Entry Mode and Initial Management System
Entry into China was via a Joint Venture with Chinese management consulting firm Zhong Chuang and both established a firm called Jia Chaung in which Carrefour had majority shares. Although there had no options at the time (Chinese law enforced JVs as only means for entry) as seen in Figure 4 below, JV/Alliances is the recommended strategy in high market and cultural risk environment such as China in the 1990s (Durand, 2007).
According the “Relatedness Matrix” (figure 5) entering into China was a heartland business for Carrefour as it could leverage on its 20 years of experience in global retailing and replicated some of its best practices in the region. Ward (2005) as cited by Icmrindia (2006) says “Carrefour has gotten right China much more successfully than “Iconic” Wal-mart”.
Till the 1980s China’s retail industry was fully controlled by the government and Carrefour entered in 1995. The company recognised the influence that this formal institution and the informal one within it would have on its success in China. In a bid to build social capital, it entered into direct deals with the local governments of various provinces to get approval to open its stores (Icmrindia, 2006).
This social capital proved invaluable when in 2001 Carrefour allegedly had illegal operations in China against the “Experimental Method for Foreign Businesses Investing in Commercial Enterprises” which stipulated it must operated only Joint Ventures and not wholly owned subsidiaries. Carrefour was found to have 100% stake of some stores. The consequences of this ordinarily should have been dire, and led to shutdown of Carrefour’s operations. Instead an apology was made by the then CEO saying “sometimes we may not understand rules and regulations”. The business did not go “down-hill”, after all, “it was issued a warning yellow card and not banished by a red one” (People’s Daily, 2001).
Carrefour was keen on being Chinese in China and its management strategy reflected this. Majority of its staff were Chinese (NewsGD, 2008), store managers were also Chinese and they were empowered to run their stores freely (Direction, 2008). The stores and its branded product were designed to suit the frequency and portions preferred by Chinese customers (Burt et al, 2008). To satisfy the Chinese preference for fresh food, Carrefour developed a supply chain system with majority of its procurement being carried out locally. As such, the retailer successful averted culture clash that did Wal-Mart-in in Japan (Icmrindia, 2006).
Its business strategy of high value and variety at low cost (Figure 6) enables it cater to both the growing “western-culture-seeking” middle class and the vast population in the rural cities.
At point of entry, the Chinese economy was in the growth phase and urban preferences appeared to shifting towards westernization. Carrefour recognized that bringing the French way of business to China would be an error as less than 20% of China’s population lived in these urban areas. Carrefour recognized the diversity in China and tailored its operations to satisfy this diversity. As Chairman Jean-Luc Chereua puts it “China is nearly as big as Europe and each area differs from the other. We have to keep learning something new (Forbes, 2006).”
Evolution of Strategy.
1995 - Carrefour looked for passive partners, willing to give it the control needed to realize the learning curve. It did not face cost pressure, as the partners had strong alliances suppliers and owned distribution networks.
2004 – Challenges arose when Chinese central government restricted further expansion. In conformance with the government requirement, it reduced the number of holding companies to one per partner and reduced its stake to 65%. Carrefour played a complex strategy relative to different level of government. However as its non-conformance was flagged by the national government, it managed to technically comply with law, but was not aligned in spirit.
2005 – Even though the restriction on ownership was relaxed, it continued to work with JV. Its network within the local community, government and vendors, along with knowledge of good suppliers, distributors were valuable.
2006 – New regulations were introduced that would impede expansion plan of foreign players. Carrefour could no longer get support from the local government.
Acquisition of Trumart – Acquisition of Trumart, gave Wal-Mart a big market presence that reduced the gap and limited the potential for organically. It probably triggered Carrefour to consider acquisition (Child 2006). Acquisition has not been the natural style of Carrefour and its reluctance is evident.
Today, while it has retained good partners Carrefour focuses on wholly owned outlets. It has grown organically while also being actively involved in acquisition.
3.1 Evolution of Management System.
Carrefour China maintains a flexible management approach. Operations are organised to exploit its firm specific advantage. Initially Carrefour relied heavily on the local partner’s knowledge of the culture, taste, preferences and its network of supplier and distributors (Child 2006). However, having drawn the sourcing and merchandising experience from its local partners, staffing from its own Taiwanese operations and Carrefour China Institute, and permissive government regulations, Carrefour went on to open wholly owned stores.
Carrefour’s primary concern with local responsiveness led to a localisation strategy with decentralised management system (Grace 2005). Currently the management structure has four levels, Chinese HQ, Greater regions, regions and stores. The regions are equivalent to independent country-level companies with dedicated functions; Human Resources, Financial affairs, operations and marketing. Each region acts as a stand-alone entity and the need for coordination between areas is minimal (Sinocast China Business Daily news 2005; 2007).
The operational decision-making is delegated to store level. This provides flexibility and quick responsiveness. However an increased level of organisation structure and resulting lack of coordination and communication is evident from their slow response to the Olympic boycott. There was delay in awareness amongst PR officers at the branches on the event and the activities happening at the Chinese HQ. It indicated inconsistency in communication and coordination that are hallmarks of a highly decentralised structure (China Business 2008; Hill 2009).
3.1.1 Store Management
Carrefour started learning about Chinese consumer behaviour with main cities on the coast and expanded into the rest of the China (Child 2006). It moved from its hypermarket format in the big cities and became more local in its orientation, adapting its formats and products to different regions. Carrefour conducts detailed research on the local culture, customs, consumer preferences and purchasing power for a year before opening a new store (Grace 2005). It relied heavily on the knowledge of local managers and maintained a flexible approach in store management. Each store was considered as a profit centre and decided its format, size, product offerings and purchases. This enabled Carrefour adapt to the taste and preferences of the local customer that varied significantly across regions (Qin 2004, Child 2006). However in a place like China where there are serious considerations on ethical practices, high levels of autonomy can lead to non-conformance with business objectives and code of conduct. Past cases of counterfeit products and recent bribery case that involved 8 purchase officers highlights this concern (Dyer 2007; Fong 2006).
3.1.2 Supply Chain
Carrefour sources 90% of its products locally and adopts a combination of centralised and decentralised sourcing (Saravanan 2007). Initially, it empowered purchasing rights to four regional sourcing centres. This allowed Carrefour to cater to the needs of local customers while lowering the purchasing cost (www.supplierchainer.com). Although it has enabled it keep prices lower than Wal-mart (Li 2004), it does not assure product quality and delivery but saves cost and time. However in 2001, Carrefour strengthened the authority of controlling logistics and purchase for some products into the Procurement Division of the Regional Headquarter in Shanghai, and implemented direct transactions and mass purchase from manufacturers so as to realize low-price strategies as well as to keep profitability. Carrefour demands various rebates, promotion fees, and cooperation money from manufacturers through direct transaction that allowed it to secure 20-30% gross margin of the sales trade from manufacturers before selling their products. Moreover, it also used manufacturers to deliver those goods to each store (Huang 2003). Unlike Wal-mart, Carrefour believes that underdeveloped infrastructure in China makes an efficient central distribution unfeasible in design and cost (Child 2006). It relies on local distribution network that consist of 18 wheel trucks and 3 wheel bicycles (Lee 2006). This flexibility in management allows it to lower cost and cater to the different needs of the stores.
3.1.3 Human Resources
At inception, Carrefour used trained employees from Taiwan because of their knowledge of Chinese market conditions, culture and Carrefour operations (Child 2006). French and Spanish expatriates were used in top management positions. This enabled it to infuse company values and philosophy (Holtreman 2000).
Although China has a large population, it had only 3 million graduates in 2005 and only 10 percent will be suitable for employment in large multinational companies (Global Retail Development Index 2006). Carrefour sensing the problem started its own institute that now provides a constant source of trained Chinese staff (engendering the ‘Carrefour Spirit’) as it expands aggressively (Grace 2005). Carrefour believes in developing competence and relying on local management trained by expatriates in running multicultural enterprise. In 2007, out of the 60,000 Carrefour China employees, only 80 were expatriates and 13 these were Taiwanese (Shastry 2004). New stores are staffed by rotating members from existing stores. Carrefour retains Chinese staff by paying good incentive and training opportunities. They also have training courses at the HQ in France for some local managers (Huang 2003).
Carrefour is aware that CSR policies impact decision making which affects social, environment and economy. It has incorporated CSR as a part of its management system. The CSR are not largely restricted to the organisational stakeholder directly affected by decision-making and organisational practices.
Liability of Foreignness
MNCs doing business outside the home country face considerable challenges. Foreign firms have to overcome a liability of foreigners, which is the inherent disadvantage that foreign firms experience in host countries because of their non-native status. (Mezias 2002, Zaheer 1995, Miller & Parkhe 2002). These exist in form of differences in regulations, languages, cultures, and norms. To maintain competitive advantage, foreign firms need to employ considerable amount of resources and capabilities, which overcome these liabilities of foreignness.
Carrefour has been able to succeed in China, mainly due to its high learning capability leading to growth through the implementation of a combination of entry and growth strategies which were ‘Chinacentric’, differentiating it from other foreign players (Saravanan 2007).
The major liabilities of foreigners identified by Carrefour in the formulation and implementation of their entry strategy include:
- China government interference in retail market and industry through regulations and policies
- High institutional and cultural differences
- Significant use of social capital in business relationships.
4.1 Government Interference
Carrefour entered China in 1995 shortly after the Chinese government opened up its retail business to foreign investors in “measured strokes” in 1992 (Li Heng, 2001; Business Alert China, 2001). The structure stipulated by the Chinese government required:
Chinese government also favoured local retailers. In 2004, the Chinese government selected 20 local flagship retailers for special financial support.
Although the Chinese Government had opened up its retail sector to foreign retailers, foreign retailers may continue to face regulatory problems in China. In December 2006, the government drafted new rules that impeded Carrefour's growth plans. According to the new rules, foreign retailers would be asked to file details of their proposed expansion plans and hold public hearings on the impact of their outlets on the communities.
4.2 High Institutional and cultural differences
A prime example is the ”Chinese way of conducting business” which points out the attitude of the Chinese towards a signed contract as not binding showing that there is high cost because explicit contracts are not used and that it is difficult to enforce such contracts.
4.3 Criticality of Social capital
The success of Carrefour in China is attributable to their learning and adaptability. It seems it practised the Chinese way of doing business when it circumvented the federal government restriction/regulation on ownership limit and number of outlets per city. These they did by appealing directly to the local governments rather than abiding by the central government’s regulations. This brings a question of whether Carrefour has become more adept at the Chinese way of doing business more than the Chinese themselves.
Carrefour adopted several strategies to combat their liabilities of foreigners and gain/maintain competitive advantage. It considered the country to be comprised of several small markets and approached these markets with flexible procurement, store management, marketing, and service strategies. According to Chereau, "China does not have an easy market; the country is more like a continent where the variety of cultures and traditions set up challenges for us in how to adapt our concept to each area. We have to deal with strong differences between cities and provinces, and with different institutional levels in the country. However, it is a fantastic challenge to adapt our concept to each area of the country. (Selami 2007).
On assessment of the liabilities of foreignness identified by Carrefour in choosing and implementing its entry strategy, there is still much to learn about Chinese behaviour and attitudes. In 2007, it underestimated the reaction of the Chinese consumers to the Dalai lama incident in France which led to a boycott of Carrefour stores in china. It probably assumed that this was not a pressing liability but this liability crystallized in 2007 and still affects their business till date.
Carrefour’s procurement policy, allowing store managers decide on the merchandise to be stocked, was also criticized. Due to this policy, widespread corruption was reported in several stores. In April 2006, the Shanghai court imposed a fine of £25,000 on Carrefour for selling fake Louis Vuitton handbags. To address these issues, Carrefour formed a special investigation team, which conducted surprise checks on the stores and interacted with the suppliers leading to more cost.
Recommendations and Conclusion
Carrefour benefited immensely from the local partner’s knowledge of the regions competitive landscape, culture, language, political systems and business systems. It also benefitted by sharing the development cost and the risk of operating in foreign market. It acquired local customer knowledge which helped reduce its liability of foreigners.
It is a widely accepted truth in business, that “no matter the level of success, things can always be improved”. Despite Carrefour’s apparent success in China (which cannot be said for the iconic Wal-Mart), there are things they could have done differently and further improved their performance.
However there exists risk of duplication and inconsistency with organisational objectives.
The pursuit and evolution of JV to a combination of JV and WOS entry modes cannot be faulted; it was the right direction which offered the best advantages to Carrefour. However, their implementation of this could have been improved upon by:
- Improving the communication between HQ and regional offices. If the communication had been good, the boycott incident in 2006 could have been handled better.
- Incorporate better measures to ensure and control quality of products in the stores
A critical review of events has demonstrated that in China, Carrefour relies heavily on learning and It observing its competition. Carrefour also shows flexibility in dealing with current realities to increase operational efficiency (Child 2006).
Appendix 1: Retailers and dependency on foreign sales
Appendix 2: 2008 Results highlighting contribution per Zone
Source: Carrefour, 2009
Q 1 2008,
Q3 2008
Appendix 3: The Carrefour Group
Source: www.carrefour.com
References
Burt, S, Davies, K., Dawson, J, Sparks, L., (2008). Categorizing Patterns and Processes in Retail Grocery Internationalization, Journal of Retailing and Consumer Services, (NewsGD, 2008).vol 15, pp. 78-92
Carrefour (n.d), General Information on the Company, . [Accessed 16th march, 2009]
Carrefour, (2007 and 2009). Financial Reports, 2006-2008, Carrefour S.A
Center for Management Research, (2006). Carrefour’s Strategies in China, [Accessed 16th March, 2009]
Child, P.N., (2006) Carrefour China – Lessons from a Global retailer, McKinsey Quarterly,
Child, P., N. ( 2006). , The Mckinsey Quarterly. New York: p. 70
China Business (2008). Thirteen days of crisis at Carrefour. 26th April 2008. Available at [accessed on 10th March 2009].
China Daily (2007). Retailers on Alert for Food Quality. Available at [Accessed 10th March 2009].
Durand, C., (2007), How Institutions Affect Retailers’ Internationalization? – a comparative analysis of Wal-Mart abd Carrefour Trajectories, EAEPE Conference.
Dyer, G. (2007). Eight Chinese Carrefour managers detained in bribery inquiry; [ASIA EDITION]. Financial Times. London : UK, 28th August 2007. pp 15. [Accessed vis Metalib on 10 March 2009]
Fong, K (2006). EU welcomes China tourist money, but not the fake goods. 23rd April 2006.
Available at [accessed on 10th March 2009]
Global Retail Development Index (2006). A T Kearney. Available at [Accessed on 10th march 2009]
Grace (2005). Carrefour China: A local Market. Available at [Accessed on 10th March 2009]
Hayet Sellami. Carrefour China: A Local Market. . April 28,2005
Holtreman, A. (2000). Carrefour vs. Wal-mart:The Battle for Global Retail Dominance: Unpublished. [Accessed on 10th March 2009]
Lee, J. (2006). French rival leads Wal-Mart in China. Available at [accessed on 10th March 2009]
Li, W. (2004) “Who Wins in Chinese Market: Wal-Mart or Carrefour” 24th August 2004. , Available at www.people.com.cn on 24/08/2004. Accessed on 10th march 2009.
Mezias, J. 2002, Identifying liabilities of foreignness and strategies to minimize their effects, SMJ, 23: 229–244;
Miller S. & Parkhe, A. 2002, Is there a liability of foreignness in global banking? SMJ, 23: 55–75; S.
NewsGD (2008). Carrefour’s Statement against Tibet independence welcomed: MOC, [Accessed 16th March, 2009]
No easy Way to Win in China: Carrefour, People’s Daily Online, March 31, 2004.
Paul K. Ward, Goofing up Global CRM, , September 6, 2005
People’s Daily, (2001). Business – How Many Tests Has Carrefour to Pass, www://english.peopledaily.com.cn/200104/10/end20010410_67348.html [Accessed 16th march, 2009]
Qin, F. (2004) “Wal-Mart vs. Carrefour: Comparison between Strategies in Chinese Retail Market” (translated title) 21st July 2004. Available at http://finance.sina.com.cn Accessed on 10th March 2009.
Saravanan I.B 2007, Carrefour in China: Savouring the success, ICFAI Business School Case Development Centre.
Shastry, U. S. (2004). Carrefour in China, ICFAI Business School Case Development Centre.
Sinocast Chine Business News (2005). “Carrefour sets up four level management frame in China”. London: UK. 10th May 2005, pg 1. [Accessed via Metalib on 10 March 2009]
Sinocast Chine Business News (2005). “Carrefour reaveals restructuring details”. London: UK. 31st Jan 2007, pg 1. [Accessed via Metalib on 10 March 2009]
Strategic Direction, (2008). Wal-Mart, Tesco and Carrefour do Battle in the East. Strategic Direction, vol 24, No 2, pp. 5-7.
(2006). Carrefour Launches New Supplier Management System. Available at [accessed on 10th March 2009].
Zaheer, 1995, Overcoming the liability of foreignness, AMJ, 38: 341–363.
08017014; 07014162; 08009719
Appendix 1 shows largest grocery sales retailers ranked by sales. It also shows the % dependency on foreign markets.
Appendix 2 shows financial reports in detail.
