The retail retreat

Sold 80% of its Chinese business

Such was Carrefour’s reputation when it first came to China in 1995 that the French hypermarket chain earned local status as the retailing equivalent of the Whampoa Military Academy (set up in 1927 as China’s version of West Point).

Chinese retailers were soon poaching its managers in the hope that the executives would bring insights from an outsider that was setting new benchmarks in their industry. Indee, at a time when most city dwellers still did their grocery shopping at wet markets and small stores, the first visit to Carrefour’s all-in-one hypermarkets was an eye-opener for consumers as well.

Perhaps that’s why Carrefour’s retreat from China almost a quarter of a century later has come as a shock to many older shoppers.

Last week it announced it was selling an 80% stake in its China business for Rmb4.8 billion ($700 million) to local retailer Suning. Carrefour will keep a 20% stake and two seats out of seven on the unit’s supervisory board, although onlookers say the sale signals the company’s fuller exit from the world’s biggest consumer market, following a difficult period in which it has struggled against the marauding forces of e-commerce and other domestic competition.

Since opening its first store in Shanghai 24 years ago, Carrefour had expanded its network to 210 hypermarkets and 24 convenience stores. But Carrefour China reported a net loss of Rmb578 million last year, according to a statement from Suning.

Besides its tussles with competitors, Carrefour has also been grappling with how to maintain a healthy relationship with suppliers. As a premium retail brand in the past, the French firm was able to charge high “entrance fees” to local suppliers that wanted their products on Carrefour’s premium shelves, Southern Weekend reports. The newspaper reckons that Carrefour’s profit margins were built for years on “squeezing its suppliers” in this way but that it has struggled in recent years to charge the same premiums. In 2003, for instance, a number of suppliers in Shanghai and Nanjing joined forces to boycott Carrefour. In 2006, the dairy giant Mengniu publicly threatened to pull its products from the hypermarket’s shelves.

The ceding of majority control comes after a long search for a local partner for the Chinese unit. It also coincides with a period in which a growing number of foreign retailers have been scaling back their presence or joining forces with locals to stay afloat. Britain’s Tesco, France’s Auchan, and Lotte Mart and E-Mart from South Korea have all pulled back from the Chinese market in recent years.

Germany’s Metro AG is also looking to sell its Chinese business and just days after Carrefour’s announcement, Japanese department store Takashimaya said it will close its only outlet in the country (in Shanghai’s prime shopping district) in August.

In the official notice the Japanese brand claimed that “a changing consumption structure and stiff competition” made it impossible to sustain profitability.

Some other major retailers show fewer signs of retreating, including Walmart, which now runs more than 400 supermarkets, working with JD.com for online sales and delivery services (see WiC331).

Indeed, Walmart announced this week that it will be investing Rmb8 billion over the next 10 years to upgrade its logistics capacity. Analysts said the investment will help it push deeper into fresh food and grocery sales, a growing shopping segment.

Amid talk that foreign investors are no longer confident about the prospects for the retail industry, People’s Daily countered this week that sales are still growing at an annual rate of over 9%. So what message might be being sent by Carrefour, a firm that the same newspaper described as “the Godfather of Chinese retailers”? Perhaps that Chinese consumers no longer find it worthwhile to linger too long in one-stop-shop hypermarkets when so many other shopping options now exist.

Carrefour’s move also opens new avenues to Alibaba, which holds a 20% stake in Suning. Both companies have been investing in bricks-and-mortar retailers to seed an empire where offline and online shopping are completely integrated in what Alibaba terms ‘new retail’.

© ChinTell Ltd. All rights reserved.

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.