Mainland marketing a tough sell

PUBLISHED : Friday, 11 November, 2011, 12:00am
UPDATED : Friday, 11 November, 2011, 12:00am


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This year could well be remembered as the one in which international retail companies took a giant step back in China.

Some of the largest names in retailing have been struggling. Perhaps most telling is that four global supermarket chains have replaced their directors of China operations - the UK's Tesco in March, France's Carrefour in August, Canada's Metro Inc in September and then the US's Wal-Mart in October.

The latest brouhaha came on Monday when Beijing said Johnson & Johnson should 'practise morality', a week after the US conglomerate was accused of continuing to sell baby shampoo with a possible cancer-causing ingredient. A US coalition of health campaigners said last week consumers should boycott the shampoo until the company stopped using a preservative considered a possible carcinogen and allergy trigger. 'Abiding by laws and regulations is the minimum compliance,' said a signed commentary, adding: 'Responsible businesses should have 'moral blood' flowing in their veins.'

Then there has been the withdrawal from China of most foreign home-improvement chains in recent years, including the US-based Home Depot and France's Leroy Merlin, plus the failure of the US-based electronics chain Best Buy in China and the closure in Beijing of the Taiwanese-invested Pacific Department Store Co.

What has gone wrong? Has China, on the 10th anniversary of its accession to the World Trade Organisation, decided to shut its doors again? Or is it that the Chinese market is so different from elsewhere that few business executives have been prepared for its unique challenges?

The latest Wal-Mart reshuffle came after authorities in southwestern Chongqing fined Wal-Mart 2.69 million yuan (HK$3.28 million) for selling pork that had been mislabelled as organic over a period of 20 months.

A 15-day closure for 'consolidation' was also imposed on all 13 local Wal-Mart outlets.

On October 17, Wal-Mart announced that its MIT-graduated president and CEO for China operations, Ed Chan, had resigned on personal grounds.

On October 18, Foreign Ministry spokesman Liu Weimin said Beijing still hoped to 'join hands with foreign-invested enterprises to further improve China's investment environment'.

He cited 'big changes' that had taken place, saying that local enterprises had become more competitive in the past 30 years and many preferential policies designed for foreign-invested companies had expired.

He said Chinese and foreign companies were now competing on the same footing, adding: 'We hope the latter will work to improve their own competitiveness and abide by China's laws and regulations.'

At a China-US governors' meeting the next day, Cui Tiankai , vice-minister of foreign affairs, described the Wal-Mart incident as a problem of business ethics, not politics. 'All businesses should abide by Chinese laws when they are operating in China, whether they are domestic or foreign,' he said.

On October 21, Cui met C. Douglas McMillon, president and CEO of Wal-Mart International, in Beijing. The meeting was reported in Chinese on the Foreign Ministry website, but no other details were given. Wal-Mart has not lodged any formal complaint claiming wrongful treatment.

All of the company's Chongqing outlets reopened on Tuesday, and Christina Lee, Wal-Mart China's senior director of corporate affairs, simply said that the company wanted to play by the book and was glad to see customers coming back.

Lee would not comment on reports speculating that the company had strained relations with Beijing.

But none of the official statements, either by Chinese officials or company executives, were able to calm a subsequent war of words among commentators. Foreign observers said it appeared Wal-Mart had been made a scapegoat by officials wanting to boost nationalistic sentiment and divert attention from consumers' rising concerns over food safety issues - and particularly stop citizens from pointing fingers at the government.

In response, official state media accused the overseas press of joining in on US politicians' recent accusations against China, such as claims it was artificially keeping its currency low.

Xinhua criticised 'foreign media', specifically naming The New York Times and Wall Street Journal, for 'stir-frying' a case of 'regular law enforcement'.

The nationalistic Global Times quoted He Maochun , a member of the Ministry of Commerce's Research Institute, as advising Western media not to use Wal-Mart to divert the focus in Sino-US economic relations.

The Beijing Morning Post, a mouthpiece of the Beijing municipal government, ran a long commentary condemning foreign retail companies' 'arrogance and greed', while praising the 'very optimistic' business results of Wumart, a state-owned retail chain headquartered in Beijing.

But the newspaper failed to mention that Zhang Wenzhong , the founder of the store, is serving an 18-year prison sentence for bribery.

Zhang was rumoured to have sent 10 million yuan worth of his company's stock as a gift to Liu Zhihua , a former vice-mayor of Beijing who was given a suspended death sentence for corruption.

Zhang had ambitions to build 1,000 Wumart outlets by 2010, but its website shows it has only about 700.

But customers generally don't care about politics.

According to Hc360.com, an e-commerce platform, while some internet users complain about what they say are double standards for multinational corporations' business practices in China, there is more criticism of China's own inadequacies in business laws and their enforcement.

Despite the difficulties facing foreign retailers, 163.com, a popular Chinese internet portal, reported that since 2005, all 50 of the largest retail groups in the world have tested the Chinese market - 80 per cent of them have lost money.

The only exception until a few years ago was Carrefour, which has proven more successful in some provinces than local retailers. But even the French chain has reported dwindling profits.

Hong Tao , a professor of commerce at Beijing Technology and Business University, attributed the problem to China having perhaps not only the fastest-growing retail market in the world but also the most challenging. 'This country's retail market has seen double-digit growth for the last decade. Its sales grew from 13 trillion yuan in 2009 to 15.7 trillion yuan in 2010, and will likely hit 17 trillion yuan this year,' he said. 'It is so huge that every merchant wants to grab a share.'

But that leads to ever-increasing competition.

'On average, in the largest cities such as Beijing and Shanghai, retail merchants' net profits are only a meagre 2 per cent,' the veteran researcher of retail markets noted. 'Every year, businesses come and go like they're passing through a revolving door. Shops open and close in large numbers.'

To win in the Chinese market, the key was to have a good model, a good strategy and good people to implement them. 'Every failure that we have seen is because the company came to China before it was ready to adapt to the local market,' he said.

But Hong noted that Wal-Mart's localisation efforts had been quite rapid, pointing out that its number of outlets recently passed that of Carrefour. But the company still had to adapt to new tricks, 'such as integrated management of information and logistics'.

Instead, Wal-Mart copied tricks from Carrefour in dividing its management into regions, which sometimes resulted in excessive power being delegated to local managers, Hong said.

But he said Wal-Mart still had a chance to dominate in China as it had elsewhere, because '99 per cent of Chinese retailers are small companies'.

But whether it can do that is a matter of contention among some Chinese industry analysts.

Wang Xianqing , a marketing professor at Guangdong University of Business Studies, said that for too long, foreign retail chains had enjoyed supranational treatment, a policy designed more than a decade ago simply to attract their investment.

So until those preferential policies ended recently, foreign retailers had the edge when it came to competing with their domestic counterparts. They had been so spoiled by their privileges that some began to think they could operate outside the law.

Ye Tan , an online business commentator, said Wal-Mart actually had three disadvantages because it operated so far from its homeland.

First, having the headquarters so far away meant delays in taking action in the Chinese market, she said. Secondly, the company's low-price policy may backfire, as pursuing low prices in China may attract substandard products, resulting in consumer complaints. Lastly, China was just beginning a prolonged cycle of rising costs and prices.

But international retailers' woes must be seen in light of the success seen by other foreign-invested companies. A few that learned the localisation game early on, such as KFC and McDonald's, have continued to be market leaders.

Even Coca-Cola has been rolling out new products for the Chinese market since 2005. The first of them, a soft drink called Minute Maid Pulpy, is dominating the Chinese fruit-juice market and is sold in 20 countries, generating US$1 billion a year, according to Zhao Yanhong, an executive with Coca-Cola's Greater China operations.

'We haven't seen competition jeopardise our business in recent years,' she said.

Given those types of success stories, Hong said it was unlikely China would drive away all foreign businesses on nationalistic grounds.

'It has been 10 years since China became a member of the WTO, and 19 years since the first foreign retail company built its beachhead in this country,' he said. 'China has become intertwined with the global market in many ways, in everyday life as well as in industry.'

The Chinese market is so large that it 'isn't easy for anyone to push others out of the market', he said, adding that companies, both foreign and domestic, would eventually learn to 'share the market like in one big family'.