Foreign supermarkets find competition tough in China

Local operators proving strong competition amid slowing economy and change in consumer habits

PUBLISHED : Saturday, 23 February, 2013, 12:00am
UPDATED : Saturday, 23 February, 2013, 4:51am


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Foreign supermarket chains are struggling to compete on the mainland and should expand their online sales platforms to boost their revenues, industry insiders say.

Against a backdrop of declining sales last year as the mainland economy slowed and shopping habits changed, foreign retailers slowed their previously aggressive expansion.

"Sales at physical outlets will continue to drop, and foreign retailers should expand their presence online," said Shi Jun, a senior partner with Beijing-based consulting firm Alliance PKU Management Consultants who specialises in advising clients in the retail sector.

It was a difficult year for foreign supermarket chains last year. British retail chain Tesco closed four stores in August, while French supermarket chain Carrefour shut two and United States giant Wal-Mart shut five, according to a report in the Southern Metropolis Daily.

Domestic operators were better able to weather the downturn because they enjoyed supportive measures from local governments, chiefly by securing the best locations for their stores, Shi said.

"Local governments tend to allocate more resources to local companies to foster their growth," he said.

In the first nine months of last year, Carrefour's sales on the mainland dropped 5.7 per cent from the same period in 2011, on the basis of a constant number of stores, the company said.

The absence of preferential policies favouring foreign supermarket operators also made it more difficult for them to grow their number of outlets, said Zhang Jing, an analyst with Essence Securities in Shanghai.

"A few years ago, local governments would offer inducements to attract foreign investors, including supermarket operators. But these kinds of policies have since been withdrawn," Zhang said.

A few years ago, local governments would offer inducements to attract ... supermarket operators. But these kinds of policies have since been withdrawn

In 2010, Wal-Mart opened 47 new stores and Carrefour added 30, according to an information provider for the retail sector.

Foreign retailers had played an important role in the development of the mainland's retail sector in the past, their business models providing lessons for domestic companies, Shi said.

"Local governments now tend to provide more support to local retailers," he said.

Location is a key element in a successful supermarket operation, but the allocation of land is under the control of the government, "and the best locations are always granted to local retailers", Shi said.

Zhang Ting, a housewife in Beijing, buys her daily needs at Wumart, one of the leading local retail chains.

"I prefer shopping at Wumart as it is closer to my home," she said. "Although prices at the foreign store may be cheaper, I would need to walk 15 to 20 minutes to get there. So I shop at Wumart instead."

Zhang Ting said she also shopped online because it was convenient. "The online shops offer home delivery services, so I don't need to carry bulky goods."

Shi said consumers' shopping habits had changed. "The major consumer groups are the post-1980 and post-1990 generations, who shop online," he said. "The online market is so huge that foreign retailers should look into it and think about how to use their physical stores as a platform to develop online sales."

Transactions at Taobao Marketplace and Taobao Mall, the two e-commerce platforms under Alibaba, were valued at more than one trillion yuan (HK$1.24 trillion) last year, which revealed huge business opportunities for foreign retailers, Shi said.

An online platform could target the younger generations, he said.

Shi did not expect to see more closures of foreign stores this year. "A physical store is necessary as a platform to display goods that are also offered online. And consumers are unlikely to buy fresh food online," he said.

Carrefour chief executive Georges Plassat said in November last year the French supermarket chain would add 24 stores in the country this year to its existing complement of more than 200 stores. Wal-Mart also said it would maintain its plan to open 100 stores over the next three years.

However, Zhang Jing said rising wage costs might hinder these expansion plans. According to her estimate, a 20 per cent rise in salary costs would erode a retailer's profit margin by 1 to 2 percentage points.

As a result, retail chains on the mainland were likely to face higher operating pressure this year, she said.