Abandoned Shopping Carts: Why did Tesco and Best… | tutor2u Business

Abandoned Shopping Carts: Why did Tesco and Best Buy Fail in China?

Just why have so many Western retail giants struggled to succeed in China? If global retailers like Walmart, Tesco, Carrefour and Best Buy have struggled, what hope is there for the rest?

In August 2013 Tesco announced that it was effectively bowing is brand out of the Chinese supermarket business. It announced plans to merge its chain of 131 mainland stores into a joint venture with China Resources Enterprise ("CRE"), an operator of nearly 3,000 smaller stores called Vanguard. Tesco will become a minority shareholder in the joint venture owning just 20 per cent of the combined business. CRE is also China's second-biggest operator of hypermarkets.

Tesco's 131 stores in China made it just the 8th largest grocery retailer there and it had a market share of just 2 per cent.

Tesco, which reported losses for each of its nine years trading alone in China, achieved just 150 million yuan of average sales per store at its 121 outlets in 2012, compared with the break-even level commonly thought to be around 250 million yuan per year.

Tesco is hardly alone in its inability to compete successfully in China. Earlier in 2013 media reported that global retail giants Walmart and Carrefour were closing several of their underperforming stores in China.

In fact, companies like Carrefour and Tesco have been rationalising many of their global operations over the last few years, as they grapple with bigger problems in their recession-hit home European markets. Tesco’s decision to withdraw from the US market by selling Fresh’Easy was perhaps a more strategically important and costly decision than the joint venture with CRE.

But the rapid rise of e-commerce in China has been compounding their headaches in a market once seen as full of big potential due to the rapid rise of a Chinese middle class. E-commerce sites run by Jingdong, Alibaba and Tencent now carry many of the same items as traditional hypermarkets but for far less. What's more, most of those online names can often deliver goods on the same day, and a few are even trailing services that deliver in two hours or less.

The loss of the Tesco trading name from China is similar to the decision back in 2011 taken by Best Buy (the world’s largest consumer electronics retailer) to close all of its nine Best Buy branded stores in China. The Best Buy format captured less than 1 per cent of the China market struggling to compete against more agile and aggressive home-grown rivals Gome and Suning, which each have more than 1,000 branded stores in China.

Best Buy decided instead to focus on expanding the more profitable domestic electrical chain (Five Star). Best Buy entered China in 2006 by paying $180 million to take control of Five Star, China's fourth-largest electronics retailer. Yt then tried to expand by introducing the Best Buy format into China, without success.

According to a retail analyst in China, this dual brand strategy was always likely to struggle.

“They have struggled with some of their branded stores,” Ben Cavender, a Shanghai-based analyst at China Market Research Group said. “The Five Star brand has been in the market considerably longer and is a brand people recognize. Not many people in China know what Best Buy is.”

“Best Buy believed it could grab market share in China by offering high-quality service and a good shopping experience,” claimed Torsten Stocker, retail analyst at Monitor Group. “But what determines Chinese consumers’ purchasing decision is price, not service.” Best Buy’s store strategy was also at odds with local habits. Chinese retailers generally divide up electronics and other large-ticket items by leading brands, rather than category, supported by sales staff working for the manufacturers rather than for the retailer".

What lessons can be learned from the experiences of Tesco, Best Buy and other major retailers who have struggled with their market entry strategies in China?

According to Gupta and Wang in their article in Businessweek, the crucial factor to consider in China is "scale" and in-depth understanding of customer needs and regulations. They argue that what matters is local - not global -scale. They suggest four strategic guidelines for major Western retailers wanting to succeed in China.

(1) Depth beats Breadth

It is better to aim to achieve a high market share in a small number of markets (regions, products) rather than gain a relatively small market share in each of many markets. They argue that Tesco spread its resources too thinly across many markets.

(2) Be Open to Joint Ventures

For Tesco this has come nine years after first entering China! Joint ventures (JVs) help acquire local knowledge and enable a retailer to build local scale quicker.

(3) Invest Heavily in Localisation

Tailor the retail format, product range and location to meet the specific needs of the local population. We have seen how KFC and P&G have been particularly successful doing this - so others should follow!

(4) Invest in Local Management and Staff

A retailer that wants to succeed in China can't do so relying on expat management. It needs to invest in and develop teams drawn from the local working population.

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