Oct 16, 2012 03:04 PM

China Winds Shift for U.S., European Retailers


(Beijing) – Major American and European retail chains, once rising contenders for China's highest consumer crowns, may be losing confidence on the mainland.

American home improvement retailer Home Depot recently pulled out of China, while its British counterpart B&Q and the world's largest retailer Wal-Mart have tapped the brakes on expansion projects.

Swedish furnishing and home products giant IKEA, the most profitable foreign retailer in China, is in hot water with some of its domestic suppliers, who accused the Swedish company of squeezing their profits and decided to terminate the partnerships.

And since August, global retail giants Carrefour of France and Britain's Tesco have been rattled by the industry rumor mill which, despite denials from each corporation, suggests each plans to give up in China.

Industry analysts say many of the world's biggest foreign retailers, after years of rapid expansion, now face a variety of hurdles in China. Key challenges are affecting procurement and supplier quality control mechanisms, sales strategies, internal management and online business. The immigrants are also seeing strong competition from Chinese rivals.

Moreover, Wal-Mart and Carrefour officials said a weak macroeconomic outlook for China has forced them to slow their respective development programs.

Changing Focus

En route to success in other countries, Carrefour relied on "manager-responsibility" store operations and Home Depot catered to do-it-yourself consumers. These unique retailing niches worked well outside China, but the companies struggled to apply these strategies on the mainland.

Home Depot Chief Financial Officer Carol Tome said her company failed to acclimate to China, where consumers prefer hiring tradesmen rather than installing kitchen cabinets or painting walls themselves. And the Chinese government's 2010 decision to rein in the real estate market with price control policies was apparently the straw that broke Home Depot's back.

A Guangdong Shunde-based construction materials supplier said Home Depot's global sourcing model could not stand up to China's construction materials producers, renovators and retailers who control the market.

Home Depot also apparently erred by changing leadership: The company replaced its CEO three times in six years. The company also changed its sales strategy often, and gradually shed outlets.

Meanwhile, a source at the investment firm Hony Capital said Carrefour's flexible manager-responsibility system has been given too much power to store managers, undermining executive control.

The system was expected to be the key to success for the French retailer during its rapid expansion phase in China. Advocates of the system noted a store manager with significant authority could respond best to local consumers given the differences in China from one region to the next. But local management authority has been blamed for Carrefour's problems with food safety and supplier issues.

Domestic retailers, on the other hand, have been growing. China Resources Vanguard, for example, announced in January plans to open 800 stores in 2012, including up to 90 major outlets.

Competition from Vanguard and other big domestic retailers such as the nation's largest retailer Yonghui and Taiwan-based RT-Mart has forced Carrefour, Wal-Mart and other non-Asian retailers to slow down in China, an analyst said.

"RT-Mart and Yonghui are doing particularly well in the fresh foods category," he said. "Foreign companies simply can't beat them."

Most American and European retailers are thus fighting to survive. But Home Depot, which came to China by buying a Tianjin-based chain for about US$ 100 million in 2006, has already thrown in the towel.

Home Depot announced September 13 it had closed its remaining seven stores in China. Indeed, the retailer has been scaling down since 2009, when it closed five stores in Qingdao, Shenyang, Beijing and Tianjin.

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