Que-1: Study the regulatory environment relating to retail industry in china pr and post 2004. How did Carrefours expand its operation in China flouting the government norms and stipulation? What were the repercussions of carrefours move?
Ans-1: There was subsequent changes made in China in regulation of retail industry. Major changes were made in China after 2004.
But before that ie; prior to july 1992 foreign investment in the form of joint venture or wholly-owned subsidiaries was totally prohibited in the retail industry in China. But centeral government has allowed foreign investment in the retailng industry through joint venture in Beijing, Shangai, Dalain etc.
In the year 1999, the central government has more liberalized provisional rule on foreign investment in China. This rules has allowed foreign retailer to establish joint ventures corporate retail, or whole sale companies in different zones and cities of China with certain restrictions:
The stake of the Chinese partner in newly established wholesale joint venture had to be at least 51%.
Franchising and other forms of indirect chain-store formats were prohibited.
Foreign commercial joint venture were not allowed to act as a commodity import or export.
Commercial joint venture allowed to import product they sold was limited to 30% of their sales revenue.
Changes come after 2004 where wholly–owned foreign retailer to own their Chinese subsidiaries and open stores at any geographic location of their choice without government permission and there were no limit on number of stores. Foreign retailers were also allowed to source global brand merchandise locally without any stipulation. Foreign retailer allowed to run their own distribution channels.
Carrefour expands its operation in China by ignoring some of the government norms and stipulations which are as follows:-
In China central government has approved joint venture in condition that it has open only 3 outlets and that too in particular approved cities only. But Carrefour with the help of local authorities Carrefour was successful in open more then 3 outlets per city by saying them that it would creates employment opportunities and it would generate more tax.
Later on in 2001, State Economic And Trade Commission has done investigation in that SETC found that Carrefour has flouted government rules the ownership stake in the retail joint venture and the number of stores in each cities.
According to rules the retail outlet which were open by Carrefour in Chinese market in that Carrefour should have 100% stake there should be some part of others also. But Carrefour has ignored this rule and it owned 100% stake on this retail outlets.
The commission has ordered Carrefour to suspend further expansion in the country.
During the investigation it was also found that Carrefour had opened stored at that locations that the central government had not opened up for foreign investment.
Central government has found that Carrefour management felt that if once they expand its operation widely than it will be paying more tax and would be able major employer they will get permission and their will be no restriction for them.
This has lead in certain repercussion on Carrefour moves. This had effect that Carrefour chairman and CEO, Mr. Daniel Bernand has to apologies in public. On his move Carrefour has also announced difference with Chinese Government has been resolved and they came to an agreement that with SETC that it has to set up 10 procurement centers across the country to procure Chinese goods which would be sold through its stores all over the world.
These effects in local partners hold 35% stake in company and remaining rest by Carrefour. By this flouted be Carrefour and SETC came to an final agreement under which the number of holding companies was reduced to 13. And this effect in Carrefour formed one holding companies for each of the 13 local partners. After this settlement Carrefour has open more stores in China and it profit has increased to €1.19 in year 2002.
Que-2: What are the reasons due to which retailing company that are quite successful in there home market fail to make similar impact in their international ventures? Explain with example?
South Korea
In May 2006, Wal-Mart, world’s largest retailer announced its exit from South Korea selling its 16 stores to Shinsegae Co., the country's top discount chain for 825 billion won ($882 million), subject to approval from South Korean regulators. Wal-Mart said that its decision to withdraw from South Korea was in keeping with its global growth strategy to expand in markets where they could realise the desired economies of scale. Wal-Mart’s performance in the South Korean market which was considered highly competitive and demanding had not been encouraging. Analysts blamed Wal-Mart’s failure to localise as the main reason for its exit. They argued that Wal-Mart had not tailored its stores and offerings to suit the needs of the Korean consumer. Analysts wondered why the world’s largest retailer, with annual total sales of $312.4 billion, as of January 2006 and serving more than 175 million customers weekly in 15 countries worldwide decided to pull out of a growing economy like South Korea.
While the majority blamed Wal-Mart’s failure to localise its strategies as the reason for the debacle many felt that the environment in South Korea was not conducive to foreign brands. Hardly a month before Wal-Mart’s announcement, Carrefour of France, world's second-largest retailer quit the South Korean market. Many international brands like Nokia, Nestlé and Google, struggled in the South Korean market. While analysing the reason for its withdrawal, experts felt that Wal-Mart should use this failure to its advantage in other Asian economies like Japan and China. How it would do this was to be seen. The case offers scope for discussion on localisation strategies to be adopted by retailers in overseas markets and the impact of failure to localise.
Que-3: Entry strategies play an important role in the international expansion of a company. Whr type of entry and expansion strategy did Carrefour pursue in China? Analyse the localization strategy of Carrefour in China. Do u think that would be able to sustain its rapid growth in Chinese market? Give reason to support your answere.
Ans-3: Entry and Expansion Strategy:
Carrefour entered China in 1995, when Chinese Government had partially opened the retail sector. Carrefour started its operation by forming joint venture with the Chinese management consulting firm Zhong Chaung, and established a firm called “Jia Chuang”. The company managed the hypermarket opened in Shanghai, in the residential area, to cater the needs of the middle class in the city. The majority of the hold was in the hands of the Carrefour so 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, which is one of the prominent localities in the city.
Instead of approaching the Central Government of China, Carrefour entered into direct deal with local government and convinced them that it would create employment opportunities in their region, generate taxes for the government and help in overall development of the region. By 2000, the company had established hypermarkets in Shanghai, Beijing, Chongquing, Qingdao, Shenyang and Wuhan.
When most of the companies considered China as a single huge market, Carrefour considered it as several small markets. The company approached these markets with flexible procurement, store management, marketing and service strategy. In initial years of its operations, Carrefour kept its price low as Chinese consumers considered price as important factor. It sold vide variety of goods with convenience of obtaining all the items like fish, grains, grocery items and small specialty under one roof. The Chinese consumer buys in smaller quantity so the basket size was very small as compared to European stores. Because of these reason, Carrefour’s hypermarkets was very popular in compare to other stores in the city.
Before opening the new store, it sent a team to conduct the detail study of store location followed by a study on the culture, customs and traditions of the region, purchasing power and habits. So, Carrefour chose the store location based on the available space and purchasing power of the people in that location in highly populated area.
It opened the stores located at the centre of the city because the Chinese people owned cars and they went to stores either on bicycle or by public transport.
Carrefour had decentralized its operations, giving full freedom to store managers to take decisions according to the local traditions and customs. The store manager decided on the products to be sold in the stores according to the needs and preferences of the customer.
In early 2001, it had 27 Hypermarkets in 12 cities across the country, some of which was fully owned by the company. At that time, Carrefour was the third largest retail and also the largest foreign retail in China.
In November 2001, after the differences with Chinese government have been resolved, the company agreed to set up 10 procurement centers across the country. It also admitted local partners and all its stores in the country were 35% owned by local partners and remaining with the company.
By June 2002, the number of Hypermarkets had increased to 30, with 4 in Beijing and 6 in Shanghai. And by 2003, Carrefour had a presence in 15 cities and its sales had reached to €1.32 billion. In the same year Carrefour opened its first hard discount store, Dia, in China by entering into joint venture agreement with Shanghai Lianhua Supermarket. The goods sold through the discount stores were to be prices 10-15% lower than the hypermarkets.
In 2004, Carrefour introduced the Champion Supermarket format in China, in association with a local partner The Beijing Shoulian Group. By 2005, there were 8 Champion supermarkets and were located in residential areas.
During the year 2004, Carrefour opened 21 new hypermarkets and total hypermarkets in China increased to 62.
In late 2005, Carrefour acquires the complete ownership of its Chinese stores and bought the remaining stake owned by local joint ventures. And Carrefour became the largest foreign retail company. As of May 2006, Carrefour had opened 230 Dia outlets in China and the number of hypermarkets had grown to 79 by July 2006.
Carrefour procured most of the goods from within China. This 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 local customers.
Localization Strategy
Carrefour has customized the western style hypermarket to cater the needs and preferences of Chinese consumers.
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.
In some of the company’s store in China, the department selling fresh food and groceries was designed to resemble the local outdoor markets.
Carrefour stocked products preferred by the local population. They sold live fish, turtle and meat in the stores near coastline. In the middle and western China away from the cost, consumer preferred frozen fish and this was stocked by the stores there. They also sold products like instant noodles which was the most preferred snacks among the Chinese.
The fresh food 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 and sold at lower price in clean environment.
In city like Uighur where most of the population is Muslims, Carrefour did not sell pork and sold the certified halal products. They also sold 20 varieties of raisins, roasted mutton, sausages made of horse meat, and locally popular snow lily tea.
For important festivals, Carrefour decorates and sells the products according to the traditional practices. For instance, in Spring, Carrefour decorated its stores according to traditional practices and stacked the stores with several items like paper lanterns that were used during the festival. In Christmas, Carrefour displayed a wide variety of Christmas trees and sold several Christmas goods like Santa Claus toys, hats, items to decorated Christmas tress, etc.
Challenges faced by Carrefour
Carrefour had customizing its store formats to suit local needs is its main strength.
Despite of rapid growth, Carrefour’s share in China was only at around 1.5% of organized retail market.
Though Chinese Government had opened up its retail sector to foreign retailers, foreign retailers may continue to face regulatory problems in China.
Carrefour was facing problem of price of commercial property and because of this rent and lease cost were growing along with the marketing and advertising expense.
Carrefour’s Champion supermarket in which Carrefour owned a 6% stake were not able to withstand the onslaught of competition.
Carrefour Dia venture also faced problem and incurred losses in 2006.
Carrefour’s decentralization strategy was also criticized. Due to this policy, widespread corruption was reported in several stores.
Shanghai court imposed a fine on Carrefour for selling fake Louis Vuitton handbags. Even Carrefour was reported to be selling fake Adidas footballs.
The local companies were also in developing stage.
The biggest competitor Wal-Mart entered in market with the acquisition of Taiwan-based Trust-Mart.
Despite of all these I think that Carrefour will be able to sustain its rapid growth in Chinese market. The following are the reasons to support my answer:
Carrefour planned to introduce loyalty cards in China.
Carrefour was offering credit to consumer for the purchase of home appliances.
They were developing new and new strategies to stand in competition.
