Two decades ago, foreign retailers rushed into China, seeing it as the world’s greatest untapped market.
In the early years, they prospered. They built hypermarkets that offered consumers low prices, a diversity of choice and a delivery system they could not find elsewhere.
But the golden age is over. Now they are battling strong local competitors, the dramatic growth of e-commerce, weakening demand and an anti-corruption campaign that has hit purchases of luxury goods.
Wal-Mart, which has more than 400 stores in China, recently dismissed 30 executives and changed its country manager, in an effort to cut costs and restructure the business.
In its 2014 annual report, Carrefour said that “organic sales in China had fallen by 5.3 percent from 2013 in a consumption environment that remains marked by frugality”. It has 238 stores in 73 cities.
In 2013, British giant Tesco abandoned its solo approach to China and paid nearly US$558 million to form a joint venture with China Resources Enterprise (CRE) to merge its 134 Chinese supermarkets and 11 shopping malls with the Vanguard chain of CR.
“China represents a huge opportunity,” said Laurie McIlwee, its chief financial officer. “But, without strong local connections, it is difficult to get your arms around it.”
Another failure was British home improvement chain B&Q which had 63 stores in China at its peak in 2007 before suffering four consecutive years of losses. It has closed many of its stores.
According to Euromonitor, the two market leaders in China’s retail market are Sun Art Retail and CRE, each with a share of 14-15 percent. Wal-Mart’s share is about 10 percent.
The market has greatly changed since the 1990s. The Chinese competitors have learned the skills and techniques of mass marketing of consumer goods. They have closer ties with local governments, whose approval is needed for new sites and many kinds of licenses.
They are also more aware of the shopping patterns of mainland consumers. British retailer B&Q, for example, had large sections of its stores offering DIY products; they are very popular in northern Europe but not in China, where people have smaller homes and leave such work to professional decorators who are cheap and competitive. They do not do it themselves．
“The localization of foreign retailers in insufficient,” said Qiu Gang, a researcher at the Samsung Economic Research Institute of China. “Without the privileges and protection of local governments, foreign retailers inevitably face challenges, which can mean closing money-losing stores.”
Foreign and local retailers have both been hit by the typhoon of e-commerce. According to Forrester Research, China became the world’s largest online retail market in 2013, when total sales reached US$307 billion. Forrester estimates that the figure hit US$440 billion in 2014, or 9.8 percent of total retail sales, and will grow at a compound annual rate of 19.9 percent every year until it reaches US$1 trillion by 2019.
Some Chinese only visit shopping malls in order to look at new designs and products; after making their choice, they go home and order them on the internet. Others do not go to physical shops at all but make all their purchases over the Net. The speed and the delivery of the tens of thousands of delivery men and women all over China make a fast, efficient alternative.
This is a serious and possibly fatal challenge for traditional retailers. Some of them, including Sun Art Retail and Gome Electrical Appliance Holdings, are investing heavily in their own e-commerce sites to retain their share of the market.
Firms must spend more on marketing and discounts, which gives an advantage to those which have the largest capital.
Another option is the local and convenience store, which people visit because they are close by their home or work. They buy a small number of items and go frequently. The stores can easily monitor the demands of their customers and adjust their stock.
In November last year, Carrefour opened its first convenience outlet, Easy Carrefour, in the Minhang district of Shanghai. It will be first of a chain.
China has one convenience store for every 5,000 residents, compared with 2,000 in Japan and Taiwan.
China is leading the world in a retail revolution. The foreign retailers must adapt or perish.
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