Why Carrefour Could Fail In China

Whilst busy setting up our new office in China, my team and I have spent several days walking stores. Last week we focussed in on one major global retailer, Carrefour to get a sense of their relative positioning in China.

Carrefour was one of the earliest global players to enter China, founding its first store in 1995 and within 12 years had reached 100 stores. Rapid development and early success made the  company one of the major retail players in the market and an important customer for nearly 22,500 suppliers. In recent years it has been buffeted by bad press, pricing scandals and increasing pressure from rebellious shareholders. The recent offer for sale of South East Asian business units and the resulting closure of the company’s Thai business and restructuring in Indonesia leave many analysts asking whether Carrefour has lost its way in Asia. Having spent many hours wondering around the aisles of stores in Shanghai its increasingly apparent to me that there is a real potential that Carrefour could also fail in China.

I believe there are three major reasons that suggest this could quite easily happen.

  1. Carrefour no longer appears to sustain a coherent market position.
  2. Stores seem to be overlooking the fundamentals of efficient retail operations
  3. Carrefour runs a serious risk of losing supplier’s goodwill and support.

Let’s think about Carrefour’s positioning – Carrefour’s name in Chinese can be loosely translated as “happy and lucky family” and the company’s early success in both mainland China and Taiwan was based on its ability to deliver a localized hypermarket solution that met the needs of Chinese families. The company employed a number of strategies to deliver this, but two positioning approaches that were particularly resonant in China were a compelling fresh food offer and a keen focus on price. Looking at stores today, there’s no doubt that price has become the major strategy. It is impossible to ignore the massive volume of ‘yellow tickets’ used to communicate price promotions throughout the store but the enormous volume of price deals available makes it impossible to determine what is on offer and what is not. I suspect that the net effect is that shoppers ignore these messages – certainly in our observations, major off-shelf promotions and gondola ends are poorly shopped – one massive display in “the power aisle” remained untouched for the entire 90 minutes we were in store – despite being passed by 288 shoppers.

What’s perhaps more concerning though is the retailer’s complete dereliction of its fresh offer. Carrefour’s original concept was to bring the benefits of wet markets into a hypermarket environment – the original concept offered an excellent range of market-fresh veggies, meats and particularly fish. In the early days, stores offered a mix of live and recently caught fish in attractive displays which delivered on Chinese shoppers’ demand for super-fresh product. Fast forward to today and you’ll the tanks which once brimmed with live fish now often contain a few decidedly unhealthy looking specimens floating belly-up and beside this an attractive display of recently defrosted Norwegian salmon – hardly fresh by anyone’s standard!

Overall there’s little doubt that the business has lost its edge with shoppers in China.

The next problem Carrefour faces is that store managers appear to be ignoring the fundamentals of profitable retail. In a nutshell you make money in retail by selling out stock before you have to pay for it; efficient retailers balance shopper demand with lean stock holding and careful ranging. These principles appear to be completely lost on Carrefour’s store managers – the range of product on offer is staggering but so is the sheer volume of stock and the shambolic fashion in which its merchandised. We found Lipton’s tea in 8 locations throughout the store, breakfast cereals in five locations, a huge variety of locally manufactured dairy products in a chiller labelled ‘imported goods’ and a mountain of promoted paper tissues filling an escalator well. Almost every aisle was filled with additional promotional displays adding further confusion and stock weight.

My simple conclusion: the stores  are massively over-stocked and what I infer is that the only way the stores can be making money is through forward buying gains (where a retailer buys stocks at a reduced price for a promotion and sells what is left over at the normal retail price, hence increasing the margin on these sales). Which brings me to the last reason why I feel Carrefour’s business in China is under threat – the risk that the company will lose supplier support.

According to Deloitte,  Carrefour’s net operating margin globally is 0.62% as compared to an industry average of 3.8% – not a great performance for the second biggest retailer in the world and a very poor performance when one considers Carrefour’s ability to extract funding from its suppliers. With such a fine margin, its relatively easy to infer that Carrefour is highly dependent on suppliers’ funds as a source of profit. In China, this presents a major risk: if the retailer continues to lose its way with shoppers, market shares and like for like growth will wither, making the business a less attractive investment proposition. Add to this what appears to be a fairly cavalier attitude to suppliers’ funding, apparent forward buying of promoted stock and low-levels of in-store execution and pretty soon you would conclude that continuing to support Carrefour in the medium term is unlikely to deliver significant value. As a result Carrefour can expect to see less funding from vendors in the future regardless of how hard its buyers bang the table.

It seems to me that the world’s second largest retailer is at a turning point in China  – either the business will re-invent itself and its relationships with vendors or its shareholders will seek to divest. In either case, manufacturers in China should be extremely reticent in their approach to Carrefour; unless there is a wholesale turnaround ROI will remain in negative territory and growth will be poor. Manufactures should be seeking to build relationships with retailers who have a clearer connection with Chinese shoppers and greater potential for growth.

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23 thoughts on “Why Carrefour Could Fail In China

  1. Nice blog Toby! Looks like Carrefour China are in a headlong race to the bottom. Which is not what I would have thought an aspirational Chinese shopper wants.

    I will stick to Rutland Water trout, freshly caught.

  2. Very interesting point-of-view, Toby?
    Thanks for sharing your insights.
    Unfortunately, nobody in China will read this post as wordpress is blogged ; )

    Keep up the good work!

    Best,

    Johannes

  3. my real concerns as a shareholder is that this observation is partially true in there homemarket too.
    The business model hypermarket is still ok, but the promised and expected consumer benefit is next to variety quality. A recent consumer insight study confirmed the must haves in retail: quality, quality, quality at a fair price . Promotion price was not under the top 5 shopper criteria.
    Thanks for your analysis.
    Wolfgang

    • Hi Wolfgang, I share your concerns and appreciate your insights. I’d be interested to know more about your views on the future of hypers. Personally I think we have seen their peak. I anticipate that online sales and the ensuing need for localisation and specialisation will lead to a relatively rapid decline in this part of the industry.

      What do you think?

      • Hi Toby, I share your view. The role of hypers seems to me like the role of department stores in the past. Their benefit is rapidly declining as the conveniant aspect (saturday shopping to get it all for a week) is becoming more and more irrelevant for all those who live in a city. The opening hours of little family stores for fresh (vegatable) products and the internet for non perishable goods will reduce their relevance.

  4. Hi Toby

    Good insight for Carrefour, as this situation are also happen in indonesia. I heard many suppliers are beginning complaining on Carrefour operation as they increases their budget demand every year but not parallel to the purchase by the customer and the remain stock either being return to the supplier or change to a more sellable products.

    There’s also an increasing number of competitor hypermart which gaining more favor from both customer and supplier seems to also bring an impact to Carrefour’s overall operation.

    Like to hear more. Thanks

  5. Toby,

    It is a pleasure to make your acquaintance and discover this blog. The transition in grocery has been taking place for several years and many companies are failing to deliver on their value. The issues you described are ‘easily’ corrected and your insight and recommendations go a long way toward lighting the path.

    I have been involved in the grocery supply chain from the manufacturers perspective primarily but also included time spent with the largest grocers in the world and their distribution networks. What we have witnessed in the Supply Chains of both the manufacturer and retailer is a complete absence of collaboration. The retailer lacks the process agility to manage the ‘lean’ flow of inventory to the point of a shelf. They are incapable of collaborating with the manufacturers on process, inventory and data to achieve meaningful benefits to both parties while better serving, and therefore growing, the customer. It is easy to get ‘hooked’ on the special buy margins as store performance erodes but as you’ve identified, this is short path to failure.

    I think retailers that continue to deliver upon and improve their ‘value’ to customers will succeed. Stagnate, and die. We see a grocery retail industry that transitions to a combination of stores and efficient distribution. Store size can actually decrease while per store sales and margins grow. There are a multitude of strategies that can spiral out and take hold but they all start with the ability to execute. Supply Chains are too often viewed as an expense to squeeze instead of an asset to leverage. Those that leverage their supply chain will win.

    Steve

  6. Toby, good article and I agree with everything you are saying.

    If these companies really want to save money, and pass along lower prices to their customers, they need to learn and move towards Vendor/Distributor collaboration. This would allow them to make more of a profit on those items they buy on forward buying gains and reduce their spend due to having to throw out those fresh foods that they have because they bought too much.

    I personally think that too much of retail is trying to buy for the best price possible even if you don’t need it, or will never sell it.

  7. Pingback: What Wal-Mart’s Latest Acquisition in China Tells Us About The Future of E-commerce « Shopper Marketing

  8. Hii Toby,

    i tend to agree with you and what Mario defined regarding the situation in Indonesia is genuinely correct.
    I saw this C4 outlet at Shanghai nearby my hotel and found it so messy. Spills of sugar and syrup on the floor being ignored for some time and what supprised me a little was that we have to paid for the plastics bag.

    How about the traditional market, do you have any observation Toby?.

    • Hi Kevin,

      I think the independent retail market is very much alive and well in China. As major manufacturers seek deeper distribution in the coming years it will have a greater role to play. Though in the meantime most manufacturers have this way off their radar – this will have to change in the future.

      Best Toby

  9. Great article Toby. I’m probably late at responding to this but given that I have recently moved to Beijing, I have noticed this myself. Carrefour’s ‘wet market freshness’ mantra is nothing but frozen, un-fresh, wilted produce and totally overrated.Clearly there is a lack of collaboration due to copius amounts of stock. IMO, it really needs serious thought in forward-planning, just like everything else here I suppose!

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