, while Wal-Mart is (thought to be) not. Adapting to the local environment is essential (though one can understand that selling dog meat in north China was difficult for Wal-Mart, which has so many pet owners to supply back home!). As one analyst puts it:

    “The appetite for losses in China is much less than it was five years ago. Wal-Mart has been focusing on the back-end and not the customer. Carrefour has kept the focus on its consumers. That is the right philosophy, but over time all its stores will have different products and it won’t have synergies, so its challenge will be to build that back-end.”

The FT points out that local groups such as Lianhua, Bailian and Wumart are also developing – learning from the foreign players and maximising their local advantage by securing some of the best sites (from friends in local government) – and may even end up, attractively packaged, in a foreign shopping basket. The FT reports:

    “In 2004 Tesco was willing to stump up a premium of nearly 50 times historic earnings for a slice of Mr Wei’s network of 25 [Hymall] stores – and has since bought another 40 per cent of the chain. Wal-Mart looks set to pay $1bn for Trust-Mart, the second biggest hypermarket chain in China, after winning a bidding war with rival Carrefour”

Indeed reports today indicate that Wal-Mart has bought 35% of the 101-store Trust-Mart chain (which has been brewing since at least October last year, and which may still require official approvals.

So much for who is doing what, and where. But what do the Chinese customers really want? Certainly not the same as their US and EU counterparts. Another FT report suggests that they tend to travel by foot, bike and public transport, spending an average of only US$10 per visit (after all, they have to carry the bags home):

    “They like to shop often and spend little. They are keenly sensitive about price and like their food so fresh it leaps out of the tank…”

This can be something of a surprise to a suited and booted marketing expert from France and the US, who has never seen anything actually moving in its supermarket packaging before! Or to the planners who designed-in big car parks (as B&Q did). Give the people what they want:

    “Joe Hatfield, the 62-year-old outgoing chief executive of Wal-Mart China, loves talking about how customers change across regions and towns.

    “In the north of China, there is no point selling litres of shampoo because people don’t have hot water at home and will go to public baths to wash once or twice a week,” he says from his headquarters in Shenzhen, just north of Hong Kong. “So we sell small sachets.

    “And our stores up north [Wal-Mart has outlets in Shenyang and Changchun], we build them with bigger aisles, as those people eat more red meat and bread and dairy, so they are bigger and, because it is cold, they have more layered clothing.””

But even while these businesses try hard to serve their customers, others are fighting to take them away. Hypermarkets, like everything else in China, are hyper-competitive and highly fragmented. According to the FT

    • Carrefour has 90 stores with 0.6% market share.

    • Wal-Mart has 75 stores and 0.2% share (not including the Trust-Mart stores).

    • Tesco Hymall has 41 stores with 0.2% market share.

    • Vanguard, from Hong Kong, has over 2,000 stores.

    • Wumart has over 650 stores.

The competition is driving the cost of prime sites up, while putting pressure on product prices. Another case of the “Chinese Squeeze”!

I suspect that, while the strategies of Wal-Mart and Carrefour may have their own rationales (and different horizons), Carrefour is proving to be more adept at playing the multi-market China game (as they were a few years ago when using local approvals to get around central government barriers to store growth). This should bring them earlier opportunity for success with lower risk, molding themselves to the market rather than trying to mould the market to fit an existing international model. Wal-Mart tried and failed with the latter approach in Germany (from where they pulled out last year). Will they fare better in China?

In any event, their experiences in China’s fast-moving, cut-throat, fragmented (etc. etc.) consumer market will be interesting to watch.

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