Carrefour has been doing business in China since 1995 and is very familiar with local customs and trends. The company executives believe that rapid changes in consumer behavior in the countries where they do business are promising. China is the continent with the greatest potential for long-term growth. Through its becoming a member of the World Trade Organization in 2004 it opened a market of over one billion people to international companies (Carrefour official website).
Carrefour has become the country’s top foreign retailer. Now it is expanding in fifteen of the seventeen major cities. In 2001 a process of Carrefour’s legal structures reorganization, which was being carried out in cooperation with Chinese authorities, temporarily slowed their growth in the country and delayed some store openings. Solely on the basis of its marketing strategies the Group increased its sales in local currency by 15% comparing with 2000. At the end of the year Carrefour received the authorizations required to continue its growth. It resumed its expansion projects in January 2002 and had plans to open between seven and ten stores a year further on. China’s membership in the World Trade Organization opens up new possibilities of medium-term growth for international retailers. Carrefour is in a good position to take advantage of these opportunities.
The US retail giant, Wal-Mart, entered the China market in 1996 and concentrated on the southern Chinese province of Guangdong near the Hong Kong border. The reason for it was, first of all, that the Hong Kong border is the door to outside world and, secondly, the city government provides this special economics region with preferential tax treatment. Wal-Mart made the boom city of Shenzhen its first focus and since has established chain stores in cities like Dong guan, Dalian and KunMing. Compared to its French-based rival Carrefour, which opened about 50 chain stores in China, Wal-Mart has pursued a conservative strategy in China and has 26 units now, including Super centers, SAM’S CLUBs and a Wal-Mart Neighborhood Markets. However, in October 2000 Wal-Mart announced that it was investing 85 million USD to grow its network in China. This meant that Wal-Mart’s presence in China increased dramatically in 2000/2001. Almost as many stores were opened in 2001 as in the previous five years of operations. Now the chain seems to be intent on catching up with Carrefour and is expanding out of Southern China into Beijing and other provincial cities. Sourcing in China is significant for Wal-Mart’s operations and the company is the largest single sourer in the PRC. If Wal-Mart was a nation it would be China’s eighth-largest export destination. To sum up, Carrefour established stores in 15 cities first and then integrated them to gain economies of scale and scope.
It is obvious that from 2001 Wal-Mart boosts the speed of store opening in China. The number of new stores opened within the following three years was double that of the previous five years. Besides that, Carrefour, which had just stepped out the reform limitation, was even more too impatient to wait for expansion. According to statistics Carrefour launched eight new stores from January to August 2005, one each month in average. The competition of two giants began when they faced each other through the dithyrambic roping strategy in NanJing, TiaNjing, Kunming, Changsha and Dalian. Carrefour and Wal-Mart were hassling up to at least 20 major cities.
Although there are many foreign and world class retailers in China market, their strength cannot be compared with ones of these two giants. Despite local competitors, Carrefour and Wal-Mart are the only rivals for each other in China market. Hence, taking into consideration and having analyzed strategies, situations and major factors which lead to success, we can come to a conclusion that it is an oligopoly competition.
Carrefour took advantage
Although the world ranking indicates the strength difference, Carrefour and Wal-Mart ranks the same in China retailing market which gives even more suspense to this competition.
Both were launched in China market nearly at the same time: Carrefour came in 1995 and Wal-Mart was one year later. But Carrefour has carried out more outstanding achievements in China than Wal-Mart. Business department published retail statistics which show that up to January 2006 Carrefour ranked number one among China foreign chain enterprises with 240 stores and 372.25 billion RMB sales. Wal-Mart was only number 2, with 56 stores and 53.45 billion RMB sales that are not even half of Carrefour’s. Therefore, from single store sales point of view, Wal-Mart is in obvious disadvantage. As for the profit aspect, Wal-Mart China is one step backward. According to the investigation of China commercial union, Wal-Mart China lost 2.4 billion RMB in 2002 and this loss decreased to 40,000,000 RMB in 2003 until early 2004 when Wal-Mart China reached breakeven. But Carrefour China makes profits in 2003 already.
In order to explore details about the differences we can see that Carrefour China occupied the advantageous position and shows better understanding of and adaptation to local market requirements.
Although the experience gained in Taiwan market helped Wal-Mart China, its flexible reaction needs more policy decentralization. Marketing executive of Carrefour said that ‘there is only one person needed to carve out, every time Carrefour enters a new place. Only one person is appointed in Carrefour Taiwan market and one person for China mainland.’ This parlance maybe a little exaggerated, but the abundant authorization is certain. Carrefour is more like a local retailer rather than a foreign firm, although the stores are wide spread; each of them is a successful legend.
The right location is half success
Once Carrefour came to China, it occupied commercial shopping areas in the front lines of metropolitan cities. On the other hand, Wal-Mart stores were located mostly in south-west China cities and entered only Shanghai, Beijing and Guangzhou – the cities with the largest purchasing power. However, Carrefour also entered those three cities stealthily.
Location, a necessary condition of retailing, determines the success of business and can not be ignored. Six Carrefour stores in Shanghai, for example, make the revenue of nearly 30 billion RMB a year. That’s a challenge for Wal-Mart.
Nevertheless, opportunity never waits for anyone. Though the retailers competed in front line cities, they had to follow the government restrictions. Wal-Mart opened only one store in PuDong, a new district in Shanghai, and couldn’t enter the central part for the government had stated that all chain stores or large markets were to be regulated. Business program of 2003 restricted the number of hypermarkets (larger than 10000 square meters) - within the inner city there could be not more than 60 and the existing number of hypermarkets within Shanghai is more or less 60.
Even though Wal-Mart enters some cities, the location is doubtful. The reason for this is Wal-Mart’s low cost strategy which led to stores location in devious areas where rents are lower. This strategy worked well in the US because its community is not concentrated and car is a commonplace vehicle. In China cities the population is locally distributed. Even in metropolitan cities satellite towns are still under construction. Moreover, cars are not common for household use; the majority of people are still shopping within walking distance or using public conveyances. Consequently, the cost reduction strategy of Wal-Mart China is not optimal and restricts customers’ liquidity.
Comparing with Wal-Mart, Carrefour acts smarter when choosing a place to situate a store. According to my investigation, nearly all Carrefour stores locations are more appropriate to compromise China household shopping activities. Since 11 years ago Carrefour had entered China market, it was insisting on launching its stores in business commercial areas. For example, in Chongqing two Carrefour stores were opened: in JieFangBei and GuanYin Bridge flourishing shopping centers. On the contrary, Wal-Mart chose west village which is quite far from business and residential areas. (This situation may change later due to the completion of city light-train)
Wal-Mart may had realized what a ponderate problem that is and opened new stores in city centers of Shenyang, Guiyang, Nananing and two hypermarkets in business commercial area of Beijing.
The statistics I collected include locations and total sales before and after Wal-Mart changed its strategy in comparison with Carrefour, which insists on locating in central areas.
( leave this part blank please, that I will fill in the relative statistics and analysis later)
Digitalization
Wal-Mart was a cost advance competitor. Despite far location and low price strategy, the high efficiency generated by Wal-Mart’s high-tech information system and efficient usage of retailing economics of scales are among its advantages. Wal-Mart has spent more than half a billion dollars for information technology facilities to connect their global stores with headquarters. Meanwhile, Wal-Mart requests suppliers to adopt electronic data interchange system (EDI).Using this EDI Wal-Mart can transfer information swiftly and has saved three fourth of stocking-holding costs. Moreover, the HQ is able to carry out stock-taking of each item either on shelf or in stocks within an hour in more than 4000 stores all around the world.
In the US the high efficient information system co-operates with high automatic material liquidity system minimizing Wal-Mart’s stocks and time storing. In addition it compresses operational costs. For each store it takes only 2 days to send information to the suppliers via Internet and get products replenished while their rivals normally spend five days to do it. For 10 years (from 1989 to 1998), Wal-Mart has boosted its sales from 258 to 1376 billion dollars; the average growth makes 433%. However, the stock value meanwhile has increased from 4700000 to only 17500000 dollars, - this makes 272%.
Wal-Mart has a proficient storage management system which allows it to replenish goods twice a week and reduce storage space and delivery time further. Consequently, it boosts 2.5% of profitability by the cost reduction and time saving.
In 1980s Wal-Mart started using EDI to contact suppliers in the US. This method operated smoothly in the rest of the world too, but at the moment China’s business environment restricted Wal-Mart’s effective information advantages. China Internet is far more backwards than one of the rest of the world, especially what concerns business use. Besides that, most China suppliers are not provided with modern software or actual data bases. That’s why they can exchange only small amounts of the simplest data. In addition, from the policy point of view, Wal-Mart’s commercial satellite can not be used under Chinese national security policy; China Wal-Mart is unable to share the global stocking and distributing system. Although this advantage seems to be of no use in Chinese market at present, in the future, as China market is becoming more mature and connects to the outside world, this particular cost minimization strategy will be fully explored.
Physical distribution
Another Wal-Mart winning trump is an effective use of the scales economics. This includes stocking and logistics scale economy. Wal-Mart always prefers buing national or world famous brand. This maximizes usage of economic purchasing scale and, hence, reduces costs. However, in the present China market circumstances this operation is restricted. The reason for it is decentralization of China consumption industry and small scales of the most producers. Most brands located within an area are known only within that area. For example, in Shenyang milk production the local brand is HuiShan; although MengNiu is nationally famous, it can not compete equally in Shenyang. This happens because local citizens believe that HuiShan is nearer so its products are fresher than MengNiu’s. Wal-Mart promotes the principle of direct purchasing from producer, but in China producer’s agents are more commonly accepted than direct purchasing.
Material liquidity scale economy is actualized through distribution centers. A powerful distribution centre could support 120 stores and service radius of above 500 km. Therefore, the stores density within effective servicing area is another aspect of cost reduction. In the US Wal-Mart locates high density of small town stores, which exert the scale economy more efficiently. Only a few experimental units were launched in some large cities of China. In order to use this expensive material liquidity centers effectively, Wal-Mart has to choose location around Shenzhen in the early period. In the northern part of China, Wal-Mart is depends mostly on Tianjin material liquidity center. Such an expansion strategy is restricted by its opponent – Carrefour, which has already occupied the most valuable locations. Now in order to increase the stores area density, Wal-Mart tends to move to the 2nd level cities rather than compete with Carrefour in large cities.
Unlike Wal-Mart, Carrefour emphasizes purchasing decentralization in particular, that’s why it is better acclimatized to China market. Carrefour does not have a material liquidity centers in China. Its authority is transferred to a lower level i.e.: store managers. They have the power to decide where to buy from. Most Carrefour stores combine local, national and world brands together but emphasize local brand and that is another successful strategy.
Localization
Comparing with Wal-Mart, Carrefour is more experienced in foreign market expansion. The success of the enterprise was caused by sufficient localization of its stores all over the world. Comparing with its old opponent, Wal-Mart, Carrefour is more recognized internationally and that is the main trump of Carrefour’s operational strategy. Carrefour CEO confidently denotes that Carrefour is the biggest international retailing corporation. It is true that local culture is not ignorable and Carrefour is convinced that ‘a retailing branch is an epitome of the country located’ so the local branch must adapt the local culture. To ensure and guarantee success Carrefour carries out a detailed and exact investigation of local lifestyle, consumption level, population growth, urbanization, living conditions, traditions, consuetude, economic situation, faith, ideology, middle class percentage and even feminism tendencies. This investigation lasts two years in average.
‘Retail industry is to concern details and is aware of customer’s demand, where after, acclimatizes itself to different countries. In China, you have to be Sinitic that will lead to success, because customer is motility of modern economy.’ According to this CEO’s instruction, every Carrefour in the world endeavors to fit to the local culture and satisfy local residents’ shopping demands. In Thailand Carrefour soap, dentifrice and food are gathered in a barrel which is specifically prepared for handing out to a customer; in Japan, consumers tend to buy products which were produced in France, therefore Carrefour always deliver French goods to Japan. Moreover, in China, unlike Wal-Mart’s high living standard strategy, Carrefour is more concentrated on common consumption group with low living standard. Besides, major Chinese transportation can not carry much, that’s why Carrefour sells food or even water in small packages.
In addition, Carrefour always pays attention to purchasing and employees localization. They exploit the potentiality of economies of scale and accommodate local sourcing, fresh fish and meat for example, to achieve the objective of quick response (lhermie, 2001). Carrefour has constructed eleven procurement centers in developed cities like Beijing, Shanghaj and Tianjing, and they are directly responsible for headquarters in France. Such an action not only reduces costs of transportation and distribution but also does favor for local government which presents kind gestures in turn. China has become the biggest procurement center in Asia and procures more than 1.5 billion dollars yearly. Carrefour believes that localization of employees makes combination of operational theory and practical operation much easier. Thus, Carrefour has removed foreign managers backwards recently and this comes with more obvious localization of employees. Some managers, such as Shenyang and Beijing are China citizens. In addition, Carrefour manages to choose experienced retailers in new locations and build up relationships with them, so obtain support from stocking and human resources, moreover, become familiar with local market very soon. The classical example is 1989: Carrefour joined with the largest food factory in Taiwan and benefited from its partner.
While opening shops without a stop everywhere, Carrefour successfully conjugated with local governments. When Carrefour’s largest opponent was following the central government policy—operating centralization in Guangdong, Carrefour had expand massively and stealthily all along China. Carrefour’s vice president indicates that: there are three conditions for Carrefour to be successful in China market: localization, support from local government and excellent partners.
Wal-Mart does not act as smart as Carrefour though Wal-Mart worked closely with central authorities and was extremely careful not to exceed the guidelines and regulations. It means that Wal-Mart had no argument for Beijing which has been a hallmark of Carrefour’s development but also Wal-Mart didn’t manage to build a national network the French retailer has. Although Wal-Mart discussed store opening issues with Shanghai, did not compromise with the government about removing procurement centers to Shanghai as well as insist on central clearing. The consequences are that even though after eight years Wal-Mart opened a store in Shanghai it had already lost an excellent opportunity for further expansion.
Wal-Mart insists on copying success in the US and creates thirty shelf shortages in Shanghai Branch. But it is considered that there is a problem in supplying. China suppliers are not adapting Wal-Mart pattern at present. Wal-Mart has been forcing its suppliers to use EDI system since 1986 and this is made a great impact to the US success. But at the moment Chinese business environment restrict Wal-Mart’s advantages. Meanwhile, due to policy restrictions Wal-Mart can not use its satellite transmission system, thus its global procumbent and logistic system can not work in China market effectively. Again, over-area chain distribution is hard to actualize. All these realities indicate that it is hard for Wal-Mart to have no solid operational basis which would have to repeat the US success. However, the significant thing is the scale of stores - it is Wal-Mart China’s current weakness.
Wal-Mart retorts
Having faced such an enormous market opportunity Wal-Mart appears to be much weaker than Carrefour. Firstly, Carrefour occupied front line cities. Secondly, Carrefour’s policy is more localized and recognized widely. Of course, Wal-Mart endeavors to build up close relationships with China market, it even compromises with Chinese national union that allows it to construct a union, but it is known that Wal-Mart is against unions in other countries. Although Wal-Mart did not agree, having considered all pros and cons it had to make a compromise finally. Wal-Mart China CEO decides to expand in second and third level cities further to increase the density of stores and, hence, solve many problems.
Conclusion
Entering an international market requires any company to use certain specific and unique for each country strategies to gain an immense success.
Having discussed and analyzed an oligopoly competition of two large corporations, we can come to a conclusion that even if there is only one serious competitor in the country’s market, the company should never forget that it is a guest in the country and, hence, should, first of all study the country’s tastes and demands before offering any product or service.
Wal-Mart’s mistake consists in using the same strategies that were used in the United States. Yes, they were successful, but one must consider that the Chinese market is a completely different thing: different culture, different legislative regulations, laws and policies, different tastes. National culture – a concept which includes a great number of specific issues – is one of the first factors to be evaluated when starting business in a foreign country, was almost completely underestimated by Wal-Mart and, in its turn, made it become weaker in comparison with Carrefour.
