“In the world of business, bad news often surfaces serially: you see a cockroach in your kitchen; as the days go by, you meet his relatives,” Warren Buffett wrote in his annual letter to Berkshire Hathaway shareholders this year.
The investment mogul was referring to Britain’s largest grocer Tesco, which at one point had Berkshire as its biggest shareholder (it first purchased the stock in 2006, and raised its stake to over 5% in 2012).
Buffett acknowledged he’d made a “huge mistake” to indulge in “thumb-sucking” rather than cut his losses after Tesco issued four profit warnings and got embroiled in an accounting scandal. The 84 year-old conceded defeat last year, offloading the entire Tesco holding and taking a loss of $444 million.
Also cutting the ties with Tesco this year is a Hong Kong-listed firm which had aspired to become the “Walmart of China”. China Resources Enterprise (CRE) said last month that it will sell its supermarket business, including a joint venture with Tesco in China, to its state-owned parent for $3.6 billion. CRE will focus instead on its beer business (see WiC279).
And while Tesco may have failed to improve its fortunes by partnering with a formidable Chinese partner (CRE is still one of the country’s most influential state-controlled firms), a rival supermarket giant plans to double-down on the bet it has made on the Chinese consumer.
The world’s biggest retailer Walmart said late last month it plans to expand its Chinese footprint by nearly a third with 115 new stores to be opened by 2017. The new outlets will be located mostly in major cities such as Shanghai and Shenzhen and will create 30,000 jobs. Walmart also plans to spend $50 million to remodel more than 50 existing stores.
“Our aim is to become an integral part of China’s economy,” chief executive Doug McMillon told a news conference in Beijing. “China is a top priority.”
The American grocer’s renewed push in China comes despite slowing growth in the domestic economy, and at a time when competitors like Carrefour have been cutting back. According to the Securities Daily, total gross floor area among retailers dropped 2.3% in 2014 (the first decline ever), while the number of closures for supermarkets and department stores hit a record of 201 units (compared with 35 in 2013).
Nor has Walmart’s track record in China always been convincing. After 18 years of operations, its 411 stores there contributed only about 2% of the company’s global revenues last year. In some cases that’s because local retailers have been undercutting its low-price strategy. But in others it’s because it has misjudged the market. “The retailer has had problems in understanding discerning Chinese consumers as their buying decisions aren’t always price driven. They are more inclined towards tailor-made products and a shopping environment that reflects local preferences,” Forbes magazine suggests.
Same-store sales fell in the most recent quarter, although Walmart’s share of the hypermarket sector grew for eight consecutive quarters to the end of 2014.
Still, some commentators are warning that the expansion plans may not be fully implemented. “Could it be just another smoke screen?” National Business Daily asked. “Walmart has unveiled ambitious expansion plans several times before. But in reality the numbers don’t seem to have added up.”
Walmart is also facing more competition from the e-commerce sector, with Tencent and Alibaba increasingly focused on the burgeoning opportunity in online-to-offline (020) commerce. The American giant is trying to expand into online retail itself, through its 51% stake in Yihaodian, and it is promising to better integrate this part of its business into its existing network of stores in the months ahead.
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