China: Exodus Of The Foreign Large Distribution Giants

After years of profits and expansion, the giants of Large Organized Distribution (LOD) are encountering new challenges in the Chinese market. French LOD Carrefour was a market pioneer in 1995 and the first to turn a profit. It invested in a chain of local distributors that allowed it to open 206 supermarkets in 64 Chinese cities. Now – as second largest distributor on the world – Carrefour has been the subject of a growing number of predictions that it will soon sell off its stores in China. The decision is likely to follow Carrefour’s pullout from Singapore and closures in other Asian countries, Italy, and Greece. Even Wal-Mart, which built its empire on impeccable logistics, has declared that will reduce, and possibly halve, new store openings. After opening 370 stores in China, the American giant is reconsidering its commitment and type of involvement. Another American LOD, DIY giant Home Depot, is closing a hundred stores and leaving China. Chinese consumers are indeed attracted by the quality and prices offered by foreign LOD chains, but are uncomfortable with the complex outlets spread across multiple floors, making it difficult to find exactly what they are looking for. More recent research has shown that historical familiarity with traditional stores clustered according to type has been discarded too hastily. In its search for a solution to compensate its disengagement, Wal-Mart has invested in e-commerce via the acquisition of 51% of Chinese online retailer Yihaodian. Tesco adopted even more drastic measures. After a round of layoffs and failed partnerships, the British distribution chain has decided to close some of its sales points to cut its expenditure. These decisions are not motivated solely by cultural reasons. Economic reasons, such as employment and rent costs play a more important role. The combination of excessive supply and fluctuation demand has also had a decisively negative impact. Expectations turned out to be far too optimistic, while real estate speculation – this time on commercial space – has led to the opening of unnecessary sales locations. Government intervention will become necessary if consumption does not pick up, especially in times of a general slowdown in the economy. A stimulus package is expected to be announced immediately after the People’s Congress, where a new leadership will be selected. Among the measures being considered is a loosening of restrictions on the importation of luxury consumer goods, which should encourage retail sales. As in 2009, an economy that is off balance in its investments needs to spur family savings towards consumerism. Unsurprisingly, the Shanghai stock exchange registered a sudden increase in the shares of listed companies tied to the organized distribution sector. In the hopes that investments in China will finally be paced in relation to expected consumption and not driven by psychological factors and domestic liquidity, supply grows ever faster, causing a compression of margins even in sectors experiencing strong growth.