French-owned retail giant Carrefour denied rumours that it was withdrawing from the Chinese market earlier this month, with its PR department pledging a commitment to continue expanding its presence there by adding 20-25 new stores each year.
But a report in weekly Chinese newspaper the Economic Observer says the rumours stem from some serious challenges facing Carrefour’s business in China.
While the retailer previously reaped the benefits and enjoyed the reputation of being the first foreign-invested chain to enter China, those “glorious days” have long past, according to the newspaper.
Nowadays, Carrefour barely receives any preferential treatment or favourable policies in areas such as property rentals or store openings. Rather, domestic competitors now enjoy priority in access to retail estate.
“Six (Carrefour) stores have closed since last July and high employee turnover has led to increased pressure on cost control,” a source close to the retail group told the Economic Observer. “The cost of physical stores and logistics has surged dramatically, which makes it impossible to reach the expected profit target if we continue to follow the previous operating model.”
Compounding the cost crunch is the fact that the overwhelming majority of Carrefour’s stores in China are rented, while other foreign players such as Walmart and Tesco have begun to get involved in real estate, according to the report. “Huge rent increases will be a headache facing Carrefour after the 20-year lease period for its stores signed in 1995 ends in 2015,” the report said.
Leasing a storefront in urban business districts of major cities is now almost impossible for the group, given the operating costs, according to the Economic Observer. Faced with this predicament, the group is reportedly adapting its store-opening strategy, shifting its focus towards China’s second- and third-tier cities and the outskirts of the first-cities.
A restructuring of Carrefour China has also been rumoured in the French media after the world’s second largest retail group suffered a net loss of E249m (US$359.41m) in the first half of 2011, compared to a net income of E97m in the corresponding period of 2010.
While a solid performance in China helped to grow the group’s Asian sales by 7.7 per cent, competitors such as Walmart and RT-Mart have been outperforming Carrefour.
Personnel changes also look to be on the cards for Carrefour China, according to the Economic Observer. Eric Legros, the current Carrefour China chief executive who took the helm 2006, has reportedly rung a number of controversial changes to management, cost control and procurement. He now looks set to return to the French headquarters as executive director of Carrefour Group and president of global merchandise development. Thierry Garnier, currently Carrefour’s executive director for Growth Markets, is set to take over from Legros from April next year.
The need to find new pathways to growth and solutions to its problems is growing more urgent for Carrefour China, especially as rivals reap the benefits of their investments in areas such as the supply chain. For instance, Walmart has increased its spending on technologies to boost logistics efficiency and cost control and Carrefour cannot get an edge on these competitors by continuing to rely on to rely on human labour, especially as the cost of such resources is increasing rapidly, the report concluded.
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