Has China Become Too Hard to Crack for International Retailers?

In the past year there have been numerous reports of international retailers leaving, or considering withdrawal from, the Chinese market.

Tesco has signed a memo with China Resources Enterprise to form a joint venture in which the U.K.-based retailer will hold only 20 percent and will most likely lose its own banners as a consequence. Carrefour China is also rumored to be either selling its operation or launching an IPO to finance any further expansion.

A similar story goes for German Metro Group’s Media Markt, Korea’s E-mart and Lotte Shopping and Lotus from Thailand.

Competition

It has been almost a decade since China fully opened its retail market to foreign companies. Beijing, Shanghai and Guangzhou, as well as affluent coastal cities, have reached the saturation point. It is no longer as easy to grab land for new stores, particularly in prime locations.

At the same time, many Chinese operators have accelerated their growth by learning from their international rivals. Together with their knowledge of local consumers and established connections with suppliers, business partners and local governments, domestic retailers have proved to be worthy competitors.

The rise of e-commerce has significantly changed the Chinese retail landscape in the past few years. Although consumers still visit bricks-and-mortar stores for fresh produce and food, more Chinese consumers are buying electronics, clothing, household products and personal care products online. These high-margin products are a principal source of profit for many offline retailers, especially grocers.

E-commerce has had an even greater impact on the non-food bricks-and-mortar retail sector. Being able to offer a broader range — and, more importantly, lower prices — will help online retailers continue to erode the profits of physical competitors.

Real estate and localization

High rent is the last straw for many retail outlets. With already slim margins in China, numerous retailers find they can no longer afford the rent levels being demanded and are compelled to surrender good locations. China is currently in a cycle where large numbers of retailers are renewing their contracts with landlords. It will shock no one to hear of store closures coming about because of this.

Despite their best efforts, many international retailers have never succeeded in becoming genuinely localized for the Chinese market. Although they may hire local employees and managers, it is still difficult for Chinese talent to rise to the higher echelons of foreign-owned businesses. Key decision-makers are usually expatriates or those back at headquarters and, to a considerable extent, those retailers’ China prospects are determined by these decision-makers’ understanding of the Chinese market. After a few years executing strategies devised by such thinkers, they usually discover it has not worked as planned — and by then it could be too late to salvage the operation.

Remaining potential

The Chinese economy will maintain a steady pace of growth into the foreseeable future, and consumer incomes will continue to increase along with it. Technologies and infrastructure are expected to improve gradually. A large section of the population — more than 700 million people — currently living in rural areas will be progressively urbanized. Hundreds of smaller cities are waiting to be opened up, all offering potentially impressive rates of consumption. And the more open-minded younger generations will further stimulate retail consumption.

Therefore, despite challenges aplenty, China still affords international retailers a vast amount of potential.