International Retailers Struggle in China
In recent weeks, many of the large international retailers have announced changes in their expansion plans for China. Home Depot (NYSE: HD), the large U.S. do it yourself chain, is closing stores, as is Tesco PLC (LSE: TSCO.L), the large U.K. retailer. Even the two earliest entrants into China’s retailing industry, Wal-Mart Stores Inc. (NYSE:WMT) and Carrefour SA (Paris:CA.PA), are struggling to make their business models work in the country.
On September 14, Home Depot announced that it would be shutting its remaining seven stores in China. Between 2009 and 2011, the company had closed five of its original 12 Chinese stores due to rising real estate costs. Tesco also announced that it is shutting down four stores as part of a consolidation campaign, apparently giving up on its earlier goal to double the number of its Chinese hypermarkets to more than 200 by 2016.
Meanwhile, Wal-Mart has also announced that it is having a China rethink, admitting it had made mistakes in its haste to expand and saying that it has cut by one-half the amount of new square footage that it will add in the country. With respect to Carrefour, rumors are circulating that the French hypermarket operator is in discussions with China Resources Enterprise about selling its China operations. Apparently, the French firm has also spoken to Tingyi, another major food manufacturer, and COFCO, the large Chinese agribusiness conglomerate.
Many analysts blame these strategic about faces on the part of international retailers on the slowdown in China’s economy. Last week, China announced that its GDP growth slowed to 7.4 percent in the third quarter, down from 7.6 percent in the second. China’s economy grew by 7.7 percent in the first nine months, compared to 7.8 percent during the first six months of the year.
However, real retail sales growth in China accelerated in September, rising 13.2 percent, the fastest pace of the year, taking year to date real retail sales growth to 11.6 percent, compared to 11.3 percent during the first nine months of 2011. With continued high growth in retail sales, it’s difficult to understand how macro-economic factors are solely to blame.
It just may be that China’s retailing sector will always be one of those industries that is difficult for the international players to crack and that will remain the exclusive preserve of the local players. Carol Tomé, Chief Financial Officer of Home Depot who has been overseeing the company’s Chinese investment for 18 months, described Home Depot’s difficulties in China in an unusually candid interview that she gave to the Atlanta Business Chronicle.
In the interview, Ms. Tomé said that Home Depot thought it could replicate what it had done in the United States — change the distribution channels, get rid of the middlemen and get products directly from the manufacturers. “Six years later, yes the middle class is growing in the market but it’s not a ‘do it yourself’ market,” Ms.Tomé said. “They don’t live in houses with garages for tools. They wanted to hire someone to do it for them.” According to Ms.Tomé, Home Depot was unable to break the distribution network in China, eliminate the middleman and leverage its worldwide supplier network.
Competition in China is fierce, especially in China’s extremely fragmented retailing industry where literally hundreds of thousands of companies sell goods all over the country. When it comes to ordinary household goods, such as those carried by the likes of Home Depot, Tesco, Carrefour and Wal Mart, the Chinese are extremely price sensitive. Because many consumer products are now made in China and available from a number of sources, the Chinese have many choices as to where to shop. In this environment, the international retailers have been unable to distinguish themselves from the local vendors where most Chinese prefer to buy the food and other items that they use on a daily basis.
As Ms.Tomé highlighted in her interview, the Chinese culture is very different from Western culture.“Their way of doing business and their way of interacting with others is different.” For example, the Chinese are used to “haggling” when they go shopping. And that’s not part of Home Depot’s business model.
Reflecting on Home Depot’s experience in China, Ms. Tomé said it will not dissuade the company from seeking opportunities in other international markets. As far as China, she believes that the focus will be less on bricks and mortar and more on e-commerce. Despite Home Depot’s difficulties, Ms. Tomé is adamant that “China is too big to ignore.”