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Question
Paper
Integrated
Case Studies - I (MB3J1): October 2008
Case Study∗ (100 Marks)
• This section consists of
questions with serial number 1 - 5.
• Answer all questions.
• Marks are indicated against each question.
Read the case carefully and answer the following
questions:
1.
“The Chinese market is a
lucrative destination for international players because of its huge population
base, but stringent regulatory norms hold them back from entering China”. In
this context,
a.
Analyze the major business
environmental factors in China that have attracted retailers such as Carrefour.
b.
Discuss the challenges faced by Carrefour while
expanding in China.
2.
“Entry strategy plays an
important role in the international expansion of a company”. Explain why
companies enter into foreign markets and the entry modes available to retailing
companies. Why do you think Carrefour adopted the joint venture mode of entry
in China?
3.
“As Carrefour and Wal-Mart were
quickly moving toward a frontal clash, questions arose in observers’ minds
regarding which chain was better prepared to win in an increasingly global
marketplace”. In the light of the strategies adopted by foreign companies like
Carrefour and Wal-Mart in China, do you think Carrefour has a competitive edge
over Wal-Mart? Discuss.
4.
“Retailers are no longer just
concerned about cost control, instead they view supply chain as a key element
of their business strategy”. In this context, explain the significance of
efficient Supply Chain Management (SCM) in retailing. Also discuss the SCM
related challenges that retailers need to deal with when operating in countries
such as China. Elucidate the factors that contributed to Carrefour having an
efficient SCM in China.
5.
“Carrefour had decentralized its
operations, giving full freedom to store managers to operate their stores to
differentiate themselves from the competition while satisfying and delighting
their customers”. Analyze the role and responsibilities of store managers at
Carrefour. Is Carrefour right in giving the store managers complete freedom in
choosing the products according to the local demands?
<Answer>
( 15 marks)
( 10 marks)
<Answer>
( 25 marks)
<Answer>
( 18 marks)
<Answer>
( 20 marks)
<Answer>
( 12 marks)
Carrefour’s
Strategies in China
“Carrefour
has gotten it right in China – and, in fact, they’re doing mass retailing
globally much more successfully than the iconic Wal-Mart, earning twice
Wal-Mart’s revenue. What Carrefour is doing right (in additional to grabbing
and building as many retail outlets as it can in the big cities) is simple:
They’re selling in a Chinese way to Chinese consumers. You can pull your own
seafood from tanks. You can select from bins of fresh produce. It’s more like a
Shanghai outdoor market than a Paris indoor one. That’s the customer experience
the Chinese consumer wants.”1
– Paul K. Ward2, CRM Consultant, in 2005.
“China represents a huge market when it has
acquired its WTO membership. But it’s no easy way to stand
∗
The case is prepared only for the purpose of examination and not to
illustrate effective or ineffective performance of the company. The case
contains factual information adapted to and combined with other information to
enable analysis of the given topics.
Page 1 of 32
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1 
Paul K. Ward, “Goofing up Global CRM,”
www.crm2day.com, September 06, 2005.
2
Paul K. Ward is known for his
work in the area of CRM, Perceived Customer Value, branding and strategy in
China.
3
“No Easy Way to Win in China:
Carrefour,” People’s Daily Online, March 31, 2004.
4
Carrefour’s hypermarkets occupied
floor space between 5,000 sq meters and 20,000 sq meters. They offered more
than 70,000 food and non-food products like household products, medicines, and
clothes.
5
Hard discount stores occupied
area between 200 and 800 sq meters and sold a range of 800 food products.
Carrefour’s hard discount stores were named Dia, Ed, and Minipreco.
6
As of October 24, 2006, 1 Euro =
US$ 1.254.
7
Rebecca MacKinnon, “China’s
Reforms Produce Winners, but More Losers,” www.cnn.com, October 1999.
8
In China, wet markets can be
found all across the country. These markets sell fresh fish, chicken, and live
mammals and reptiles, generally in an open environment.
9
Founded in 1995, CTR Market Research
is the leading market research company in China. CTR provides different
services that include interpretation of information, market segmentation,
advertising, media research, and business research.
10 Don Lee, “A Chinese Lesson for Big Retailers,” Los Angeles Times, July
02, 2006.
11 Prior to the advent of free service, the sales clerks picked up the
necessary items for consumers from the shelves. Under free service, the
customers were given shopping carts or baskets, which they used to collect the
individually priced items placed on the shelves.
12 Delhaize Fréres-Le-Lion is a part of The Delhaize Group, a food retailer
headquartered in Belgium. Founded in 1867, the group operates food supermarkets
in North America, Europe, and Southeast Asia. As of December 2005, the group
operated 2,636 stores. It recorded sales of € 364.9 million and profit of €
18.6 million.
13 Subsequently, Carrefour suspended the US operations in 1993, as the
stores were not profitable.
14 The supermarkets were between 1,000 and 2,000 sq. meters in area and
offered mostly food products and household merchandise at competitive prices.
Carrefour’s supermarkets were called Champion, GS Norte, Gb, and Marinopoulos.
15 Established in 1950, Promodès SA played a major role in promoting
supermarkets in France. During the 1960s and 1970s, Promodès expanded its
operations into other countries in Europe and South America.
16 Uni President Enterprises Corporation is one of the leading business
conglomerates in Taiwan and the largest food retailer.
17 Hayet Sellami, “Carrefour China: A Local Market,” www.cityweekend.com,
April 28, 2005.
18 Each store employed about 500 people at different levels including the
store manager, department heads, and store management staff.
19 According to China’s WTO commitments in 2001, foreign retailers were
allowed to establish joint ventures in five economic zones and six Chinese
cities. In the next year, all provincial capitals were to be opened up to
foreign investors and in the third year, the limitations regarding investments
were to be lifted.
20 Retail Forward Inc. is a Columbus, Ohio, based firm that focuses on
management consultancy services, market research, and executive development.
21 Jenny Summerour, “The China Connection,” Progressive Grocer, January 01,
2002.
22 “No Easy Way to Win in China: Carrefour,” People’s Daily Online, March
31, 2004.
23 Owned by the Bailian Group and controlled by the Shanghai City
Government, Shanghai Lianhua supermarket is the largest retailer in China.
Established in 1991, it operated through different store formats including
hypermarkets, supermarkets, convenience stores, chain drug stores, and
e-business stores. In 2003, Shanghai Lianhua and Shanghai Hualian merged to
form the Bailian Group.
24 RMB (Renminbi) is the Chinese currency; it means people’s money. The
unit of Renminbi is a yuan & with smaller denomination called jiao and fen.
The conversion among the three is 1 yuan = 10 jiao = 100 fen. The currency
exchange rate as on October 24, 2006 was 1 US$ = 7.89 RMB
25 The Beijing Shoulian Group is an enterprise group with more than 10
retailers. It is a state owned company engaged in logistics and department
store operations.
26 “French Firm Opens First Asian Store in Beijing,” People’s Daily Online,
June 25, 2004.
27 Hayet Sellami, “Carrefour China: A Local Market,” www.cityweekend.com,
April 28, 2005.
28 The Chinese meal consisted of carbohydrate rich products like rice,
noodles, and steamed buns accompanied by dishes made of vegetables, meat, or
fish. The meal usually ended with fresh fruits or a sweet.
29 “Carrefour Focuses Growth on Mall-based Retail Outlets,” Shanghai Daily
News, January 20, 2006.
30 Don Lee, “A Chinese Lesson for Big Retailers,” Los Angeles Times, July
02, 2006.
31 Maria Trombly and Betta Plebani, “In China, Complex Supply Chains Yield
to Simple Systems,” www.ciocentral.com, November 07, 2005.
32 Carol Matlack, Wendy Zellner, Frederik Balfour, “Carrefour in a Corner,”
BusinessWeek Online, October 11, 2004.
Page 2 of 32
out a winner here. China is nearly as big as Europe and each area
differs from any other. We have to keep on learning something new. We must know
customers’ wishes and expectations, therefore offering them more added values.”3
– Jean-Luc Chéreau, Chairman,
Carrefour China, in 2004.
THE ‘GREAT MALL’ OF CHINA
In 2006, France-based Carrefour Group (Carrefour),
the second largest retailer in the world, successfully completed eleven years
of its operations in China (Refer to Exhibit I for the top 25 food retailers in
the world in 2005). As of September 2006, Carrefour operated in China through
its 80 hypermarkets4 and around 250 hard discount stores5. China was Carrefour’s sixth largest market, with sales of over €6 2.06 billion in 2005 (Refer to
Table I for the top six markets of Carrefour).
Being one of the first foreign companies to enter
the Chinese retail industry, Carrefour played a major role in bringing about a
retail revolution in the country. It leveraged on its experience in the
international markets and introduced a few of its global best practices into
the Chinese market. Carrefour had adopted a decentralized management structure,
where all store managers in China operated stores with complete freedom.
Carrefour sold private label products and designed the stores according to the
convenience of Chinese customers. By procuring the majority of its products
locally, Carrefour was able to ensure their freshness, an attribute considered
important by Chinese consumers. In China, where vast economic, social, and
cultural differences existed among different provinces, Carrefour was able to
cater to the needs of different customers successfully.
Table I
Carrefour
– Top Six Markets (2005)
|
Country |
Revenue
(In € million) |
|
France |
44,468 |
|
Spain |
13,619 |
|
Italy |
7,320 |
|
Belgium |
5,285 |
|
Brazil |
3,944 |
|
China |
2,064 |
Source:
Carrefour Annual Report, 2005.
Till the 1980s, the retail industry in China was fully controlled by the
Government. The department stores run by the Government provided little in the
way of convenience. According to Wang Zhirong, General Manager
33 Uighur, also known as Xinjiang Uyghur Autonomous Region, is located in
the west of China bordering Tibet, Mongolia, Russia, Russia, Kazakhsthan, Pakistan,
and India. Uighur is populated by Uyghurs (45.21% of the population according
to 2000 census) and Kazakhs (6.74% of the population) who are the Muslim Turkic
groups. The number of Han Chinese in the region stood at 40.58% as of 2000.
34 As per Islamic law, the Muslims are forbidden to consume pork.
35 The Arabic word Halal refers to food that is permissible according to
the Islamic dietary laws, which specify the type of food Muslims can consume.
The laws also specify the method of slaughtering animals, and sea food that is
permissible to consume.
36 “Foreign Businesses Cash on Chinese Holiday Economy,”
www.peopledaily.com.cn, January 20, 2004.
37 RNCOS is a market research consulting services company that specializes
in the pharma, IT, telecom, retail, and services industries.
38 M+M Planet conducts research on grocery retailers and retail markets.
The company maintains a database of leading grocery retailers along with
details of trends and happenings in the industry. The firm functions from
London, Frankfurt, Brussels, and Tokyo.
39 “Chinese Rule Change to Spark Retail Growth,”
www.foodanddrinkeurope.com, March 19, 2004.
40 “Carrefour Admits Selling Fake Louis Vuitton Handbags in China Store,”
www.finanznachrichten.de, April 20, 2004.
41 Wu-Mart is one of largest retail chain store operators in China and is a
non state-owned enterprise. It operates hypermarkets, supermarkets, and
convenience stores in several major cities across China.
42 MerryMart Chainstore Development Co. Ltd. is the fourth largest
supermarket in Beijing.
43 GOME opened its first retail outlet in China in 1987 and adopted the
name GOME in 1993. The company began its expansion in China in 1999. In 2004,
it was recognized as one of the ‘Key and Strategically important enterprises’
by the Ministry of Commerce, China.
44 China Paradise Electronics Retail Ltd., established in 1996, is the
leading retailer of household appliances and consumer electronics products.
45“Carrefour
Focuses Growth on Mall-Based Retail Outlets,” Shanghai Daily News, January 20,
2006.
46Hayet
Sellami, “Carrefour China: A Local Market,” www.cityweekend.com, April 28,
2005.
Page 3 of 32
of Tian Bai department store in
Dalian, concepts like customer service and choice were unheard of. She said,
“It didn’t matter how you did your job, when customers came they had to wait
until the shop assistants were in a good mood before begging them for help.”7
Carrefour entered China in 1995, when the Chinese
Government had partially opened the retail sector. The country’s economy was in
the growth phase and the urban consumers were shifting their preferences from
the wet markets8 and state-owned stores, to foreign retailers like Carrefour which
provided convenience along with a wide range of products in hygienic
surroundings (Refer to Exhibit II for retail industry in China). Carrefour went
on to strengthen its position in the country and by 2005, it had emerged as the
sixth largest retailer in China. It was also the largest foreign retailer in
the country (Refer to Table II for the leading retailers in China in 2005).
Table II
China’s
Leading Retailers (December 2005)
|
Retailer |
Sales
(RMB Billion) |
No. of
Stores |
|
Bailian Group |
72.1 |
6,345 |
|
Gome |
49.8 |
537 |
|
Suning |
39.7 |
363 |
|
Vanguard |
32.0 |
2,133 |
|
Wumart |
19.1 |
659 |
|
Carrefour |
17.4 |
70 |
|
China Paradise |
15.2 |
225 |
|
Trust-Mart |
13.2 |
96 |
|
Parkson China |
11.0 |
36 |
|
Lotus |
10.1 |
61 |
|
Wal-Mart China |
9.9 |
60 |
|
B&Q
China |
5.2 |
48 |
Source:
China Chain Store & Franchise Association and www.carrefour.com.
According to Beijing -based CTR Market Research9, Carrefour was the major
retailer in 15 of the largest cities across China, with a market share of more
than 5%. Between 2006 and 2010, Carrefour projected revenue growth of above 20%
per annum in China and planned to open about 80 more hypermarkets in the
country by 2009. Commenting on Carrefour’s success in China, Los Angeles Times reported, “By joining
with Chinese partners, adapting to local culture, and employing a supply chain
that includes 18-wheel trucks and three-wheel bicycles, Carrefour has become
the biggest foreign retailer operating in China.”10
BACKGROUND NOTE
In the early 1950s, the grocery industry in France
consisted mostly of family-owned stores. Though there were some big department
stores, these charged exorbitant prices. At that time, the concept of free
service11 was gaining popularity and there were very few stores in France that
were providing such services. In 1959, two entrepreneurs, Marcel Fournier
(Fournier) and Louis Defforey (Defforey) from Annecy in Eastern France decided
to establish a large discount supermarket. Initially, they offered 7,000 shares
to 10 stockholders and purchased a facility that was under construction.
On the ground floor of the building, the duo
started constructing a supermarket. They sold the upper floors, thereby
obtaining the required capital to run the business. Fournier was the President
of the venture and Defforey’s son Denis was the General Director. Fournier
decided to name the venture Carrefour (Crossroads), as the store was located at
the convergence of five roads in Annecy. At that time, another businessman
announced his intentions of opening a similar store in Annecy. Fournier and
Defforey decided to open a store at other premises as their facility was still
under construction. Fournier used the basement of his office to open a store in
January 1960. As the threat of competition was looming large, the duo offered
products at the lowest prices. Soon, the store became very popular among
customers.
Before the new store at Annecy was opened in June
1960, a campaign was launched to familiarize customers with the concept of
supermarkets. The campaign was highly successful and in the first two days,
Carrefour attracted more than 15,000 customers. To accommodate the vehicles of
the customers, Carrefour expanded the parking lot, but this was not enough to
cater to the growing number of visitors. Several traffic jams were reported in
the store’s vicinity and the founders concluded that locating supermarkets in
the congested urban areas was not practical and decided to move to the suburbs.
The next supermarket that was opened was also in the Annecy region in
Cran-Gevrier. It had a large parking lot and a discount service station that
sold petrol on a no-profit, no-loss basis.
In 1962,
Carrefour decided to open a store at Sainte-Genevieve des Bois, a Paris suburb
30 km away from the main city where land was easily available at low price.
Before the store was constructed, Defforey and his brother went to the US to
observe the retail practices prevalent there. After observing the huge stores,
the
Page 4 of 32
discounts offered, the low prices and services that
the customers were provided with, they decided to adopt similar practices in
France. In 1963, they opened a new store. It occupied an area of 2,500 square
meters and had enough space to park more than 400 cars. The store provided a
wide range of items, including grocery at discounted price, stocked items like
clothing, sporting equipment, electronic goods, and auto accessories. The store
was inaugurated in June 1963 and its huge size earned it the name ‘hypermarket’
in the media. Carrefour offered products at the lowest prices as compared to
its competitors by negotiating with wholesalers and suppliers. The concept of a
hypermarket found instant acceptance among the younger people, suburban dwellers,
and price conscious consumers.
In 1965, Carrefour formed two divisions – Carrefour
Supermarché led by Fournier and Denis and Grands Magasins Carrefour, headed by
Defforey and Fournier’s son. Carrefour continued its expansion, opening huge
stores in France. In 1966, a 10,000 sq. meters hypermarket was opened in Lyon
and a 20,000 sq. meters hypermarket was opened in Vitrolles. In 1967, Carrefour
opened an office in Paris to coordinate the activities of its different stores.
In 1970, the company’s shares were listed on the Paris stock exchange. By 1971,
Carrefour operated 16 wholly owned stores in France, had an equity interest in
five stores, and also operated seven stores through its franchises.
GOING GLOBAL
Carrefour started making efforts to enter international
markets after a law was passed in France in 1963 to restrict the development of
large stores. For international expansion, Carrefour adopted the route of
forming alliances with local partners. Its first international venture was in
Belgium, where it opened an outlet in association with Delhaize Fréres-Le-Lion12, in 1969. Carrefour expanded its
operations outside Europe by opening a hypermarket in Brazil in 1975.
In 1978, Carrefour developed a hard discount store
format, under the banner Ed in France (Refer to Exhibit III for different
banners of Carrefour). The store offered a limited range of products at very
low prices. By 1985, Carrefour was operating in ten countries and had
introduced private label products that were priced 10-20% lower than the
branded products and were of superior quality. In 1988, Carrefour entered the
US market by opening a 330,000 sq. feet hypermarket in Philadelphia. Another
hypermarket in the country was set up in 199113. In 1992, Carrefour reported
sales of €17.86 billion and a net income of €271 million.
In the early 1990s, Carrefour concentrated on
establishing larger stores (area greater than 2,500 sq. meters) and sold off
the smaller stores. In 1996, a law was passed in France under which food
wholesalers were not allowed to give any extra discount to supermarkets14 and hypermarkets. They were to
charge an equal price from all retailers. Due to this, the advantage the bigger
stores had in terms of cost was lost and the price of the products was uniform
across different types of stores.
The legislation was passed with the aim of
protecting the small retailers from the onslaught of supermarkets and
hypermarkets, which got a higher discount from the wholesalers and offered
products at a lower price. The legislation led to the growth of discount chains
that stocked private label brands. The chains started providing products at
prices much lower than those at Carrefour.
By then, Carrefour’s European operations were
spread across Austria, Britain, Switzerland, The Netherlands, Germany, Italy,
Belgium, and Spain. Ed was operating in Britain and Italy. Carrefour’s South
American operations were doing well and the company was aggressively expanding
into those markets. In 1996, Carrefour opened 30 hypermarkets across the world,
of which 15 were in Argentina, Brazil, and Mexico. By 1997, the number of
stores in South America had increased to 60.
Some of the acquisitions made in the late 1990s
helped Carrefour in becoming the top retailer in Europe. In 1998, Carrefour
acquired Comptoirs Modernes SA, which brought 790 supermarkets into Carrefour’s
fold. In 1999, Carrefour acquired Promodès SA15, which owned several
hypermarkets, supermarkets, convenience stores, and discount stores in France
and other European countries. This acquisition made Carrefour the second
largest retailer in the world.
By December 2005, Carrefour was operating in 29
countries with 12,028 stores (including franchisees and partners) and employed
436,000 people (Refer to Exhibit IV for Carrefour’s consolidated store network
excluding partners as of December 2005 and to Exhibit V for sales per store
format and region). For the financial year ending December 2005, Carrefour
generated revenues of €74.49 billion and net income of €1.58 billion (Refer to
Table III for financial summary of Carrefour for the financial years 2004 and
2005).
Table III
Financial
Summary of Carrefour
(In € million)
|
Particulars |
2005 |
2004 |
|
Net Sales |
74496.8 |
72668.0 |
|
Other Income |
1011.3 |
1038.6 |
|
Total Revenue |
75508.1 |
73706.6 |
|
Cost of
Sales |
(58626.5) |
(57052.8) |
Page 5 of 32
|
16881.6 |
16653.8 |
|
|
SG&A |
(12232.7) |
(11888.2) |
|
Activity
contribution before depreciation & provisions |
4648.9 |
4765.6 |
|
Depreciation
& Provisions |
1474.2 |
1494.7 |
|
Activity
contribution |
3174.7 |
3270.9 |
|
Non-current
income & expenses |
(20.4) |
(76.0) |
|
EBIT |
3154.3 |
3194.9 |
|
Net
debt and other expenses |
(454.6) |
(484.5) |
|
Income
before tax |
2699.6 |
2710.4 |
|
Income
tax |
(793.9) |
(805.9) |
|
Net
income from recurring operations |
1905.7 |
1904.5 |
|
Total
net income |
1582.1 |
1859.6 |
Source: www.carrefour.com.
CARREFOUR IN ASIA
During the late 1980s, the economy of several Asian
countries like Taiwan, Singapore, South Korea, Thailand etc. was rapidly
growing. In order to reap the benefits of this growth, Carrefour started its
Asian operations by entering Taiwan in 1989. It established a joint venture
with Uni President Enterprises Corporation16. Initially, Carrefour aimed at building a hypermarket of 10,000 square
meters, similar to its hypermarkets in France. On studying the Taiwanese
market, Carrefour realized that the store format which had been successful in
other parts of the world would not be successful in Asia as the Asian retail
markets were different from the other markets, in terms of the layout of the
stores, the products offered, the frequency of shopping, and highly price
sensitive customers. Carrefour decided to adapt the stores, the products, and
management culture to suit the local environment.
Carrefour changed its strategy of building the
hypermarkets in large open urban lands and began operating in high density
urban areas in pre-existing buildings, when it found that the consumers in Asia
did not wish to travel long distances to purchase groceries and other items as
they shopped frequently and in small quantities. The first store in Taiwan was
located in Kaohsiung and occupied an area of around 3,500 sq. meters. The
number of products offered was limited and Carrefour concentrated on selling
high volumes at competitive prices. Tapping the Taiwanese market was a big
challenge for Carrefour as the tastes of the people in the country changed
rapidly. The best selling products in a typical Taiwanese store changed within
a span of just six months. In order to assess the trends, Carrefour opened
pilot departments in the stores, where new products were tested. These
departments interviewed some of the customers and studied their purchasing
habits to monitor the changing customer preferences. The information was later
communicated to all their other stores in the country.
Local store managers and department heads were
given more autonomy. The department heads were made responsible for the hiring
of staff, procurement, product selection, and vendor management. They were
responsible for achieving the budgeted sales and maintaining profit margins. In
the initial years, senior executives from France were made department heads.
Later, local employees were trained and promoted to assume higher
responsibilities.
Carrefour leveraged upon the experience it had
gathered in Taiwan to expand into other Asian markets. The next destination was
Malaysia, followed by China (Refer to Table IV for details of Carrefour’s entry
into Asian countries). Carrefour’s Taiwanese experience acted as a prelude to
its Chinese venture. The hypermarkets that Carrefour opened initially in China
were similar to the ones that existed in Taiwan. According to Eric Deliers
(Deliers), Regional Manager, Carrefour China, “Our Taiwanese experience was
very important. It was Carrefour’s laboratory not only for China but for all
Asia.”17
ENTRY AND EXPANSION IN CHINA
Carrefour identified China as one of the most
important foreign markets, after the country partially opened its retail sector
for foreign investments in 1992. Carrefour entered China in 1995 by forming a
joint venture with the Chinese management consulting firm Zhong Chuang, and
established a firm called ‘Jia Chuang’, in which it held the majority of
shares. During that time, consultancy firms in China were not allowed to invest
in any other businesses so Zhong Chuang set up another company, Chuang Yi Jia
as a commercial enterprise. The joint venture company, ‘Jia Chuang’ managed the
hypermarket that was opened in Shanghai, in a residential area, to cater to the
needs of the middle class in the city. The hypermarket was named Chuang Yi Jia.
As Carrefour had a major say in running and managing the store, the signboards
had the name ‘Carrefour’ displayed on them. The next store was opened near the
International Exhibition Center, in the north-east part of Beijing, one of the
prominent localities in the city.
Table IV
Carrefour
– Entry into Asia
|
Country |
Year of Entry |
|
|
Page 6 of 32 |
|
1989 |
|
|
Malaysia |
1994 |
|
China |
1995 |
|
South Korea* |
1996 |
|
Thailand |
1996 |
|
Singapore |
1997 |
|
Indonesia |
1998 |
|
Japan* |
2000 |
Source: www.carrefour.com.
*Carrefour
exited Japan in 2005 and South Korea in 2006.
In China, as per the guidelines issued by the State
Council, in the retail industry, Sino-foreign joint ventures were allowed to
operate only at a few locations. As per the next set of guidelines issued in
1999, the foreign retail joint ventures were allowed to operate in more cities.
Some of the conditions stipulated were that the joint ventures should be
approved by the Central Government, and that only three outlets could be opened
in each of the approved cities (Refer to Exhibit VI for Regulations of the
Retail Industry in China).
Instead of approaching the Central Government of
China for approval, Carrefour entered into direct deals with the local
governments of various provinces and convinced them that it would create
employment opportunities18 in their region, generate taxes for the government, and help in the
overall development of the region. The local government officials were quick to
grant Carrefour the required approvals. By 2000, Carrefour had established
hypermarkets in Shanghai, Beijing, Chongquing, Qingdao, Shenyang, and Wuhan.
Carrefour expanded its operations in China rapidly
and by early 2001, it had 27 hypermarkets in 12 cities across the country, some
of which were fully owned by the company. At that time, Carrefour was the third
largest retailer and also the largest foreign retailer in China. Though foreign
retailers were allowed to open only three outlets per city, Carrefour managed
to open more than three outlets in several cities with the approval of local
authorities.
But there was trouble brewing for Carrefour. In
early 2001, a cabinet level body, the State Economic and Trade Commission
(SETC), carried out an investigation into Carrefour’s entry and expansion in
China, after receiving complaints from its competitors. It was widely reported
in the Chinese media that Carrefour had flouted Government stipulations
regarding the ownership stake in retail joint ventures and the number of stores
in each city. During the course of investigation, it was found that in some of
the stores, Carrefour owned a 100% stake. The Commission ordered Carrefour to
suspend further expansion in the country, in order to regularize its position
according to the Chinese retail industry regulations.
During the investigation, it was found that
Carrefour had opened stores at locations that the Central Government had not
opened up for foreign investments19. Industry analysts opined that Carrefour had deliberately flouted the
rules and set up stores without approval from the Central Government. They felt
that the company’s management was of the view that once its operations had
spread widely across the country, Carrefour would be among the major employers
and tax payers, a fact which would force the Central Government to subsequently
grant the required approvals.
This episode led to the then CEO and Chairman of
Carrefour, Daniel Bernand, tendering a public apology during his visit to China
in March 2001. On the bureaucracy in China, Chief Economist of Retail Forward
Inc.20 pointed out, “They can overlook rules and then suddenly decide to
enforce them. That happened with Carrefour recently.”21
By November 2001, Carrefour announced that the
differences with the Chinese Government had been resolved and that the SETC had
allowed the company to continue expanding its activities. As per the agreement
reached with the SETC, Carrefour agreed to set up 10 procurement centers across
the country, to procure Chinese goods which would be sold through its stores
all over the world. Carrefour also admitted local partners and all its stores
in the country were 35% owned by the local partners with the remaining held by
the company. According to Jean-Luc Chéreau (Chéreau), Chairman, Carrefour
China, “Sometimes we may have problems in understanding Chinese laws and
regulations. But we always respond positively to the government’s requirements
when problems arise, by rectifying our operation to make sure that the law is
fully observed.”22
In April 2002, SETC and Carrefour reached the final
agreement, according to which the number of holding companies was to be reduced
to 13. Earlier, Carrefour had 27 holding companies, one for each store. After
the agreement, Carrefour formed one holding company for each of the 13 local
partners (Refer to Table V for some of Carrefour’s partners in China). In June
2002, Carrefour transferred 35% of its ownership in three hypermarkets to two
local firms – Chengda and Harbin Dongli Equipment Company.
Carrefour opened its 28th Chinese store in Hangzhou,
Capital of Zhejiang province, in June 2002 and by the end of 2002, its sales in
the country had increased to €1.19 billion as compared to €1.18 billion in
2001. By then, the number of hypermarkets had increased to 30, with four
hypermarkets in Beijing and six in Shanghai.
Page 7
of 32
By 2003, Carrefour had a presence
in 15 cities and its sales had reached to €1.32 billion. In 2003, Carrefour
opened its first hard discount store, Dia, in China by entering into a joint
venture agreement with Shanghai Lianhua Supermarket23. They planned to open 300
discount stores in different residential areas in Shanghai by the year 2007.
The joint venture was set up with total capital investment of RMB24 90 million. The goods sold
through the discount stores were to be priced 10-15% lower than the goods sold
through the hypermarkets. These stores were targeted at low and middle income
customers and stocked only 1,500 varieties of goods as against the 35,000
varieties stocked by a typical hypermarket.
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Table V
Carrefour
– Partners in China
|
Year |
City |
Partner |
|
1998 |
Wuhan |
Hanshang Group |
|
2000 |
Shanghai |
LianHua |
|
2002 |
Kunmig |
Kunmig Department Store Co. |
|
2002 |
Xi’an |
Jin Hua Group |
|
2002 |
Guangzhou |
Guangzhou Department Store Co. |
|
2002 |
Liaoning |
Liaoning Chen Da |
|
2002 |
Harbin |
Harbin Dong Li |
|
2002 |
Tianjin |
Tianjin
Quan Ye |
Source: Jean Kinsey, Min Xue, “Supermarket
Development in China,” Globalization, China and the Industry Studies Program,
Solan Workshop, MPI Worcester Polytechnic Institute, June 16-17, 2005.
In 2004, Carrefour introduced the Champion
Supermarket format in China, in association with a local partner The Beijing
Shoulian Group25. By 2005, there were eight Champion supermarkets spread across the
country. These stores were different from hypermarkets and were located in
residential areas. According to Philippe Pauze, President, Champion
Supermarket, “Champion supermarkets are specifically engaged in providing
various fresh foods, including vegetables, fruits, meat, seafood, and snacks to
the customers, so our chain stores are all set up in residential communities.”26
In 2004, Carrefour recorded total sales of €1.62
billion. During the year, Carrefour opened 21 new hypermarkets and total
hypermarkets in China increased to 62. By the end of 2004, the restrictions on
the number of outlets that foreign retailers could operate per city were lifted
and the foreign retailers were allowed to have 100% ownership. The Chinese
Government also announced that the remaining restrictions in the retail sector
would be removed by the end of the year 2007.
In late 2005, Carrefour had stepped up efforts to
acquire complete ownership of its Chinese stores. It bought the remaining stake
owned by most of the local joint venture partners in its stores. Between 2004
and 2005, Carrefour’s revenues in China grew by 25% and it remained the largest
foreign retailer in the country.
In the first half of 2006, Carrefour generated
sales of €1.26 billion in China, a growth of 28.1% as compared to the first
half of 2005. As of May 2006, Carrefour had opened 230 Dia outlets in China.
The number of hypermarkets had grown to 79 by July 2006 (Refer to Exhibit VII
for Carrefour’s hypermarkets in China as of September 2006).
THE STRATEGIES
While most of the global retailers and consumer
product companies considered China to be a single huge market, Carrefour
adopted a different approach. It considered the country to be comprised of
several small markets. The company approached these markets with flexible
procurement, store management, marketing, and service strategies. According to
Chéreau, “China does not have an easy market, the country is more like a continent
where the variety of cultures and traditions set up challenges for us in how to
adapt our concept to each area. We have to deal with strong differences between
cities and provinces, and with different institutional levels in the country.
However, it is a fantastic challenge to adapt our concept to each area of the
country.”27
Since the initial years of its operations in China,
Carrefour concentrated on keeping the prices low, keeping in mind the fact that
for Chinese consumers, price was the main consideration. This made Carrefour’s
hypermarkets very popular among the Chinese consumers. Even when the first
outlet was opened in Shanghai, the managers were confident that their prices
were lower than the prices charged by any other store in the city.
Carrefour sold a wide variety of goods, which
attracted consumers to the stores. Convenience was another factor that the
company promoted. The Chinese consumers had to visit several places like wet
markets for purchasing fish, grain markets to pick up grocery items, and small
specialty stores to obtain other items.28 Carrefour provided the convenience of obtaining all these items under
one roof.
The
basket size in the Chinese stores of Carrefour was much smaller than that in
the European stores, as Chinese consumers bought in small quantities, several
times a week. They also liked to test new products by buying in small
quantities, before they made bulk purchases. Daily shopping for fresh foods was
widely
Page 8 of 32
prevalent in China, especially during summer.
OPENING NEW STORES
Carrefour planned the expansion of its operations
in China in a systematic manner by establishing regional offices. For instance,
the headquarters of the East China region in Shanghai took care of expansion
activities in that region. The headquarters of the Northwestern region was
located in Xinjiang and it was responsible for expanding business in that
region.
Carrefour chose the store location based on the
available space and the purchasing power of the people in that location. Before
opening new stores, it sent a team to conduct a detailed study of the store
location followed by a study on the culture, customs, and traditions of that
region. As a part of the study, the team also assessed the purchasing potential
of the local people and assessed their purchasing habits. Carrefour was careful
in choosing the locations and opened stores in highly populated areas.
Few consumers in China owned cars and they went to
stores either on bicycles or by public transport. Therefore, unlike in the
western countries, where the stores were located on the city outskirts, most of
the Carrefour stores were located at the center of the city with easy access to
public transport.
As Carrefour expanded its operations into smaller
Chinese cities, the capital investment in stores was comparatively lower as the
stores were smaller. The volume of goods at these stores was less and they were
in small assortments. Carrefour did not follow a particular store format and
encouraged the local store managers to come out with the best format for the
store and sales plans to ensure that the store broke even within two to three
years.
In early 2006, Carrefour decided to explore the
potential for establishing hypermarkets in major shopping malls. Carrefour
initially explored the opportunities in Shanghai and opened three outlets by
January 2006. These hypermarkets were located in the Nanfang Shopping Center in
Minhang District, the Lianyang Thumb Square in Pudong New Area, and in the
Dragon City shopping mall in Minhang District’s Qibao area. Commenting on this
strategy, Wang Xiaozhong, Corporate Communications Manager of Carrefour, said,
“The shopping mall has many resources including stores, counters, and
restaurants that will attract many more customers than if we opened an
independent store somewhere. Since opportunities to locate stores in the
downtown are getting scarce as the city becomes more crowded, we’d like to make
use of big shopping malls and their adjoining neighborhoods in suburban areas.”29
STORE MANAGEMENT
As a part of its global strategy, Carrefour had
decentralized its operations, giving full freedom to store managers to operate
their stores. Decentralization was one of the important factors for Carrefour’s
success in international markets, with store managers being empowered to take
decisions according to the local traditions and customs.
Each store was managed by the store manager and
department heads. The store manager allotted a particular portion of the store
to each department head, who was responsible for managing that portion,
including the products stocked, promotions to be carried out, etc. The store
manager along with the department head decided on the product mix for that
portion of the store. All personnel of a particular department reported to the
department head. Each store was treated as a profit center.
The store managers decided on the products to be
sold in the stores according to the needs and preferences of the customers. The
suppliers had to negotiate prices with each store separately. This policy was
highly useful in China, where centralized supply system and logistics network
were not well developed. As each store was free to procure the required
products, the store manager and department heads procured products that were in
high demand at that store. The managers carefully monitored the shelf space and
if the products stacked in the shelves did not generate enough sales within
45-60 days, they were removed.
The performance of the store managers was judged by
their ability to meet the forecasts and profit targets. The monthly performance
of individual stores was communicated to all other store managers in China.
Good performance was rewarded with higher incentives and an increase in salary.
SUPPLY CHAIN MANAGEMENT
The supply chain system that Carrefour had in China
was quite flexible. According to Christophe De Nays Candau, In-charge of
Organization, Systems and Supply Chain in Carrefour, China, “It’s (supply chain
system) highly fragmented, so we have to keep our flexibility. We still use the
bike if it’s the lowest cost and most efficient.”30
Carrefour procured most of the goods from within
China to cater to its local operations. Since its initial years of operation in
China, about 85% of the stock sold was procured locally. This helped Carrefour
maintain lower prices compared to other foreign retailers, who sold imported
products.
Buying and stocking local products was part of
Carrefour’s strategy to cater to the needs of the local customers. However, the
items stacked were also different depending on the location of the store.
Stores that were located in places that had a large expatriate population had
more imported goods, different kinds of European and American food items, and
the prices charged were also higher. The outlets in other locations
Page 9 of 32
were designed to cater to the
needs of the local Chinese population and stacked predominantly Chinese
products and food items. In order to differentiate the imported products from
the Chinese products, the flag of the country from which the product had been
obtained was displayed on its label.
Carrefour established the global procurement
headquarters at Shanghai and the first procurement center was opened in the
southern Chinese province of Guangdong in July 2001. In 2002, Carrefour set up
its global purchasing center in Shanghai, through which goods were sourced
across the country. Through this center, Carrefour procured Chinese products to
be sold in the international markets. The total procurement from China was
valued at US$ 1.6 billion in 2002, US$ 2.15 billion in 2003, and US$ 3.2
billion in 2004. The purchasing centers were located in Beijing, Guangzhou,
Wuhan, Ningbo, and Dalian. By 2006, 11 purchase centers had been established
across the country (Refer to Table VI for the products procured by Carrefour
from China).
Carrefour sold its own label of products that were
of good quality. As of 2006, there were over 2000 products that Carrefour sold
under its own label which included food, grocery, daily necessities, and
clothes. These products were priced 20-40% below the market price of competing
branded products (Refer to Exhibit VIII for the private label products sold by
Carrefour in China).
Carrefour faced several supply chain related
problems in China owing to its size of operations and the country’s
underdeveloped logistics infrastructure in some of its store locations (Refer
to Exhibit IX for a note on supply chain and logistics network in China) . For
instance, it took more than seven days to cover the distance between Shanghai
in the East of China and Urumqi in Western part of the country by truck. In
December 2005, Carrefour had more than 9,000 suppliers who supplied 250,000
different products. On an average, each of Carrefour’s stores had around 40,000
products. A distributor with a countrywide network was not present in China.
The country had more than four million transport companies with a combined
fleet of around five million trucks.
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Table VI
Carrefour
– Products Procured from China (2006)
Food/Fresh Products
Grocery,
fruits, vegetables, flowers, aquatic products.
Hard Goods
Household ware, kitchen ware, household tools, stationary, outdoor
products, car accessories, luggage, furniture, toys, gifts, sports and fitness
products.
Electronics
Kitchen
appliances, air conditioners, fans, refrigerators, cameras, audio and video
products, computers.
Textiles
Baby and
children wear, home textiles, women’s wear, men’s wear, shoes, gloves, ties,
other accessories.
Source: www.sourcing.org.cn.
Vendor relationship was another issue that
Carrefour had to deal with, in China. Local suppliers were not conversant with how
to maintain optimum inventory levels. They did not maintain a standard size for
delivering goods, nor a standard as far as product reference or order forms
were concerned; concepts like service levels were unheard of. Carrefour taught
the suppliers how to do business efficiently and provided them with the
required support. Many of the suppliers were provided with computers and
software to manage inventory and standardize their products and orders.
Carrefour chose to use the services of local distributors who were well versed
with the local networks. The company was not in favor of building a national
network for distribution or an automated supply chain system in the country.
Commenting on the supply chain problems, Philippe Riou, Executive In- charge, Supply
Chain Development, Carrefour China, said, “The distribution is not mature. The
producers are adjusting to the production network and many companies merge and
go into partnerships, making it difficult for us to have a stable source and
very difficult to design a proper, efficient network.”31
Carrefour China Foundation for Food Safety, a Hong
Kong-based non-profit foundation, organized training programs for farmers and
other fresh food suppliers in China. The training program, called Agricultural
Products Quality and Safety, was launched in 2005. The farmers and suppliers
were taught about food safety, health, and hygiene and about preserving the
freshness of their products. Within one year, Carrefour had conducted ten
training programs at eight different locations. The company was of the view
that such training would help it in providing the consumers with products of
higher quality and safety.
LOCALIZATION STRATEGIES
Carrefour believed that its stores should reflect
the local environment and complement the local culture. The western style
hypermarket was customized by Carrefour to effectively cater to the needs and
preferences of Chinese consumers (Refer to Exhibit X to see a few visuals of a
typical Carrefour hypermarket in China). Most of Carrefour’s stores in China
were spread across several floors and ramp escalators were provided to move
shopping carts between the floors. The sides of the escalators were stacked
with snacks and eatables.
Page 10 of 32
Carrefour stocked products
preferred by the local population, in a manner they demanded. In some of the
company’s stores in China, the department selling fresh food and groceries was
designed to resemble the local outdoor markets. According to Sherry Ding,
Analyst with AT Kearney Inc., “There are ladies calling out to the customers,
saying: ‘Come here, this is fresh and good,’ just like in street markets.”32 For instance, for selling fish,
Carrefour adopted different methods. In its stores near the coastline,
consumers preferred live fish so Carrefour sold live fish. In the middle and
western China, away from the coast, consumers preferred frozen fish and this
was stocked by the stores there. In many of the Carrefour stores in China,
consumers could buy live fish, turtles, and meat that was usually not available
in Europe. Other products like instant noodles, the most preferred snack among
the Chinese, was sold across all Carrefour stores in the country.
The fresh food section was located at the entrance
of the store and products that were available there were similar to the
products available in the other local fresh food markets. However, Carrefour
ensured that these food items were available at lower prices and in a clean
environment. This made customers who purchased fresh food several times a week visit
Carrefour regularly.
In a store in Uighur33 populated mostly by Muslims,
Carrefour did not sell pork34. All the products sold at this outlet was certified halal products35. Other local products sold in
the store were 20 varieties of raisins, roasted mutton, sausages made of horse
meat, and locally popular snow lily tea. When the store was opened, the store
displayed 20 varieties of French wine priced above US$ 10. However, not much
wine was sold, as it was very expensive going by the Chinese standards.
Carrefour soon replaced these with local wine priced at US$ 1 per bottle.
For important festivals like the Spring festival, which fell on the 15th day of the first lunar month
according to the Chinese calendar (between January and February), Carrefour decorated
its stores according to traditional practices and stacked the stores with
several items like paper lanterns that were used during the festival. According
to one of the shoppers at a Carrefour store in Beijing, “I like to do my
pre-festival shopping in Carrefour. They have got all the stuff from imported
cheese to homegrown fresh fruits and vegetables.”36 Christmas was widely celebrated
in China by the retailers, as the Western holidays were also gaining popularity
in the country especially in the urban areas, with several Chinese returning
home from foreign countries. Carrefour displayed a wide variety of Christmas
trees and sold several Christmas goods like Santa Claus toys, hats, items to
decorate Christmas trees, etc. at all its stores.
THE HR PRACTICES
Though Carrefour had expanded its operations all
over the world, the organization remained lean as several of its key functions
were decentralized. The headquarters had a staff of only about 20, with around
10 people involved in the HR function. Between the stores spread all over the
world and the headquarters in France, one tier of regional managers was
present. Each of the regional managers functioned with just around five
assistants. The store managers reported to these regional managers.
Training was an ongoing process all over the world,
and Carrefour spent around 2% of its payroll costs on it. The store managers
and department managers were responsible for providing training to the staff.
The best performing stores were asked to share their experiences and best
practices with other stores in the country. The top management of these stores
helped other stores to train the staff, select and display the merchandise, and
lay out new business plans.
At Carrefour, all the employees were told that they
were responsible for people, assets, money, and merchandise. Each employee was
given a job description that revolved around these areas and the training
programs were designed to fulfill the needs of the job. Performance reviews
provided employees feedback about how they had fared in each area.
In the initial years, the top level management at
Carrefour China comprised French people. Their main task was to infuse
Carrefour’s values, spreading the philosophy of serving customers and managing
the staff of each store. (Refer to Table VII for Carrefour’s Values). Carrefour
chose 25 employees from Taiwan, who were well versed with Carrefour’s business,
to start its Chinese operations. These employees spoke the local language and
were well versed with the local market conditions and customs. They were
instrumental in setting up the initial operations of the company in China and
infusing Carrefour’s global practices into Chinese operations.
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Table VII
Carrefour
Values
Freedom: Make consumption more democratic by giving the customer the freedom to
purchase products at prices that correspond to their buying power.
Responsibility: Give all the employees the right to take the initiative and assume
responsibility for actions.
Sharing: Distribute the wealth created among the customers, employees,
shareholders, and suppliers in an equitable manner.
Respect: Listen to, understand, and
respect individual cultures, differences, and interests worldwide.
Page 11 of 32
Integrity: Act with
transparency and respect commitments.
Solidarity: Foster solidarity among the women and men in the group and contribute
to the development of the local economy while preserving social equity.
Progress: Encourage innovation and make
commitment to a process of continual improvement.
Source: www.csreurope.org.
In the year 2000, Carrefour started the ‘Carrefour
China Institute’ to train the employees in Carrefour’s values. In the
institute, the first such in Asia, Carrefour provided training to its staff
including store managers. The center was spread over an area of 1,200 square
meters and had conference rooms, training rooms, a computer room, and a
restaurant. The employees were trained in the areas of security, services, cash
handling, etc.
For fresh graduates and some of the internal
personnel, Carrefour conducted training in three stages. The training was both
theoretical and practical. For the managerial staff, Carrefour conducted a
six-month training consisting of theory and practical training. The trained
personnel were absorbed into the organization as store directors and were
equipped to negotiate with local government officials, suppliers, and vendors.
The Carrefour Elite training was aimed at training
managerial level personnel. The training was for a period of one year and
senior officials from Carrefour also participated in it. The participants in
the program were given an opportunity to visit Carrefour Stores in China and
also in France. All the personnel trained in the institute were required to
sign a three- to five-year contract to work for Carrefour.
THE CHALLENGES
Industry analysts opined that customizing its store
formats to suit local needs had been Carrefour’s main strength and this had
helped the company penetrate large and tier II cities in China. Despite rapid
growth, Carrefour’s share in China was only at around 1.5% of the organized
retail market. According to RNCOS37 market research report 2005, China’s retail market was valued at around
US$ 756 billion, with organized retail accounting for 20% of the market.
Analysts feared that though the Chinese Government
had opened up its retail sector to foreign retailers, foreign retailers may
continue to face regulatory problems in China. It was widely reported in the
Chinese media that the Government was drafting new rules to restrict the
expansion of large foreign retailers. These rules were expected to be announced
in December 2006, and were likely to impede Carrefour’s growth plans. According
to the new rules, foreign retailers would be asked to file details of their
proposed expansion plans and hold public hearings on the impact of their
outlets on the communities. The public hearings that included regulators,
industrial associations, academic experts, competitors, and local residents
were widely practiced in North America and Europe and China was believed to be
interested in adopting a similar practice. According to Robert Gregory, Retail
Analyst with M+M Planet Retail38, “The Chinese authorities seem intent on protecting the local retailers
and it is likely that they will continue to give the locals more favorable
treatment in the future – maybe preferential treatment when it comes to store
locations, for example.”39
Apart from regulatory challenges, Carrefour faced
several other problems in China. The price of commercial property, especially
in the urban areas in China where Carrefour had a significant presence, was
increasing rapidly. Due to this, the rent and lease costs were growing along
with the marketing and advertising expenses of the company.
Moreover, Carrefour’s Champion supermarkets in
which Carrefour owned a 65% stake (35% was held by local partner Shoulian) were
not able to withstand the onslaught of competition. In April 2006, Carrefour
sold its stake in four of its Champion supermarkets to Shoulian and planned to
sell its stake in the remaining four by the end of the year. Carrefour’s Dia
venture also faced problems and incurred losses in 2006. The local partner –
Lianhua – had signed a termination agreement to exit from the venture.
The company’s procurement policy, under which the
individual store managers and department heads were free to decide on the
merchandise to be purchased at their store, was also criticized. Due to this
policy, widespread corruption was reported in several stores of Carrefour in
China. For instance, in April 2006, the Shanghai court imposed a fine of
£25,000 on Carrefour for selling fake Louis Vuitton handbags through its
stores. The judge criticized Carrefour’s purchasing policies that had allowed
counterfeiters to sell their products through the company’s stores. Three bags
each priced at £3.60 were sold before the stock was removed from the shelves.
The official from Carrefour said, “It is true that fake bags appeared in our
store, but we did not intend this to happen. It is impossible for us to check
every product. Perhaps we can only say our staff didn’t have much knowledge of
luxury products.”40
In June 2006, Carrefour was reported to be selling
fake Adidas footballs. In Carrefour’s Fangzhuang store in Beijing, fake Adidas
footballs were sold at RMB 59.90, while the original Adidas football that was
used for the World cup was priced at RMB 900. This problem was also attributed
to the flaws in Carrefour’s local procurement policies. In order to address
these issues, Carrefour formed a special investigation team, which conducted
surprise checks on the stores and interacted with the suppliers.
In 2006,
consolidation and expansion had become the norm in the Chinese retailing
industry. Wu-Mart41
Page 12 of 32
acquired a 75% stake in MerryMart42 in January 2006. With this
acquisition, 100 stores of Merry Mart in Beijing became a part of Wu-Mart and
its share in Beijing’s supermarket business increased to 10%. GOME Electrical
Appliance Holding Ltd. (GOME)43 acquired China Paradise44 in July 2006, creating a US$ 10 billion retail chain. Other competitors
like the Thailand-based Lotus Supercenter were on an expansion spree. Lotus
Supercenter announced plans to increase its store count in China by 100 in
2006. Several local retail chains like GOME were also expanding at a tremendous
pace, opening one store every thirty hours.
On October 17, 2006, Carrefour’s global archrival
Wal-Mart, announced the acquisition of Taiwan-based Trust-Mart for US$ 1
billion. Trust-Mart operated through its 108 stores across 20 provinces in
China. The company had 30,000 employees in the country. Wal-Mart planned to
acquire Trust-Mart in a phased manner, acquiring 31 stores initially. The other
Trust-Mart stores were to be acquired by Wal-Mart in the next three years.
With this acquisition, Wal-Mart would be able to
lay its hands on a wide spread, well-developed network of stores. Industry
analysts opined that the acquisition would also help Wal-Mart in sprucing up
its supply chain. They felt that after this acquisition, Wal-Mart could give a
tough competition to Carrefour in China and would be in a position to challenge
leading Chinese retailers like Bailian Group (Refer to Exhibit XI for
Wal-Mart’s key business strategies in China). Carrefour was strong only in some
regions in China and the competitors were gaining ground in several other
regions (Refer to Exhibit XII for geographical spread of Carrefour’s operations
and its competitors in China).
Notwithstanding these challenges, Carrefour
remained positive about its future prospects in China. According to Patrick
Ganaye, General Manager of Carrefour China-East, “Competition is fierce, but we
don’t view it as bad news as long as we can figure out new ways to attract
consumers.”45
Carrefour had several plans to retain customers and
attract new customers in China. It planned to introduce loyalty cards in China
by the end of 2006. Another area that Carrefour was looking at was offering
consumer credit for the purchase of home appliances. Carrefour’s management
appeared to be well aware of the competition it had to face in the Chinese
markets. According to Deliers, “This is not a chess game, where you kill the
king at the end. Rather, it is like the game of Go, where you have to
continuously develop a new strategy to expand on the map.” 46
Exhibit I
Top 25
Food Retailers in the World (December 2005)
|
Rank |
Company |
Headquarters |
Sales |
No. of Stores |
|
|
(In billion US$) |
|||||
|
|
|
|
6,380 |
||
|
1 |
Wal-Mart |
USA |
312.4 |
||
|
2 |
Carrefour |
France |
92.7 |
12,028 |
|
|
3 |
Tesco |
UK |
69.6 |
2,365 |
|
|
4 |
Metro Group |
Germany |
69.3 |
2,458 |
|
|
5 |
Kroger |
USA |
60.6 |
3,726 |
|
|
6 |
Ahold |
Netherlands |
55.3 |
6,422 |
|
|
7 |
Costco |
USA |
52.9 |
460 |
|
|
8 |
Rewe |
Germany |
51.8 |
11,242 |
|
|
9 |
Schwarz Group |
Germany |
45.8 |
7,299 |
|
|
10 |
Aldi |
Germany |
45.0 |
7,788 |
|
|
11 |
Walgreens |
USA |
42.2 |
4,953 |
|
|
12 |
Auchan |
France |
41.8 |
2,686 |
|
|
13 |
Edeka |
Germany |
41.3 |
19,001 |
|
|
14 |
Albertsons |
USA |
40.4 |
2,541 |
|
|
15 |
AEON |
Japan |
40.2 |
10,132 |
|
|
16 |
Safeway |
USA |
38.4 |
1,914 |
|
|
17 |
ITM |
France |
37.7 |
3,932 |
|
|
18 |
Leclerc |
France |
35.4 |
581 |
|
|
19 |
Seven & I |
Japan |
35.3 |
21,136 |
|
|
20 |
Tengelmann |
Germany |
29.8 |
7,730 |
|
|
21 |
Sainsbury |
UK |
29.2 |
808 |
|
|
22 |
Casino |
France |
28.3 |
9,388 |
|
|
23 |
Woolworths |
Australia |
28.0 |
2,744 |
|
|
24 |
Coles Myer |
Australia |
27.9 |
2,755 |
|
|
25 |
Delhazie
Group |
Belgium |
23.1 |
2,637 |
Source:
www.supermarketnews.com and www.carrefour.com.
Exhibit
II
Page 13 of 32
Retail Industry in China (2006)
China is among the fastest growing economies in the
world with a population of over 1.3 billion. In recent years, there has been a
rapid growth in the disposable income of the middle class population. Their
collective spending is estimated to cross US$ 500 billion by 2010. According to
the consulting firm Retail Forward, China was the seventh largest retail market
in the world as of 2005. The top six markets are the US, Japan, the UK,
Germany, France, and Italy. By 2008, China was tipped to climb up to the fifth
position.
The eastern parts of China are comparatively
wealthy and the markets in these regions are well developed. Even among the
well-developed regions, cities like Beijing, Tianjin, Shanghai, and Guangdong
are very well developed and the retail spending by the consumers in these
cities is much higher than the average in the country. According to estimates
by research firm IGD, the urban population of China would reach to 874 million
by 2030 from 529 million in 2004 with the influx of 345 million people from
rural to urban areas. This would provide vast opportunities for the retailers.
In 2005, retail spending in China stood at US$ 756
billion. The retail sales in 2006 were estimated to grow by more than 13% to
reach US$ 860 billion. With an estimated compounded annual growth rate in the
range of 8-10%, the retail sales in China are estimated to grow to US$ 2.4
trillion by 2020. The growth is estimated to be fueled by increase in income
levels across China. According to McKinsey, the number of households in China
with annual earnings between RMB 25,000 and RMB 100,000 is likely to grow to
200 million by 2015 from 42 million in 2003.
However, organized retailing in China has yet to
penetrate several areas. The top 100 chains in China account for only 10% of
the total retail sales. The share of the foreign firms was 23% when the total
sales of top 100 chains in China was considered. The sales of the top 100
retailers in China in 2005 stood at RMB 707.6 billion, registering a growth of
42% as compared to 2004. The number of stores operated by the top 100 retailers
reached 38,260.
In 2005,
the Chinese economy grew by over 8% and the events like the Olympic Games in
2008 and the Shanghai Expo slated for 2010 are expected to further accelerate
the economic growth. These events would have a positive impact on consumer
spending, further fueling the growth of the retail industry.
Supermarket Development in China
|
Time Period |
|
Development |
|
Details |
|
1980s |
|
Traditional grocery |
|
Mainly state owned and collectively operated. |
|
|
|
Stores |
|
Some are privately owned and operated |
|
Early 1990s |
|
Emergence of |
|
Stores of 300-800 sq. meters, which sold packaged |
|
|
|
Supermarkets |
|
foods and items for daily use were sold. The
fresh |
|
|
|
|
|
items sold were very few. Chains had fewer than
10 |
|
|
|
|
|
stores |
|
Late 1990s |
|
Net Store Formats |
|
Superstores in area of 20,000 sq. meters, along
with |
|
|
|
|
|
hyper markets and convenience stores |
|
|
|
Foreign Investment |
|
Entrance of multinational companies like |
|
|
|
|
|
Carrefour, Wal-Mart, Metro and 7-Eleven |
|
|
|
Coastal Cities |
|
Development was rapid in coastal cities like |
|
21st
Century |
|
|
|
Shanghai and Shenzhen. |
|
|
More new formats |
|
European style discounters, warehouse clubs and |
|
|
|
|
|
|
Minimarts. |
|
|
|
Geographic
Expansion |
|
Retail
chain expand outside their home provinces |
|
|
|
Merchandise Structure |
|
Wide variety of items, including more fresh |
|
|
|
|
|
produce and organic foods. Emergence of Private- |
|
|
|
|
|
label
store brands |
|
|
|
Mergers |
|
Chinese supermarket chains merged with both |
|
|
|
|
|
domestic
and foreign players |
|
|
|
Reform of traditional |
|
Traditional stores including mom and pop |
|
|
|
Stores |
|
groceries, state owned grain and oil shops, and |
|
|
|
|
|
kiosks were transformed into small supermarkets |
|
|
|
|
|
and convenience stores. Small independent |
|
|
|
|
|
supermarkets
also emerged. |
Adapted
from: Geping Guo, “Development of Supermarkets in China,” Supermarkets and
Agricultural Development Conference, Shanghai, May
2004. (www.fas.usda.gov)
Compiled from various sources.
Exhibit
III
Page 14 of 32
|
Banners |
Description |
Facts |
|
Champion |
International supermarket banner opened in |
Second largest supermarket chain in |
|
|
1969 in Bayeux, France. |
France. |
|
|
Covers range of household food needs based |
Average area is 1,500 square meters. |
|
|
on 4 key aspects: food industry expertise, |
Product ranges Reflets de France, |
|
|
fresh produce expertise, discount prices and |
Destination Saveurs. |
|
|
customer rapport. |
Active in Belgium, Spain, Poland, |
|
|
Concept – “the customer is always right” |
Greece and Turkey, Argentina and |
|
|
Mascot – Sporty |
Brazil. |
|
Dia |
Introduced in Spain. |
Operates in Spain, Greece, Turkey, |
|
|
Discount food products retailer offering high- |
Brazil, China, and Argentina, Portugal |
|
|
quality products at lowest prices. |
(Minipreco banner), France (Ed banner). |
|
|
Range of products between 1,600 and 2,000 |
|
|
|
food, personal care and cleaning products. |
|
|
Ed |
French hard discount banner introduced in |
Selling space ranges between 500 to |
|
|
1978. |
1,000 square meters. |
|
|
Provides 1,200 product references at low |
|
|
|
prices and offers convenience shopping. |
|
|
|
Concept – “convenience with discount |
|
|
|
prices”. |
Offers
products under different labels |
|
Carrefour |
International hypermarket banner introduced |
|
|
|
in 1973 in Spain. |
such as Carrefour, Filiere Qualite, Reflets |
|
|
Concept – “everything under one roof”. |
de France, Destinations Saveurs, Tex. |
|
|
Focus on product quality, safety and |
|
|
|
innovation with wide range of services like |
|
|
|
insurance, financial services, travel, car |
|
|
|
service, eye care, florists, and tickets sales. |
Leader
in France and has self-service |
|
8 a Huit |
Convenience store banner opened in France in |
|
|
|
1977. |
stores in France, West Indies, Guyana. |
|
|
Offers 2,000-5,000 products with a mixture of |
Retail space of 70 to 400 square meters. |
|
|
big brands and private labels. |
|
|
|
Concept – “8 am to 8 pm shopping.” |
Trademark
products include Reflets de |
|
Promocash |
Opened in 1965 in France as a cash and carry |
|
|
|
banner. |
France, Prorest, and Grand Jury. |
|
|
Supplies wholesale and retail goods, both |
|
|
|
foodstuffs and non-foodstuffs to restaurant |
|
|
|
owners, hoteliers, café proprietors and food |
|
|
|
trade professionals. |
|
|
|
More than 10,000 quality products available |
|
|
|
in 8 sections: fresh meat, seafood, fruit and |
|
|
|
vegetables, fresh grocery items, drinks, non- |
|
|
|
foodstuffs, groceries, wines and beers. |
Retail
spaces between 400 to 900 square |
|
Shopi |
Introduced in 1973 in France as a |
|
|
|
convenience store banner in urban and rural |
meters. |
|
|
areas. |
|
|
|
6,500 items including 2,500 fresh-food items |
|
|
|
and 1,000 own-branded products provided at |
|
|
|
supermarket prices. |
|
|
|
Consists of fruit and vegetable departments, |
|
|
|
wine shops, and personal care. |
Brands
featured are Destination Saveurs |
|
Proxi |
Chain of mini markets with full range of food |
|
|
|
products at affordable prices. |
and Reflets de France. |
|
|
Offers convenience services like home |
Sales area of 80 to 200 square meters. |
|
|
delivery, gas bottles, bakery and ATMs. |
Sales
area of 200 to 400 square meters. |
|
Marche Plus |
Convenience store located in the heart of |
|
|
|
urban districts. |
Distributes the Grand Jury brand which |
|
|
Product mix of 4,000 lines. |
has products that need strict |
|
|
Specializes
in fresh products including fruit |
specifications
to meet the consumers’ |
|
|
Page 15 of 32 |
|
Source:
“Carrefour, Creating a New Growth Platform,” www.carrefour.com, March 2006.
Exhibit
VI
Regulations
in the Retail Industry in China: Pre and Post 2004
Prior to 2004:
Prior to July 1992, foreign investment in the form
of joint ventures or wholly-owned subsidiaries was totally prohibited in the
retail industry in China. In July 1992, the Central Government, on an
experimental basis, allowed foreign investment in the retailing industry
through the establishment of joint ventures in Beijing, Shanghai, Tianjin,
Guangzhou, Dalian, Qingdao and the five special economic zones (Hainan,
Shenzhen, Zhuhai, Shantou, and Xiamen).
In June 1995, the Central Government listed the
retail industry in the Directory for Foreign Investment, although under the
“restricted” category, to encourage foreign investment in the industry. By the
year-end, the provincial and state governments had approved up to 300 joint
ventures. In mid-1998, the Central Government disallowed local government
approval and asked foreign-invested joint venture companies, which had taken
such approval, to restructure to conform with the 1992 provisions or close
down.
In June
1999, the Central Government issued more liberalized provisional rules on
foreign investment in
Page 16 of 32
the retailing industry. The rules
allowed foreign retailers to establish joint ventures cooperative retail, or
wholesale companies in Central Government administered cities, the five special
economic zones, and the capital cities of provinces and autonomous regions with
certain restrictions. They were:
The stake of the Chinese partner in any newly established wholesale
joint venture had to be at least 51% Specific requirements as per sales and
assets were to be followed by the joint ventures. Franchising and other forms
of indirect chain-store formats were prohibited
Foreign commercial joint ventures were not allowed to act as a commodity
import or export agent Commercial joint ventures were allowed to import
products they sold, limited to 30% of their total yearly sales revenue
Post 2004:
After 2004, when China allowed wholly-owned foreign
retailers to own their Chinese subsidiaries and open stores at any geographic
location of their choice without government permission. With the restriction on
the number of stores having been lifted, foreign retailers can open an
unlimited number of stores in any city. Also foreign retailers do not have to
meet any minimum criteria for sales, capital or assets, to enter the Chinese
market. Foreign companies are allowed to source global brand merchandise
locally without any stipulation that the goods purchased should be exported.
Foreign retailers are allowed to run all distribution activity inclusive of
transportation, wholesaling, and retailing.
Foreign Investment in China’s Retail Industry
|
|
Before
2004 |
After
2004 |
|
Geographic Restraints |
Retail limited to certain cities |
Restriction on retail lifted from |
|
|
like Beijing, Shanghai, etc. |
December 2004 |
|
Form of Vehicle |
Only Joint Venture |
Wholly foreign owned |
|
|
|
enterprises (WFOE) allowed |
|
|
|
from December 2004 |
|
Prerequisites for |
Annual sales volume of at least |
Good reputation No breach of |
|
Retail JV |
US$ 2 billion, assets at least |
national laws |
|
|
US$ 200 million |
|
|
Pre requisites for |
Annual sales volume of at least |
Good reputation No breach of |
|
Wholesale JV |
US$ 2.5 billion, assets at least |
national laws |
|
|
US$ 300 million |
|
|
Minimum registered |
RMB 50 million |
RMB 300,000 |
|
Capital for retail JV/WFOE |
(US$ 6.4 million) |
(US$ 36,245) |
|
Minimum registered |
RMB 80 million |
RMB 500,000 |
|
Capital for wholesale |
(US$ 9.7 million) |
(US$ 60,408) |
|
JV/WFOE |
|
Provincial
commerce |
|
Approval authority |
Ministry of Foreign Trade and |
|
|
|
Economic Cooperation |
authorities, MOFCOM |
|
|
(MOFTEC) |
|
Source:
US-China Business Council. (Retail Outlook for China, KPMG, October 2005).
With the removal of the restriction, hypermarkets,
supermarkets, and convenience stores have mushroomed in the wealthy coastal
cities in China. The number of specialty stores that sell non-food items like
apparel, electronic goods, furniture, etc. has also grown. Not only foreign
retailers like Carrefour, Wal -Mart, Metro, Ikea, and B&Q but several local
stores like Lianhua, Hualian, and Wu-mart were also operating hypermarkets and
supermarkets of international standards.
Compiled from various sources.
Exhibit
VII
Carrefour
– Hypermarkets in China (October 2006)
|
Location |
No. of Stores |
|
Beijing |
6 |
|
Shanghai |
10 |
|
Tianjin |
5 |
|
Chongqing |
4 |
|
Guangzhou, Guangdong Province |
4 |
|
Shenzhen, Guangdong Province |
5 |
|
Zhuhai, Guangdong Province |
1 |
|
Shenyang,
Liaoning Province |
4 |
Page 17 of 32
|
3 |
|
|
Harbin, Heilongjiang Province |
3 |
|
Qingdao, Shandong Province |
2 |
|
Jinan, Shandong Province |
1 |
|
Urumqi, Xinjiang Uygur |
2 |
|
Nanjing, Jiangsu Province |
2 |
|
Ningbo, Zhejiang Province |
1 |
|
Wuxi, Jiangsu Province |
2 |
|
Hangzhou, Zheijiang Province |
1 |
|
Suzhou, Jiangsu Province |
1 |
|
Xuzhou |
1 |
|
Hefei, Anhui Province |
2 |
|
Dongguan, Guangdong Province |
1 |
|
Changsha, Hunan Province, |
1 |
|
Wuhan, Hubei Province |
4 |
|
Chengdu, Sichuan Province |
4 |
|
Kunming, Yunnan Province |
4 |
|
Fuzhou, Fujian Province |
1 |
|
Xi’an, Shaanxi |
1 |
|
Xiamen, Fujian Province |
1 |
|
Zhengzhou, Henan Province |
1 |
|
Luoyang, Henan Province |
1 |
|
Nantong,
Jiangsu Province |
1 |
Adapted
from www.carrefour.com.cn
Exhibit
VIII
Carrefour
– Private Label Products sold in China
Carrefour Quality Line
The Carrefour quality line consisted of fresh products and was sold to
customers only after they met stringent quality standards, which included
origin, traceability, and supply chain principles. Carrefour sold pork, salmon,
apples, oranges, litchi, etc. under this line.
Carrefour Brand
The Carrefour Brand was launched in 2004 and was sold in all stores
across China. Carrefour sold more than 900 food and non-food products under
this line. To ensure the quality of the products, Carrefour made outside
laboratories conduct quality checks on the products.
Firstline Brand
Firstline is Carrefour’s own brand under which it offered a wide range
of kitchen appliances, audio accessories, and video accessories. In 2006,
Carrefour also introduced the European line of kitchen appliances, including
coffee makers, juice extractors, sandwich makers, toasters, egg beaters,
electronic ovens, etc.
French Touch Brand
French
Touch offered a wide range of clothing and household products of high quality.
Bang Products
Bang is
the label under which Carrefour sold popular low priced items.
Source: www.carrefour.com.cn
Exhibit
IX
A Note on
Supply Chain and Logistics Network in China
China has a vast size and a varied topography.
Despite initiatives taken for improving regional motorways and national
highways, the quality of road and rail network varies drastically between the
urban and rural areas. Roads are easily damaged due to the weight of overloaded
freight trucks. Until recently, drivers were given licenses based on truck size
rather than truck loads.
•
China’s logistics industry is
fragmented. Logistics accounts for an estimated 20 percent of GDP compared with
about 8 percent of GDP in the US.
•
In China, 21% of large
corporations (including multinational corporations) outsource logistics to
third-party logistics providers as compared with 45% in the European Union and
the US.
•
In Chinese firms, outsourcing
accounts for only 5 percent of all logistics spending, leading to massive
duplication and underutilization of supply chain assets, such as ocean shipping
containers.
Page 18 of 32
With this fragmentation, railway
and trucking traffic in China far exceeds the capacity the infrastructure was
designed to handle, leading to shortages of key commodities and increased
logistics costs.
Adapted
from Jeff Richards, Jihong Sanderson and Roger MacFarlane, “Understanding RFID
Adoption in China,” http://www.rfidjournal.com, February 07, 2005 and other
sources.
Exhibit X
Visuals
of a Typical Carrefour Hypermarket in China
Source: www.crienglish.com.
Source: www.admirabledesign.com.
Source:
www.admirabledesign.com.
Exhibit
XI
Wal-Mart
in China
Wal-Mart began groundwork for its Chinese
operations in 1994, and started actual operations in the country in 1996 by
opening its first Super Centre and Sam’s Club in partnership with Shenzhen
International Credit Investment Company in Shenzhen. China presented several
challenges to Wal- Mart, as it was the company’s first foray into Asia. The
consumers in Shenzhen reacted positively to Wal-Mart’s Chinese venture.
Wal-Mart established four development centers in Shenzhen, Kunming, Beijing and
Dalian to manage the Chinese operations. Gradually, Wal-Mart spread its
operations in the country.
Page 19 of 32
In Northern China, super center
was opened in association with Dalian Huanan Group Company Limited, in 2000. In
the East, a store was opened through a joint venture, Wal-Mart East China
Stores Company in 2002. In 2005, a store was opened in Shanghai through
Wal-Mart East China Stores Company.
In order to maintain low prices, Wal-Mart began
procuring goods locally, and opened procurement centers and distribution
centers in the country. As the goods were sourced locally, Wal-Mart was able to
maintain competitive prices. To ensure the quality of the products, Wal-Mart
sent its managers to suppliers’ factories and also maintained an extranet site
to share sales information and consumer’s expectations from the suppliers.
When Wal-Mart started its operations in China, the
workforce was completely American. Gradually, several Chinese were employed as
managers and shop assistants. Wal- Mart maintained a Chinese feel to its stores
by selling Chinese goods and having Chinese employees. The stores had wider
aisles and smaller checkout counters to cater to the needs of the Chinese
customers who shopped frequently and in small quantities. Wal-Mart designed the
packaging, uniform of the shop assistants, and the décor according to the
preferences of the Chinese consumers. Wal-Mart took enough care to train the
suppliers and employees and regularly featured on the list of most preferred
employers in China.
In the US and rest of the world, where Wal-Mart
operated, its success was attributed to its highly effective supply chain and
logistics. But in the Chinese market, Wal-Mart could not reap the benefits
attributed to the supply chain, as it was not well developed and was highly
fragmented. Wal-Mart also faced stiff competition from domestic and foreign
players active in the retail sector. Wal-Mart’s Everyday low pricing strategy
was easily copied by other retailers.
As of January 2006, Wal-Mart operated through 56
stores in China. As the stores were few and widespread, the distribution
centers could not be utilized fully. Another obstacle was the absence of
nation-wide distribution system, which limited Wal- Mart’s economies of scale.
The suppliers complained about the short lead time, sudden price reduction, and
other practices like squeezing the suppliers to maintain low prices, which
forced several suppliers to close down. The wages paid to the employees were
subjected to sharp criticism as they were very low. Another area of problem for
Wal-Mart in China was its store formats and location of the stores. With rigid
store formats, Wal-Mart was not able to customize the stores to the extent it
was necessary in China.
Wal-Mart’s limited exposure to international
markets also proved to be an impediment to its operations in China. Moreover,
China was the first Asian country in which Wal-Mart had started its operations.
As the Asian market was quite different from the other markets in world,
Wal-Mart took time to expand in the market, which gave a chance to other
domestic and foreign retailers to consolidate their position in the market.
Adapted
from various sources.
Exhibit
XII
China –
Spread of Competitors by Region* (March 2006)
|
|
South
West |
North West |
North |
North East |
East |
Central |
South |
|
Wal-Mart |
7 |
0 |
9 |
11 |
3 |
6 |
20 |
|
Carrefour |
9 |
3 |
15 |
10 |
16 |
7 |
13 |
|
Lianhua |
3 |
0 |
23 |
10 |
60 |
8 |
7 |
|
Wu-Mart |
0 |
0 |
45 |
0 |
10 |
1 |
0 |
* Stores
with floor space > 4,000 sq.meters.
Adapted
from China Resource Enterprise Limited, Global Roadshow, 2006.
END OF
QUESTION
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Page 20 of 32
Integrated Case Studies - I
(MB3J1): October 2008
Section A
1.
a.The Chinese market has
attracted foreign investors because of its huge size and < TOP > market
potential. Some predict that China will become in few years the world’s largest
economy. The following are the environment that contributed to the booming
Chinese retail business:
Economic: China is an emerging economy but a dual economy too, with a wealthy
urban professional and a poor country people. The gap between rich and poor has
grown almost as fast as overall income, meaning that inequality is increasing
nearly with the country’s development. There are huge income discrepancies that
are emerging within social groups and between regions.
Political: The political environment in China is undergoing a transformation. The
Old China defended the working class against the capital class. China has just
begun its transition to become a democratic country. China’s new leadership has
come to power facing enormous economic, environmental, political and social
challenges at home.
Socio-
cultural: The Chinese population is 1.3
billion of people. The past decade has seen a phenomenal rate of growth in
China. It represents an important potential of customers for the retailers. The
consumer buying process is consistent across cultures.
The level
of consumer involvement: The Chinese are seen as having a
low level of involvement when purchases are for private consumption but a high
level of involvement when they are buying products for their social or symbolic
value. Since the Chinese greatly value social harmony and smoothness of
relationships within the extended family, the social significance of products
are highly important be it to express status, gratitude, approval or even
disapproval.
The level of risk consumer’s associate with a
purchase varies enormously across cultures and as such it is an important
variable in consumer behavior. It will determine whether a consumer will go for
the comfortable purchase or is willing to try new products and services.
The Chinese are sensitive to social risk and the
loss of social status if a wrong buying decision is made. The level of brand
loyalty found in a market is also closely related to the perception of risk.
There are huge variations in attitudes to brand loyalty across different
cultures.
In China, consumers are loyal, not really brand
conscious and not really used to cross product comparisons, except the urban
consumers, who have a wide recognition of foreign brand names. Indeed, there
are sharp differences between rural and urban attitudes. On a national level,
Chinese consumers prefer to buy domestically manufactured products rather than
comparable foreign-made goods. But, consumers in big cities are less likely to
favor domestic products than are consumers nationally.
And, typical Chinese consumers do not want to be
amongst the first to try a new product. They are reluctant to be pioneers,
especially for an expensive, unrecognized (in terms of brand), foreign product.
Opportunities
for retailers: China remains a huge opportunity
with many untapped sectors and a large population and growing middle class
demanding new products and serves. The key factors lie in adopting sound
business practices and taking a long term view to developing a local business.
With the opening of the Chinese markets, Chinese customers have been offered an
increasing array in the products and services they can choose to consume. As a
result, distinctly different customer segments have emerged based on age,
income, experiences and evolving value systems. Retailers, whether local or
foreign, must not only recognize these differences but also cater for the
diverse needs of consumers if they plan to have a lasting and profitable
presence in China.
Legal:
Government policies are barriers in international markets. In China, policies
Page 21 of 32
and regulations are often applied
inconsistently and can vary between regions. Both foreign nationals and Chinese
officials themselves lack a solid understanding of China’s policies. The key
policies which act as barriers to entry relate to foreign exchange control
policies and foreign investment policy. Concerning foreign exchange control
policies, the state is responsible for formulating and promulgating the
principles, degrees and regulations for foreign exchange control.
The acquisition of foreign exchange is a
significant non -tariff barrier to doing business in China. Concerning foreign
investment policies, China encourages joint ventures. The barriers to access
China’s distribution system make this system unstable: wholesalers at the local
and central levels, new collective and private enterprises and factories, as
well as some foreign companies compete to distribute consumer products. Local
ministry of commerce wholesalers traditionally served as intermediaries between
the producer and retail outlets.
Foreign companies are not permitted to engage in
wholesale trade. A strict isolationist policy kept foreign goods and trends out
of reach of the average Chinese person, because Chinese consumers have less
abundant information and purchasing experience with foreign products, they may
rely more heavily on information such as the producing country’s image in
product evaluation.
Rules and
Regulation regarding the entry of foreign players: The retail industry in China was protected till the year 1991 as no
foreign retailer was allowed an entry into the country. The industry till this
time was dominated by local retailers. The retail sector was opened on a trial
basis in 1992, where foreign companies were allowed to operate in six cities –
Beijing, Shanghai, Tianjin, Guangzhou, Dalian and Qingdao and five special
economic zones – Shenzhen, Zhuhai, Xiamen, Shantou and Hainan Island. The
foreign investments allowed in the retail sector could be in the form of joint
ventures or contractual cooperative ventures with Chinese partner holding a
stake of more than 51%. They were not allowed to conduct wholesale business and
the total imported commodities could not be greater than 30%.
At this time, the authority to approve these
foreign joint ventures laid with the respective provincial and state
governments which competed for approving more and more such ventures in their
states with the result that a huge number of approvals were granted. During
this time, many foreign retailers like Carrefour obtained many approvals from
competing provincial governments and expanded very quickly.
Opposition
from Central government: Until 1997, the Central
Government allowed over 20 foreign retail joint ventures. Limited investments
could not meet the growing demand for retail services across China. By 1997,
several retail enterprises with foreign investment were established in China,
with approval from the local government. The foreign companies also established
logistics infrastructure and offered warehouse services in the country. Though
the Central Government was keen on restricting these operations, they were met
with opposition from the provincial governments, which were concerned about
generating employment and taxes. In 1998, the Central Government ordered
closure of about 36 retail joint ventures.
Relaxing
the norms according to WTO: By June 1999, the Central
Government decided upon more liberalized rules on foreign investment in
retailing and wholesaling industry, in preparation of China’s entry to the WTO.
As per the new rules, foreign parties can hold upto 65% equity stake in the
joint ventures. The foreign partners were required to possess strong financial
strength, advanced commercial and operational experience, merchandising
technology, sales network and strong operational results. The foreign companies
were required to have sales turnover of more than US$ 2 billion during the past
three years and assets of more than US$ 200 million. The Chinese joint venture
partner was also required to have assets of RMB 50 million or RMB 30 million
depending on the location and average turnover of RMB 300 million or RMB 200
million as the case may be.
The retail companies were allowed to operate in the
cities of Beijing, Shanghai, Tianjin, Guangzhou, Dalian, Qingdao, Zhengzhou and
Wuhan and special economic zones of Zhuhai, Shantou, Xiamen and Hainan. In
Beijing and Shanghai, no more than four joint ventures were permitted and in
other cities only two joint ventures
Page 22 of 32
Wholly owned foreign enterprises were permitted in
retailing:
After 2004, wholly owned foreign enterprises were
permitted in retailing, wholesaling and trading sectors. The geographical
restrictions were done away with and the ventures could be established anywhere
in the country. The capital requirement was also reduced and the retail
companies were required to have assets of RMB 300,000 as against RMB 50 million
stipulated earlier.
These changes in the regulations governing the
retail sector enabled Carrefour to expand its operations further. Carrefour
expanded rapidly and by 2006, the number of hypermarkets increased to 80.
As the geographical restrictions were done away
with, analysts projected that there would be rapid expansion in markets where
the respective retailers have had no presence and including new markets in
rural areas beyond the metropolitan areas which are becoming saturated. The
overall impact of the competition between the foreign retailers and the local
retailers would be that the overall efficiencies and profitability would go up.
In spite of the new reforms that were announced in
2004, analysts felt that retailers would continue facing difficulties in the
market as the new rules have increased the complexity of doing business in
China. Instead of permission from one central authority, the retailer now needs
to obtain 40 to 50 approvals from local and central authorities to open new
stores. As the restrictions on the minimum capital were lifted, several small
and mid-sized retailers from Hong Kong have also entered the Chinese retail
market, increasing the overall level of competition in the industry.
b.
Challenges
faced by Carrefour while expanding in China:
• Chinese Government had opened up its retail sector to foreign retailers,
still foreign retailers continued to face regulatory problems in China. The
Chinese Government was drafting new rules to restrict the expansion of large
foreign retailers to encourage State –owned Enterprises (SOE), and were likely
to impede Carrefour’s growth plans.
The price of commercial property was increasing
rapidly, especially in the urban areas where Carrefour had a significant
presence. Even the rent and lease costs were growing along with the other
marketing and advertising expenses of the company.
Carrefour’s global archrival Wal-Mart, announced
the acquisition of Taiwan -based Trust-Mart for US$ 1 billion. With this
acquisition, Wal -Mart would be able to lay its hands on a wide spread,
well-developed network of stores. The acquisition would also help Wal-Mart to
improve its supply chain. And, Wal-Mart could give a tough competition to
Carrefour in China.
Carrefour was strong only in some regions in China
and the competitors were gaining ground in several other regions.
The Chinese authorities seem intent on protecting
the local retailers and it is likely that they will continue to give the locals
more favorable treatment in the future – maybe preferential treatment when it
comes to store locations.
In China, the market was highly fragmented; the
supply chain and logistics infrastructure was not well developed and prevalent
cultural differences which prevented the growth of Carrefour.
Conclusion:
Though China is going through an unprecedented
economic boom, people’s pockets are getting deeper and they are ready to
embrace new lifestyle concepts and habits. The trick lies in understanding
China’s billion-plus population, what they buy, their spending power and what
determines their purchasing pattern. In order words, the mind and the wallet of
the Chinese consumer.
2.
Retailers go global for a number
of reasons. Some retailers invest globally to tap fast < TOP > growing
consumer markets, especially when their home markets are stagnant. Retailers
Page 23 of 32
expand globally in order to
leverage their existing assets; global purchasing relationships, a global
supply chain, a unique product, a unique format, or a well known brand. In
doing so, they blow away the competition or at least that is their hope wanting
to maximize shareholders’ wealth generally tries and increase their foreign
business to become more internationalized.
i.
Some of
the important reasons why firms decide to go global are:
1.
New sources of demand: In many situations growth is
limited in the home country. This may either be due to intense competition or
saturation in the share of the market. Thus, an alternative solution is to
penetrate foreign markets where a potential demand exists.
2.
Existence of various market imperfections: Various empirical theories have emphasized various market
imperfections that is imperfections in product, factor and capital markets as
the key motivating forces drawing FDI. Countries differ with respect to
resources available for the production of goods. However, if all resources
could be easily transferred among countries, the volume of international
business would be limited. If markets were perfect, all factors of production
(except land) would be mobile and freely transferable. In the real world,
markets are imperfect and factors of production are somewhat immobile. Thus, it
is worthwhile for MNCs to survey markets - to determine whether they can
benefit from cheaper costs by producing in those markets.
3.
Economies of scale: MNCs may want to enter new
markets to increase their earnings and to realize the full benefits of
economics of scale. Companies in industries where the fixed costs are
relatively large need to engage in. volume selling to break even and these high
volumes can only be realized if firms expand overseas.
4.
Use foreign raw material and foreign technology: Some corporations are increasingly establishing or acquiring existing
overseas plants to learn about the technology of foreign countries. This
technology can then be used by corporations to improve their production process
at their various subsidiaries allover the world. In some cases when a
corporation plans to sell a finished product in a foreign country, it may
decide to develop the product in the country where the new materials are
located. This will help the corporation in saving the transportation costs
which it would have incurred in transporting the raw materials from a given
country
5.
Exploit monopolistic advantage: In many
situations, firms become internationalized when they possess an advantage not
available to competitive firms. Even within a given country some firms may
possess an advantage over other firms in these markets. For example, if a firm
possesses advanced technology and has exploited this advantage successfully in
local markets it may attempt to exploit it internationally as well. The
advanced technology is not restricted to developing a new product - it could
also represent a more efficient production, marketing or financing process.
6.
Diversify internationally: When
investors cannot effectively diversify their portfolio holdings internationally
because of barriers to cross border capital. Flows, firm_ may help their
shareholders with indirect diversification services by making direct investment
in foreign countries. The firm’s cash flows are internationally diversified
when it holds assets in many countries. Thus, shareholders of the firm Can
indirectly benefit from international diversification even when they do not
hold foreign shares. Capital market imperfections may thus motivate firms to
undertake FD I.
7.
Political safety seekers: Some
MNCs attempt. to expand their operations in countries that are unlikely to
interfere with private enterprises and are considered politically stable. Also,
MNCs based in politically unstable countries try to establish new operations
and pursue other markets in which they may have greater flexibility to make
business decisions.
8.
Knowledge
seeking: Another important reason why firms decide to
enter
Page 24 of 32
foreign markets is for the
purpose of gaining information and experience that will be useful to them
elsewhere. For example, industries characterized by fast technological and
product innovation it is important to collect information on foreign innovation
and research and development systematically over a period of time. This
information collected can then be used by the organization in its own research
and development, marketing and other areas.
ii.
All retail is local. Hence, the
mail-order/e-commerce segment maybe aside, retailing is special in the sense
that exports are not a viable option in order to expand one’s business across
national borders. Consequently, other entry modes strategies have to be pursued
are as follows:
Organic
growth: This involves setting up of
businesses in an international market from scratch. When a company grows, the
growth may be either organic or inorganic. Organic growth means that the
company itself has grown from its own business activity and its own resources,
while inorganic growth means that the company has grown by merger or take-over.
Joint
ventures: In a foreign joint venture, a
domestic small business forms an alliance with a company in the target nation.
The host partner brings to the joint venture valuable knowledge of the local
market and its method of operation as well as the customs and the tastes of
local customers. Sometimes foreign countries place certain limitations on joint
ventures. Some nations, for example, require host companies to own at least 51
percent of the venture.
Strategic
alliances: A Strategic Alliance is a
formal relationship formed between two or more parties to pursue a set of
agreed upon goals or to meet a critical business need while remaining
independent organizations.
Franchising: Over the past decade, a growing number of franchises have been
attracted to international markets to boost sales and profits as the domestic
market has become increasingly saturated with outlets and much tougher to wring
growth from. International franchisers sell virtually every kind of product or
service imaginable — from fast food to child day care — in international
markets. In some cases, the products and services sold in international markets
are identical to those sold in the United States. However, most franchisers
have learned that they must modify their products and services to suit local
tastes and customs.
Mergers
and acquisitions: A merger is a tool used by
companies for the purpose of expanding their operations often aiming at an
increase of their long term profitability. Acquisition may be friendly or
hostile. In the former case, the companies cooperate in negotiations; in the
latter case, the takeover target is unwilling to be bought or the target's
board has no prior knowledge of the offer. Acquisition usually refers to a
purchase of a smaller firm by a larger one.
Foreign
Licensing : Rather than sell their products
or services directly to customers overseas, some small companies enter foreign
markets by licensing businesses in other nations to use their patents,
trademarks, copyrights, technology, processes, or products. In return for
licensing such assets, the small company collects royalties from the sales of
its foreign licenses. Licensing is a relatively simple way for even the most
inexperienced business owner to extend his reach into global markets.
iii.
Entry
mode adopted by Carrefour:
Joint
venture as an entry mode: In China, a joint venture was
the only way for a foreign company to set up operations. As per the guidelines
issued by the State Council, in the retail industry, Sino-foreign joint
ventures were allowed to operate only at a few locations.
Carrefour entered China in 1995 by forming a joint
venture with the Chinese management consulting firm Zhong Chuang, and
established a firm called ‘Jia Chuang’, in which it held the majority of
shares.
Carrefour decided to creatively circumvent central
government regulations prohibiting foreign ownership, because they believed it
was strategically imperative to enter the market quickly. Their operations were
illegal, but their relations with local officials gave them the opportunity to
proceed without informing the central
Page 25 of 32
government. However, in 2001
Carrefour was cited for its failure to secure the central government’s approval
for opening all of the stores it operates, relying instead on the goodwill of
local authorities. Due to this citation by the State Economic and Trade
Commission (SETC), Carrefour’s expansion plans have been derailed.
Local
partner: As Joint ventures help a firm
benefits from the local partner’s knowledge of the host country’s culture,
language and political systems and in addition, a firm can share the costs and
risks of opening and running a new business with its local partner. This is
particularly important in China as it is culturally very different and had
complex negotiations, prevalent bureaucracy and corruption.
Expansion: Carrefour partnered with 27 holding companies, one for each store, but
later after reached an agreement with SETC, Carrefour has reduced 27 holding
companies to 13.
It has entered into associations with various local
partners in various cities like Hanshang Group in Wuhan , Lian Hua in shanghai,
Kunmig department store in Kunmig, Jin Hua group in Xi’an, Guangzhou dept store
in Guangzhou, etc. In 2003, Carrefour opened its first hard discount store, Dia,
in China by entering into a joint venture agreement with Shanghai Lianhua
Supermarket.
Carrefour opened its 28th Chinese store in Hangzhou,
Capital of Zhejiang province, in June 2002 and by the end of 2002, its sales in
the country had increased to €1.19 billion as compared to €1.18 billion in
2001.
By 2003, Carrefour had a presence in 15 cities and
its sales had reached to €1.32 billion.
They planned to open 300 discount stores in
different residential areas in Shanghai by the year 2007. The joint venture was
set up with total capital investment of RMB 90 million.
In 2004, Carrefour introduced the Champion
Supermarket format in China, in association with a local partner The Beijing
Shoulian Group.
Carrefour believes that its entry strategy was
correct; after all, it is profitable in China. Carrefour’s new strategy was to
pursue both local and central approval simultaneously. In order to generate
goodwill with the central government, Carrefour has shifted its expansion plans
to the west of China and has expanded its retail export business beyond its
current needs. These moves are intended to demonstrate to the central
government that Carrefour intends to invest in China long-term.
3. Strategies followed by Carrefour in China: < TOP >
Flexible
approach: Carrefour adopted a different
approach in China. While many of the retailers and consumer product companies
considered China to be a single huge market. It considered the country to be
comprised of several small markets and approached these markets with flexible
procurement, store management, marketing, and service strategies.
Consumer
conscious: Carrefour always tried to keep
their prices low by keeping in mind the fact that for Chinese consumers, price
was the main consideration. This has bought Carrefour a huge popularity for its
hypermarkets. By keeping the consumers’ convenience in mind, Carrefour sold a
different variety of goods by attracting the consumers to the stores. A Chinese
consumer, instead of visiting several places for various items, he/she can
obtain all the items under one roof that is in a Carrefour store. As Chinese
consumers prefer buying in smaller quantities, Carrefour provided them with
different small size baskets than compared to European stores.
Expansion
of operations in China: Carrefour planned the expansion
of its operations in China in a systematic manner by establishing regional
offices. The headquarters of the East China region in Shanghai took care of
expansion activities in that region. Similarly, headquarters of the Northwestern
region was located in Xinjiang and it was responsible for expanding business in
that region.
Choosing
appropriate store locations: Carrefour was careful in
selecting its store location. Before opening new stores, it sent a team to
conduct a detailed study of the store location, available space, purchasing
power of people, their habits followed by a study on the culture,
Page 26 of 32
customs, and traditions of that
region. Carrefour stores were located at the center of the city, as many of the
consumers went either on their bicycles or by public transport. Carrefour did
not follow a particular store format and encouraged the local store managers to
come out with the best format for the store and sales plans to ensure that the
store broke even within two to three years.
Exploring
the potential: Carrefour explored the
potential markets in Shanghai and opened three hypermarkets at Nanfang Shopping
Center in Minhang district, the Lianyang Thumb Square in Pudong New area and in
the Dragon City shopping mall in Minhang district’s Qibao area. These shopping
malls had many resources including stores, counters, and restaurants that
attracted more and more customers from various parts of the China.
Decentralization:
Decentralization was one of the important factors for Carrefour’s success in
international markets, with store managers being given the authority to take
decisions according to their local traditions and customs. Every store of
Carrefour was managed by a store manager and department heads. The store
manager allotted a particular portion of the store to each department head, who
was responsible for managing that portion, including the products stocked,
promotions to be carried out, etc. He along with the department head decided on
the product mix for that portion of the store and also decided on the products
to be sold in the stores according to the needs and preferences of the
customers. The performance of the store managers was judged by their ability to
meet the forecasts and profit targets. The monthly performance of individual
stores was communicated to all other store managers in China. Good performance
was rewarded with higher incentives and an increase in salary.
Efficient
supply chain management: Carrefour adopted a quite
flexible supply chain system in China. As it has procured most of the goods
from within China to cater to its local operations, it helped Carrefour to
maintain lower prices compared to other foreign retailers, who sold imported
products. Buying and stocking local products was part of Carrefour’s strategy
to cater to the needs of the local customers. Stores that were located in
places that had a large expatriate population had more imported goods,
different kinds of European and American food items, and the prices charged were
also higher. In order to differentiate the imported products from the Chinese
products, the flag of the country from which the product had been obtained was
displayed on its label.
Localization: Most of
Carrefour’s stores in China were spread across several floors and ramp
escalators were provided to move shopping carts between the floors. The sides
of the escalators were stacked with snacks and eatables. The department selling
fresh food and groceries was designed to resemble the local outdoor markets.
Carrefour catered different products according to the different tastes of
people living in various parts of China. Consumers near the coastline of china,
consumers preferred live fish so Carrefour sold live fish. In the middle and
western China, consumers preferred frozen fish. It opened a fresh food section
that made the products available that were similar to the products available in
the other local fresh food markets. It ensured that these food items were
available at lower prices and in a clean environment. Carrefour decorated its
stores according to traditional practices and stacked the stores with several
items like paper lanterns that were used during the festival.
Strategies Adopted by Wal-Mart in China:
Ensure
the good quality of the products: For
ensuring better quality of products, Wal-Mart has sent many of its managers to
suppliers’ factories and maintained an extranet site for sharing sales
information and the consumers’ expectations from the suppliers. Even though,
Wal-Mart started its operations in China with American workforce, later on it
employed several Chinese as mangers and shop assistants. It also took enough
care to train the suppliers and employees and regularly featured on the list of
most preferred employers in China.
Ambience
of the stores: Wal-Mart tried to create an
ambience that gave a Chinese feel for its stores and also by selling Chinese
goods and having Chinese employees. The stores had wider aisles and smaller
checkout counters to cater to the needs of the Chinese customers who shopped
frequently and in small quantities. It also designed the packaging, uniform of
the shop assistants, and the décor according to the preferences of the Chinese
consumers.
Page 27 of 32
Responsibility to associates:
Wal-Mart was the largest private employer where the associates were given
recognition and a share of the profits and were expected to be totally
committed to the company and its success. The training given to the associates
was extensive for giving them an overall perspective of the business.
Everyday-low-prices: Wal-Mart offered brand name products at prices consistently lower—
approximately 2–4 percent—than those found at department or specialty stores.
The everyday-low-price strategy implied that there were few promotions. Although
other major competitors, including Carrefour, typically ran 50 to 100
advertised circulars per year— spending 2.1 percent of discount store sales on
advertising—Wal- Mart produced only 12–13 major circulars per year—spending 1.5
percent of sales.
Using
superior technology: Technological superiority was
seen as a competitive advantage by Wal- Mart. Technology was used not only in
setting price and product offerings, but also in areas such as communication,
distribution and the control of supplier relations. Wal-Mart’s information
systems expense was estimated to be 1.5 percent of sales compared with 1.3
percent for its direct US competitors.
Difference in distribution system:
As of January 2006, Wal-Mart operated through 56
stores in China. As the stores were few and widespread, the distribution
centers could not be utilized fully. Another obstacle was the absence of
nation-wide distribution system, which limited Wal-Mart’s economies of scale.
In 2006,Wal-Mart has finished the construction of a central distribution center
in Kengzian (China). The place is a massive 40000 sq m facility with 70 huge
doors designed to handle deliveries from trucks. While Wal-Mart is making a
central distribution center in China but Carrefour, the French competitor, has
a different strategy.
Carrefour relies more on local distributors to
deliver direct to the stores because it believes that flexibility matters more
especially when the market is new. In other words, Carrefour is building a
network store by store and while it faces the challenges of uniformity in
service and quality control, the cost of development is lower.
Competitive edge:
Wal-Mart’s limited exposure to international
markets also proved to be an impediment to its operations in China. Moreover,
China was the first Asian country in which Wal-Mart had started its operations.
As the Asian market was quite different from the other markets in world, Wal-
Mart took time to expand in the market, which gave a chance to other domestic
and foreign retailers to consolidate their position in the market. Well, after
nine years of presence in China Wal-Mart is still loss-making but Carrefour is
profitable on the other hand. So we can conclude that at least till this stage,
Carrefour is having a competitive edge over Wal-Mart in China.
Carrefour has its eye on the customer and Wal-Mart
is spending on the back-end. Many believe that this approach will guarantee
Carrefour's growth in the future but at the end of the day it will have
different products in its stores. So in the future many people may see
Carrefour investing in the back-end to benefit from the synergy between its
stores.
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Page 28 of 32
• Excellent retail supply chain management revolves around understanding
and balancing three key dimensions of availability, inventory and cost.
Managing these trade-offs efficiently can result in supply chains that improve
business performance and drive competitive advantage.
• Today's supply chain leaders are working with their business partners to
design, develop, move, store, sell and service their products with ever greater
speed and economy. Now, more than ever, supply chains are regarded as sources
of business value and competitive advantage. Differentiated supply chain models
are emerging to address different merchandise characteristics. "One size
fits all" no longer applies.
• Short-lifecycle fashion products require a supply chain that can cope
with fast lead-times and accelerated time-to-market — tight integration with
the supply base is critical. Repeatable continuity products demand integrated
and optimized replenishment and forecasting. Regardless of type, all supply
chains need to be supported by effective core processes and capabilities.
• Supply chain leaders develop robust basic processes and disciplines, and
then add new and differentiating capabilities that drive supply chain
excellence. These new capabilities enable leading retailers to transform and
differentiate their supply chains. Creating change in an existing supply chain
can be daunting. Given the breadth and depth of impact, virtually all areas of
a business are affected.
ii.
The SCM
challenges that are dealt by the retailers while globalizing:
1.
Poor infrastructure: One of the key challenges facing
the SCM is the state of the country’s transport infrastructure. At present,
despite some large-scale projects, companies in the region complain of
insufficient integration of transport networks, IT, warehousing and
distribution facilities. Outside of the main economic centers, the logistics
sector tends to be of low quality, highly inefficient and with little
technological competence.
2.
Regulation: Regulation exists at a number of
different tiers, imposed by national, regional and local authorities.
Regulations often differ from city to city, hindering the creation of national
networks.
3.
Bureaucracy & Culture: Getting
the go-ahead for any logistics project still relies heavily on the strength of
contacts within host-country bureaucracy. Many western companies find it
difficult to repatriate profits generated in the country.
4.
Poor training: Training in both the third-party
logistics (3PL) sector and the manufacturing and retailing sectors is very weak
both at a practical level, such as IT, driving and warehousing, as well as at a
higher strategic level. Many do not realize the benefits of best practices in
logistics and are not interested in outsourcing or supply chain management
techniques. This has been compounded by the failure of the government and other
regulatory authorities to promote logistics programs
5.
Information and communications technology: Outside of the main logistics centers, information and communications
technology and infrastructure is unreliable. There is a lack of IT standards
and poor systems integration and equipment. At a very basic level, the
consistent supply of energy is also problematic leading to interruptions in
communications.
6.
Undeveloped domestic industry: If the
host-country’s logistics sector is fragmented and dominated by commoditized and
low quality transport and warehousing, then it provides little base to build a
modern industry. This also makes it difficult to meet the growing supply chain
demands for industrial and commercial enterprises.
7.
High transport costs: Some estimates put the cost of
transporting goods in countries like China at up to 50 percent more than in
developed regions such
Page 29 of 32
as Japan, Europe and North
America. These costs are increased by high tolls on roads. Logistics costs
(including warehousing, distribution, inventory holding, order processing,
etc.) are estimated to be two to three times the norm and in excess of 20
percent.
8.
Poor warehousing and storage: Poor
facilities and management are to blame for high levels of loss, damage and
deterioration of stock, especially in the perishables sector. Part of the
problem is insufficient specialist equipment, i.e. proper refrigerated storage
and containers, but it is also partly down to lack of training.
9.
Regional imbalance: If the host-country’s economy is
characterized by wide variances in levels of economic activity and development
then it is problematic in terms of distribution as there is a major imbalance
of goods flows from the one part of the country to another part of the country.
10.
Domestic trade barriers: Although
the various countries in accession to the WTO has lowered trade barriers such
as tariffs and quotas for international shipments, there are still problems
related to moving goods around the country itself. Goods can be subject to
unofficial border tolls when moving between provinces. This is particularly
evident when shipping from an inland manufacturing location to a port city or
vice versa.
iii.
Carrefour’s
SCM in China:
• One of the secrets to their success in bringing the new model of SCM to
China has been the use of Third-party Logistics (3PLs) to manage the
distribution process. Carrefour procured most of the goods from within China to
cater to its local operations. This helped Carrefour maintain lower prices
compared to other foreign retailers, who sold imported products.
• Carrefour’s strategy is to buy and stock local products to cater to the
needs of the local customers. The items stacked were also different depending
on the location of the store. Stores that were located in places with the large
population had more imported goods, different kinds of European and American
food items, and the prices charged were also higher. The outlets in other
locations were designed to cater to the needs of the local Chinese population
and stacked predominantly Chinese products and food items.
• Carrefour set up its global purchasing center in Shanghai, through which
goods were sourced across the country.
• Carrefour introduced its own label of products that were of good
quality which included food, grocery, daily necessities, and clothes. These
products were sold at priced 20-40% below the market price of competing branded
products.
• Carrefour taught the suppliers how to do business efficiently and
provided them with the required support. Many of the suppliers were provided
with computers and software to manage inventory and standardize their products
and orders. Carrefour chose to use the services of local distributors who were
well versed with the local networks. The company was not in favor of building a
national network for distribution or an automated supply chain system in the
country.
• The training program, called Agricultural Products Quality and Safety,
was launched .The farmers and suppliers were taught about food safety, health,
and hygiene and about preserving the freshness of their products. Carrefour had
conducted ten training programs at eight different locations within one year.
The company was of the view that such training would help it in providing the
consumers with products of higher quality and safety.
• By adopting all the above given strategies Carrefour is successful in
having efficient supply chain management.
5.
The role, responsibilities of
store managers along with skills required to carry out these < TOP >
responsibilities in general:
The retail store manager should take the
responsibility for the conduct of the store personnel and maintenance of
service standards of the organization as well as protection of the
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merchandise in a retail store.
The responsibilities of a store manager can be broadly divided into four
categories:
Managing the Store Personnel
In order to adapt to the highly competitive
conditions, Carrefour had to adapt its human resources and vendor relationship
management. Department heads were much more autonomous then their French
counterparts. They had the responsibilities of a business-within-the-business
for their department— handling everything from supplier relationships to
hiring, promoting and firing staff and from price definition to full product
selection. All the pressures of sales and margin were on their shoulders. To
incentivize performance, department heads and store managers had a bonus linked
to store results and a base salary. A typical “Carrefour-man” would start from
the bottom of the store level and work his/her way up through dedication and
performance. Although this path has changed in recent years, Carrefour promoted
managers internally, hiring from the outside only when the skills needed could
not be found in-house. On-the-job-training was applied to all the levels in the
store. All managers and department heads were trained in existing stores for at
least a year. A prospective store manager would move through all the
departments of the store, and if they were appointed to a new store, they would
be on-site at the beginning of the construction. Each level in Carrefour was
responsible for training and developing the level below.
A store manager can increase the productivity of
the store by managing the store's human resources effectively and efficiently.
To increase the productivity of the store personnel, a store manager should.
Minimizing the Cost of the Retail Store
The
payment of salaries and other compensation benefits to employees constitute a
major part of the cost of a retail store. Other costs of the store include cost
for control and maintenance and inventory loss due to shoplifting and employee theft.
The store manager should try to reduce these costs by efficiently managing the
store personnel as well as providing security and maintenance to the store. At
Carrefour, store managers and department heads were the key people in the
stores. The store manager and his/her department heads had nearly total
responsibility and control over their store. The store manager allocated the
area for each department within the store and was in charge of general
advertising and decoration policies for the store. Jointly with department
heads, s/he would decide on the product mix and make sure that all departments
presented coherent positioning. Each department was a profit center, with its
own targets and income statements. The department head had full responsibility
over purchasing, promotion, pricing and motivating and training his/her
assistants.
Managing the Buying and Selling Activities
A retail store can manage the buying and selling
activities through displays and visual merchandising. The retail store manager
can work along with buyers and suggest new merchandise plan and manage special
events, and, decide on markdowns to increase the sale of merchandise. At
Carrefour, department heads decided what they wanted to buy and from where.
They would buy centrally through Carrefour’s central purchasing only when the
advantages of mass purchasing outweighed the advantages of local buying. This
meant that the range of products varied from store to store and that a supplier
would (at least initially) have to negotiate with all the stores in order to
guarantee the presence of its products in a certain region or at a national
level. In order to leverage its purchasing power, Carrefour had, over the
years, centralized negotiations with some suppliers at the headquarters level.
With aggregate agreements covering all stores, these suppliers could be
confident of their products’ presence in most all stores, both regionally and
nationally (depending on the arrangement). Nevertheless, for many products
local buying was essential. This was especially the case in areas where
regional specialties and highly perishable products were seen as sources of
differentiation. Generally, product mix varied from store to store and local
products could represent up to 30 percent of an individual store’s food sales.
Pricing was the complete responsibility of
department heads, both for the products purchased locally and centrally. In
order to ensure the veracity of its aggressive pricing policy Carrefour
conducted extensive price scanning of all competitors within 5 minutes driving
time of any store. These scanning were done 3 to 4 times a week for the top 20
percent of products, which accounted for 80 percent of sales, and once a week
for the remaining
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products. Prices were then set
either equal to or below the competitor’s level. Invariably because of its
decentralized pricing system, customers at four Carrefour stores in a large
city could find the same product being offered at four different prices.
Providing Customer Service
To retain customers and increase traffic flow in a
retail store, the store manager has to provide customized services, which add
value to the merchandise sold. At Carrefour, the western style hypermarket was
customized to effectively cater to the needs and preference of Chinese
consumers. Carrefour stocked products preferred by the local population, in a
manner they demanded.
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