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| Case Study* (100 Marks) · This section consists of questions with serial number 1 - 5. · Answer all questions. · Marks are indicated against each question. | | | | | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Read the case carefully and answer the following questions: | | | | | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| “The Chinese market is a lucrative destination for international players because of its huge population base, but stringent regulatory norms hold them back from entering China”. In this context, | | | | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| | a. Analyze the major business environmental factors in China that have attracted retailers such as Carrefour. | ( | 15 | marks) | | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| | b. Discuss the challenges faced by Carrefour while expanding in China. | ( | 10 | marks) | | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| “Entry strategy plays an important role in the international expansion of a company”. Explain why companies enter into foreign markets and the entry modes available to retailing companies. Why do you think Carrefour adopted the joint venture mode of entry in China? | ( | 25 | marks) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| “As Carrefour and Wal-Mart were quickly moving toward a frontal clash, questions arose in observers’ minds regarding which chain was better prepared to win in an increasingly global marketplace”. In the light of the strategies adopted by foreign companies like Carrefour and Wal-Mart in China, do you think Carrefour has a competitive edge over Wal-Mart? Discuss. | ( | 18 | marks) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| “Retailers are no longer just concerned about cost control, instead they view supply chain as a key element of their business strategy”. In this context, explain the significance of efficient Supply Chain Management (SCM) in retailing. Also discuss the SCM related challenges that retailers need to deal with when operating in countries such as China. Elucidate the factors that contributed to Carrefour having an efficient SCM in China. | ( | 20 | marks) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| “Carrefour had decentralized its operations, giving full freedom to store managers to operate their stores to differentiate themselves from the competition while satisfying and delighting their customers”. Analyze the role and responsibilities of store managers at Carrefour. Is Carrefour right in giving the store managers complete freedom in choosing the products according to the local demands? | ( | 12 | marks) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Carrefour’s Strategies in China “Carrefour has gotten it right in China – and, in fact, they’re doing mass retailing globally much more successfully than the iconic Wal-Mart, earning twice Wal-Mart’s revenue. What Carrefour is doing right (in additional to grabbing and building as many retail outlets as it can in the big cities) is simple: They’re selling in a Chinese way to Chinese consumers. You can pull your own seafood from tanks. You can select from bins of fresh produce. It’s more like a Shanghai outdoor market than a Paris indoor one. That’s the customer experience the Chinese consumer wants.”[1] – Paul K. Ward[2], CRM Consultant, in 2005. “China represents a huge market when it has acquired its WTO membership. But it’s no easy way to stand out a winner here. China is nearly as big as Europe and each area differs from any other. We have to keep on learning something new. We must know customers’ wishes and expectations, therefore offering them more added values.”[3] – Jean-Luc Chéreau, Chairman, Carrefour China, in 2004. THE ‘GREAT MALL’ OF CHINA In 2006, France-based Carrefour Group (Carrefour), the second largest retailer in the world, successfully completed eleven years of its operations in China (Refer to Exhibit I for the top 25 food retailers in the world in 2005). As of September 2006, Carrefour operated in China through its 80 hypermarkets[4] and around 250 hard discount stores[5]. China was Carrefour’s sixth largest market, with sales of over €[6] 2.06 billion in 2005 (Refer to Table I for the top six markets of Carrefour). Being one of the first foreign companies to enter the Chinese retail industry, Carrefour played a major role in bringing about a retail revolution in the country. It leveraged on its experience in the international markets and introduced a few of its global best practices into the Chinese market. Carrefour had adopted a decentralized management structure, where all store managers in China operated stores with complete freedom. Carrefour sold private label products and designed the stores according to the convenience of Chinese customers. By procuring the majority of its products locally, Carrefour was able to ensure their freshness, an attribute considered important by Chinese consumers. In China, where vast economic, social, and cultural differences existed among different provinces, Carrefour was able to cater to the needs of different customers successfully. Table I Carrefour – Top Six Markets (2005)
Source: Carrefour Annual Report, 2005. Till the 1980s, the retail industry in China was fully controlled by the Government. The department stores run by the Government provided little in the way of convenience. According to Wang Zhirong, General Manager of Tian Bai department store in Dalian, concepts like customer service and choice were unheard of. She said, “It didn’t matter how you did your job, when customers came they had to wait until the shop assistants were in a good mood before begging them for help.”[7] Carrefour entered China in 1995, when the Chinese Government had partially opened the retail sector. The country’s economy was in the growth phase and the urban consumers were shifting their preferences from the wet markets[8] and state-owned stores, to foreign retailers like Carrefour which provided convenience along with a wide range of products in hygienic surroundings (Refer to Exhibit II for retail industry in China). Carrefour went on to strengthen its position in the country and by 2005, it had emerged as the sixth largest retailer in China. It was also the largest foreign retailer in the country (Refer to Table II for the leading retailers in China in 2005). Table II China’s Leading Retailers (December 2005)
Source: China Chain Store & Franchise Association and www.carrefour.com. According to Beijing-based CTR Market Research[9], Carrefour was the major retailer in 15 of the largest cities across China, with a market share of more than 5%. Between 2006 and 2010, Carrefour projected revenue growth of above 20% per annum in China and planned to open about 80 more hypermarkets in the country by 2009. Commenting on Carrefour’s success in China, Los Angeles Times reported, “By joining with Chinese partners, adapting to local culture, and employing a supply chain that includes 18-wheel trucks and three-wheel bicycles, Carrefour has become the biggest foreign retailer operating in China.”[10] BACKGROUND NOTE In the early 1950s, the grocery industry in France consisted mostly of family-owned stores. Though there were some big department stores, these charged exorbitant prices. At that time, the concept of free service[11] was gaining popularity and there were very few stores in France that were providing such services. In 1959, two entrepreneurs, Marcel Fournier (Fournier) and Louis Defforey (Defforey) from Annecy in Eastern France decided to establish a large discount supermarket. Initially, they offered 7,000 shares to 10 stockholders and purchased a facility that was under construction. On the ground floor of the building, the duo started constructing a supermarket. They sold the upper floors, thereby obtaining the required capital to run the business. Fournier was the President of the venture and Defforey’s son Denis was the General Director. Fournier decided to name the venture Carrefour (Crossroads), as the store was located at the convergence of five roads in Annecy. At that time, another businessman announced his intentions of opening a similar store in Annecy. Fournier and Defforey decided to open a store at other premises as their facility was still under construction. Fournier used the basement of his office to open a store in January 1960. As the threat of competition was looming large, the duo offered products at the lowest prices. Soon, the store became very popular among customers. Before the new store at Annecy was opened in June 1960, a campaign was launched to familiarize customers with the concept of supermarkets. The campaign was highly successful and in the first two days, Carrefour attracted more than 15,000 customers. To accommodate the vehicles of the customers, Carrefour expanded the parking lot, but this was not enough to cater to the growing number of visitors. Several traffic jams were reported in the store’s vicinity and the founders concluded that locating supermarkets in the congested urban areas was not practical and decided to move to the suburbs. The next supermarket that was opened was also in the Annecy region in Cran-Gevrier. It had a large parking lot and a discount service station that sold petrol on a no-profit, no-loss basis. In 1962, Carrefour decided to open a store at Sainte-Genevieve des Bois, a Paris suburb 30 km away from the main city where land was easily available at low price. Before the store was constructed, Defforey and his brother went to the US to observe the retail practices prevalent there. After observing the huge stores, the discounts offered, the low prices and services that the customers were provided with, they decided to adopt similar practices in France. In 1963, they opened a new store. It occupied an area of 2,500 square meters and had enough space to park more than 400 cars. The store provided a wide range of items, including grocery at discounted price, stocked items like clothing, sporting equipment, electronic goods, and auto accessories. The store was inaugurated in June 1963 and its huge size earned it the name ‘hypermarket’ in the media. Carrefour offered products at the lowest prices as compared to its competitors by negotiating with wholesalers and suppliers. The concept of a hypermarket found instant acceptance among the younger people, suburban dwellers, and price conscious consumers. In 1965, Carrefour formed two divisions – Carrefour Supermarché led by Fournier and Denis and Grands Magasins Carrefour, headed by Defforey and Fournier’s son. Carrefour continued its expansion, opening huge stores in France. In 1966, a 10,000 sq. meters hypermarket was opened in Lyon and a 20,000 sq. meters hypermarket was opened in Vitrolles. In 1967, Carrefour opened an office in Paris to coordinate the activities of its different stores. In 1970, the company’s shares were listed on the Paris stock exchange. By 1971, Carrefour operated 16 wholly owned stores in France, had an equity interest in five stores, and also operated seven stores through its franchises. GOING GLOBAL Carrefour started making efforts to enter international markets after a law was passed in France in 1963 to restrict the development of large stores. For international expansion, Carrefour adopted the route of forming alliances with local partners. Its first international venture was in Belgium, where it opened an outlet in association with Delhaize Fréres-Le-Lion[12], in 1969. Carrefour expanded its operations outside Europe by opening a hypermarket in Brazil in 1975. In 1978, Carrefour developed a hard discount store format, under the banner Ed in France (Refer to Exhibit III for different banners of Carrefour). The store offered a limited range of products at very low prices. By 1985, Carrefour was operating in ten countries and had introduced private label products that were priced 10-20% lower than the branded products and were of superior quality. In 1988, Carrefour entered the US market by opening a 330,000 sq. feet hypermarket in Philadelphia. Another hypermarket in the country was set up in 1991[13]. In 1992, Carrefour reported sales of €17.86 billion and a net income of €271 million. In the early 1990s, Carrefour concentrated on establishing larger stores (area greater than 2,500 sq. meters) and sold off the smaller stores. In 1996, a law was passed in France under which food wholesalers were not allowed to give any extra discount to supermarkets[14] and hypermarkets. They were to charge an equal price from all retailers. Due to this, the advantage the bigger stores had in terms of cost was lost and the price of the products was uniform across different types of stores. The legislation was passed with the aim of protecting the small retailers from the onslaught of supermarkets and hypermarkets, which got a higher discount from the wholesalers and offered products at a lower price. The legislation led to the growth of discount chains that stocked private label brands. The chains started providing products at prices much lower than those at Carrefour. By then, Carrefour’s European operations were spread across Austria, Britain, Switzerland, The Netherlands, Germany, Italy, Belgium, and Spain. Ed was operating in Britain and Italy. Carrefour’s South American operations were doing well and the company was aggressively expanding into those markets. In 1996, Carrefour opened 30 hypermarkets across the world, of which 15 were in Argentina, Brazil, and Mexico. By 1997, the number of stores in South America had increased to 60. Some of the acquisitions made in the late 1990s helped Carrefour in becoming the top retailer in Europe. In 1998, Carrefour acquired Comptoirs Modernes SA, which brought 790 supermarkets into Carrefour’s fold. In 1999, Carrefour acquired Promodès SA[15], which owned several hypermarkets, supermarkets, convenience stores, and discount stores in France and other European countries. This acquisition made Carrefour the second largest retailer in the world. By December 2005, Carrefour was operating in 29 countries with 12,028 stores (including franchisees and partners) and employed 436,000 people (Refer to Exhibit IV for Carrefour’s consolidated store network excluding partners as of December 2005 and to Exhibit V for sales per store format and region). For the financial year ending December 2005, Carrefour generated revenues of €74.49 billion and net income of €1.58 billion (Refer to Table III for financial summary of Carrefour for the financial years 2004 and 2005). Table III Financial Summary of Carrefour (In € million)
Source: www.carrefour.com. CARREFOUR IN ASIA During the late 1980s, the economy of several Asian countries like Taiwan, Singapore, South Korea, Thailand etc. was rapidly growing. In order to reap the benefits of this growth, Carrefour started its Asian operations by entering Taiwan in 1989. It established a joint venture with Uni President Enterprises Corporation[16]. Initially, Carrefour aimed at building a hypermarket of 10,000 square meters, similar to its hypermarkets in France. On studying the Taiwanese market, Carrefour realized that the store format which had been successful in other parts of the world would not be successful in Asia as the Asian retail markets were different from the other markets, in terms of the layout of the stores, the products offered, the frequency of shopping, and highly price sensitive customers. Carrefour decided to adapt the stores, the products, and management culture to suit the local environment. Carrefour changed its strategy of building the hypermarkets in large open urban lands and began operating in high density urban areas in pre-existing buildings, when it found that the consumers in Asia did not wish to travel long distances to purchase groceries and other items as they shopped frequently and in small quantities. The first store in Taiwan was located in Kaohsiung and occupied an area of around 3,500 sq. meters. The number of products offered was limited and Carrefour concentrated on selling high volumes at competitive prices. Tapping the Taiwanese market was a big challenge for Carrefour as the tastes of the people in the country changed rapidly. The best selling products in a typical Taiwanese store changed within a span of just six months. In order to assess the trends, Carrefour opened pilot departments in the stores, where new products were tested. These departments interviewed some of the customers and studied their purchasing habits to monitor the changing customer preferences. The information was later communicated to all their other stores in the country. Local store managers and department heads were given more autonomy. The department heads were made responsible for the hiring of staff, procurement, product selection, and vendor management. They were responsible for achieving the budgeted sales and maintaining profit margins. In the initial years, senior executives from France were made department heads. Later, local employees were trained and promoted to assume higher responsibilities. Carrefour leveraged upon the experience it had gathered in Taiwan to expand into other Asian markets. The next destination was Malaysia, followed by China (Refer to Table IV for details of Carrefour’s entry into Asian countries). Carrefour’s Taiwanese experience acted as a prelude to its Chinese venture. The hypermarkets that Carrefour opened initially in China were similar to the ones that existed in Taiwan. According to Eric Deliers (Deliers), Regional Manager, Carrefour China, “Our Taiwanese experience was very important. It was Carrefour’s laboratory not only for China but for all Asia.”[17] ENTRY AND EXPANSION IN CHINA Carrefour identified China as one of the most important foreign markets, after the country partially opened its retail sector for foreign investments in 1992. Carrefour entered China in 1995 by forming a joint venture with the Chinese management consulting firm Zhong Chuang, and established a firm called ‘Jia Chuang’, in which it held the majority of shares. During that time, consultancy firms in China were not allowed to invest in any other businesses so Zhong Chuang set up another company, Chuang Yi Jia as a commercial enterprise. The joint venture company, ‘Jia Chuang’ managed the hypermarket that was opened in Shanghai, in a residential area, to cater to the needs of the middle class in the city. The hypermarket was named Chuang Yi Jia. As Carrefour had a major say in running and managing the store, 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, one of the prominent localities in the city. Table IV Carrefour – Entry into Asia
Source: www.carrefour.com. *Carrefour exited Japan in 2005 and South Korea in 2006. In China, as per the guidelines issued by the State Council, in the retail industry, Sino-foreign joint ventures were allowed to operate only at a few locations. As per the next set of guidelines issued in 1999, the foreign retail joint ventures were allowed to operate in more cities. Some of the conditions stipulated were that the joint ventures should be approved by the Central Government, and that only three outlets could be opened in each of the approved cities (Refer to Exhibit VI for Regulations of the Retail Industry in China). Instead of approaching the Central Government of China for approval, Carrefour entered into direct deals with the local governments of various provinces and convinced them that it would create employment opportunities[18] in their region, generate taxes for the government, and help in the overall development of the region. The local government officials were quick to grant Carrefour the required approvals. By 2000, Carrefour had established hypermarkets in Shanghai, Beijing, Chongquing, Qingdao, Shenyang, and Wuhan. Carrefour expanded its operations in China rapidly and by early 2001, it had 27 hypermarkets in 12 cities across the country, some of which were fully owned by the company. At that time, Carrefour was the third largest retailer and also the largest foreign retailer in China. Though foreign retailers were allowed to open only three outlets per city, Carrefour managed to open more than three outlets in several cities with the approval of local authorities. But there was trouble brewing for Carrefour. In early 2001, a cabinet level body, the State Economic and Trade Commission (SETC), carried out an investigation into Carrefour’s entry and expansion in China, after receiving complaints from its competitors. It was widely reported in the Chinese media that Carrefour had flouted Government stipulations regarding the ownership stake in retail joint ventures and the number of stores in each city. During the course of investigation, it was found that in some of the stores, Carrefour owned a 100% stake. The Commission ordered Carrefour to suspend further expansion in the country, in order to regularize its position according to the Chinese retail industry regulations. During the investigation, it was found that Carrefour had opened stores at locations that the Central Government had not opened up for foreign investments[19]. Industry analysts opined that Carrefour had deliberately flouted the rules and set up stores without approval from the Central Government. They felt that the company’s management was of the view that once its operations had spread widely across the country, Carrefour would be among the major employers and tax payers, a fact which would force the Central Government to subsequently grant the required approvals. This episode led to the then CEO and Chairman of Carrefour, Daniel Bernand, tendering a public apology during his visit to China in March 2001. On the bureaucracy in China, Chief Economist of Retail Forward Inc.[20] pointed out, “They can overlook rules and then suddenly decide to enforce them. That happened with Carrefour recently.”[21] By November 2001, Carrefour announced that the differences with the Chinese Government had been resolved and that the SETC had allowed the company to continue expanding its activities. As per the agreement reached with the SETC, Carrefour agreed to set up 10 procurement centers across the country, to procure Chinese goods which would be sold through its stores all over the world. Carrefour also admitted local partners and all its stores in the country were 35% owned by the local partners with the remaining held by the company. According to Jean-Luc Chéreau (Chéreau), Chairman, Carrefour China, “Sometimes we may have problems in understanding Chinese laws and regulations. But we always respond positively to the government’s requirements when problems arise, by rectifying our operation to make sure that the law is fully observed.”[22] In April 2002, SETC and Carrefour reached the final agreement, according to which the number of holding companies was to be reduced to 13. Earlier, Carrefour had 27 holding companies, one for each store. After the agreement, Carrefour formed one holding company for each of the 13 local partners (Refer to Table V for some of Carrefour’s partners in China). In June 2002, Carrefour transferred 35% of its ownership in three hypermarkets to two local firms – Chengda and Harbin Dongli Equipment Company. Carrefour opened its 28th Chinese store in Hangzhou, Capital of Zhejiang province, in June 2002 and by the end of 2002, its sales in the country had increased to €1.19 billion as compared to €1.18 billion in 2001. By then, the number of hypermarkets had increased to 30, with four hypermarkets in Beijing and six in Shanghai. By 2003, Carrefour had a presence in 15 cities and its sales had reached to €1.32 billion. In 2003, Carrefour opened its first hard discount store, Dia, in China by entering into a joint venture agreement with Shanghai Lianhua Supermarket[23]. They planned to open 300 discount stores in different residential areas in Shanghai by the year 2007. The joint venture was set up with total capital investment of RMB[24] 90 million. The goods sold through the discount stores were to be priced 10-15% lower than the goods sold through the hypermarkets. These stores were targeted at low and middle income customers and stocked only 1,500 varieties of goods as against the 35,000 varieties stocked by a typical hypermarket. Table V Carrefour – Partners in China
Source: Jean Kinsey, Min Xue, “Supermarket Development in China,” Globalization, China and the Industry Studies Program, Solan Workshop, MPI Worcester Polytechnic Institute, June 16-17, 2005. In 2004, Carrefour introduced the Champion Supermarket format in China, in association with a local partner The Beijing Shoulian Group[25]. By 2005, there were eight Champion supermarkets spread across the country. These stores were different from hypermarkets and were located in residential areas. According to Philippe Pauze, President, Champion Supermarket, “Champion supermarkets are specifically engaged in providing various fresh foods, including vegetables, fruits, meat, seafood, and snacks to the customers, so our chain stores are all set up in residential communities.”[26] In 2004, Carrefour recorded total sales of €1.62 billion. During the year, Carrefour opened 21 new hypermarkets and total hypermarkets in China increased to 62. By the end of 2004, the restrictions on the number of outlets that foreign retailers could operate per city were lifted and the foreign retailers were allowed to have 100% ownership. The Chinese Government also announced that the remaining restrictions in the retail sector would be removed by the end of the year 2007. In late 2005, Carrefour had stepped up efforts to acquire complete ownership of its Chinese stores. It bought the remaining stake owned by most of the local joint venture partners in its stores. Between 2004 and 2005, Carrefour’s revenues in China grew by 25% and it remained the largest foreign retailer in the country. In the first half of 2006, Carrefour generated sales of €1.26 billion in China, a growth of 28.1% as compared to the first half of 2005. As of May 2006, Carrefour had opened 230 Dia outlets in China. The number of hypermarkets had grown to 79 by July 2006 (Refer to Exhibit VII for Carrefour’s hypermarkets in China as of September 2006). THE STRATEGIES While most of the global retailers and consumer product companies considered China to be a single huge market, Carrefour adopted a different approach. It considered the country to be comprised of several small markets. The company approached these markets with flexible procurement, store management, marketing, and service strategies. According to Chéreau, “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.”[27] Since the initial years of its operations in China, Carrefour concentrated on keeping the prices low, keeping in mind the fact that for Chinese consumers, price was the main consideration. This made Carrefour’s hypermarkets very popular among the Chinese consumers. Even when the first outlet was opened in Shanghai, the managers were confident that their prices were lower than the prices charged by any other store in the city. Carrefour sold a wide variety of goods, which attracted consumers to the stores. Convenience was another factor that the company promoted. The Chinese consumers had to visit several places like wet markets for purchasing fish, grain markets to pick up grocery items, and small specialty stores to obtain other items.[28] Carrefour provided the convenience of obtaining all these items under one roof. The basket size in the Chinese stores of Carrefour was much smaller than that in the European stores, as Chinese consumers bought in small quantities, several times a week. They also liked to test new products by buying in small quantities, before they made bulk purchases. Daily shopping for fresh foods was widely prevalent in China, especially during summer. OPENING NEW STORES Carrefour planned the expansion of its operations in China in a systematic manner by establishing regional offices. For instance, the headquarters of the East China region in Shanghai took care of expansion activities in that region. The headquarters of the Northwestern region was located in Xinjiang and it was responsible for expanding business in that region. Carrefour chose the store location based on the available space and the purchasing power of the people in that location. Before opening new stores, it sent a team to conduct a detailed study of the store location followed by a study on the culture, customs, and traditions of that region. As a part of the study, the team also assessed the purchasing potential of the local people and assessed their purchasing habits. Carrefour was careful in choosing the locations and opened stores in highly populated areas. Few consumers in China owned cars and they went to stores either on bicycles or by public transport. Therefore, unlike in the western countries, where the stores were located on the city outskirts, most of the Carrefour stores were located at the center of the city with easy access to public transport. As Carrefour expanded its operations into smaller Chinese cities, the capital investment in stores was comparatively lower as the stores were smaller. The volume of goods at these stores was less and they were in small assortments. Carrefour did not follow a particular store format and encouraged the local store managers to come out with the best format for the store and sales plans to ensure that the store broke even within two to three years. In early 2006, Carrefour decided to explore the potential for establishing hypermarkets in major shopping malls. Carrefour initially explored the opportunities in Shanghai and opened three outlets by January 2006. These hypermarkets were located in the Nanfang Shopping Center in Minhang District, the Lianyang Thumb Square in Pudong New Area, and in the Dragon City shopping mall in Minhang District’s Qibao area. Commenting on this strategy, Wang Xiaozhong, Corporate Communications Manager of Carrefour, said, “The shopping mall has many resources including stores, counters, and restaurants that will attract many more customers than if we opened an independent store somewhere. Since opportunities to locate stores in the downtown are getting scarce as the city becomes more crowded, we’d like to make use of big shopping malls and their adjoining neighborhoods in suburban areas.”[29] STORE MANAGEMENT As a part of its global strategy, Carrefour had decentralized its operations, giving full freedom to store managers to operate their stores. Decentralization was one of the important factors for Carrefour’s success in international markets, with store managers being empowered to take decisions according to the local traditions and customs. Each store was managed by the store manager and department heads. The store manager allotted a particular portion of the store to each department head, who was responsible for managing that portion, including the products stocked, promotions to be carried out, etc. The store manager along with the department head decided on the product mix for that portion of the store. All personnel of a particular department reported to the department head. Each store was treated as a profit center. The store managers decided on the products to be sold in the stores according to the needs and preferences of the customers. The suppliers had to negotiate prices with each store separately. This policy was highly useful in China, where centralized supply system and logistics network were not well developed. As each store was free to procure the required products, the store manager and department heads procured products that were in high demand at that store. The managers carefully monitored the shelf space and if the products stacked in the shelves did not generate enough sales within 45-60 days, they were removed. The performance of the store managers was judged by their ability to meet the forecasts and profit targets. The monthly performance of individual stores was communicated to all other store managers in China. Good performance was rewarded with higher incentives and an increase in salary. SUPPLY CHAIN MANAGEMENT The supply chain system that Carrefour had in China was quite flexible. According to Christophe De Nays Candau, In-charge of Organization, Systems and Supply Chain in Carrefour, China, “It’s (supply chain system) highly fragmented, so we have to keep our flexibility. We still use the bike if it’s the lowest cost and most efficient.”[30] Carrefour procured most of the goods from within China to cater to its local operations. Since its initial years of operation in China, about 85% of the stock sold was procured locally. This helped Carrefour 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 the local customers. However, the items stacked were also different depending on the location of the store. Stores that were located in places that had a large expatriate population had more imported goods, different kinds of European and American food items, and the prices charged were also higher. The outlets in other locations were designed to cater to the needs of the local Chinese population and stacked predominantly Chinese products and food items. In order to differentiate the imported products from the Chinese products, the flag of the country from which the product had been obtained was displayed on its label. Carrefour established the global procurement headquarters at Shanghai and the first procurement center was opened in the southern Chinese province of Guangdong in July 2001. In 2002, Carrefour set up its global purchasing center in Shanghai, through which goods were sourced across the country. Through this center, Carrefour procured Chinese products to be sold in the international markets. The total procurement from China was valued at US$ 1.6 billion in 2002, US$ 2.15 billion in 2003, and US$ 3.2 billion in 2004. The purchasing centers were located in Beijing, Guangzhou, Wuhan, Ningbo, and Dalian. By 2006, 11 purchase centers had been established across the country (Refer to Table VI for the products procured by Carrefour from China). Carrefour sold its own label of products that were of good quality. As of 2006, there were over 2000 products that Carrefour sold under its own label which included food, grocery, daily necessities, and clothes. These products were priced 20-40% below the market price of competing branded products (Refer to Exhibit VIII for the private label products sold by Carrefour in China). Carrefour faced several supply chain related problems in China owing to its size of operations and the country’s underdeveloped logistics infrastructure in some of its store locations (Refer to Exhibit IX for a note on supply chain and logistics network in China). For instance, it took more than seven days to cover the distance between Shanghai in the East of China and Urumqi in Western part of the country by truck. In December 2005, Carrefour had more than 9,000 suppliers who supplied 250,000 different products. On an average, each of Carrefour’s stores had around 40,000 products. A distributor with a countrywide network was not present in China. The country had more than four million transport companies with a combined fleet of around five million trucks. Table VI Carrefour – Products Procured from China (2006)
Source: www.sourcing.org.cn. Vendor relationship was another issue that Carrefour had to deal with, in China. Local suppliers were not conversant with how to maintain optimum inventory levels. They did not maintain a standard size for delivering goods, nor a standard as far as product reference or order forms were concerned; concepts like service levels were unheard of. Carrefour taught the suppliers how to do business efficiently and provided them with the required support. Many of the suppliers were provided with computers and software to manage inventory and standardize their products and orders. Carrefour chose to use the services of local distributors who were well versed with the local networks. The company was not in favor of building a national network for distribution or an automated supply chain system in the country. Commenting on the supply chain problems, Philippe Riou, Executive In-charge, Supply Chain Development, Carrefour China, said, “The distribution is not mature. The producers are adjusting to the production network and many companies merge and go into partnerships, making it difficult for us to have a stable source and very difficult to design a proper, efficient network.”[31] Carrefour China Foundation for Food Safety, a Hong Kong-based non-profit foundation, organized training programs for farmers and other fresh food suppliers in China. The training program, called Agricultural Products Quality and Safety, was launched in 2005. The farmers and suppliers were taught about food safety, health, and hygiene and about preserving the freshness of their products. Within one year, Carrefour had conducted ten training programs at eight different locations. The company was of the view that such training would help it in providing the consumers with products of higher quality and safety. LOCALIZATION STRATEGIES Carrefour believed that its stores should reflect the local environment and complement the local culture. The western style hypermarket was customized by Carrefour to effectively cater to the needs and preferences of Chinese consumers (Refer to Exhibit X to see a few visuals of a typical Carrefour hypermarket in China). Most of 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. Carrefour stocked products preferred by the local population, in a manner they demanded. In some of the company’s stores in China, the department selling fresh food and groceries was designed to resemble the local outdoor markets. According to Sherry Ding, Analyst with AT Kearney Inc., “There are ladies calling out to the customers, saying: ‘Come here, this is fresh and good,’ just like in street markets.”[32] For instance, for selling fish, Carrefour adopted different methods. In its stores near the coastline, consumers preferred live fish so Carrefour sold live fish. In the middle and western China, away from the coast, consumers preferred frozen fish and this was stocked by the stores there. In many of the Carrefour stores in China, consumers could buy live fish, turtles, and meat that was usually not available in Europe. Other products like instant noodles, the most preferred snack among the Chinese, was sold across all Carrefour stores in the country. The fresh food section 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. However, Carrefour ensured that these food items were available at lower prices and in a clean environment. This made customers who purchased fresh food several times a week visit Carrefour regularly. In a store in Uighur[33] populated mostly by Muslims, Carrefour did not sell pork[34]. All the products sold at this outlet was certified halal products[35]. Other local products sold in the store were 20 varieties of raisins, roasted mutton, sausages made of horse meat, and locally popular snow lily tea. When the store was opened, the store displayed 20 varieties of French wine priced above US$ 10. However, not much wine was sold, as it was very expensive going by the Chinese standards. Carrefour soon replaced these with local wine priced at US$ 1 per bottle. For important festivals like the Spring festival, which fell on the 15th day of the first lunar month according to the Chinese calendar (between January and February), Carrefour decorated its stores according to traditional practices and stacked the stores with several items like paper lanterns that were used during the festival. According to one of the shoppers at a Carrefour store in Beijing, “I like to do my pre-festival shopping in Carrefour. They have got all the stuff from imported cheese to homegrown fresh fruits and vegetables.”[36] Christmas was widely celebrated in China by the retailers, as the Western holidays were also gaining popularity in the country especially in the urban areas, with several Chinese returning home from foreign countries. Carrefour displayed a wide variety of Christmas trees and sold several Christmas goods like Santa Claus toys, hats, items to decorate Christmas trees, etc. at all its stores. THE HR PRACTICES Though Carrefour had expanded its operations all over the world, the organization remained lean as several of its key functions were decentralized. The headquarters had a staff of only about 20, with around 10 people involved in the HR function. Between the stores spread all over the world and the headquarters in France, one tier of regional managers was present. Each of the regional managers functioned with just around five assistants. The store managers reported to these regional managers. Training was an ongoing process all over the world, and Carrefour spent around 2% of its payroll costs on it. The store managers and department managers were responsible for providing training to the staff. The best performing stores were asked to share their experiences and best practices with other stores in the country. The top management of these stores helped other stores to train the staff, select and display the merchandise, and lay out new business plans. At Carrefour, all the employees were told that they were responsible for people, assets, money, and merchandise. Each employee was given a job description that revolved around these areas and the training programs were designed to fulfill the needs of the job. Performance reviews provided employees feedback about how they had fared in each area. In the initial years, the top level management at Carrefour China comprised French people. Their main task was to infuse Carrefour’s values, spreading the philosophy of serving customers and managing the staff of each store. (Refer to Table VII for Carrefour’s Values). Carrefour chose 25 employees from Taiwan, who were well versed with Carrefour’s business, to start its Chinese operations. These employees spoke the local language and were well versed with the local market conditions and customs. They were instrumental in setting up the initial operations of the company in China and infusing Carrefour’s global practices into Chinese operations. Table VII Carrefour Values
Source: www.csreurope.org. In the year 2000, Carrefour started the ‘Carrefour China Institute’ to train the employees in Carrefour’s values. In the institute, the first such in Asia, Carrefour provided training to its staff including store managers. The center was spread over an area of 1,200 square meters and had conference rooms, training rooms, a computer room, and a restaurant. The employees were trained in the areas of security, services, cash handling, etc. For fresh graduates and some of the internal personnel, Carrefour conducted training in three stages. The training was both theoretical and practical. For the managerial staff, Carrefour conducted a six-month training consisting of theory and practical training. The trained personnel were absorbed into the organization as store directors and were equipped to negotiate with local government officials, suppliers, and vendors. The Carrefour Elite training was aimed at training managerial level personnel. The training was for a period of one year and senior officials from Carrefour also participated in it. The participants in the program were given an opportunity to visit Carrefour Stores in China and also in France. All the personnel trained in the institute were required to sign a three- to five-year contract to work for Carrefour. THE CHALLENGES Industry analysts opined that customizing its store formats to suit local needs had been Carrefour’s main strength and this had helped the company penetrate large and tier II cities in China. Despite rapid growth, Carrefour’s share in China was only at around 1.5% of the organized retail market. According to RNCOS[37] market research report 2005, China’s retail market was valued at around US$ 756 billion, with organized retail accounting for 20% of the market. Analysts feared that though the Chinese Government had opened up its retail sector to foreign retailers, foreign retailers may continue to face regulatory problems in China. It was widely reported in the Chinese media that the Government was drafting new rules to restrict the expansion of large foreign retailers. These rules were expected to be announced in December 2006, and were likely to impede 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. The public hearings that included regulators, industrial associations, academic experts, competitors, and local residents were widely practiced in North America and Europe and China was believed to be interested in adopting a similar practice. According to Robert Gregory, Retail Analyst with M+M Planet Retail[38], “The Chinese authorities seem intent on protecting the local retailers and it is likely that they will continue to give the locals more favorable treatment in the future – maybe preferential treatment when it comes to store locations, for example.”[39] Apart from regulatory challenges, Carrefour faced several other problems in China. The price of commercial property, especially in the urban areas in China where Carrefour had a significant presence, was increasing rapidly. Due to this, the rent and lease costs were growing along with the marketing and advertising expenses of the company. Moreover, Carrefour’s Champion supermarkets in which Carrefour owned a 65% stake (35% was held by local partner Shoulian) were not able to withstand the onslaught of competition. In April 2006, Carrefour sold its stake in four of its Champion supermarkets to Shoulian and planned to sell its stake in the remaining four by the end of the year. Carrefour’s Dia venture also faced problems and incurred losses in 2006. The local partner – Lianhua – had signed a termination agreement to exit from the venture. The company’s procurement policy, under which the individual store managers and department heads were free to decide on the merchandise to be purchased at their store, was also criticized. Due to this policy, widespread corruption was reported in several stores of Carrefour in China. For instance, in April 2006, the Shanghai court imposed a fine of £25,000 on Carrefour for selling fake Louis Vuitton handbags through its stores. The judge criticized Carrefour’s purchasing policies that had allowed counterfeiters to sell their products through the company’s stores. Three bags each priced at £3.60 were sold before the stock was removed from the shelves. The official from Carrefour said, “It is true that fake bags appeared in our store, but we did not intend this to happen. It is impossible for us to check every product. Perhaps we can only say our staff didn’t have much knowledge of luxury products.”[40] In June 2006, Carrefour was reported to be selling fake Adidas footballs. In Carrefour’s Fangzhuang store in Beijing, fake Adidas footballs were sold at RMB 59.90, while the original Adidas football that was used for the World cup was priced at RMB 900. This problem was also attributed to the flaws in Carrefour’s local procurement policies. In order to address these issues, Carrefour formed a special investigation team, which conducted surprise checks on the stores and interacted with the suppliers. In 2006, consolidation and expansion had become the norm in the Chinese retailing industry. Wu-Mart[41] acquired a 75% stake in MerryMart[42] in January 2006. With this acquisition, 100 stores of Merry Mart in Beijing became a part of Wu-Mart and its share in Beijing’s supermarket business increased to 10%. GOME Electrical Appliance Holding Ltd. (GOME)[43] acquired China Paradise[44] in July 2006, creating a US$ 10 billion retail chain. Other competitors like the Thailand-based Lotus Supercenter were on an expansion spree. Lotus Supercenter announced plans to increase its store count in China by 100 in 2006. Several local retail chains like GOME were also expanding at a tremendous pace, opening one store every thirty hours. On October 17, 2006, Carrefour’s global archrival Wal-Mart, announced the acquisition of Taiwan-based Trust-Mart for US$ 1 billion. Trust-Mart operated through its 108 stores across 20 provinces in China. The company had 30,000 employees in the country. Wal-Mart planned to acquire Trust-Mart in a phased manner, acquiring 31 stores initially. The other Trust-Mart stores were to be acquired by Wal-Mart in the next three years. With this acquisition, Wal-Mart would be able to lay its hands on a wide spread, well-developed network of stores. Industry analysts opined that the acquisition would also help Wal-Mart in sprucing up its supply chain. They felt that after this acquisition, Wal-Mart could give a tough competition to Carrefour in China and would be in a position to challenge leading Chinese retailers like Bailian Group (Refer to Exhibit XI for Wal-Mart’s key business strategies in China). Carrefour was strong only in some regions in China and the competitors were gaining ground in several other regions (Refer to Exhibit XII for geographical spread of Carrefour’s operations and its competitors in China). Notwithstanding these challenges, Carrefour remained positive about its future prospects in China. According to Patrick Ganaye, General Manager of Carrefour China-East, “Competition is fierce, but we don’t view it as bad news as long as we can figure out new ways to attract consumers.”[45] Carrefour had several plans to retain customers and attract new customers in China. It planned to introduce loyalty cards in China by the end of 2006. Another area that Carrefour was looking at was offering consumer credit for the purchase of home appliances. Carrefour’s management appeared to be well aware of the competition it had to face in the Chinese markets. According to Deliers, “This is not a chess game, where you kill the king at the end. Rather, it is like the game of Go, where you have to continuously develop a new strategy to expand on the map.” [46] Exhibit I Top 25 Food Retailers in the World (December 2005)
Source: www.supermarketnews.com and www.carrefour.com. Exhibit II Retail Industry in China (2006)
Compiled from various sources. Exhibit III Carrefour’s Banners
Adapted from www.carrefour.com. Exhibit IV Carrefour – Consolidated Store Network (December 2005)*
Source: www.carrefour.com. * Does not include stores owned by partners. Exhibit V Carrefour – Consolidated Net Sales per Format/Region (2005) (In million €)
Source: “Carrefour, Creating a New Growth Platform,” www.carrefour.com, March 2006. Exhibit VI Regulations in the Retail Industry in China: Pre and Post 2004
Source: US-China Business Council. (Retail Outlook for China, KPMG, October 2005). With the removal of the restriction, hypermarkets, supermarkets, and convenience stores have mushroomed in the wealthy coastal cities in China. The number of specialty stores that sell non-food items like apparel, electronic goods, furniture, etc. has also grown. Not only foreign retailers like Carrefour, Wal-Mart, Metro, Ikea, and B&Q but several local stores like Lianhua, Hualian, and Wu-mart were also operating hypermarkets and supermarkets of international standards. Compiled from various sources. Exhibit VII Carrefour – Hypermarkets in China (October 2006)
Adapted from www.carrefour.com.cn Exhibit VIII Carrefour – Private Label Products sold in China
Source: www.carrefour.com.cn Exhibit IX A Note on Supply Chain and Logistics Network in China
Adapted from Jeff Richards, Jihong Sanderson and Roger MacFarlane, “Understanding RFID Adoption in China,” http://www.rfidjournal.com, February 07, 2005 and other sources. Exhibit X Visuals of a Typical Carrefour Hypermarket in China
Source: www.crienglish.com.
Source: www.admirabledesign.com.
Source: www.admirabledesign.com. Exhibit XI Wal-Mart in China
Adapted from various sources. Exhibit XII China – Spread of Competitors by Region* (March 2006)
* Stores with floor space > 4,000 sq.meters. Adapted from China Resource Enterprise Limited, Global Roadshow, 2006. END OF QUESTION PAPER | | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Suggested Answers
Integrated Case Studies - I (MB3J1): October 2008
| Section A | | |
| a. The Chinese market has attracted foreign investors because of its huge size and market potential. Some predict that China will become in few years the world’s largest economy. The following are the environment that contributed to the booming Chinese retail business: Economic: China is an emerging economy but a dual economy too, with a wealthy urban professional and a poor country people. The gap between rich and poor has grown almost as fast as overall income, meaning that inequality is increasing nearly with the country’s development. There are huge income discrepancies that are emerging within social groups and between regions. Political: The political environment in China is undergoing a transformation. The Old China defended the working class against the capital class. China has just begun its transition to become a democratic country. China’s new leadership has come to power facing enormous economic, environmental, political and social challenges at home. Socio-cultural: The Chinese population is 1.3 billion of people. The past decade has seen a phenomenal rate of growth in China. It represents an important potential of customers for the retailers. The consumer buying process is consistent across cultures. The level of consumer involvement: The Chinese are seen as having a low level of involvement when purchases are for private consumption but a high level of involvement when they are buying products for their social or symbolic value. Since the Chinese greatly value social harmony and smoothness of relationships within the extended family, the social significance of products are highly important be it to express status, gratitude, approval or even disapproval. The level of risk consumer’s associate with a purchase varies enormously across cultures and as such it is an important variable in consumer behavior. It will determine whether a consumer will go for the comfortable purchase or is willing to try new products and services. The Chinese are sensitive to social risk and the loss of social status if a wrong buying decision is made. The level of brand loyalty found in a market is also closely related to the perception of risk. There are huge variations in attitudes to brand loyalty across different cultures. In China, consumers are loyal, not really brand conscious and not really used to cross product comparisons, except the urban consumers, who have a wide recognition of foreign brand names. Indeed, there are sharp differences between rural and urban attitudes. On a national level, Chinese consumers prefer to buy domestically manufactured products rather than comparable foreign-made goods. But, consumers in big cities are less likely to favor domestic products than are consumers nationally. And, typical Chinese consumers do not want to be amongst the first to try a new product. They are reluctant to be pioneers, especially for an expensive, unrecognized (in terms of brand), foreign product. Opportunities for retailers: China remains a huge opportunity with many untapped sectors and a large population and growing middle class demanding new products and serves. The key factors lie in adopting sound business practices and taking a long term view to developing a local business. With the opening of the Chinese markets, Chinese customers have been offered an increasing array in the products and services they can choose to consume. As a result, distinctly different customer segments have emerged based on age, income, experiences and evolving value systems. Retailers, whether local or foreign, must not only recognize these differences but also cater for the diverse needs of consumers if they plan to have a lasting and profitable presence in China. Legal: Government policies are barriers in international markets. In China, policies and regulations are often applied inconsistently and can vary between regions. Both foreign nationals and Chinese officials themselves lack a solid understanding of China’s policies. The key policies which act as barriers to entry relate to foreign exchange control policies and foreign investment policy. Concerning foreign exchange control policies, the state is responsible for formulating and promulgating the principles, degrees and regulations for foreign exchange control. The acquisition of foreign exchange is a significant non-tariff barrier to doing business in China. Concerning foreign investment policies, China encourages joint ventures. The barriers to access China’s distribution system make this system unstable: wholesalers at the local and central levels, new collective and private enterprises and factories, as well as some foreign companies compete to distribute consumer products. Local ministry of commerce wholesalers traditionally served as intermediaries between the producer and retail outlets. Foreign companies are not permitted to engage in wholesale trade. A strict isolationist policy kept foreign goods and trends out of reach of the average Chinese person, because Chinese consumers have less abundant information and purchasing experience with foreign products, they may rely more heavily on information such as the producing country’s image in product evaluation. Rules and Regulation regarding the entry of foreign players: The retail industry in China was protected till the year 1991 as no foreign retailer was allowed an entry into the country. The industry till this time was dominated by local retailers. The retail sector was opened on a trial basis in 1992, where foreign companies were allowed to operate in six cities – Beijing, Shanghai, Tianjin, Guangzhou, Dalian and Qingdao and five special economic zones – Shenzhen, Zhuhai, Xiamen, Shantou and Hainan Island. The foreign investments allowed in the retail sector could be in the form of joint ventures or contractual cooperative ventures with Chinese partner holding a stake of more than 51%. They were not allowed to conduct wholesale business and the total imported commodities could not be greater than 30%. At this time, the authority to approve these foreign joint ventures laid with the respective provincial and state governments which competed for approving more and more such ventures in their states with the result that a huge number of approvals were granted. During this time, many foreign retailers like Carrefour obtained many approvals from competing provincial governments and expanded very quickly. Opposition from Central government: Until 1997, the Central Government allowed over 20 foreign retail joint ventures. Limited investments could not meet the growing demand for retail services across China. By 1997, several retail enterprises with foreign investment were established in China, with approval from the local government. The foreign companies also established logistics infrastructure and offered warehouse services in the country. Though the Central Government was keen on restricting these operations, they were met with opposition from the provincial governments, which were concerned about generating employment and taxes. In 1998, the Central Government ordered closure of about 36 retail joint ventures. Relaxing the norms according to WTO: By June 1999, the Central Government decided upon more liberalized rules on foreign investment in retailing and wholesaling industry, in preparation of China’s entry to the WTO. As per the new rules, foreign parties can hold upto 65% equity stake in the joint ventures. The foreign partners were required to possess strong financial strength, advanced commercial and operational experience, merchandising technology, sales network and strong operational results. The foreign companies were required to have sales turnover of more than US$ 2 billion during the past three years and assets of more than US$ 200 million. The Chinese joint venture partner was also required to have assets of RMB 50 million or RMB 30 million depending on the location and average turnover of RMB 300 million or RMB 200 million as the case may be. The retail companies were allowed to operate in the cities of Beijing, Shanghai, Tianjin, Guangzhou, Dalian, Qingdao, Zhengzhou and Wuhan and special economic zones of Zhuhai, Shantou, Xiamen and Hainan. In Beijing and Shanghai, no more than four joint ventures were permitted and in other cities only two joint ventures were allowed. Wholly owned foreign enterprises were permitted in retailing: After 2004, wholly owned foreign enterprises were permitted in retailing, wholesaling and trading sectors. The geographical restrictions were done away with and the ventures could be established anywhere in the country. The capital requirement was also reduced and the retail companies were required to have assets of RMB 300,000 as against RMB 50 million stipulated earlier. These changes in the regulations governing the retail sector enabled Carrefour to expand its operations further. Carrefour expanded rapidly and by 2006, the number of hypermarkets increased to 80. As the geographical restrictions were done away with, analysts projected that there would be rapid expansion in markets where the respective retailers have had no presence and including new markets in rural areas beyond the metropolitan areas which are becoming saturated. The overall impact of the competition between the foreign retailers and the local retailers would be that the overall efficiencies and profitability would go up. In spite of the new reforms that were announced in 2004, analysts felt that retailers would continue facing difficulties in the market as the new rules have increased the complexity of doing business in China. Instead of permission from one central authority, the retailer now needs to obtain 40 to 50 approvals from local and central authorities to open new stores. As the restrictions on the minimum capital were lifted, several small and mid-sized retailers from Hong Kong have also entered the Chinese retail market, increasing the overall level of competition in the industry. b. Challenges faced by Carrefour while expanding in China: Chinese Government had opened up its retail sector to foreign retailers, still foreign retailers continued to face regulatory problems in China. The Chinese Government was drafting new rules to restrict the expansion of large foreign retailers to encourage State –owned Enterprises (SOE), and were likely to impede Carrefour’s growth plans. The price of commercial property was increasing rapidly, especially in the urban areas where Carrefour had a significant presence. Even the rent and lease costs were growing along with the other marketing and advertising expenses of the company. Carrefour’s global archrival Wal-Mart, announced the acquisition of Taiwan-based Trust-Mart for US$ 1 billion. With this acquisition, Wal-Mart would be able to lay its hands on a wide spread, well-developed network of stores. The acquisition would also help Wal-Mart to improve its supply chain. And, Wal-Mart could give a tough competition to Carrefour in China. Carrefour was strong only in some regions in China and the competitors were gaining ground in several other regions. The Chinese authorities seem intent on protecting the local retailers and it is likely that they will continue to give the locals more favorable treatment in the future – maybe preferential treatment when it comes to store locations. In China, the market was highly fragmented; the supply chain and logistics infrastructure was not well developed and prevalent cultural differences which prevented the growth of Carrefour. Conclusion: Though China is going through an unprecedented economic boom, people’s pockets are getting deeper and they are ready to embrace new lifestyle concepts and habits. The trick lies in understanding China’s billion-plus population, what they buy, their spending power and what determines their purchasing pattern. In order words, the mind and the wallet of the Chinese consumer. | ||
| Retailers go global for a number of reasons. Some retailers invest globally to tap fast growing consumer markets, especially when their home markets are stagnant. Retailers expand globally in order to leverage their existing assets; global purchasing relationships, a global supply chain, a unique product, a unique format, or a well known brand. In doing so, they blow away the competition or at least that is their hope wanting to maximize shareholders’ wealth generally tries and increase their foreign business to become more internationalized. i. Some of the important reasons why firms decide to go global are: 1. New sources of demand: In many situations growth is limited in the home country. This may either be due to intense competition or saturation in the share of the market. Thus, an alternative solution is to penetrate foreign markets where a potential demand exists. 2. Existence of various market imperfections: Various empirical theories have emphasized various market imperfections that is imperfections in product, factor and capital markets as the key motivating forces drawing FDI. Countries differ with respect to resources available for the production of goods. However, if all resources could be easily transferred among countries, the volume of international business would be limited. If markets were perfect, all factors of production (except land) would be mobile and freely transferable. In the real world, markets are imperfect and factors of production are somewhat immobile. Thus, it is worthwhile for MNCs to survey markets - to determine whether they can benefit from cheaper costs by producing in those markets. 3. Economies of scale: MNCs may want to enter new markets to increase their earnings and to realize the full benefits of economics of scale. Companies in industries where the fixed costs are relatively large need to engage in. volume selling to break even and these high volumes can only be realized if firms expand overseas. 4. Use foreign raw material and foreign technology: Some corporations are increasingly establishing or acquiring existing overseas plants to learn about the technology of foreign countries. This technology can then be used by corporations to improve their production process at their various subsidiaries allover the world. In some cases when a corporation plans to sell a finished product in a foreign country, it may decide to develop the product in the country where the new materials are located. This will help the corporation in saving the transportation costs which it would have incurred in transporting the raw materials from a given country 5. Exploit monopolistic advantage: In many situations, firms become internationalized when they possess an advantage not available to competitive firms. Even within a given country some firms may possess an advantage over other firms in these markets. For example, if a firm possesses advanced technology and has exploited this advantage successfully in local markets it may attempt to exploit it internationally as well. The advanced technology is not restricted to developing a new product - it could also represent a more efficient production, marketing or financing process. 6. Diversify internationally: When investors cannot effectively diversify their portfolio holdings internationally because of barriers to cross border capital. Flows, firm_ may help their shareholders with indirect diversification services by making direct investment in foreign countries. The firm’s cash flows are internationally diversified when it holds assets in many countries. Thus, shareholders of the firm Can indirectly benefit from international diversification even when they do not hold foreign shares. Capital market imperfections may thus motivate firms to undertake FD I. 7. Political safety seekers: Some MNCs attempt. to expand their operations in countries that are unlikely to interfere with private enterprises and are considered politically stable. Also, MNCs based in politically unstable countries try to establish new operations and pursue other markets in which they may have greater flexibility to make business decisions. 8. Knowledge seeking: Another important reason why firms decide to enter foreign markets is for the purpose of gaining information and experience that will be useful to them elsewhere. For example, industries characterized by fast technological and product innovation it is important to collect information on foreign innovation and research and development systematically over a period of time. This information collected can then be used by the organization in its own research and development, marketing and other areas. ii. All retail is local. Hence, the mail-order/e-commerce segment maybe aside, retailing is special in the sense that exports are not a viable option in order to expand one’s business across national borders. Consequently, other entry modes strategies have to be pursued are as follows: Organic growth: This involves setting up of businesses in an international market from scratch. When a company grows, the growth may be either organic or inorganic. Organic growth means that the company itself has grown from its own business activity and its own resources, while inorganic growth means that the company has grown by merger or take-over. Joint ventures: In a foreign joint venture, a domestic small business forms an alliance with a company in the target nation. The host partner brings to the joint venture valuable knowledge of the local market and its method of operation as well as the customs and the tastes of local customers. Sometimes foreign countries place certain limitations on joint ventures. Some nations, for example, require host companies to own at least 51 percent of the venture. Strategic alliances: A Strategic Alliance is a formal relationship formed between two or more parties to pursue a set of agreed upon goals or to meet a critical business need while remaining independent organizations. Franchising: Over the past decade, a growing number of franchises have been attracted to international markets to boost sales and profits as the domestic market has become increasingly saturated with outlets and much tougher to wring growth from. International franchisers sell virtually every kind of product or service imaginable — from fast food to child day care — in international markets. In some cases, the products and services sold in international markets are identical to those sold in the United States. However, most franchisers have learned that they must modify their products and services to suit local tastes and customs. Mergers and acquisitions: A merger is a tool used by companies for the purpose of expanding their operations often aiming at an increase of their long term profitability. Acquisition may be friendly or hostile. In the former case, the companies cooperate in negotiations; in the latter case, the takeover target is unwilling to be bought or the target's board has no prior knowledge of the offer. Acquisition usually refers to a purchase of a smaller firm by a larger one. Foreign Licensing : Rather than sell their products or services directly to customers overseas, some small companies enter foreign markets by licensing businesses in other nations to use their patents, trademarks, copyrights, technology, processes, or products. In return for licensing such assets, the small company collects royalties from the sales of its foreign licenses. Licensing is a relatively simple way for even the most inexperienced business owner to extend his reach into global markets. iii. Entry mode adopted by Carrefour: Joint venture as an entry mode: In China, a joint venture was the only way for a foreign company to set up operations. As per the guidelines issued by the State Council, in the retail industry, Sino-foreign joint ventures were allowed to operate only at a few locations. Carrefour entered China in 1995 by forming a joint venture with the Chinese management consulting firm Zhong Chuang, and established a firm called ‘Jia Chuang’, in which it held the majority of shares. Carrefour decided to creatively circumvent central government regulations prohibiting foreign ownership, because they believed it was strategically imperative to enter the market quickly. Their operations were illegal, but their relations with local officials gave them the opportunity to proceed without informing the central government. However, in 2001 Carrefour was cited for its failure to secure the central government’s approval for opening all of the stores it operates, relying instead on the goodwill of local authorities. Due to this citation by the State Economic and Trade Commission (SETC), Carrefour’s expansion plans have been derailed. Local partner: As Joint ventures help a firm benefits from the local partner’s knowledge of the host country’s culture, language and political systems and in addition, a firm can share the costs and risks of opening and running a new business with its local partner. This is particularly important in China as it is culturally very different and had complex negotiations, prevalent bureaucracy and corruption. Expansion: Carrefour partnered with 27 holding companies, one for each store, but later after reached an agreement with SETC, Carrefour has reduced 27 holding companies to 13. It has entered into associations with various local partners in various cities like Hanshang Group in Wuhan , Lian Hua in shanghai, Kunmig department store in Kunmig, Jin Hua group in Xi’an, Guangzhou dept store in Guangzhou, etc. In 2003, Carrefour opened its first hard discount store, Dia, in China by entering into a joint venture agreement with Shanghai Lianhua Supermarket. Carrefour opened its 28th Chinese store in Hangzhou, Capital of Zhejiang province, in June 2002 and by the end of 2002, its sales in the country had increased to €1.19 billion as compared to €1.18 billion in 2001. By 2003, Carrefour had a presence in 15 cities and its sales had reached to €1.32 billion. They planned to open 300 discount stores in different residential areas in Shanghai by the year 2007. The joint venture was set up with total capital investment of RMB 90 million. In 2004, Carrefour introduced the Champion Supermarket format in China, in association with a local partner The Beijing Shoulian Group. Carrefour believes that its entry strategy was correct; after all, it is profitable in China. Carrefour’s new strategy was to pursue both local and central approval simultaneously. In order to generate goodwill with the central government, Carrefour has shifted its expansion plans to the west of China and has expanded its retail export business beyond its current needs. These moves are intended to demonstrate to the central government that Carrefour intends to invest in China long-term. | ||
| Strategies followed by Carrefour in China: Flexible approach: Carrefour adopted a different approach in China. While many of the retailers and consumer product companies considered China to be a single huge market. It considered the country to be comprised of several small markets and approached these markets with flexible procurement, store management, marketing, and service strategies. Consumer conscious: Carrefour always tried to keep their prices low by keeping in mind the fact that for Chinese consumers, price was the main consideration. This has bought Carrefour a huge popularity for its hypermarkets. By keeping the consumers’ convenience in mind, Carrefour sold a different variety of goods by attracting the consumers to the stores. A Chinese consumer, instead of visiting several places for various items, he/she can obtain all the items under one roof that is in a Carrefour store. As Chinese consumers prefer buying in smaller quantities, Carrefour provided them with different small size baskets than compared to European stores. Expansion of operations in China: Carrefour planned the expansion of its operations in China in a systematic manner by establishing regional offices. The headquarters of the East China region in Shanghai took care of expansion activities in that region. Similarly, headquarters of the Northwestern region was located in Xinjiang and it was responsible for expanding business in that region. Choosing appropriate store locations: Carrefour was careful in selecting its store location. Before opening new stores, it sent a team to conduct a detailed study of the store location, available space, purchasing power of people, their habits followed by a study on the culture, customs, and traditions of that region. Carrefour stores were located at the center of the city, as many of the consumers went either on their bicycles or by public transport. Carrefour did not follow a particular store format and encouraged the local store managers to come out with the best format for the store and sales plans to ensure that the store broke even within two to three years. Exploring the potential: Carrefour explored the potential markets in Shanghai and opened three hypermarkets at Nanfang Shopping Center in Minhang district, the Lianyang Thumb Square in Pudong New area and in the Dragon City shopping mall in Minhang district’s Qibao area. These shopping malls had many resources including stores, counters, and restaurants that attracted more and more customers from various parts of the China. Decentralization: Decentralization was one of the important factors for Carrefour’s success in international markets, with store managers being given the authority to take decisions according to their local traditions and customs. Every store of Carrefour was managed by a store manager and department heads. The store manager allotted a particular portion of the store to each department head, who was responsible for managing that portion, including the products stocked, promotions to be carried out, etc. He along with the department head decided on the product mix for that portion of the store and also decided on the products to be sold in the stores according to the needs and preferences of the customers. The performance of the store managers was judged by their ability to meet the forecasts and profit targets. The monthly performance of individual stores was communicated to all other store managers in China. Good performance was rewarded with higher incentives and an increase in salary. Efficient supply chain management: Carrefour adopted a quite flexible supply chain system in China. As it has procured most of the goods from within China to cater to its local operations, it 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 the local customers. Stores that were located in places that had a large expatriate population had more imported goods, different kinds of European and American food items, and the prices charged were also higher. In order to differentiate the imported products from the Chinese products, the flag of the country from which the product had been obtained was displayed on its label. Localization: Most of 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. The department selling fresh food and groceries was designed to resemble the local outdoor markets. Carrefour catered different products according to the different tastes of people living in various parts of China. Consumers near the coastline of china, consumers preferred live fish so Carrefour sold live fish. In the middle and western China, consumers preferred frozen fish. It opened a fresh food section that made the products available that were similar to the products available in the other local fresh food markets. It ensured that these food items were available at lower prices and in a clean environment. Carrefour decorated its stores according to traditional practices and stacked the stores with several items like paper lanterns that were used during the festival.
Strategies Adopted by Wal-Mart in China: Ensure the good quality of the products: For ensuring better quality of products, Wal-Mart has sent many of its managers to suppliers’ factories and maintained an extranet site for sharing sales information and the consumers’ expectations from the suppliers. Even though, Wal-Mart started its operations in China with American workforce, later on it employed several Chinese as mangers and shop assistants. It also took enough care to train the suppliers and employees and regularly featured on the list of most preferred employers in China. Ambience of the stores: Wal-Mart tried to create an ambience that gave a Chinese feel for its stores and also by selling Chinese goods and having Chinese employees. The stores had wider aisles and smaller checkout counters to cater to the needs of the Chinese customers who shopped frequently and in small quantities. It also designed the packaging, uniform of the shop assistants, and the décor according to the preferences of the Chinese consumers. Responsibility to associates: Wal-Mart was the largest private employer where the associates were given recognition and a share of the profits and were expected to be totally committed to the company and its success. The training given to the associates was extensive for giving them an overall perspective of the business. Everyday-low-prices: Wal-Mart offered brand name products at prices consistently lower—approximately 2–4 percent—than those found at department or specialty stores. The everyday-low-price strategy implied that there were few promotions. Although other major competitors, including Carrefour, typically ran 50 to 100 advertised circulars per year—spending 2.1 percent of discount store sales on advertising—Wal- Mart produced only 12–13 major circulars per year—spending 1.5 percent of sales. Using superior technology: Technological superiority was seen as a competitive advantage by Wal-Mart. Technology was used not only in setting price and product offerings, but also in areas such as communication, distribution and the control of supplier relations. Wal-Mart’s information systems expense was estimated to be 1.5 percent of sales compared with 1.3 percent for its direct US competitors. Difference in distribution system: As of January 2006, Wal-Mart operated through 56 stores in China. As the stores were few and widespread, the distribution centers could not be utilized fully. Another obstacle was the absence of nation-wide distribution system, which limited Wal-Mart’s economies of scale. In 2006,Wal-Mart has finished the construction of a central distribution center in Kengzian (China). The place is a massive 40000 sq m facility with 70 huge doors designed to handle deliveries from trucks. While Wal-Mart is making a central distribution center in China but Carrefour, the French competitor, has a different strategy. Carrefour relies more on local distributors to deliver direct to the stores because it believes that flexibility matters more especially when the market is new. In other words, Carrefour is building a network store by store and while it faces the challenges of uniformity in service and quality control, the cost of development is lower. Competitive edge: Wal-Mart’s limited exposure to international markets also proved to be an impediment to its operations in China. Moreover, China was the first Asian country in which Wal-Mart had started its operations. As the Asian market was quite different from the other markets in world, Wal-Mart took time to expand in the market, which gave a chance to other domestic and foreign retailers to consolidate their position in the market. Well, after nine years of presence in China Wal-Mart is still loss-making but Carrefour is profitable on the other hand. So we can conclude that at least till this stage, Carrefour is having a competitive edge over Wal-Mart in China. Carrefour has its eye on the customer and Wal-Mart is spending on the back-end. Many believe that this approach will guarantee Carrefour's growth in the future but at the end of the day it will have different products in its stores. So in the future many people may see Carrefour investing in the back-end to benefit from the synergy between its stores. | ||
| i. Significance of SCM: · Excellent retail supply chain management revolves around understanding and balancing three key dimensions of availability, inventory and cost. Managing these trade-offs efficiently can result in supply chains that improve business performance and drive competitive advantage. · Today's supply chain leaders are working with their business partners to design, develop, move, store, sell and service their products with ever greater speed and economy. Now, more than ever, supply chains are regarded as sources of business value and competitive advantage. Differentiated supply chain models are emerging to address different merchandise characteristics. "One size fits all" no longer applies. · Short-lifecycle fashion products require a supply chain that can cope with fast lead-times and accelerated time-to-market — tight integration with the supply base is critical. Repeatable continuity products demand integrated and optimized replenishment and forecasting. Regardless of type, all supply chains need to be supported by effective core processes and capabilities. · Supply chain leaders develop robust basic processes and disciplines, and then add new and differentiating capabilities that drive supply chain excellence. These new capabilities enable leading retailers to transform and differentiate their supply chains. Creating change in an existing supply chain can be daunting. Given the breadth and depth of impact, virtually all areas of a business are affected. ii. The SCM challenges that are dealt by the retailers while globalizing: 1. Poor infrastructure: One of the key challenges facing the SCM is the state of the country’s transport infrastructure. At present, despite some large-scale projects, companies in the region complain of insufficient integration of transport networks, IT, warehousing and distribution facilities. Outside of the main economic centers, the logistics sector tends to be of low quality, highly inefficient and with little technological competence. 2. Regulation: Regulation exists at a number of different tiers, imposed by national, regional and local authorities. Regulations often differ from city to city, hindering the creation of national networks. 3. Bureaucracy & Culture: Getting the go-ahead for any logistics project still relies heavily on the strength of contacts within host-country bureaucracy. Many western companies find it difficult to repatriate profits generated in the country. 4. Poor training: Training in both the third-party logistics (3PL) sector and the manufacturing and retailing sectors is very weak both at a practical level, such as IT, driving and warehousing, as well as at a higher strategic level. Many do not realize the benefits of best practices in logistics and are not interested in outsourcing or supply chain management techniques. This has been compounded by the failure of the government and other regulatory authorities to promote logistics programs 5. Information and communications technology: Outside of the main logistics centers, information and communications technology and infrastructure is unreliable. There is a lack of IT standards and poor systems integration and equipment. At a very basic level, the consistent supply of energy is also problematic leading to interruptions in communications. 6. Undeveloped domestic industry: If the host-country’s logistics sector is fragmented and dominated by commoditized and low quality transport and warehousing, then it provides little base to build a modern industry. This also makes it difficult to meet the growing supply chain demands for industrial and commercial enterprises. 7. High transport costs: Some estimates put the cost of transporting goods in countries like China at up to 50 percent more than in developed regions such as Japan, Europe and North America. These costs are increased by high tolls on roads. Logistics costs (including warehousing, distribution, inventory holding, order processing, etc.) are estimated to be two to three times the norm and in excess of 20 percent. 8. Poor warehousing and storage: Poor facilities and management are to blame for high levels of loss, damage and deterioration of stock, especially in the perishables sector. Part of the problem is insufficient specialist equipment, i.e. proper refrigerated storage and containers, but it is also partly down to lack of training. 9. Regional imbalance: If the host-country’s economy is characterized by wide variances in levels of economic activity and development then it is problematic in terms of distribution as there is a major imbalance of goods flows from the one part of the country to another part of the country. 10. Domestic trade barriers: Although the various countries in accession to the WTO has lowered trade barriers such as tariffs and quotas for international shipments, there are still problems related to moving goods around the country itself. Goods can be subject to unofficial border tolls when moving between provinces. This is particularly evident when shipping from an inland manufacturing location to a port city or vice versa. iii. Carrefour’s SCM in China: · One of the secrets to their success in bringing the new model of SCM to China has been the use of Third-party Logistics (3PLs) to manage the distribution process. Carrefour procured most of the goods from within China to cater to its local operations. This helped Carrefour maintain lower prices compared to other foreign retailers, who sold imported products. · Carrefour’s strategy is to buy and stock local products to cater to the needs of the local customers. The items stacked were also different depending on the location of the store. Stores that were located in places with the large population had more imported goods, different kinds of European and American food items, and the prices charged were also higher. The outlets in other locations were designed to cater to the needs of the local Chinese population and stacked predominantly Chinese products and food items. · Carrefour set up its global purchasing center in Shanghai, through which goods were sourced across the country. · Carrefour introduced its own label of products that were of good quality which included food, grocery, daily necessities, and clothes. These products were sold at priced 20-40% below the market price of competing branded products. · Carrefour taught the suppliers how to do business efficiently and provided them with the required support. Many of the suppliers were provided with computers and software to manage inventory and standardize their products and orders. Carrefour chose to use the services of local distributors who were well versed with the local networks. The company was not in favor of building a national network for distribution or an automated supply chain system in the country. · The training program, called Agricultural Products Quality and Safety, was launched .The farmers and suppliers were taught about food safety, health, and hygiene and about preserving the freshness of their products. Carrefour had conducted ten training programs at eight different locations within one year. The company was of the view that such training would help it in providing the consumers with products of higher quality and safety. · By adopting all the above given strategies Carrefour is successful in having efficient supply chain management. | ||
| The role, responsibilities of store managers along with skills required to carry out these responsibilities in general: The retail store manager should take the responsibility for the conduct of the store personnel and maintenance of service standards of the organization as well as protection of the merchandise in a retail store. The responsibilities of a store manager can be broadly divided into four categories: Managing the Store Personnel In order to adapt to the highly competitive conditions, Carrefour had to adapt its human resources and vendor relationship management. Department heads were much more autonomous then their French counterparts. They had the responsibilities of a business-within-the-business for their department— handling everything from supplier relationships to hiring, promoting and firing staff and from price definition to full product selection. All the pressures of sales and margin were on their shoulders. To incentivize performance, department heads and store managers had a bonus linked to store results and a base salary. A typical “Carrefour-man” would start from the bottom of the store level and work his/her way up through dedication and performance. Although this path has changed in recent years, Carrefour promoted managers internally, hiring from the outside only when the skills needed could not be found in-house. On-the-job-training was applied to all the levels in the store. All managers and department heads were trained in existing stores for at least a year. A prospective store manager would move through all the departments of the store, and if they were appointed to a new store, they would be on-site at the beginning of the construction. Each level in Carrefour was responsible for training and developing the level below. A store manager can increase the productivity of the store by managing the store's human resources effectively and efficiently. To increase the productivity of the store personnel, a store manager should. Minimizing the Cost of the Retail Store The payment of salaries and other compensation benefits to employees constitute a major part of the cost of a retail store. Other costs of the store include cost for control and maintenance and inventory loss due to shoplifting and employee theft. The store manager should try to reduce these costs by efficiently managing the store personnel as well as providing security and maintenance to the store. At Carrefour, store managers and department heads were the key people in the stores. The store manager and his/her department heads had nearly total responsibility and control over their store. The store manager allocated the area for each department within the store and was in charge of general advertising and decoration policies for the store. Jointly with department heads, s/he would decide on the product mix and make sure that all departments presented coherent positioning. Each department was a profit center, with its own targets and income statements. The department head had full responsibility over purchasing, promotion, pricing and motivating and training his/her assistants. Managing the Buying and Selling Activities A retail store can manage the buying and selling activities through displays and visual merchandising. The retail store manager can work along with buyers and suggest new merchandise plan and manage special events, and, decide on markdowns to increase the sale of merchandise. At Carrefour, department heads decided what they wanted to buy and from where. They would buy centrally through Carrefour’s central purchasing only when the advantages of mass purchasing outweighed the advantages of local buying. This meant that the range of products varied from store to store and that a supplier would (at least initially) have to negotiate with all the stores in order to guarantee the presence of its products in a certain region or at a national level. In order to leverage its purchasing power, Carrefour had, over the years, centralized negotiations with some suppliers at the headquarters level. With aggregate agreements covering all stores, these suppliers could be confident of their products’ presence in most all stores, both regionally and nationally (depending on the arrangement). Nevertheless, for many products local buying was essential. This was especially the case in areas where regional specialties and highly perishable products were seen as sources of differentiation. Generally, product mix varied from store to store and local products could represent up to 30 percent of an individual store’s food sales. Pricing was the complete responsibility of department heads, both for the products purchased locally and centrally. In order to ensure the veracity of its aggressive pricing policy Carrefour conducted extensive price scanning of all competitors within 5 minutes driving time of any store. These scanning were done 3 to 4 times a week for the top 20 percent of products, which accounted for 80 percent of sales, and once a week for the remaining products. Prices were then set either equal to or below the competitor’s level. Invariably because of its decentralized pricing system, customers at four Carrefour stores in a large city could find the same product being offered at four different prices. Providing Customer Service To retain customers and increase traffic flow in a retail store, the store manager has to provide customized services, which add value to the merchandise sold. At Carrefour, the western style hypermarket was customized to effectively cater to the needs and preference of Chinese consumers. Carrefour stocked products preferred by the local population, in a manner they demanded. | ||
* The case is prepared only for the purpose of examination and not to illustrate effective or ineffective performance of the company. The case contains factual information adapted to and combined with other information to enable analysis of the given topics.
[1] Paul K. Ward, “Goofing up Global CRM,” www.crm2day.com, September 06, 2005.
[2] Paul K. Ward is known for his work in the area of CRM, Perceived Customer Value, branding and strategy in China.
[3] “No Easy Way to Win in China: Carrefour,” People’s Daily Online, March 31, 2004.
[4] Carrefour’s hypermarkets occupied floor space between 5,000 sq meters and 20,000 sq meters. They offered more than 70,000 food and non-food products like household products, medicines, and clothes.
[5] Hard discount stores occupied area between 200 and 800 sq meters and sold a range of 800 food products. Carrefour’s hard discount stores were named Dia, Ed, and Minipreco.
[6] As of October 24, 2006, 1 Euro = US$ 1.254.
[7] Rebecca MacKinnon, “China’s Reforms Produce Winners, but More Losers,” www.cnn.com, October 1999.
[8] In China, wet markets can be found all across the country. These markets sell fresh fish, chicken, and live mammals and reptiles, generally in an open environment.
[9] Founded in 1995, CTR Market Research is the leading market research company in China. CTR provides different services that include interpretation of information, market segmentation, advertising, media research, and business research.
[10] Don Lee, “A Chinese Lesson for Big Retailers,” Los Angeles Times, July 02, 2006.
[11] Prior to the advent of free service, the sales clerks picked up the necessary items for consumers from the shelves. Under free service, the customers were given shopping carts or baskets, which they used to collect the individually priced items placed on the shelves.
[12] Delhaize Fréres-Le-Lion is a part of The Delhaize Group, a food retailer headquartered in Belgium. Founded in 1867, the group operates food supermarkets in North America, Europe, and Southeast Asia. As of December 2005, the group operated 2,636 stores. It recorded sales of € 364.9 million and profit of € 18.6 million.
[13] Subsequently, Carrefour suspended the US operations in 1993, as the stores were not profitable.
[14] The supermarkets were between 1,000 and 2,000 sq. meters in area and offered mostly food products and household merchandise at competitive prices. Carrefour’s supermarkets were called Champion, GS Norte, Gb, and Marinopoulos.
[15] Established in 1950, Promodès SA played a major role in promoting supermarkets in France. During the 1960s and 1970s, Promodès expanded its operations into other countries in Europe and South America.
[16] Uni President Enterprises Corporation is one of the leading business conglomerates in Taiwan and the largest food retailer.
[17] Hayet Sellami, “Carrefour China: A Local Market,” www.cityweekend.com, April 28, 2005.
[18] Each store employed about 500 people at different levels including the store manager, department heads, and store management staff.
[19] According to China’s WTO commitments in 2001, foreign retailers were allowed to establish joint ventures in five economic zones and six Chinese cities. In the next year, all provincial capitals were to be opened up to foreign investors and in the third year, the limitations regarding investments were to be lifted.
[20] Retail Forward Inc. is a Columbus, Ohio, based firm that focuses on management consultancy services, market research, and executive development.
[21] Jenny Summerour, “The China Connection,” Progressive Grocer, January 01, 2002.
[22] “No Easy Way to Win in China: Carrefour,” People’s Daily Online, March 31, 2004.
[23] Owned by the Bailian Group and controlled by the Shanghai City Government, Shanghai Lianhua supermarket is the largest retailer in China. Established in 1991, it operated through different store formats including hypermarkets, supermarkets, convenience stores, chain drug stores, and e-business stores. In 2003, Shanghai Lianhua and Shanghai Hualian merged to form the Bailian Group.
[24] RMB (Renminbi) is the Chinese currency; it means people’s money. The unit of Renminbi is a yuan & with smaller denomination called jiao and fen. The conversion among the three is 1 yuan = 10 jiao = 100 fen. The currency exchange rate as on October 24, 2006 was 1 US$ = 7.89 RMB
[25] The Beijing Shoulian Group is an enterprise group with more than 10 retailers. It is a state owned company engaged in logistics and department store operations.
[26] “French Firm Opens First Asian Store in Beijing,” People’s Daily Online, June 25, 2004.
[27] Hayet Sellami, “Carrefour China: A Local Market,” www.cityweekend.com, April 28, 2005.
[28] The Chinese meal consisted of carbohydrate rich products like rice, noodles, and steamed buns accompanied by dishes made of vegetables, meat, or fish. The meal usually ended with fresh fruits or a sweet.
[29] “Carrefour Focuses Growth on Mall-based Retail Outlets,” Shanghai Daily News, January 20, 2006.
[30] Don Lee, “A Chinese Lesson for Big Retailers,” Los Angeles Times, July 02, 2006.
[31] Maria Trombly and Betta Plebani, “In China, Complex Supply Chains Yield to Simple Systems,” www.ciocentral.com, November 07, 2005.
[32] Carol Matlack, Wendy Zellner, Frederik Balfour, “Carrefour in a Corner,” BusinessWeek Online, October 11, 2004.
[33] Uighur, also known as Xinjiang Uyghur Autonomous Region, is located in the west of China bordering Tibet, Mongolia, Russia, Russia, Kazakhsthan, Pakistan, and India. Uighur is populated by Uyghurs (45.21% of the population according to 2000 census) and Kazakhs (6.74% of the population) who are the Muslim Turkic groups. The number of Han Chinese in the region stood at 40.58% as of 2000.
[34] As per Islamic law, the Muslims are forbidden to consume pork.
[35] The Arabic word Halal refers to food that is permissible according to the Islamic dietary laws, which specify the type of food Muslims can consume. The laws also specify the method of slaughtering animals, and sea food that is permissible to consume.
[36] “Foreign Businesses Cash on Chinese Holiday Economy,” www.peopledaily.com.cn, January 20, 2004.
[37] RNCOS is a market research consulting services company that specializes in the pharma, IT, telecom, retail, and services industries.
[38] M+M Planet conducts research on grocery retailers and retail markets. The company maintains a database of leading grocery retailers along with details of trends and happenings in the industry. The firm functions from London, Frankfurt, Brussels, and Tokyo.
[39] “Chinese Rule Change to Spark Retail Growth,” www.foodanddrinkeurope.com, March 19, 2004.
[40] “Carrefour Admits Selling Fake Louis Vuitton Handbags in China Store,” www.finanznachrichten.de, April 20, 2004.
[41] Wu-Mart is one of largest retail chain store operators in China and is a non state-owned enterprise. It operates hypermarkets, supermarkets, and convenience stores in several major cities across China.
[42] MerryMart Chainstore Development Co. Ltd. is the fourth largest supermarket in Beijing.
[43] GOME opened its first retail outlet in China in 1987 and adopted the name GOME in 1993. The company began its expansion in China in 1999. In 2004, it was recognized as one of the ‘Key and Strategically important enterprises’ by the Ministry of Commerce, China.
[44] China Paradise Electronics Retail Ltd., established in 1996, is the leading retailer of household appliances and consumer electronics products.
[45] “Carrefour Focuses Growth on Mall-Based Retail Outlets,” Shanghai Daily News, January 20, 2006.
[46] Hayet Sellami, “Carrefour China: A Local Market,” www.cityweekend.com, April 28, 2005.
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