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Carrefour China: A Local Market

Several years ago, the typical Chinese consumer purchased his vegetables and groceries at open-air markets. Supermarkets were out of his league; they were uncompetitive and overpriced. This has changed. In recent years, shopping in China has become easier and cheaper as the number of supermarkets and retail stores in major cities has rapidly mushroomed. Foreign retailers continue to steadily flow into the country as China gradually opens its retail market to overseas investment. And with over a billion mouths to feed, the opportunities for food retailers are huge indeed.

Carrefour, the French retail giant, has foreseen China s potential. It is the largest retailer in Europe and second largest worldwide (the first being American retailer Wal-Mart). Though Carrefour Group"s Asia operations accounts only for 11 percent of its business (over 50 percent of its business is in Europe), and revenues from China were just 3 percent of total 2004 Carrefour Group profits, China s retail market is one of its top priorities. Since 1995, Carrefour has opened 59 Carrefour supermarkets, 8 Champion hypermarkets, and over 150 DIA hard discount stores throughout China.

BOOMING BUSINESS

At the end of the 1980s, Carrefour considered Asia as the next market for its future development, and arrived in Taiwan in 1989. "At that time, the goal was to build a hypermarket of 10,000 square meters on multiple levels, similar to stores in France," says Eric Deliers, Regional Manager of Carrefour China, North Region. "But it did not work. Carrefour could not just transfer their French concepts, even though it has been done in other countries." The Chinese concept of retail and operations were significantly different.

In order to set up their stores on the island, Carrefour needed first to completely revise its concept to adapt to the specifics of the local environment. This included changes in management structure, products carried and even store design. The company had to operate in high density urban areas with stores built inside of preexisting buildings, not on flat, open, undeveloped land as had been done elsewhere. Carrefour has since opened 34 outlets on the island and is Taiwan"s largest hypermarket chain in terms of current sales. "Our Taiwanese experience was very important," adds Deliers. "It was Carrefour s laboratory not only for China but for all Asia."
After Taiwan, Carrefour expanded first into Malaysia and then to the Chinese mainland, where it built its first hypermarket in Beijing in 1995. Over the next five years, Carrefour established 27 chain stores in 15 Chinese cities, with revenues that reached more than US$1 billion in 2000. This figure rose to US$1.2 billion in 2002 and to US$1.6 billion the following year. In 2004 alone, with an eye on major cities with populations of more than 2 million, the French retailer opened more than 12 stores, and revenues reached US$1.9 billion.

Overall, in less than ten years of operation in China, Carrefour has doubled its revenues and the number of stores in the country. The French company is currently the fifth largest retailer in the country and the third in its category.

LOCATION AND LOCALIZATION
Carrefour"s strategy is to create and expand retail stores best suited to the local market, setting up hypermarket, supermarket and hard discount stores. Each of these three formats is linked and work together. "We need to have, overall, a large number of supermarkets (and hypermarkets) for the concept [of hard discount stores] to be viable," explains Deliers. "Thus, we would like to create 300 to 500 hard discount DIA stores across China at a rate of 20 DIA stores per month".

Carrefour China s approach is to pull in Chinese consumers with low prices and large supermarkets. The two main Carrefour principles are best location and strong localization. Before opening a store, in-depth research of store location is conducted, followed by research of the local culture and traditions, and local consumer purchasing habits. "The total investment for launching a new store runs from US$650 to US$1,040 million, depending on the city and locations," explains Deliers.

To further increase effectiveness and answer local needs, Carrefour has decentralized its management. Each store manager has autonomy in decision-making and store operation. A Carrefour China Institute in Asia was also created to train its staff so as to engender the "Carrefour Spirit".

The success of Carrefour China has shown that the combination of the concepts of "localization management" and "low price and high quality" has worked in the Chinese world. The French retailer has developed its own labeling to guarantee high quality products and hygiene. It has provided more than 400 commodities of its own brand covering four varieties (food, grocery, daily necessities, and clothes), which account for 2 to 4 percent of its total goods and are 20 to 40 percent cheaper than market prices.

"China does not have an easy market," comments Carrefour China President, Jean-Luc Chereau. "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." Being able to shape itself to local habits has allowed the French retailer to be at the top of its game. But how long will it last?

NOT ABOVE THE LAW

In the beginning of 2002, Carrefour lost its smile when the company had to abruptly stop its aggressive expansion in China. During the following two consecutive years it was unable to expand its business because of violations of Chinese regulations.

In dealing only with local regional authorities, the French retailer had ignored stipulations that foreign retailers had to register with the State Economic and Trade Commission (SETC) to get permission before building stores in China. In addition, Chinese law required foreign retailers to operate through joint ventures. Thus, Carrefour China had to reorganize its Chinese operations and rapidly transfer 35 percent of its ownership to three local stores and two trading firms. The French retailer has since created 31 joint ventures and now has 32 Chinese partners.

At the same time, China s entrance into the World Trade Organization (WTO) led to the lifting of all restrictions for foreign investments in retail business on December 11, 2004. As a result, entry and expansion of foreign retail business anywhere in the country is unrestricted and foreign companies can, for the first time, wholly own stores.

This change of events has thus further opened the door to Carrefour and other retail groups to continue their expansion and strengthen their positions in China. Foreign supermarkets in China represent both a threat and an opportunity. They are a threat to the small-scale local retailer, but at the same time they are an opportunity for their Chinese partners, who benefit by learning from the knowledge and experience of their foreign partners.

Already ranked the third largest in the world, China s retailmarket is expected to maintain an annual growth rate of 8 to 10 percent from 2005 to 2010, according to statistics from the China Economic Information Network. Carrefour seems ready to take a lion"s share of this and plans to expand into several regions in China.

Very confident in China s economy, Carrefour China President Chereau feels that the country has a unique market. He says that over the near future the company plans to open one store per month in China in major cities, and it has strong ambitions for Beijing and Shanghai.

Carrefour s next commercial offensive is to add another 40 stores over the next five years, investing some US$780 million in its Chinese operations, and to double the number of its hypermarkets that increasingly offer non-food products. For 2005, the company plans to increase its market share in Taiwan to 50 percent and hopes to add 12 stores each in Shanghai, Beijing, Shenzhen and Guangzhou by the end of the year. Added to this, it signed a new joint venture between its DIA stores and domestic chain Shanghai Lianghua to open 300 discount outlet stores in the residential areas of Shanghai.

While the secret of Carrefour China s success is to find the best location and then localizing its operations, this requires knowing the rules of the game. As Deliers puts it, "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 continuously to develop a new strategy to expand on the map." So far, Carrefour has learned how to play well.

Source: linkshop.com.cn 
Editor: Grace
Date: 2005-7-5 15:14:00

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