hen US warehouse club Costco opened its first physical retail store in the Chinese mainland in Shanghai on August 27, thousands of shoppers flocked to its doors, resulting in traffic jams in the store, parking lot and neighborhood roads.
Costco is known for its membership-based business model. But despite its apparent initial success, many are skeptical about its long-term prospects given the different consumer and shopping habits of the Chinese market. The same goes for Aldi, Germany’s discount supermarket chain, which in June opened two pilot stores in Shanghai.
In the three decades since China opened to foreign retail enterprises, many global giants have partially or completely withdrawn from the Chinese market. The latest case is Metro, a warehouse club from Germany, which announced on October 11 the sale of a majority stake in its China operations to local retailer Wumart for 1.9 billion euros (US$2.1b). Metro retained a 20 percent stake in the joint venture – Metro Wumart China – to be established after the deal.
A closer look at the rise and fall of foreign retail enterprises in the past decades provides some valuable insight for newcomers, such as Costco and Aldi, looking to expand their businesses in a market expected to become the world’s largest this year.
The presence of foreign retail enterprises can be traced back to the early 1990s, when China gradually opened its doors to foreign retailers. By 1995, Carrefour, a hypermarket brand from France, became one of the first foreign multinational retail firms to enter China with the opening of two stores in Shanghai and Beijing.
With stocked aisles covering a wide range of products over thousands of square meters, the hypermarket model, a novelty to Chinese consumers at the time, was immediately met with awe and enthusiasm.
In 1996, top US retailer Walmart’s first store in China drew a rush of 80,000 shoppers on its opening day. Walmart and Carrefour, the world’s two largest retailers, were soon followed by Metro AG (Germany), Makro (the Netherlands), Auchan (France) and Lotus (Thailand), all of which entered the Chinese market between 1996 and 1999.
In these early years, supermarkets run by foreign firms not only represented the future of shopping, but also symbolized the prosperity and material abundance promised by the Western way of life.
While the Chinese government posed some restrictions on their expansion in the 1990s, foreign retail firms were given a free hand after China joined the World Trade Organization in 2001 with a promise to further open its markets. By October 2006, Carrefour operated 83 hypermarkets in 34 cities. They expanded to 182 stores by 2010. Walmart also expanded rapidly, reaching 219 stores in 2010.
In the meantime, more foreign retailers entered the Chinese market in the early 2000s, including supermarket brands such as Tesco (UK), the world’s No.3 retailer, and more specialized brands such as US home improvement retailer Home Depot and electronics retailer Best Buy, both opening their first Chinese stores in 2006.
But the golden age for multinationals proved short-lived, if not a complete illusion. As the novelty of Western-style hypermarkets and supermarkets wore off, the era of rapid growth when global firms could generate profit by simply opening new stores quickly came to an end.
In the meantime, the world’s fastest growing retail market attracted formidable competition from domestic investors. Already closing stores operating at losses in late 2000s and early 2010s, Carrefour and Walmart doubled down and opened stores to continue their China expansion. But for many smaller firms, pulling out appeared to be the only choice.
In 2008, the Netherlands’ Makro sold its six supermarkets to South Korean conglomerate Lotte for 1.28 billion yuan (US$180m). In 2011, after five years in China and capturing less than 1 percent of the market, Best Buy decided to close shop. Home Depot followed suit. In 2013, Lotus struck a share-swap deal of US$295 million with domestic supermarket chain Wumart Stores. The same year, a decade after entering the Chinese market, British retailer Tesco merged its operations with China Resources Enterprise which operates Vanguard, a nationwide chain of about 3,000 supermarkets and hypermarkets.
For years there have been heated discussions over the reasons behind the struggle of foreign retail firms in China. One of the major consensuses among experts is that multinationals tended to rely on their long-established business models and failed to respond to the rapidly changing dynamics of the Chinese market.
Navigating China’s vast regional economic and cultural disparities posed a serious challenge for global giants. Market analysis by Fortune magazine in February 2016 found that Walmart struggled to find the right product mix for its stores across China, and found it challenging to sell a core set of products as it does in the US.
In the meantime, China’s supermarket and hypermarket sector stagnated in the 2010s. According to economic data analysts ceicdata.com, total sales in the supermarket and hypermarket sector in China recorded an estimated 14 percent annual growth rate between 2008 and 2011, which then fell to 5 percent in 2012 and 10 percent in 2013.
The sector contracted in 2014, the first since China opened its retail market. From 2014 to 2018, sales stagnated with only slight year-on-year fluctuations.
The rise of e-commerce attributed to this stagnation, but there also appeared to be an abrupt shift in consumer habits as convenience stores reported steady growth between 9 to 18 percent between 2012 and 2017, according to a report made by DT Finance, a domestic financial media outlet. While stagnation affected all firms, domestically owned chains adapted more successfully. Vanguard shifted focus to convenience stores while Yonghui Superstores expanded its high-end, mid-sized stores.
In 2016, Vanguard and the Hong Kong-listed Sun Art Retail Group surpassed Walmart as China’s top two largest retailers. By comparison, global giants were taking a bigger hit. In 2016, Carrefour slid to fifth in terms of market share. Its 2018 sales in China were US$4.1 billion, down almost 10 percent from the previous year, and reported net losses of US$84 million.
Besides direct competition from domestic chains, the recent rise of internet commerce in China is a major factor behind foreign retailer woes. In 2010, online retail sales accounted for about only 4 percent of China’s total sales of consumer goods. In 2018, the share increased to 25 percent, with total online retail sales reaching 9 trillion yuan (US$126b).
Amazon also stumbled in China. The global e-commerce giant entered the Chinese market in 2004 through the acquisition of Joyo, a domestic online shopping platform that was rebranded as Amazon China in 2011. Amazon enjoyed success in the early years, with an estimated market share of over 15 percent in 2011 to 2012. But domestic platforms Alibaba and JD.com, which adopted far more aggressive marking and pricing strategies, quickly eclipsed Amazon.
When Amazon announced that it would shut its China online store by July 18 to focus on overseas goods and cloud services in China, its market in China’s online retail business dropped to less than 1 percent.
After becoming dominant players in China’s internet commerce landscape, e-commerce giants like Alibaba, JD.com and Suning are now moving to physical stores. For example, since 2015, Alibaba has invested about US$9.3 billion in brick-and-mortar stores. In 2017, Alibaba forged a strategic alliance with Auchan, the French multinational retail group, by acquiring a 36.16 percent stake in Sun Art, China’s top hypermarket operator, for HK$22.4 billion (US$2.88b). While Auchan remains a major player in China’s retail market, owning 36.18 percent of Sun Art, it decided in December 2018 to hand over its retail business in the Chinese mainland to RT-Mart, a hypermarket chain from Taiwan owned by Sun Art.
More recently, other e-commerce giants also increased their stakes in the offline retail market. In September, 24 years after entering the China market, Carrefour sold an 80 percent stake in its China operations to Suning, China’s largest omni-channel retailer, for 4.8 billion yuan (US$674m).
As one of the few surviving major foreign players in China’s retail landscape, Walmart also opted to build alliances with e-commerce giants in order to remain competitive. In 2016, JD.com launched an online store for Walmart warehouse brand Sam’s Club. In May, Walmart announced it would strengthen their partnership by opening a store on JD.com. In the meantime, Walmart has increased its stake in JD.com from 5 percent in 2016 to 12.1 percent in February.
While the alliance with JD.com can help Walmart to better cope with the developing dynamics of the Chinese retail market, it also makes the world largest brick-and-mortar retailer increasingly more dependent on its Chinese partner. With Costco and Aldi the latest newcomers in this highly competitive and rapidly changing market, it seems that the rise and fall of global retail firms will continue.