China Consumer

Supermarket sweep

Carrefour admits to mistakes in China strategy

Bags and baguettes: Carrefour’s new strategy to lure Chinese shoppers

When Carrefour conducted its latest market research on the Chinese market, it discovered a number that no one seemed to be able to explain. Although it knew that it hadn’t opened a single outlet in Fuyang in Anhui province, its surveying suggested it had 160 stores in the city.

As it turned out, a local firm had been using a name bearing striking resemblance to Carrefour’s own Chinese name Jialefu, which means “Every Happy Family”.

So early this month Carrefour filed a lawsuit against Anhui Jiale and its subsidiaries in Fuyang, claiming that it was infringing upon the Carrefour trademark, reports Xinhua.

A local knock-off is only one of the problems currently plaguing Carrefour in China, a market it entered in 1995. The French retail giant has been undergoing a painful transition as it struggles to compete with a series of aggressive rivals in the world’s most populous market.

The company, which opened 22 new stores last year (the most of any of its overseas markets) still lags behind its competitors in new store openings. Walmart opened more than 50 stores in China last year. RT-Mart, which is partially owned by another French retailer Auchan, is also opening an average of two new stores a month, says Shaun Rein, managing director of the China Market Research Group in Shanghai.

Carrefour sales leadership is also slipping. In 2009, RT-Mart recorded Rmb38.8 billion ($5.7billion) in revenues, surpassing the French retail giant’s Rmb33.5 billion, says research firm Euromonitor. It was the first time Carrefour had lost its pole position as China’s largest foreign retailer.

Last month the French chain also closed down its only outlet in Xi’an in Shaanxi province, the first time it had shut up shop since its expansion in mainland China accelerated in 2005. That year Beijing relaxed rules, allowing foreign retailers to open stores nationwide.

So what’s gone wrong for Carrefour? In a recent interview with CBN Weekly, Carrefour China President Eric Legros admitted to management missteps.

One of the reasons for Carrefour’s slip in market share, says Legros, is that the management system was “too flexible”. Unlike the more centralised system of procurement and coordinating logistics employed by retailers like Walmart, Carrefour encouraged a system in which local managers at each outlet were permitted to manage their own pricing, as well as negotiate on promotional campaigns with suppliers.

This flexibility gave ample room for managers to adapt quickly to local competition, which was useful when the company was in rapid expansion mode.

But on the flipside, the leeway also encouraged corruption at a local level. In 2008, eight supervisors of Carrefour stores in Beijing were convicted of taking kickbacks from suppliers.

Since 2007, in an effort to stamp out corruption and reinforce pricing discipline, Legros has been consolidating decision-making authority through several new regional units directly controlled by Carrefour’s China headquarters. Promotional activities at stores also need approval from head office.

But the efforts to centralise have created problems of their own, with many of the more experienced managers growing disgruntled at the reforms. Many complained that the new pricing processes were time-consuming and inefficient. Other branch managers argued that they had lost their ability to influence the bottom line, which was unfair when their bonuses were linked to store performance. According to the Global Times, many store managers have voted with their feet. Resignation levels have created a personnel crisis.

Carrefour says it has learned lessons from the experience. “We are now trying to strike a balance between centralisation and decentralisation,” Legros tells CBN Weekly.

But analysts say that Carrefour needs a further overhaul. In particular, a criticism is that its retailing strategy is outdated. Carrefour’s stores have a “ruckus atmosphere,” resembling the street market, says China Market Research Group’s Rein. The strategy worked in the past when Chinese shoppers were less sophisticated. Today, it’s a turn-off for middle-class shoppers.

The closing of the Xi’an outlet was another painful lesson. Legros admits that it was slow to arrrive in the city, failing to notice the rapid expansion of its competitors in Xi’an. It then struggled to win local market share.

Perhaps as a result of its experience in Xi’an, Carrefour announced in July that it was entering into a joint venture with Baolongcang, a major hypermarket operator in another province, fast-growing Hebei.

Competition in Hebei is already heating up. Walmart has announced that it is opening a supermarket in Shijiazhuang, the provincial capital. Tesco announced in February that it was opening an outlet in the same city. But analysts say Carrefour’s latest JV will give it a leg-up against its international competitors. Baolongcang already operates 11 hypermarkets in Hebei and Shandong province.

Despite the setbacks, Carrefour remains committed to a growth strategy. The company says it plans to open at least 30 stores in China in each of the next four years. By 2014, says Legros, Carrefour will have 300 outlets versus 156 today.


© ChinTell Ltd. All rights reserved.

Exclusively sponsored by HSBC.

The Week in China website and the weekly magazine publications are owned and maintained by ChinTell Limited, Hong Kong. Neither HSBC nor any member of the HSBC group of companies ("HSBC") endorses the contents and/or is involved in selecting, creating or editing the contents of the Week in China website or the Week in China magazine. The views expressed in these publications are solely the views of ChinTell Limited and do not necessarily reflect the views or investment ideas of HSBC. No responsibility will therefore be assumed by HSBC for the contents of these publications or for the errors or omissions therein.