Overseas chain stores find the going tough in China

China was an ideal business destination for global retailing giants in the 1990s. However, changing conditions now make the journey here less easy.

In the past two years, chain store operators have reported the lowest year-on-year growth rates in 10 years.

International brick-and-mortar retailing giants are facing unprecedented difficulties in China, including increasing rental costs, fast-growing Chinese counterparts and competition from e-commerce, industrial experts said.

In 2012, the average sales growth of top 100 large retail companies in China was 8 per cent year-on-year, down 10.5 percentage points from 2011, according to the China National Commercial Information Center.

In addition, the centre reported that the international brick-and-mortar retailing giants closed about 26 stores in China in 2012.

In contrast, the year-on-year growth of total retail sales in China was 14.3 per cent last year from 18.12 trillion yuan (S$3.6 trillion) in 2011, the National Bureau of Statistics said.

Weak economic conditions and rising market competition caused many foreign retailers to suffer in 2012 and forced them to reconsider their development policies in China.

"China is the most challenging market for international retailers. You can find retailers such as Carrefour and Auchan. Everybody is here," said Paul Ritchie, chief executive officer of Tesco China.

The departure of Media Markt China Ltd has become the most recent case to suggest foreign retailers' overseas successes might not be easily replicated in China. The German retailing giant closed all its seven stores in the country on March 11. In contrast with Best Buy Inc, which operated in China for five years, it only survived in China for less than three years.

"The decision to close the stores was made in response to the highly competitive market environment and associated high investment of building and operating the necessary sales," said a statement from Media Markt China Ltd on Feb 27.

Media Markt is not the only foreign retailer to adjust its strategy in response to changing market conditions. In 2012 and this year, many chain store operators closed unprofitable outlets and adjusted their management structures to ensure future strength, according to Chinese media reports. But, they refused to comment on the reports.

In January 2013, Hong Kong-listed CP Lotus Corp closed one of its stores in Beijing after the rent increased and it suffered losses, according to Beijing Business Today.

In 2012 United States-based Wal-Mart Stores Inc closed five outlets including three convenience stores and France-based Carrefour SA closed two in China, according to National Business Daily.

In August 2012 Tesco China closed four shops in China. The store closures, in Bengbu, Anhui province, Tieling, Liaoning province, and Taizhou and Changshu, both in Jiangsu province, reflected a move to optimize the UK company's retail network and better serve customers.

"The four stores we closed were quite widespread and difficult to manage. By closing those stores, we could make the business stronger and we can concentrate our efforts on the right stores that can grow," said Ritchie.

Peng Jianzhen, deputy secretary-general of CCFA, said the closure of stores owned by foreign retailers might be caused by increasing rental costs and may not suggest they have experienced unique problems in China. However, they might need to adjust store formats to be more competitive in large cities.

"Some leasing contracts were signed 10 years earlier and there have been significant rental increases in recent years that has prompted chain store operators to relocate their stores," said Peng.

"There are too many hypermarkets in large cities and the market is saturated. They might consider moving into smaller cities or consider smaller formats such as community stores to better meet market demand," he said.

To meet complex market conditions, retailers are applying changes to daily operations.

Tesco China has centralized its management structure and integrated its commercial property development sector into its trading sector, a move designed to lower the complexity of operations and increase efficiency.

The Globe and Mail said Wal-Mart Stores Inc also slowed its growth in China. Wal-Mart confessed it had made marketing mistakes and let profitability slip in its haste to expand.

"The golden period of the hypermarket format has already gone in China," Peng said.