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Part A Basic Concepts _30 Points_ by xumiaomaio

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									                                              Question Paper
                             Integrated Case Studies - I (MB3J1): October 2008


                                             Case Study (100 Marks)

                     This section consists of questions with serial number 1 -
                      5.
                     Answer all questions.
                     Marks are indicated against each question.

    Read the case carefully and answer the following questions:

    1.       ―The Chinese market is a lucrative destination for international players because of its                               <Answer>
             huge population base, but stringent regulatory norms hold them back from entering
             China‖. In this context,
             a.      Analyze the major business environmental factors in China that have attracted
                     retailers such as Carrefour.                                                    ( 15 marks)
             b.      Discuss the challenges faced by Carrefour while expanding in China.             ( 10 marks)
    2.       ―Entry strategy plays an important role in the international expansion of a company‖.               <Answer>
             Explain why companies enter into foreign markets and the entry modes available to
             retailing companies. Why do you think Carrefour adopted the joint venture mode of entry
             in China?                                                                               ( 25 marks)
    3.     ―As Carrefour and Wal-Mart were quickly moving toward a frontal clash, questions arose                      <Answer>
           in observers‘ minds regarding which chain was better prepared to win in an increasingly
           global marketplace‖. In the light of the strategies adopted by foreign companies like
           Carrefour and Wal-Mart in China, do you think Carrefour has a competitive edge over
           Wal-Mart? Discuss.                                                                            ( 18 marks)
    4.     ―Retailers are no longer just concerned about cost control, instead they view supply chain                  <Answer>
           as a key element of their business strategy‖. In this context, explain the significance of
           efficient Supply Chain Management (SCM) in retailing. Also discuss the SCM related
           challenges that retailers need to deal with when operating in countries such as China.
           Elucidate the factors that contributed to Carrefour having an efficient SCM in China.         ( 20 marks)
    5.     ―Carrefour had decentralized its operations, giving full freedom to store managers to                       <Answer>
           operate their stores to differentiate themselves from the competition while satisfying and
           delighting their customers‖. Analyze the role and responsibilities of store managers at
           Carrefour. Is Carrefour right in giving the store managers complete freedom in choosing
           the products according to the local demands?                                                  ( 12 marks)
                                             Carrefour’s Strategies in China
    ―Carrefour has gotten it right in China – and, in fact, they’re doing mass retailing globally much more
    successfully than the iconic Wal-Mart, earning twice Wal-Mart’s revenue. What Carrefour is doing right (in
    additional to grabbing and building as many retail outlets as it can in the big cities) is simple: They’re selling
    in a Chinese way to Chinese consumers. You can pull your own seafood from tanks. You can select from bins
    of fresh produce. It’s more like a Shanghai outdoor market than a Paris indoor one. That’s the customer
    experience the Chinese consumer wants.‖1




         The case is prepared only for the purpose of examination and not to illustrate effective or ineffective performance of the company.
         The case contains factual information adapted to and combined with other information to enable analysis of the given topics.

1
    Paul K. Ward, ―Goofing up Global CRM,” www.crm2day.com, September 06, 2005.
                                                                Page 1 of 33
                                                                    – Paul K. Ward2, CRM Consultant, in 2005.
    “China represents a huge market when it has acquired its WTO membership. But it’s no easy way to stand out
    a winner here. China is nearly as big as Europe and each area differs from any other. We have to keep on
    learning something new. We must know customers’ wishes and expectations, therefore offering them more
    added values.”3
                                                      – Jean-Luc Chéreau, Chairman, Carrefour China, in 2004.
    THE ‘GREAT MALL’ OF CHINA
    In 2006, France-based Carrefour Group (Carrefour), the second largest retailer in the world, successfully
    completed eleven years of its operations in China (Refer to Exhibit I for the top 25 food retailers in the world
    in 2005). As of September 2006, Carrefour operated in China through its 80 hypermarkets 4 and around 250
    hard discount stores5. China was Carrefour‘s sixth largest market, with sales of over € 6 2.06 billion in 2005
    (Refer to Table I for the top six markets of Carrefour).
    Being one of the first foreign companies to enter the Chinese retail industry, Carrefour played a major role in
    bringing about a retail revolution in the country. It leveraged on its experience in the international markets and
    introduced a few of its global best practices into the Chinese market. Carrefour had adopted a decentralized
    management structure, where all store managers in China operated stores with complete freedom. Carrefour
    sold private label products and designed the stores according to the convenience of Chinese customers. By
    procuring the majority of its products locally, Carrefour was able to ensure their freshness, an attribute
    considered important by Chinese consumers. In China, where vast economic, social, and cultural differences
    existed among different provinces, Carrefour was able to cater to the needs of different customers
    successfully.
                                                           Table I
                                           Carrefour – Top Six Markets (2005)
                                            Country     Revenue (In € million)
                                           France                44,468
                                           Spain                 13,619
                                           Italy                  7,320
                                           Belgium                5,285
                                           Brazil                 3,944
                                           China                  2,064
                                          Source: Carrefour Annual Report, 2005.
    Till the 1980s, the retail industry in China was fully controlled by the Government. The department stores run
    by the Government provided little in the way of convenience. According to Wang Zhirong, General Manager
    of Tian Bai department store in Dalian, concepts like customer service and choice were unheard of. She said,
    ―It didn‘t matter how you did your job, when customers came they had to wait until the shop assistants were
    in a good mood before begging them for help.‖7
    Carrefour entered China in 1995, when the Chinese Government had partially opened the retail sector. The
    country‘s economy was in the growth phase and the urban consumers were shifting their preferences from the
    wet markets8 and state-owned stores, to foreign retailers like Carrefour which provided convenience along
    with a wide range of products in hygienic surroundings (Refer to Exhibit II for retail industry in China).
    Carrefour went on to strengthen its position in the country and by 2005, it had emerged as the sixth largest
    retailer in China. It was also the largest foreign retailer in the country (Refer to Table II for the leading
    retailers in China in 2005).

                                                      Table II
                                      China’s Leading Retailers (December 2005)


2
    Paul K. Ward is known for his work in the area of CRM, Perceived Customer Value, branding and strategy in China.
3
    ―No Easy Way to Win in China: Carrefour,‖ People‘s Daily Online, March 31, 2004.
4
    Carrefour‘s hypermarkets occupied floor space between 5,000 sq meters and 20,000 sq meters. They offered more than 70,000
    food and non-food products like household products, medicines, and clothes.
5
    Hard discount stores occupied area between 200 and 800 sq meters and sold a range of 800 food products. Carrefour‘s hard
    discount stores were named Dia, Ed, and Minipreco.
6
    As of October 24, 2006, 1 Euro = US$ 1.254.
7
    Rebecca MacKinnon, ―China‘s Reforms Produce Winners, but More Losers,‖ www.cnn.com, October 1999.
8
    In China, wet markets can be found all across the country. These markets sell fresh fish, chicken, and live mammals and reptiles,
    generally in an open environment.
                                                            Page 2 of 33
                                 Retailer              Sales (RMB Billion)          No. of Stores
                        Bailian Group                           72.1                     6,345
                        Gome                                    49.8                       537
                        Suning                                  39.7                       363
                        Vanguard                                32.0                     2,133
                        Wumart                                  19.1                       659
                        Carrefour                               17.4                        70
                        China Paradise                          15.2                       225
                        Trust-Mart                              13.2                        96
                        Parkson China                           11.0                        36
                        Lotus                                   10.1                        61
                        Wal-Mart China                           9.9                        60
                        B&Q China                                5.2                        48
                      Source: China Chain Store & Franchise Association and www.carrefour.com.
     According to Beijing-based CTR Market Research9, Carrefour was the major retailer in 15 of the largest cities
     across China, with a market share of more than 5%. Between 2006 and 2010, Carrefour projected revenue
     growth of above 20% per annum in China and planned to open about 80 more hypermarkets in the country by
     2009. Commenting on Carrefour‘s success in China, Los Angeles Times reported, ―By joining with Chinese
     partners, adapting to local culture, and employing a supply chain that includes 18-wheel trucks and three-
     wheel bicycles, Carrefour has become the biggest foreign retailer operating in China.‖ 10
     BACKGROUND NOTE
     In the early 1950s, the grocery industry in France consisted mostly of family-owned stores. Though there
     were some big department stores, these charged exorbitant prices. At that time, the concept of free service 11
     was gaining popularity and there were very few stores in France that were providing such services. In 1959,
     two entrepreneurs, Marcel Fournier (Fournier) and Louis Defforey (Defforey) from Annecy in Eastern France
     decided to establish a large discount supermarket. Initially, they offered 7,000 shares to 10 stockholders and
     purchased a facility that was under construction.
     On the ground floor of the building, the duo started constructing a supermarket. They sold the upper floors,
     thereby obtaining the required capital to run the business. Fournier was the President of the venture and
     Defforey‘s son Denis was the General Director. Fournier decided to name the venture Carrefour (Crossroads),
     as the store was located at the convergence of five roads in Annecy. At that time, another businessman
     announced his intentions of opening a similar store in Annecy. Fournier and Defforey decided to open a store
     at other premises as their facility was still under construction. Fournier used the basement of his office to open
     a store in January 1960. As the threat of competition was looming large, the duo offered products at the
     lowest prices. Soon, the store became very popular among customers.
     Before the new store at Annecy was opened in June 1960, a campaign was launched to familiarize customers
     with the concept of supermarkets. The campaign was highly successful and in the first two days, Carrefour
     attracted more than 15,000 customers. To accommodate the vehicles of the customers, Carrefour expanded
     the parking lot, but this was not enough to cater to the growing number of visitors. Several traffic jams were
     reported in the store‘s vicinity and the founders concluded that locating supermarkets in the congested urban
     areas was not practical and decided to move to the suburbs. The next supermarket that was opened was also in
     the Annecy region in Cran-Gevrier. It had a large parking lot and a discount service station that sold petrol on
     a no-profit, no-loss basis.
     In 1962, Carrefour decided to open a store at Sainte-Genevieve des Bois, a Paris suburb 30 km away from the
     main city where land was easily available at low price. Before the store was constructed, Defforey and his
     brother went to the US to observe the retail practices prevalent there. After observing the huge stores, the
     discounts offered, the low prices and services that the customers were provided with, they decided to adopt
     similar practices in France. In 1963, they opened a new store. It occupied an area of 2,500 square meters and
     had enough space to park more than 400 cars. The store provided a wide range of items, including grocery at
     discounted price, stocked items like clothing, sporting equipment, electronic goods, and auto accessories. The
     store was inaugurated in June 1963 and its huge size earned it the name ‗hypermarket‘ in the media. Carrefour


9
     Founded in 1995, CTR Market Research is the leading market research company in China. CTR provides different services that
     include interpretation of information, market segmentation, advertising, media research, and business research.
10
     Don Lee, ―A Chinese Lesson for Big Retailers,‖ Los Angeles Times, July 02, 2006.
11
     Prior to the advent of free service, the sales clerks picked up the necessary items for consumers from the shelves. Under free
     service, the customers were given shopping carts or baskets, which they used to collect the individually priced items placed on the
     shelves.
                                                             Page 3 of 33
     offered products at the lowest prices as compared to its competitors by negotiating with wholesalers and
     suppliers. The concept of a hypermarket found instant acceptance among the younger people, suburban
     dwellers, and price conscious consumers.
     In 1965, Carrefour formed two divisions – Carrefour Supermarché led by Fournier and Denis and Grands
     Magasins Carrefour, headed by Defforey and Fournier‘s son. Carrefour continued its expansion, opening huge
     stores in France. In 1966, a 10,000 sq. meters hypermarket was opened in Lyon and a 20,000 sq. meters
     hypermarket was opened in Vitrolles. In 1967, Carrefour opened an office in Paris to coordinate the activities
     of its different stores. In 1970, the company‘s shares were listed on the Paris stock exchange. By 1971,
     Carrefour operated 16 wholly owned stores in France, had an equity interest in five stores, and also operated
     seven stores through its franchises.
     GOING GLOBAL
     Carrefour started making efforts to enter international markets after a law was passed in France in 1963 to
     restrict the development of large stores. For international expansion, Carrefour adopted the route of forming
     alliances with local partners. Its first international venture was in Belgium, where it opened an outlet in
     association with Delhaize Fréres-Le-Lion12, in 1969. Carrefour expanded its operations outside Europe by
     opening a hypermarket in Brazil in 1975.
     In 1978, Carrefour developed a hard discount store format, under the banner Ed in France (Refer to Exhibit III
     for different banners of Carrefour). The store offered a limited range of products at very low prices. By 1985,
     Carrefour was operating in ten countries and had introduced private label products that were priced 10-20%
     lower than the branded products and were of superior quality. In 1988, Carrefour entered the US market by
     opening a 330,000 sq. feet hypermarket in Philadelphia. Another hypermarket in the country was set up in
     199113. In 1992, Carrefour reported sales of €17.86 billion and a net income of €271 million.
     In the early 1990s, Carrefour concentrated on establishing larger stores (area greater than 2,500 sq. meters)
     and sold off the smaller stores. In 1996, a law was passed in France under which food wholesalers were not
     allowed to give any extra discount to supermarkets 14 and hypermarkets. They were to charge an equal price
     from all retailers. Due to this, the advantage the bigger stores had in terms of cost was lost and the price of the
     products was uniform across different types of stores.
     The legislation was passed with the aim of protecting the small retailers from the onslaught of supermarkets
     and hypermarkets, which got a higher discount from the wholesalers and offered products at a lower price.
     The legislation led to the growth of discount chains that stocked private label brands. The chains started
     providing products at prices much lower than those at Carrefour.
     By then, Carrefour‘s European operations were spread across Austria, Britain, Switzerland, The Netherlands,
     Germany, Italy, Belgium, and Spain. Ed was operating in Britain and Italy. Carrefour‘s South American
     operations were doing well and the company was aggressively expanding into those markets. In 1996,
     Carrefour opened 30 hypermarkets across the world, of which 15 were in Argentina, Brazil, and Mexico. By
     1997, the number of stores in South America had increased to 60.
     Some of the acquisitions made in the late 1990s helped Carrefour in becoming the top retailer in Europe. In
     1998, Carrefour acquired Comptoirs Modernes SA, which brought 790 supermarkets into Carrefour‘s fold. In
     1999, Carrefour acquired Promodès SA15, which owned several hypermarkets, supermarkets, convenience
     stores, and discount stores in France and other European countries. This acquisition made Carrefour the
     second largest retailer in the world.
     By December 2005, Carrefour was operating in 29 countries with 12,028 stores (including franchisees and
     partners) and employed 436,000 people (Refer to Exhibit IV for Carrefour‘s consolidated store network
     excluding partners as of December 2005 and to Exhibit V for sales per store format and region). For the
     financial year ending December 2005, Carrefour generated revenues of €74.49 billion and net income of
     €1.58 billion (Refer to Table III for financial summary of Carrefour for the financial years 2004 and 2005).
                                                          Table III
                                             Financial Summary of Carrefour
                                                                                          (In € million)


12
     Delhaize Fréres-Le-Lion is a part of The Delhaize Group, a food retailer headquartered in Belgium. Founded in 1867, the group
     operates food supermarkets in North America, Europe, and Southeast Asia. As of December 2005, the group operated 2,636
     stores. It recorded sales of € 364.9 million and profit of € 18.6 million.
13
     Subsequently, Carrefour suspended the US operations in 1993, as the stores were not profitable.
14
     The supermarkets were between 1,000 and 2,000 sq. meters in area and offered mostly food products and household merchandise
     at competitive prices. Carrefour‘s supermarkets were called Champion, GS Norte, Gb, and Marinopoulos.
15
     Established in 1950, Promodès SA played a major role in promoting supermarkets in France. During the 1960s and 1970s,
     Promodès expanded its operations into other countries in Europe and South America.
                                                           Page 4 of 33
                                          Particulars                                2005           2004
                Net Sales                                                             74496.8        72668.0
                Other Income                                                            1011.3         1038.6
                Total Revenue                                                         75508.1        73706.6
                Cost of Sales                                                       (58626.5)      (57052.8)
                Margin of current activities                                          16881.6        16653.8
                SG&A                                                                (12232.7)      (11888.2)
                Activity contribution before depreciation & provisions                  4648.9         4765.6
                Depreciation & Provisions                                               1474.2         1494.7
                Activity contribution                                                   3174.7         3270.9
                Non-current income & expenses                                            (20.4)         (76.0)
                EBIT                                                                    3154.3         3194.9
                Net debt and other expenses                                            (454.6)        (484.5)
                Income before tax                                                       2699.6         2710.4
                Income tax                                                             (793.9)        (805.9)
                Net income from recurring operations                                    1905.7         1904.5
                Total net income                                                        1582.1         1859.6
                                                Source: www.carrefour.com.
     CARREFOUR IN ASIA
     During the late 1980s, the economy of several Asian countries like Taiwan, Singapore, South Korea, Thailand
     etc. was rapidly growing. In order to reap the benefits of this growth, Carrefour started its Asian operations by
     entering Taiwan in 1989. It established a joint venture with Uni President Enterprises Corporation 16. Initially,
     Carrefour aimed at building a hypermarket of 10,000 square meters, similar to its hypermarkets in France. On
     studying the Taiwanese market, Carrefour realized that the store format which had been successful in other
     parts of the world would not be successful in Asia as the Asian retail markets were different from the other
     markets, in terms of the layout of the stores, the products offered, the frequency of shopping, and highly price
     sensitive customers. Carrefour decided to adapt the stores, the products, and management culture to suit the
     local environment.
     Carrefour changed its strategy of building the hypermarkets in large open urban lands and began operating in
     high density urban areas in pre-existing buildings, when it found that the consumers in Asia did not wish to
     travel long distances to purchase groceries and other items as they shopped frequently and in small quantities.
     The first store in Taiwan was located in Kaohsiung and occupied an area of around 3,500 sq. meters. The
     number of products offered was limited and Carrefour concentrated on selling high volumes at competitive
     prices. Tapping the Taiwanese market was a big challenge for Carrefour as the tastes of the people in the
     country changed rapidly. The best selling products in a typical Taiwanese store changed within a span of just
     six months. In order to assess the trends, Carrefour opened pilot departments in the stores, where new
     products were tested. These departments interviewed some of the customers and studied their purchasing
     habits to monitor the changing customer preferences. The information was later communicated to all their
     other stores in the country.
     Local store managers and department heads were given more autonomy. The department heads were made
     responsible for the hiring of staff, procurement, product selection, and vendor management. They were
     responsible for achieving the budgeted sales and maintaining profit margins. In the initial years, senior
     executives from France were made department heads. Later, local employees were trained and promoted to
     assume higher responsibilities.
     Carrefour leveraged upon the experience it had gathered in Taiwan to expand into other Asian markets. The
     next destination was Malaysia, followed by China (Refer to Table IV for details of Carrefour‘s entry into
     Asian countries). Carrefour‘s Taiwanese experience acted as a prelude to its Chinese venture. The
     hypermarkets that Carrefour opened initially in China were similar to the ones that existed in Taiwan.
     According to Eric Deliers (Deliers), Regional Manager, Carrefour China, ―Our Taiwanese experience was
     very important. It was Carrefour‘s laboratory not only for China but for all Asia.‖ 17
     ENTRY AND EXPANSION IN CHINA
     Carrefour identified China as one of the most important foreign markets, after the country partially opened its
     retail sector for foreign investments in 1992. Carrefour entered China in 1995 by forming a joint venture with
     the Chinese management consulting firm Zhong Chuang, and established a firm called ‗Jia Chuang‘, in which
     it held the majority of shares. During that time, consultancy firms in China were not allowed to invest in any


16
     Uni President Enterprises Corporation is one of the leading business conglomerates in Taiwan and the largest food retailer.
17
     Hayet Sellami, ―Carrefour China: A Local Market,‖ www.cityweekend.com, April 28, 2005.
                                                             Page 5 of 33
     other businesses so Zhong Chuang set up another company, Chuang Yi Jia as a commercial enterprise. The
     joint venture company, ‗Jia Chuang‘ managed the hypermarket that was opened in Shanghai, in a residential
     area, to cater to the needs of the middle class in the city. The hypermarket was named Chuang Yi Jia. As
     Carrefour had a major say in running and managing the store, the signboards had the name ‗Carrefour‘
     displayed on them. The next store was opened near the International Exhibition Center, in the north-east part
     of Beijing, one of the prominent localities in the city.
                                                          Table IV
                                               Carrefour – Entry into Asia
                                               Country           Year of Entry
                                          Taiwan                       1989
                                          Malaysia                     1994
                                          China                        1995
                                          South Korea*                 1996
                                          Thailand                     1996
                                          Singapore                    1997
                                          Indonesia                    1998
                                          Japan*                       2000
                                                Source: www.carrefour.com.
     *Carrefour exited Japan in 2005 and South Korea in 2006.
     In China, as per the guidelines issued by the State Council, in the retail industry, Sino-foreign joint ventures
     were allowed to operate only at a few locations. As per the next set of guidelines issued in 1999, the foreign
     retail joint ventures were allowed to operate in more cities. Some of the conditions stipulated were that the
     joint ventures should be approved by the Central Government, and that only three outlets could be opened in
     each of the approved cities (Refer to Exhibit VI for Regulations of the Retail Industry in China).
     Instead of approaching the Central Government of China for approval, Carrefour entered into direct deals with
     the local governments of various provinces and convinced them that it would create employment
     opportunities18 in their region, generate taxes for the government, and help in the overall development of the
     region. The local government officials were quick to grant Carrefour the required approvals. By 2000,
     Carrefour had established hypermarkets in Shanghai, Beijing, Chongquing, Qingdao, Shenyang, and Wuhan.
     Carrefour expanded its operations in China rapidly and by early 2001, it had 27 hypermarkets in 12 cities
     across the country, some of which were fully owned by the company. At that time, Carrefour was the third
     largest retailer and also the largest foreign retailer in China. Though foreign retailers were allowed to open
     only three outlets per city, Carrefour managed to open more than three outlets in several cities with the
     approval of local authorities.
     But there was trouble brewing for Carrefour. In early 2001, a cabinet level body, the State Economic and
     Trade Commission (SETC), carried out an investigation into Carrefour‘s entry and expansion in China, after
     receiving complaints from its competitors. It was widely reported in the Chinese media that Carrefour had
     flouted Government stipulations regarding the ownership stake in retail joint ventures and the number of
     stores in each city. During the course of investigation, it was found that in some of the stores, Carrefour
     owned a 100% stake. The Commission ordered Carrefour to suspend further expansion in the country, in
     order to regularize its position according to the Chinese retail industry regulations.
     During the investigation, it was found that Carrefour had opened stores at locations that the Central
     Government had not opened up for foreign investments 19. Industry analysts opined that Carrefour had
     deliberately flouted the rules and set up stores without approval from the Central Government. They felt that
     the company‘s management was of the view that once its operations had spread widely across the country,
     Carrefour would be among the major employers and tax payers, a fact which would force the Central
     Government to subsequently grant the required approvals.
     This episode led to the then CEO and Chairman of Carrefour, Daniel Bernand, tendering a public apology
     during his visit to China in March 2001. On the bureaucracy in China, Chief Economist of Retail Forward




18
     Each store employed about 500 people at different levels including the store manager, department heads, and store management
     staff.
19
     According to China‘s WTO commitments in 2001, foreign retailers were allowed to establish joint ventures in five economic
     zones and six Chinese cities. In the next year, all provincial capitals were to be opened up to foreign investors and in the third
     year, the limitations regarding investments were to be lifted.
                                                             Page 6 of 33
     Inc.20 pointed out, ―They can overlook rules and then suddenly decide to enforce them. That happened with
     Carrefour recently.‖21
     By November 2001, Carrefour announced that the differences with the Chinese Government had been
     resolved and that the SETC had allowed the company to continue expanding its activities. As per the
     agreement reached with the SETC, Carrefour agreed to set up 10 procurement centers across the country, to
     procure Chinese goods which would be sold through its stores all over the world. Carrefour also admitted
     local partners and all its stores in the country were 35% owned by the local partners with the remaining held
     by the company. According to Jean-Luc Chéreau (Chéreau), Chairman, Carrefour China, ―Sometimes we may
     have problems in understanding Chinese laws and regulations. But we always respond positively to the
     government‘s requirements when problems arise, by rectifying our operation to make sure that the law is fully
     observed.‖22
     In April 2002, SETC and Carrefour reached the final agreement, according to which the number of holding
     companies was to be reduced to 13. Earlier, Carrefour had 27 holding companies, one for each store. After the
     agreement, Carrefour formed one holding company for each of the 13 local partners (Refer to Table V for
     some of Carrefour‘s partners in China). In June 2002, Carrefour transferred 35% of its ownership in three
     hypermarkets to two local firms – Chengda and Harbin Dongli Equipment Company.
     Carrefour opened its 28th Chinese store in Hangzhou, Capital of Zhejiang province, in June 2002 and by the
     end of 2002, its sales in the country had increased to €1.19 billion as compared to €1.18 billion in 2001. By
     then, the number of hypermarkets had increased to 30, with four hypermarkets in Beijing and six in Shanghai.
     By 2003, Carrefour had a presence in 15 cities and its sales had reached to €1.32 billion. In 2003, Carrefour
     opened its first hard discount store, Dia, in China by entering into a joint venture agreement with Shanghai
     Lianhua Supermarket23. They planned to open 300 discount stores in different residential areas in Shanghai by
     the year 2007. The joint venture was set up with total capital investment of RMB 24 90 million. The goods sold
     through the discount stores were to be priced 10-15% lower than the goods sold through the hypermarkets.
     These stores were targeted at low and middle income customers and stocked only 1,500 varieties of goods as
     against the 35,000 varieties stocked by a typical hypermarket.
                                                          Table V
                                               Carrefour – Partners in China
                              Year            City                       Partner
                              1998       Wuhan            Hanshang Group
                              2000       Shanghai         LianHua
                              2002       Kunmig           Kunmig Department Store Co.
                              2002       Xi‘an            Jin Hua Group
                              2002       Guangzhou        Guangzhou Department Store Co.
                              2002       Liaoning         Liaoning Chen Da
                              2002       Harbin           Harbin Dong Li
                              2002       Tianjin          Tianjin Quan Ye
     Source: Jean Kinsey, Min Xue, “Supermarket Development in China,” Globalization, China and the Industry
     Studies Program, Solan Workshop, MPI Worcester Polytechnic Institute, June 16-17, 2005.
     In 2004, Carrefour introduced the Champion Supermarket format in China, in association with a local partner
     The Beijing Shoulian Group25. By 2005, there were eight Champion supermarkets spread across the country.
     These stores were different from hypermarkets and were located in residential areas. According to Philippe
     Pauze, President, Champion Supermarket, ―Champion supermarkets are specifically engaged in providing
     various fresh foods, including vegetables, fruits, meat, seafood, and snacks to the customers, so our chain


20
     Retail Forward Inc. is a Columbus, Ohio, based firm that focuses on management consultancy services, market research, and
     executive development.
21
     Jenny Summerour, ―The China Connection,‖ Progressive Grocer, January 01, 2002.
22
     ―No Easy Way to Win in China: Carrefour,‖ People‘s Daily Online, March 31, 2004.
23
     Owned by the Bailian Group and controlled by the Shanghai City Government, Shanghai Lianhua supermarket is the largest
     retailer in China. Established in 1991, it operated through different store formats including hypermarkets, supermarkets,
     convenience stores, chain drug stores, and e-business stores. In 2003, Shanghai Lianhua and Shanghai Hualian merged to form the
     Bailian Group.
24
     RMB (Renminbi) is the Chinese currency; it means people‘s money. The unit of Renminbi is a yuan & with smaller denomination
     called jiao and fen. The conversion among the three is 1 yuan = 10 jiao = 100 fen. The currency exchange rate as on October 24,
     2006 was 1 US$ = 7.89 RMB
25
     The Beijing Shoulian Group is an enterprise group with more than 10 retailers. It is a state owned company engaged in logistics
     and department store operations.
                                                            Page 7 of 33
     stores are all set up in residential communities.‖26
     In 2004, Carrefour recorded total sales of €1.62 billion. During the year, Carrefour opened 21 new
     hypermarkets and total hypermarkets in China increased to 62. By the end of 2004, the restrictions on the
     number of outlets that foreign retailers could operate per city were lifted and the foreign retailers were
     allowed to have 100% ownership. The Chinese Government also announced that the remaining restrictions in
     the retail sector would be removed by the end of the year 2007.
     In late 2005, Carrefour had stepped up efforts to acquire complete ownership of its Chinese stores. It bought
     the remaining stake owned by most of the local joint venture partners in its stores. Between 2004 and 2005,
     Carrefour‘s revenues in China grew by 25% and it remained the largest foreign retailer in the country.
     In the first half of 2006, Carrefour generated sales of €1.26 billion in China, a growth of 28.1% as compared
     to the first half of 2005. As of May 2006, Carrefour had opened 230 Dia outlets in China. The number of
     hypermarkets had grown to 79 by July 2006 (Refer to Exhibit VII for Carrefour‘s hypermarkets in China as of
     September 2006).
     THE STRATEGIES
     While most of the global retailers and consumer product companies considered China to be a single huge
     market, Carrefour adopted a different approach. It considered the country to be comprised of several small
     markets. The company approached these markets with flexible procurement, store management, marketing,
     and service strategies. According to Chéreau, ―China does not have an easy market, the country is more like a
     continent where the variety of cultures and traditions set up challenges for us in how to adapt our concept to
     each area. We have to deal with strong differences between cities and provinces, and with different
     institutional levels in the country. However, it is a fantastic challenge to adapt our concept to each area of the
     country.‖27
     Since the initial years of its operations in China, Carrefour concentrated on keeping the prices low, keeping in
     mind the fact that for Chinese consumers, price was the main consideration. This made Carrefour‘s
     hypermarkets very popular among the Chinese consumers. Even when the first outlet was opened in
     Shanghai, the managers were confident that their prices were lower than the prices charged by any other store
     in the city.
     Carrefour sold a wide variety of goods, which attracted consumers to the stores. Convenience was another
     factor that the company promoted. The Chinese consumers had to visit several places like wet markets for
     purchasing fish, grain markets to pick up grocery items, and small specialty stores to obtain other items. 28
     Carrefour provided the convenience of obtaining all these items under one roof.
     The basket size in the Chinese stores of Carrefour was much smaller than that in the European stores, as
     Chinese consumers bought in small quantities, several times a week. They also liked to test new products by
     buying in small quantities, before they made bulk purchases. Daily shopping for fresh foods was widely
     prevalent in China, especially during summer.
     OPENING NEW STORES
     Carrefour planned the expansion of its operations in China in a systematic manner by establishing regional
     offices. For instance, the headquarters of the East China region in Shanghai took care of expansion activities
     in that region. The headquarters of the Northwestern region was located in Xinjiang and it was responsible for
     expanding business in that region.
     Carrefour chose the store location based on the available space and the purchasing power of the people in that
     location. Before opening new stores, it sent a team to conduct a detailed study of the store location followed
     by a study on the culture, customs, and traditions of that region. As a part of the study, the team also assessed
     the purchasing potential of the local people and assessed their purchasing habits. Carrefour was careful in
     choosing the locations and opened stores in highly populated areas.
     Few consumers in China owned cars and they went to stores either on bicycles or by public transport.
     Therefore, unlike in the western countries, where the stores were located on the city outskirts, most of the
     Carrefour stores were located at the center of the city with easy access to public transport.
     As Carrefour expanded its operations into smaller Chinese cities, the capital investment in stores was
     comparatively lower as the stores were smaller. The volume of goods at these stores was less and they were in
     small assortments. Carrefour did not follow a particular store format and encouraged the local store managers
     to come out with the best format for the store and sales plans to ensure that the store broke even within two to
     three years.


26
     ―French Firm Opens First Asian Store in Beijing,‖ People‘s Daily Online, June 25, 2004.
27
     Hayet Sellami, ―Carrefour China: A Local Market,‖ www.cityweekend.com, April 28, 2005.
28
     The Chinese meal consisted of carbohydrate rich products like rice, noodles, and steamed buns accompanied by dishes made of
     vegetables, meat, or fish. The meal usually ended with fresh fruits or a sweet.
                                                          Page 8 of 33
     In early 2006, Carrefour decided to explore the potential for establishing hypermarkets in major shopping
     malls. Carrefour initially explored the opportunities in Shanghai and opened three outlets by January 2006.
     These hypermarkets were located in the Nanfang Shopping Center in Minhang District, the Lianyang Thumb
     Square in Pudong New Area, and in the Dragon City shopping mall in Minhang District‘s Qibao area.
     Commenting on this strategy, Wang Xiaozhong, Corporate Communications Manager of Carrefour, said,
     ―The shopping mall has many resources including stores, counters, and restaurants that will attract many more
     customers than if we opened an independent store somewhere. Since opportunities to locate stores in the
     downtown are getting scarce as the city becomes more crowded, we‘d like to make use of big shopping malls
     and their adjoining neighborhoods in suburban areas.‖ 29
     STORE MANAGEMENT
     As a part of its global strategy, Carrefour had decentralized its operations, giving full freedom to store
     managers to operate their stores. Decentralization was one of the important factors for Carrefour‘s success in
     international markets, with store managers being empowered to take decisions according to the local
     traditions and customs.
     Each store was managed by the store manager and department heads. The store manager allotted a particular
     portion of the store to each department head, who was responsible for managing that portion, including the
     products stocked, promotions to be carried out, etc. The store manager along with the department head
     decided on the product mix for that portion of the store. All personnel of a particular department reported to
     the department head. Each store was treated as a profit center.
     The store managers decided on the products to be sold in the stores according to the needs and preferences of
     the customers. The suppliers had to negotiate prices with each store separately. This policy was highly useful
     in China, where centralized supply system and logistics network were not well developed. As each store was
     free to procure the required products, the store manager and department heads procured products that were in
     high demand at that store. The managers carefully monitored the shelf space and if the products stacked in the
     shelves did not generate enough sales within 45-60 days, they were removed.
     The performance of the store managers was judged by their ability to meet the forecasts and profit targets.
     The monthly performance of individual stores was communicated to all other store managers in China. Good
     performance was rewarded with higher incentives and an increase in salary.
     SUPPLY CHAIN MANAGEMENT
     The supply chain system that Carrefour had in China was quite flexible. According to Christophe De Nays
     Candau, In-charge of Organization, Systems and Supply Chain in Carrefour, China, ―It‘s (supply chain
     system) highly fragmented, so we have to keep our flexibility. We still use the bike if it‘s the lowest cost and
     most efficient.‖30
     Carrefour procured most of the goods from within China to cater to its local operations. Since its initial years
     of operation in China, about 85% of the stock sold was procured locally. This helped Carrefour maintain
     lower prices compared to other foreign retailers, who sold imported products.
     Buying and stocking local products was part of Carrefour‘s strategy to cater to the needs of the local
     customers. However, the items stacked were also different depending on the location of the store. Stores that
     were located in places that had a large expatriate population had more imported goods, different kinds of
     European and American food items, and the prices charged were also higher. The outlets in other locations
     were designed to cater to the needs of the local Chinese population and stacked predominantly Chinese
     products and food items. In order to differentiate the imported products from the Chinese products, the flag of
     the country from which the product had been obtained was displayed on its label.
     Carrefour established the global procurement headquarters at Shanghai and the first procurement center was
     opened in the southern Chinese province of Guangdong in July 2001. In 2002, Carrefour set up its global
     purchasing center in Shanghai, through which goods were sourced across the country. Through this center,
     Carrefour procured Chinese products to be sold in the international markets. The total procurement from
     China was valued at US$ 1.6 billion in 2002, US$ 2.15 billion in 2003, and US$ 3.2 billion in 2004. The
     purchasing centers were located in Beijing, Guangzhou, Wuhan, Ningbo, and Dalian. By 2006, 11 purchase
     centers had been established across the country (Refer to Table VI for the products procured by Carrefour
     from China).
     Carrefour sold its own label of products that were of good quality. As of 2006, there were over 2000 products
     that Carrefour sold under its own label which included food, grocery, daily necessities, and clothes. These
     products were priced 20-40% below the market price of competing branded products (Refer to Exhibit VIII
     for the private label products sold by Carrefour in China).


29
     ―Carrefour Focuses Growth on Mall-based Retail Outlets,‖ Shanghai Daily News, January 20, 2006.
30
     Don Lee, ―A Chinese Lesson for Big Retailers,‖ Los Angeles Times, July 02, 2006.
                                                          Page 9 of 33
     Carrefour faced several supply chain related problems in China owing to its size of operations and the
     country‘s underdeveloped logistics infrastructure in some of its store locations (Refer to Exhibit IX for a note
     on supply chain and logistics network in China). For instance, it took more than seven days to cover the
     distance between Shanghai in the East of China and Urumqi in Western part of the country by truck. In
     December 2005, Carrefour had more than 9,000 suppliers who supplied 250,000 different products. On an
     average, each of Carrefour‘s stores had around 40,000 products. A distributor with a countrywide network
     was not present in China. The country had more than four million transport companies with a combined fleet
     of around five million trucks.
                                                             Table VI
                                     Carrefour – Products Procured from China (2006)
        Food/Fresh Products
        Grocery, fruits, vegetables, flowers, aquatic products.
        Hard Goods
        Household ware, kitchen ware, household tools, stationary, outdoor products, car accessories, luggage,
        furniture, toys, gifts, sports and fitness products.
        Electronics
        Kitchen appliances, air conditioners, fans, refrigerators, cameras, audio and video products, computers.
        Textiles
        Baby and children wear, home textiles, women‘s wear, men‘s wear, shoes, gloves, ties, other accessories.
     Source: www.sourcing.org.cn.
     Vendor relationship was another issue that Carrefour had to deal with, in China. Local suppliers were not
     conversant with how to maintain optimum inventory levels. They did not maintain a standard size for
     delivering goods, nor a standard as far as product reference or order forms were concerned; concepts like
     service levels were unheard of. Carrefour taught the suppliers how to do business efficiently and provided
     them with the required support. Many of the suppliers were provided with computers and software to manage
     inventory and standardize their products and orders. Carrefour chose to use the services of local distributors
     who were well versed with the local networks. The company was not in favor of building a national network
     for distribution or an automated supply chain system in the country. Commenting on the supply chain
     problems, Philippe Riou, Executive In-charge, Supply Chain Development, Carrefour China, said, ―The
     distribution is not mature. The producers are adjusting to the production network and many companies merge
     and go into partnerships, making it difficult for us to have a stable source and very difficult to design a proper,
     efficient network.‖31
     Carrefour China Foundation for Food Safety, a Hong Kong-based non-profit foundation, organized training
     programs for farmers and other fresh food suppliers in China. The training program, called Agricultural
     Products Quality and Safety, was launched in 2005. The farmers and suppliers were taught about food safety,
     health, and hygiene and about preserving the freshness of their products. Within one year, Carrefour had
     conducted ten training programs at eight different locations. The company was of the view that such training
     would help it in providing the consumers with products of higher quality and safety.
     LOCALIZATION STRATEGIES
     Carrefour believed that its stores should reflect the local environment and complement the local culture. The
     western style hypermarket was customized by Carrefour to effectively cater to the needs and preferences of
     Chinese consumers (Refer to Exhibit X to see a few visuals of a typical Carrefour hypermarket in China).
     Most of Carrefour‘s stores in China were spread across several floors and ramp escalators were provided to
     move shopping carts between the floors. The sides of the escalators were stacked with snacks and eatables.
     Carrefour stocked products preferred by the local population, in a manner they demanded. In some of the
     company‘s stores in China, the department selling fresh food and groceries was designed to resemble the local
     outdoor markets. According to Sherry Ding, Analyst with AT Kearney Inc., ―There are ladies calling out to
     the customers, saying: ‗Come here, this is fresh and good,‘ just like in street markets.‖ 32 For instance, for
     selling fish, Carrefour adopted different methods. In its stores near the coastline, consumers preferred live fish
     so Carrefour sold live fish. In the middle and western China, away from the coast, consumers preferred frozen
     fish and this was stocked by the stores there. In many of the Carrefour stores in China, consumers could buy
     live fish, turtles, and meat that was usually not available in Europe. Other products like instant noodles, the
     most preferred snack among the Chinese, was sold across all Carrefour stores in the country.
     The fresh food section was located at the entrance of the store and products that were available there were


31
     Maria Trombly and Betta Plebani, ―In China, Complex Supply Chains Yield to Simple Systems,‖ www.ciocentral.com, November
     07, 2005.
32
     Carol Matlack, Wendy Zellner, Frederik Balfour, ―Carrefour in a Corner,‖ BusinessWeek Online, October 11, 2004.
                                                          Page 10 of 33
     similar to the products available in the other local fresh food markets. However, Carrefour ensured that these
     food items were available at lower prices and in a clean environment. This made customers who purchased
     fresh food several times a week visit Carrefour regularly.
     In a store in Uighur33 populated mostly by Muslims, Carrefour did not sell pork34. All the products sold at this
     outlet was certified halal products35. Other local products sold in the store were 20 varieties of raisins, roasted
     mutton, sausages made of horse meat, and locally popular snow lily tea. When the store was opened, the store
     displayed 20 varieties of French wine priced above US$ 10. However, not much wine was sold, as it was very
     expensive going by the Chinese standards. Carrefour soon replaced these with local wine priced at US$ 1 per
     bottle.
     For important festivals like the Spring festival, which fell on the 15 th day of the first lunar month according to
     the Chinese calendar (between January and February), Carrefour decorated its stores according to traditional
     practices and stacked the stores with several items like paper lanterns that were used during the festival.
     According to one of the shoppers at a Carrefour store in Beijing, ―I like to do my pre-festival shopping in
     Carrefour. They have got all the stuff from imported cheese to homegrown fresh fruits and vegetables.‖ 36
     Christmas was widely celebrated in China by the retailers, as the Western holidays were also gaining
     popularity in the country especially in the urban areas, with several Chinese returning home from foreign
     countries. Carrefour displayed a wide variety of Christmas trees and sold several Christmas goods like Santa
     Claus toys, hats, items to decorate Christmas trees, etc. at all its stores.
     THE HR PRACTICES
     Though Carrefour had expanded its operations all over the world, the organization remained lean as several of
     its key functions were decentralized. The headquarters had a staff of only about 20, with around 10 people
     involved in the HR function. Between the stores spread all over the world and the headquarters in France, one
     tier of regional managers was present. Each of the regional managers functioned with just around five
     assistants. The store managers reported to these regional managers.
     Training was an ongoing process all over the world, and Carrefour spent around 2% of its payroll costs on it.
     The store managers and department managers were responsible for providing training to the staff. The best
     performing stores were asked to share their experiences and best practices with other stores in the country.
     The top management of these stores helped other stores to train the staff, select and display the merchandise,
     and lay out new business plans.
     At Carrefour, all the employees were told that they were responsible for people, assets, money, and
     merchandise. Each employee was given a job description that revolved around these areas and the training
     programs were designed to fulfill the needs of the job. Performance reviews provided employees feedback
     about how they had fared in each area.
     In the initial years, the top level management at Carrefour China comprised French people. Their main task
     was to infuse Carrefour‘s values, spreading the philosophy of serving customers and managing the staff of
     each store. (Refer to Table VII for Carrefour‘s Values). Carrefour chose 25 employees from Taiwan, who
     were well versed with Carrefour‘s business, to start its Chinese operations. These employees spoke the local
     language and were well versed with the local market conditions and customs. They were instrumental in
     setting up the initial operations of the company in China and infusing Carrefour‘s global practices into
     Chinese operations.
                                                         Table VII
                                                     Carrefour Values
        Freedom: Make consumption more democratic by giving the customer the freedom to purchase products
        at prices that correspond to their buying power.
        Responsibility: Give all the employees the right to take the initiative and assume responsibility for
        actions.
        Sharing: Distribute the wealth created among the customers, employees, shareholders, and suppliers in
        an equitable manner.
        Respect: Listen to, understand, and respect individual cultures, differences, and interests worldwide.


33
     Uighur, also known as Xinjiang Uyghur Autonomous Region, is located in the west of China bordering Tibet, Mongolia, Russia,
     Russia, Kazakhsthan, Pakistan, and India. Uighur is populated by Uyghurs (45.21% of the population according to 2000 census)
     and Kazakhs (6.74% of the population) who are the Muslim Turkic groups. The number of Han Chinese in the region stood at
     40.58% as of 2000.
34
     As per Islamic law, the Muslims are forbidden to consume pork.
35
     The Arabic word Halal refers to food that is permissible according to the Islamic dietary laws, which specify the type of food
     Muslims can consume. The laws also specify the method of slaughtering animals, and sea food that is permissible to consume.
36
     ―Foreign Businesses Cash on Chinese Holiday Economy,‖ www.peopledaily.com.cn, January 20, 2004.
                                                           Page 11 of 33
        Integrity: Act with transparency and respect commitments.
        Solidarity: Foster solidarity among the women and men in the group and contribute to the development
        of the local economy while preserving social equity.
        Progress: Encourage innovation and make commitment to a process of continual improvement.
     Source: www.csreurope.org.
     In the year 2000, Carrefour started the ‗Carrefour China Institute‘ to train the employees in Carrefour‘s
     values. In the institute, the first such in Asia, Carrefour provided training to its staff including store managers.
     The center was spread over an area of 1,200 square meters and had conference rooms, training rooms, a
     computer room, and a restaurant. The employees were trained in the areas of security, services, cash handling,
     etc.
     For fresh graduates and some of the internal personnel, Carrefour conducted training in three stages. The
     training was both theoretical and practical. For the managerial staff, Carrefour conducted a six-month training
     consisting of theory and practical training. The trained personnel were absorbed into the organization as store
     directors and were equipped to negotiate with local government officials, suppliers, and vendors.
     The Carrefour Elite training was aimed at training managerial level personnel. The training was for a period
     of one year and senior officials from Carrefour also participated in it. The participants in the program were
     given an opportunity to visit Carrefour Stores in China and also in France. All the personnel trained in the
     institute were required to sign a three- to five-year contract to work for Carrefour.
     THE CHALLENGES
     Industry analysts opined that customizing its store formats to suit local needs had been Carrefour‘s main
     strength and this had helped the company penetrate large and tier II cities in China. Despite rapid growth,
     Carrefour‘s share in China was only at around 1.5% of the organized retail market. According to RNCOS 37
     market research report 2005, China‘s retail market was valued at around US$ 756 billion, with organized
     retail accounting for 20% of the market.
     Analysts feared that though the Chinese Government had opened up its retail sector to foreign retailers,
     foreign retailers may continue to face regulatory problems in China. It was widely reported in the Chinese
     media that the Government was drafting new rules to restrict the expansion of large foreign retailers. These
     rules were expected to be announced in December 2006, and were likely to impede Carrefour‘s growth plans.
     According to the new rules, foreign retailers would be asked to file details of their proposed expansion plans
     and hold public hearings on the impact of their outlets on the communities. The public hearings that included
     regulators, industrial associations, academic experts, competitors, and local residents were widely practiced in
     North America and Europe and China was believed to be interested in adopting a similar practice. According
     to Robert Gregory, Retail Analyst with M+M Planet Retail38, ―The Chinese authorities seem intent on
     protecting the local retailers and it is likely that they will continue to give the locals more favorable treatment
     in the future – maybe preferential treatment when it comes to store locations, for example.‖ 39
     Apart from regulatory challenges, Carrefour faced several other problems in China. The price of commercial
     property, especially in the urban areas in China where Carrefour had a significant presence, was increasing
     rapidly. Due to this, the rent and lease costs were growing along with the marketing and advertising expenses
     of the company.
     Moreover, Carrefour‘s Champion supermarkets in which Carrefour owned a 65% stake (35% was held by
     local partner Shoulian) were not able to withstand the onslaught of competition. In April 2006, Carrefour sold
     its stake in four of its Champion supermarkets to Shoulian and planned to sell its stake in the remaining four
     by the end of the year. Carrefour‘s Dia venture also faced problems and incurred losses in 2006. The local
     partner – Lianhua – had signed a termination agreement to exit from the venture.
     The company‘s procurement policy, under which the individual store managers and department heads were
     free to decide on the merchandise to be purchased at their store, was also criticized. Due to this policy,
     widespread corruption was reported in several stores of Carrefour in China. For instance, in April 2006, the
     Shanghai court imposed a fine of £25,000 on Carrefour for selling fake Louis Vuitton handbags through its
     stores. The judge criticized Carrefour‘s purchasing policies that had allowed counterfeiters to sell their
     products through the company‘s stores. Three bags each priced at £3.60 were sold before the stock was
     removed from the shelves. The official from Carrefour said, ―It is true that fake bags appeared in our store,


37
     RNCOS is a market research consulting services company that specializes in the pharma, IT, telecom, retail, and services
     industries.
38
     M+M Planet conducts research on grocery retailers and retail markets. The company maintains a database of leading grocery
     retailers along with details of trends and happenings in the industry. The firm functions from London, Frankfurt, Brussels, and
     Tokyo.
39
     ―Chinese Rule Change to Spark Retail Growth,‖ www.foodanddrinkeurope.com, March 19, 2004.
                                                           Page 12 of 33
     but we did not intend this to happen. It is impossible for us to check every product. Perhaps we can only say
     our staff didn‘t have much knowledge of luxury products.‖ 40
     In June 2006, Carrefour was reported to be selling fake Adidas footballs. In Carrefour‘s Fangzhuang store in
     Beijing, fake Adidas footballs were sold at RMB 59.90, while the original Adidas football that was used for
     the World cup was priced at RMB 900. This problem was also attributed to the flaws in Carrefour‘s local
     procurement policies. In order to address these issues, Carrefour formed a special investigation team, which
     conducted surprise checks on the stores and interacted with the suppliers.
     In 2006, consolidation and expansion had become the norm in the Chinese retailing industry. Wu-Mart41
     acquired a 75% stake in MerryMart42 in January 2006. With this acquisition, 100 stores of Merry Mart in
     Beijing became a part of Wu-Mart and its share in Beijing‘s supermarket business increased to 10%. GOME
     Electrical Appliance Holding Ltd. (GOME)43 acquired China Paradise44 in July 2006, creating a US$ 10
     billion retail chain. Other competitors like the Thailand-based Lotus Supercenter were on an expansion spree.
     Lotus Supercenter announced plans to increase its store count in China by 100 in 2006. Several local retail
     chains like GOME were also expanding at a tremendous pace, opening one store every thirty hours.
     On October 17, 2006, Carrefour‘s global archrival Wal-Mart, announced the acquisition of Taiwan-based
     Trust-Mart for US$ 1 billion. Trust-Mart operated through its 108 stores across 20 provinces in China. The
     company had 30,000 employees in the country. Wal-Mart planned to acquire Trust-Mart in a phased manner,
     acquiring 31 stores initially. The other Trust-Mart stores were to be acquired by Wal-Mart in the next three
     years.
     With this acquisition, Wal-Mart would be able to lay its hands on a wide spread, well-developed network of
     stores. Industry analysts opined that the acquisition would also help Wal-Mart in sprucing up its supply chain.
     They felt that after this acquisition, Wal-Mart could give a tough competition to Carrefour in China and would
     be in a position to challenge leading Chinese retailers like Bailian Group (Refer to Exhibit XI for Wal-Mart‘s
     key business strategies in China). Carrefour was strong only in some regions in China and the competitors
     were gaining ground in several other regions (Refer to Exhibit XII for geographical spread of Carrefour‘s
     operations and its competitors in China).
     Notwithstanding these challenges, Carrefour remained positive about its future prospects in China. According
     to Patrick Ganaye, General Manager of Carrefour China-East, ―Competition is fierce, but we don‘t view it as
     bad news as long as we can figure out new ways to attract consumers.‖ 45
     Carrefour had several plans to retain customers and attract new customers in China. It planned to introduce
     loyalty cards in China by the end of 2006. Another area that Carrefour was looking at was offering consumer
     credit for the purchase of home appliances. Carrefour‘s management appeared to be well aware of the
     competition it had to face in the Chinese markets. According to Deliers, ―This is not a chess game, where you
     kill the king at the end. Rather, it is like the game of Go, where you have to continuously develop a new
     strategy to expand on the map.‖ 46

                                                    Exhibit I
                               Top 25 Food Retailers in the World (December 2005)
                                                                         Sales
              Rank          Company           Headquarters                                       No. of Stores
                                                                   (In billion US$)
                1     Wal-Mart              USA                          312.4                        6,380
                2     Carrefour             France                        92.7                       12,028
                3     Tesco                 UK                            69.6                        2,365
                4     Metro Group           Germany                       69.3                        2,458
                5     Kroger                USA                           60.6                        3,726


40
    ―Carrefour Admits Selling Fake Louis Vuitton Handbags in China Store,‖ www.finanznachrichten.de, April 20, 2004.
41
    Wu-Mart is one of largest retail chain store operators in China and is a non state-owned enterprise. It operates hypermarkets,
    supermarkets, and convenience stores in several major cities across China.
42
    MerryMart Chainstore Development Co. Ltd. is the fourth largest supermarket in Beijing.
43
    GOME opened its first retail outlet in China in 1987 and adopted the name GOME in 1993. The company began its expansion in
    China in 1999. In 2004, it was recognized as one of the ‗Key and Strategically important enterprises‘ by the Ministry of
    Commerce, China.
44
    China Paradise Electronics Retail Ltd., established in 1996, is the leading retailer of household appliances and consumer
    electronics products.
45
   ―Carrefour Focuses Growth on Mall-Based Retail Outlets,‖ Shanghai Daily News, January 20, 2006.
46
   Hayet Sellami, ―Carrefour China: A Local Market,‖ www.cityweekend.com, April 28, 2005.
                                                         Page 13 of 33
         6       Ahold                   Netherlands                     55.3                6,422
         7       Costco                  USA                             52.9                  460
         8       Rewe                    Germany                         51.8               11,242
         9       Schwarz Group           Germany                         45.8                7,299
        10       Aldi                    Germany                         45.0                7,788
        11       Walgreens               USA                             42.2                4,953
        12       Auchan                  France                          41.8                2,686
        13       Edeka                   Germany                         41.3               19,001
        14       Albertsons              USA                             40.4                2,541
        15       AEON                    Japan                           40.2               10,132
        16       Safeway                 USA                             38.4                1,914
        17       ITM                     France                          37.7                3,932
        18       Leclerc                 France                          35.4                  581
        19       Seven & I               Japan                           35.3               21,136
        20       Tengelmann              Germany                         29.8                7,730
        21       Sainsbury               UK                              29.2                  808
        22       Casino                  France                          28.3                9,388
        23       Woolworths              Australia                       28.0                2,744
        24       Coles Myer              Australia                       27.9                2,755
        25       Delhazie Group          Belgium                         23.1                2,637
                        Source: www.supermarketnews.com and www.carrefour.com.
                                                  Exhibit II
                                      Retail Industry in China (2006)
China is among the fastest growing economies in the world with a population of over 1.3 billion. In recent
years, there has been a rapid growth in the disposable income of the middle class population. Their
collective spending is estimated to cross US$ 500 billion by 2010. According to the consulting firm Retail
Forward, China was the seventh largest retail market in the world as of 2005. The top six markets are the
US, Japan, the UK, Germany, France, and Italy. By 2008, China was tipped to climb up to the fifth
position.
The eastern parts of China are comparatively wealthy and the markets in these regions are well developed.
Even among the well-developed regions, cities like Beijing, Tianjin, Shanghai, and Guangdong are very
well developed and the retail spending by the consumers in these cities is much higher than the average in
the country. According to estimates by research firm IGD, the urban population of China would reach to
874 million by 2030 from 529 million in 2004 with the influx of 345 million people from rural to urban
areas. This would provide vast opportunities for the retailers.
In 2005, retail spending in China stood at US$ 756 billion. The retail sales in 2006 were estimated to grow
by more than 13% to reach US$ 860 billion. With an estimated compounded annual growth rate in the
range of 8-10%, the retail sales in China are estimated to grow to US$ 2.4 trillion by 2020. The growth is
estimated to be fueled by increase in income levels across China. According to McKinsey, the number of
households in China with annual earnings between RMB 25,000 and RMB 100,000 is likely to grow to 200
million by 2015 from 42 million in 2003.
However, organized retailing in China has yet to penetrate several areas. The top 100 chains in China
account for only 10% of the total retail sales. The share of the foreign firms was 23% when the total sales
of top 100 chains in China was considered. The sales of the top 100 retailers in China in 2005 stood at
RMB 707.6 billion, registering a growth of 42% as compared to 2004. The number of stores operated by
the top 100 retailers reached 38,260.
In 2005, the Chinese economy grew by over 8% and the events like the Olympic Games in 2008 and the
Shanghai Expo slated for 2010 are expected to further accelerate the economic growth. These events would
have a positive impact on consumer spending, further fueling the growth of the retail industry.
                               Supermarket Development in China
  Time Period            Development                                 Details
 1980s             Traditional grocery        Mainly state owned and collectively operated.
                   Stores                     Some are privately owned and operated
 Early 1990s       Emergence of               Stores of 300-800 sq. meters, which sold packaged
                   Supermarkets               foods and items for daily use were sold. The fresh
                                              items sold were very few. Chains had fewer than 10
                                              stores
 Late 1990s        Net Store Formats          Superstores in area of 20,000 sq. meters, along with
                                              hyper markets and convenience stores
                                                 Page 14 of 33
                 Foreign Investment           Entrance of multinational companies like
                                              Carrefour, Wal-Mart, Metro and 7-Eleven
                 Coastal Cities               Development was rapid in coastal cities like
                                              Shanghai and Shenzhen.
 21st Century    More new formats             European style discounters, warehouse clubs and
                                              Minimarts.
                 Geographic Expansion         Retail chain expand outside their home provinces
                 Merchandise Structure        Wide variety of items, including more fresh
                                              produce and organic foods. Emergence of Private-
                                              label store brands
                 Mergers                      Chinese supermarket chains merged with both
                                              domestic and foreign players
                 Reform of traditional        Traditional stores including mom and pop
                 Stores                       groceries, state owned grain and oil shops, and
                                              kiosks were transformed into small supermarkets
                                              and convenience stores. Small independent
                                              supermarkets also emerged.
   Adapted from: Geping Guo, “Development of Supermarkets in China,” Supermarkets and
        Agricultural Development Conference, Shanghai, May 2004. (www.fas.usda.gov)
                                       Compiled from various sources.
                                                  Exhibit III
                                             Carrefour’s Banners
  Banners                        Description                                          Facts
Champion       International supermarket banner opened in          Second largest supermarket chain in
               1969 in Bayeux, France.                             France.
               Covers range of household food needs based          Average area is 1,500 square meters.
               on 4 key aspects: food industry expertise,          Product ranges Reflets de France,
               fresh produce expertise, discount prices and        Destination Saveurs.
               customer rapport.                                   Active in Belgium, Spain, Poland,
               Concept – ―the customer is always right‖            Greece and Turkey, Argentina and
               Mascot – Sporty                                     Brazil.
Dia            Introduced in Spain.                                Operates in Spain, Greece, Turkey,
               Discount food products retailer offering high- Brazil, China, and Argentina, Portugal
               quality products at lowest prices.                  (Minipreco banner), France (Ed banner).
               Range of products between 1,600 and 2,000
               food, personal care and cleaning products.
Ed             French hard discount banner introduced in           Selling space ranges between 500 to
               1978.                                               1,000 square meters.
               Provides 1,200 product references at low
               prices and offers convenience shopping.
               Concept – ―convenience with discount
               prices‖.
Carrefour      International hypermarket banner introduced         Offers products under different labels
               in 1973 in Spain.                                   such as Carrefour, Filiere Qualite, Reflets
               Concept – ―everything under one roof‖.              de France, Destinations Saveurs, Tex.
               Focus on product quality, safety and
               innovation with wide range of services like
               insurance, financial services, travel, car
               service, eye care, florists, and tickets sales.
8 a Huit       Convenience store banner opened in France in Leader in France and has self-service
               1977.                                               stores in France, West Indies, Guyana.
               Offers 2,000-5,000 products with a mixture of Retail space of 70 to 400 square meters.
               big brands and private labels.
               Concept – ―8 am to 8 pm shopping.‖
Promocash      Opened in 1965 in France as a cash and carry        Trademark products include Reflets de
               banner.                                             France, Prorest, and Grand Jury.
               Supplies wholesale and retail goods, both
               foodstuffs and non-foodstuffs to restaurant
               owners, hoteliers, café proprietors and food
                                                    Page 15 of 33
             trade professionals.
             More than 10,000 quality products available
             in 8 sections: fresh meat, seafood, fruit and
             vegetables, fresh grocery items, drinks, non-
             foodstuffs, groceries, wines and beers.
Shopi        Introduced in 1973 in France as a                 Retail spaces between 400 to 900 square
             convenience store banner in urban and rural       meters.
             areas.
             6,500 items including 2,500 fresh-food items
             and 1,000 own-branded products provided at
             supermarket prices.
             Consists of fruit and vegetable departments,
             wine shops, and personal care.
Proxi        Chain of mini markets with full range of food Brands featured are Destination Saveurs
             products at affordable prices.                    and Reflets de France.
             Offers convenience services like home             Sales area of 80 to 200 square meters.
             delivery, gas bottles, bakery and ATMs.
Marche Plus Convenience store located in the heart of          Sales area of 200 to 400 square meters.
             urban districts.                                  Distributes the Grand Jury brand which
             Product mix of 4,000 lines.                       has products that need strict
             Specializes in fresh products including fruit     specifications to meet the consumers‘
             and vegetables.                                   requirements.
             Concept – ―quick and easy shopping from 7
             am to 9 pm and on Sunday morning.‖
                                   Adapted from www.carrefour.com.
                                              Exhibit IV
                    Carrefour – Consolidated Store Network (December 2005)*
              Hyper-Market Super-Market Hard Discount Convenience Cash & Carry Total
 Argentina         28              114               319                                           461
 Brazil            99                35              201                                           335
 Colombia          21                                                                               21
 Americas         148              149               520                                           817
 China             70                 8              225                                           303
 Korea             31                                                                               31
 Taiwan            37                                                                               37
 Indonesia         20                                                                               20
 Malaysia           8                                                                                 8
 Singapore          2                                                                                 2
 Thailand          23                                                                               23
 Asia             191                 8              225                                           424
 France           179              595               782             108                          1664
 Spain            136              143              1891                                          2170
 Belgium           56                79                                                            135
 Switzerland        9                                                                                 9
 Greece            19              148               267                               52          486
 Italy             50              238                                 16             155          459
 Poland            32                71                                                            103
 Portugal           7                                292                                           299
 Turkey            12                86              339                                           437
 Europe           321              765              2789               16             207         4098
 Total Group      839             1517              4316             124              207         7003
                                      Source: www.carrefour.com.
                              * Does not include stores owned by partners.

                                          Exhibit V
                 Carrefour – Consolidated Net Sales per Format/Region (2005)
                                                                     (In million €)
           Format/Region    France Europe Americas          Asia    Total      % Sales
          Hypermarkets       18717     15424         3989   5672    43802        58.8%
                                           Page 16 of 33
             Supermarkets              7515      5020           694       10     13239       17.8%
             Hard Discount             2227      3784           369       61      6441        8.6%
             Other                     7119      3873             23        -    11015       14.8%
             Total                   35577      28102          5075     5743     74497     100.0%
             % Region                47.8%      37.7%          6.8% 7.7% 100.0%                    -
         Source: “Carrefour, Creating a New Growth Platform,” www.carrefour.com, March 2006.
                                                   Exhibit VI
                      Regulations in the Retail Industry in China: Pre and Post 2004
Prior to 2004:
Prior to July 1992, foreign investment in the form of joint ventures or wholly-owned subsidiaries was
totally prohibited in the retail industry in China. In July 1992, the Central Government, on an experimental
basis, allowed foreign investment in the retailing industry through the establishment of joint ventures in
Beijing, Shanghai, Tianjin, Guangzhou, Dalian, Qingdao and the five special economic zones (Hainan,
Shenzhen, Zhuhai, Shantou, and Xiamen).
In June 1995, the Central Government listed the retail industry in the Directory for Foreign Investment,
although under the ―restricted‖ category, to encourage foreign investment in the industry. By the year-end,
the provincial and state governments had approved up to 300 joint ventures. In mid-1998, the Central
Government disallowed local government approval and asked foreign-invested joint venture companies,
which had taken such approval, to restructure to conform with the 1992 provisions or close down.
In June 1999, the Central Government issued more liberalized provisional rules on foreign investment in
the retailing industry. The rules allowed foreign retailers to establish joint ventures cooperative retail, or
wholesale companies in Central Government administered cities, the five special economic zones, and the
capital cities of provinces and autonomous regions with certain restrictions. They were:
The stake of the Chinese partner in any newly established wholesale joint venture had to be at least 51%
Specific requirements as per sales and assets were to be followed by the joint ventures. Franchising and
other forms of indirect chain-store formats were prohibited
Foreign commercial joint ventures were not allowed to act as a commodity import or export agent
Commercial joint ventures were allowed to import products they sold, limited to 30% of their total yearly
sales revenue
Post 2004:
After 2004, when China allowed wholly-owned foreign retailers to own their Chinese subsidiaries and
open stores at any geographic location of their choice without government permission. With the restriction
on the number of stores having been lifted, foreign retailers can open an unlimited number of stores in any
city. Also foreign retailers do not have to meet any minimum criteria for sales, capital or assets, to enter the
Chinese market. Foreign companies are allowed to source global brand merchandise locally without any
stipulation that the goods purchased should be exported. Foreign retailers are allowed to run all distribution
activity inclusive of transportation, wholesaling, and retailing.


                           Foreign Investment in China’s Retail Industry
                                             Before 2004                       After 2004
   Geographic Restraints           Retail limited to certain cities Restriction on retail lifted from
                                   like Beijing, Shanghai, etc.     December 2004
   Form of Vehicle                 Only Joint Venture               Wholly foreign owned
                                                                    enterprises (WFOE) allowed
                                                                    from December 2004
   Prerequisites for               Annual sales volume of at least Good reputation No breach of
   Retail JV                       US$ 2 billion, assets at least   national laws
                                   US$ 200 million
   Pre requisites for              Annual sales volume of at least Good reputation No breach of
   Wholesale JV                    US$ 2.5 billion, assets at least national laws
                                   US$ 300 million
   Minimum registered              RMB 50 million                   RMB 300,000
   Capital for retail JV/WFOE      (US$ 6.4 million)                (US$ 36,245)
   Minimum registered              RMB 80 million                   RMB 500,000
   Capital for wholesale           (US$ 9.7 million)                (US$ 60,408)
   JV/WFOE
   Approval authority              Ministry of Foreign Trade and    Provincial commerce
                                   Economic Cooperation             authorities, MOFCOM
                                                   Page 17 of 33
                                         (MOFTEC)
           Source: US-China Business Council. (Retail Outlook for China, KPMG, October 2005).
With the removal of the restriction, hypermarkets, supermarkets, and convenience stores have mushroomed in
the wealthy coastal cities in China. The number of specialty stores that sell non-food items like apparel,
electronic goods, furniture, etc. has also grown. Not only foreign retailers like Carrefour, Wal-Mart, Metro,
Ikea, and B&Q but several local stores like Lianhua, Hualian, and Wu-mart were also operating hypermarkets
and supermarkets of international standards.
Compiled from various sources.
                                                 Exhibit VII
                            Carrefour – Hypermarkets in China (October 2006)
                                          Location                                 No. of Stores
             Beijing                                                                     6
             Shanghai                                                                   10
             Tianjin                                                                     5
             Chongqing                                                                   4
             Guangzhou, Guangdong Province                                               4
             Shenzhen, Guangdong Province                                                5
             Zhuhai, Guangdong Province                                                  1
             Shenyang, Liaoning Province                                                 4
             Dalian, Liaoning Province                                                   3
             Harbin, Heilongjiang Province                                               3
             Qingdao, Shandong Province                                                  2
             Jinan, Shandong Province                                                    1
             Urumqi, Xinjiang Uygur                                                      2
             Nanjing, Jiangsu Province                                                   2
             Ningbo, Zhejiang Province                                                   1
             Wuxi, Jiangsu Province                                                      2
             Hangzhou, Zheijiang Province                                                1
             Suzhou, Jiangsu Province                                                    1
             Xuzhou                                                                      1
             Hefei, Anhui Province                                                       2
             Dongguan, Guangdong Province                                                1
             Changsha, Hunan Province,                                                   1
             Wuhan, Hubei Province                                                       4
             Chengdu, Sichuan Province                                                   4
             Kunming, Yunnan Province                                                    4
             Fuzhou, Fujian Province                                                     1
             Xi‘an, Shaanxi                                                              1
             Xiamen, Fujian Province                                                     1
             Zhengzhou, Henan Province                                                   1
             Luoyang, Henan Province                                                     1
             Nantong, Jiangsu Province                                                   1
                                      Adapted from www.carrefour.com.cn

                                              Exhibit VIII
                            Carrefour – Private Label Products sold in China
  Carrefour Quality Line
  The Carrefour quality line consisted of fresh products and was sold to customers only after they met
  stringent quality standards, which included origin, traceability, and supply chain principles. Carrefour
  sold pork, salmon, apples, oranges, litchi, etc. under this line.
  Carrefour Brand
  The Carrefour Brand was launched in 2004 and was sold in all stores across China. Carrefour sold more
  than 900 food and non-food products under this line. To ensure the quality of the products, Carrefour
  made outside laboratories conduct quality checks on the products.
  Firstline Brand
  Firstline is Carrefour‘s own brand under which it offered a wide range of kitchen appliances, audio
  accessories, and video accessories. In 2006, Carrefour also introduced the European line of kitchen
  appliances, including coffee makers, juice extractors, sandwich makers, toasters, egg beaters, electronic
  ovens, etc.
                                                   Page 18 of 33
French Touch Brand
French Touch offered a wide range of clothing and household products of high quality.
Bang Products
Bang is the label under which Carrefour sold popular low priced items.
                                    Source: www.carrefour.com.cn

                                                Exhibit IX
                        A Note on Supply Chain and Logistics Network in China
China has a vast size and a varied topography. Despite initiatives taken for improving regional
motorways and national highways, the quality of road and rail network varies drastically between the
urban and rural areas. Roads are easily damaged due to the weight of overloaded freight trucks. Until
recently, drivers were given licenses based on truck size rather than truck loads.
      China‘s logistics industry is fragmented. Logistics accounts for an estimated 20 percent of GDP
       compared with about 8 percent of GDP in the US.
      In China, 21% of large corporations (including multinational corporations) outsource logistics to
       third-party logistics providers as compared with 45% in the European Union and the US.
      In Chinese firms, outsourcing accounts for only 5 percent of all logistics spending, leading to
       massive duplication and underutilization of supply chain assets, such as ocean shipping containers.
With this fragmentation, railway and trucking traffic in China far exceeds the capacity the infrastructure
was designed to handle, leading to shortages of key commodities and increased logistics costs.
Adapted from Jeff Richards, Jihong Sanderson and Roger MacFarlane, “Understanding RFID Adoption in
                China,” http://www.rfidjournal.com, February 07, 2005 and other sources.

                                              Exhibit X
                        Visuals of a Typical Carrefour Hypermarket in China




                                      Source: www.crienglish.com.




                                   Source: www.admirabledesign.com.




                                                 Page 19 of 33
                                    Source: www.admirabledesign.com.
                                                 Exhibit XI
                                            Wal-Mart in China
Wal-Mart began groundwork for its Chinese operations in 1994, and started actual operations in the
country in 1996 by opening its first Super Centre and Sam‘s Club in partnership with Shenzhen
International Credit Investment Company in Shenzhen. China presented several challenges to Wal-Mart,
as it was the company‘s first foray into Asia. The consumers in Shenzhen reacted positively to Wal-
Mart‘s Chinese venture. Wal-Mart established four development centers in Shenzhen, Kunming, Beijing
and Dalian to manage the Chinese operations. Gradually, Wal-Mart spread its operations in the country.
In Northern China, super center was opened in association with Dalian Huanan Group Company Limited,
in 2000. In the East, a store was opened through a joint venture, Wal-Mart East China Stores Company
in 2002. In 2005, a store was opened in Shanghai through Wal-Mart East China Stores Company.
In order to maintain low prices, Wal-Mart began procuring goods locally, and opened procurement
centers and distribution centers in the country. As the goods were sourced locally, Wal-Mart was able to
maintain competitive prices. To ensure the quality of the products, Wal-Mart sent its managers to
suppliers‘ factories and also maintained an extranet site to share sales information and consumer‘s
expectations from the suppliers.
When Wal-Mart started its operations in China, the workforce was completely American. Gradually,
several Chinese were employed as managers and shop assistants. Wal-Mart maintained a Chinese feel to
its stores by selling Chinese goods and having Chinese employees. The stores had wider aisles and
smaller checkout counters to cater to the needs of the Chinese customers who shopped frequently and in
small quantities. Wal-Mart designed the packaging, uniform of the shop assistants, and the décor
according to the preferences of the Chinese consumers. Wal-Mart took enough care to train the suppliers
and employees and regularly featured on the list of most preferred employers in China.
In the US and rest of the world, where Wal-Mart operated, its success was attributed to its highly
effective supply chain and logistics. But in the Chinese market, Wal-Mart could not reap the benefits
attributed to the supply chain, as it was not well developed and was highly fragmented. Wal-Mart also
faced stiff competition from domestic and foreign players active in the retail sector. Wal-Mart‘s
Everyday low pricing strategy was easily copied by other retailers.
As of January 2006, Wal-Mart operated through 56 stores in China. As the stores were few and
widespread, the distribution centers could not be utilized fully. Another obstacle was the absence of
nation-wide distribution system, which limited Wal-Mart‘s economies of scale. The suppliers complained
about the short lead time, sudden price reduction, and other practices like squeezing the suppliers to
maintain low prices, which forced several suppliers to close down. The wages paid to the employees
were subjected to sharp criticism as they were very low. Another area of problem for Wal-Mart in China
was its store formats and location of the stores. With rigid store formats, Wal-Mart was not able to
customize the stores to the extent it was necessary in China.
Wal-Mart‘s limited exposure to international markets also proved to be an impediment to its operations
in China. Moreover, China was the first Asian country in which Wal-Mart had started its operations. As
the Asian market was quite different from the other markets in world, Wal-Mart took time to expand in
the market, which gave a chance to other domestic and foreign retailers to consolidate their position in
the market.
                                       Adapted from various sources.
                                                Exhibit XII
                       China – Spread of Competitors by Region* (March 2006)

                                               Page 20 of 33
              South West      North West North North East East             Central   South
Wal-Mart            7              0           9         11            3      6        20
Carrefour           9              3           15        10           16      7        13
Lianhua             3              0           23        10           60      8         7
Wu-Mart             0              0           45        0            10      1         0
                          * Stores with floor space > 4,000 sq.meters.
            Adapted from China Resource Enterprise Limited, Global Roadshow, 2006.
                                  END OF QUESTION
                                       PAPER




                                           Page 21 of 33
                            Suggested Answers
             Integrated Case Studies - I (MB3J1): October 2008

                                      Section A
1.   a.   The Chinese market has attracted foreign investors because of its huge size and < TOP >
          market potential. Some predict that China will become in few years the world‘s
          largest economy. The following are the environment that contributed to the booming
          Chinese retail business:
          Economic: China is an emerging economy but a dual economy too, with a wealthy
          urban professional and a poor country people. The gap between rich and poor has
          grown almost as fast as overall income, meaning that inequality is increasing nearly
          with the country‘s development. There are huge income discrepancies that are
          emerging within social groups and between regions.
          Political: The political environment in China is undergoing a transformation. The Old
          China defended the working class against the capital class. China has just begun its
          transition to become a democratic country. China‘s new leadership has come to power
          facing enormous economic, environmental, political and social challenges at home.
          Socio-cultural: The Chinese population is 1.3 billion of people. The past decade has
          seen a phenomenal rate of growth in China. It represents an important potential of
          customers for the retailers. The consumer buying process is consistent across cultures.
          The level of consumer involvement: The Chinese are seen as having a low level of
          involvement when purchases are for private consumption but a high level of
          involvement when they are buying products for their social or symbolic value. Since
          the Chinese greatly value social harmony and smoothness of relationships within the
          extended family, the social significance of products are highly important be it to
          express status, gratitude, approval or even disapproval.
          The level of risk consumer‘s associate with a purchase varies enormously across
          cultures and as such it is an important variable in consumer behavior. It will
          determine whether a consumer will go for the comfortable purchase or is willing to
          try new products and services.
          The Chinese are sensitive to social risk and the loss of social status if a wrong buying
          decision is made. The level of brand loyalty found in a market is also closely related
          to the perception of risk. There are huge variations in attitudes to brand loyalty across
          different cultures.
          In China, consumers are loyal, not really brand conscious and not really used to cross
          product comparisons, except the urban consumers, who have a wide recognition of
          foreign brand names. Indeed, there are sharp differences between rural and urban
          attitudes. On a national level, Chinese consumers prefer to buy domestically
          manufactured products rather than comparable foreign-made goods. But, consumers
          in big cities are less likely to favor domestic products than are consumers nationally.
          And, typical Chinese consumers do not want to be amongst the first to try a new
          product. They are reluctant to be pioneers, especially for an expensive, unrecognized
          (in terms of brand), foreign product.
          Opportunities for retailers: China remains a huge opportunity with many untapped
          sectors and a large population and growing middle class demanding new products and
          serves. The key factors lie in adopting sound business practices and taking a long
          term view to developing a local business. With the opening of the Chinese markets,
          Chinese customers have been offered an increasing array in the products and services
          they can choose to consume. As a result, distinctly different customer segments have
          emerged based on age, income, experiences and evolving value systems. Retailers,
          whether local or foreign, must not only recognize these differences but also cater for
          the diverse needs of consumers if they plan to have a lasting and profitable presence
          in China.
          Legal: Government policies are barriers in international markets. In China, policies

                                          Page 22 of 33
and regulations are often applied inconsistently and can vary between regions. Both
foreign nationals and Chinese officials themselves lack a solid understanding of
China‘s policies. The key policies which act as barriers to entry relate to foreign
exchange control policies and foreign investment policy. Concerning foreign
exchange control policies, the state is responsible for formulating and promulgating
the principles, degrees and regulations for foreign exchange control.
The acquisition of foreign exchange is a significant non-tariff barrier to doing
business in China. Concerning foreign investment policies, China encourages joint
ventures. The barriers to access China‘s distribution system make this system
unstable: wholesalers at the local and central levels, new collective and private
enterprises and factories, as well as some foreign companies compete to distribute
consumer products. Local ministry of commerce wholesalers traditionally served as
intermediaries between the producer and retail outlets.
Foreign companies are not permitted to engage in wholesale trade. A strict isolationist
policy kept foreign goods and trends out of reach of the average Chinese person,
because Chinese consumers have less abundant information and purchasing
experience with foreign products, they may rely more heavily on information such as
the producing country‘s image in product evaluation.
Rules and Regulation regarding the entry of foreign players: The retail industry in
China was protected till the year 1991 as no foreign retailer was allowed an entry into
the country. The industry till this time was dominated by local retailers. The retail
sector was opened on a trial basis in 1992, where foreign companies were allowed to
operate in six cities – Beijing, Shanghai, Tianjin, Guangzhou, Dalian and Qingdao
and five special economic zones – Shenzhen, Zhuhai, Xiamen, Shantou and Hainan
Island. The foreign investments allowed in the retail sector could be in the form of
joint ventures or contractual cooperative ventures with Chinese partner holding a
stake of more than 51%. They were not allowed to conduct wholesale business and
the total imported commodities could not be greater than 30%.
At this time, the authority to approve these foreign joint ventures laid with the
respective provincial and state governments which competed for approving more and
more such ventures in their states with the result that a huge number of approvals
were granted. During this time, many foreign retailers like Carrefour obtained many
approvals from competing provincial governments and expanded very quickly.
Opposition from Central government: Until 1997, the Central Government allowed
over 20 foreign retail joint ventures. Limited investments could not meet the growing
demand for retail services across China. By 1997, several retail enterprises with
foreign investment were established in China, with approval from the local
government. The foreign companies also established logistics infrastructure and
offered warehouse services in the country. Though the Central Government was keen
on restricting these operations, they were met with opposition from the provincial
governments, which were concerned about generating employment and taxes. In
1998, the Central Government ordered closure of about 36 retail joint ventures.
Relaxing the norms according to WTO: By June 1999, the Central Government
decided upon more liberalized rules on foreign investment in retailing and
wholesaling industry, in preparation of China‘s entry to the WTO. As per the new
rules, foreign parties can hold upto 65% equity stake in the joint ventures. The foreign
partners were required to possess strong financial strength, advanced commercial and
operational experience, merchandising technology, sales network and strong
operational results. The foreign companies were required to have sales turnover of
more than US$ 2 billion during the past three years and assets of more than US$ 200
million. The Chinese joint venture partner was also required to have assets of RMB
50 million or RMB 30 million depending on the location and average turnover of
RMB 300 million or RMB 200 million as the case may be.
The retail companies were allowed to operate in the cities of Beijing, Shanghai,
Tianjin, Guangzhou, Dalian, Qingdao, Zhengzhou and Wuhan and special economic
zones of Zhuhai, Shantou, Xiamen and Hainan. In Beijing and Shanghai, no more
than four joint ventures were permitted and in other cities only two joint ventures

                                   Page 23 of 33
           were allowed.
           Wholly owned foreign enterprises were permitted in retailing:
           After 2004, wholly owned foreign enterprises were permitted in retailing, wholesaling
           and trading sectors. The geographical restrictions were done away with and the
           ventures could be established anywhere in the country. The capital requirement was
           also reduced and the retail companies were required to have assets of RMB 300,000
           as against RMB 50 million stipulated earlier.
           These changes in the regulations governing the retail sector enabled Carrefour to
           expand its operations further. Carrefour expanded rapidly and by 2006, the number of
           hypermarkets increased to 80.
           As the geographical restrictions were done away with, analysts projected that there
           would be rapid expansion in markets where the respective retailers have had no
           presence and including new markets in rural areas beyond the metropolitan areas
           which are becoming saturated. The overall impact of the competition between the
           foreign retailers and the local retailers would be that the overall efficiencies and
           profitability would go up.
           In spite of the new reforms that were announced in 2004, analysts felt that retailers
           would continue facing difficulties in the market as the new rules have increased the
           complexity of doing business in China. Instead of permission from one central
           authority, the retailer now needs to obtain 40 to 50 approvals from local and central
           authorities to open new stores. As the restrictions on the minimum capital were lifted,
           several small and mid-sized retailers from Hong Kong have also entered the Chinese
           retail market, increasing the overall level of competition in the industry.
     b.    Challenges faced by Carrefour while expanding in China:
           Chinese Government had opened up its retail sector to foreign retailers, still foreign
                retailers continued to face regulatory problems in China. The Chinese
                Government was drafting new rules to restrict the expansion of large foreign
                retailers to encourage State –owned Enterprises (SOE), and were likely to impede
                Carrefour‘s growth plans.
           The price of commercial property was increasing rapidly, especially in the urban areas
                where Carrefour had a significant presence. Even the rent and lease costs were
                growing along with the other marketing and advertising expenses of the
                company.
           Carrefour‘s global archrival Wal-Mart, announced the acquisition of Taiwan-based
                Trust-Mart for US$ 1 billion. With this acquisition, Wal-Mart would be able to
                lay its hands on a wide spread, well-developed network of stores. The acquisition
                would also help Wal-Mart to improve its supply chain. And, Wal-Mart could give
                a tough competition to Carrefour in China.
           Carrefour was strong only in some regions in China and the competitors were gaining
                ground in several other regions.
           The Chinese authorities seem intent on protecting the local retailers and it is likely
                that they will continue to give the locals more favorable treatment in the future –
                maybe preferential treatment when it comes to store locations.
           In China, the market was highly fragmented; the supply chain and logistics
                infrastructure was not well developed and prevalent cultural differences which
                prevented the growth of Carrefour.
           Conclusion:
           Though China is going through an unprecedented economic boom, people‘s pockets
           are getting deeper and they are ready to embrace new lifestyle concepts and habits.
           The trick lies in understanding China‘s billion-plus population, what they buy, their
           spending power and what determines their purchasing pattern. In order words, the
           mind and the wallet of the Chinese consumer.
2.   Retailers go global for a number of reasons. Some retailers invest globally to tap fast < TOP >
     growing consumer markets, especially when their home markets are stagnant. Retailers
     expand globally in order to leverage their existing assets; global purchasing relationships, a
                                              Page 24 of 33
global supply chain, a unique product, a unique format, or a well known brand. In doing so,
they blow away the competition or at least that is their hope wanting to maximize
shareholders‘ wealth generally tries and increase their foreign business to become more
internationalized.
i.     Some of the important reasons why firms decide to go global are:
       1.      New sources of demand: In many situations growth is limited in the home
               country. This may either be due to intense competition or saturation in the
               share of the market. Thus, an alternative solution is to penetrate foreign
               markets where a potential demand exists.
       2.      Existence of various market imperfections: Various empirical theories have
               emphasized various market imperfections that is imperfections in product,
               factor and capital markets as the key motivating forces drawing FDI. Countries
               differ with respect to resources available for the production of goods.
               However, if all resources could be easily transferred among countries, the
               volume of international business would be limited. If markets were perfect, all
               factors of production (except land) would be mobile and freely transferable. In
               the real world, markets are imperfect and factors of production are somewhat
               immobile. Thus, it is worthwhile for MNCs to survey markets - to determine
               whether they can benefit from cheaper costs by producing in those markets.
       3.      Economies of scale: MNCs may want to enter new markets to increase their
               earnings and to realize the full benefits of economics of scale. Companies in
               industries where the fixed costs are relatively large need to engage in. volume
               selling to break even and these high volumes can only be realized if firms
               expand overseas.
       4.      Use foreign raw material and foreign technology: Some corporations are
               increasingly establishing or acquiring existing overseas plants to learn about
               the technology of foreign countries. This technology can then be used by
               corporations to improve their production process at their various subsidiaries
               allover the world. In some cases when a corporation plans to sell a finished
               product in a foreign country, it may decide to develop the product in the
               country where the new materials are located. This will help the corporation in
               saving the transportation costs which it would have incurred in transporting the
               raw materials from a given country
        5.     Exploit monopolistic advantage: In many situations, firms become
               internationalized when they possess an advantage not available to competitive
               firms. Even within a given country some firms may possess an advantage over
               other firms in these markets. For example, if a firm possesses advanced
               technology and has exploited this advantage successfully in local markets it
               may attempt to exploit it internationally as well. The advanced technology is
               not restricted to developing a new product - it could also represent a more
               efficient production, marketing or financing process.
        6.     Diversify internationally: When investors cannot effectively diversify their
               portfolio holdings internationally because of barriers to cross border capital.
               Flows, firm_ may help their shareholders with indirect diversification services
               by making direct investment in foreign countries. The firm‘s cash flows are
               internationally diversified when it holds assets in many countries. Thus,
               shareholders of the firm Can indirectly benefit from international
               diversification even when they do not hold foreign shares. Capital market
               imperfections may thus motivate firms to undertake FD I.
       7.      Political safety seekers: Some MNCs attempt. to expand their operations in
               countries that are unlikely to interfere with private enterprises and are
               considered politically stable. Also, MNCs based in politically unstable
               countries try to establish new operations and pursue other markets in which
               they may have greater flexibility to make business decisions.
       8.      Knowledge seeking: Another important reason why firms decide to enter
               foreign markets is for the purpose of gaining information and experience that

                                          Page 25 of 33
               will be useful to them elsewhere. For example, industries characterized by fast
               technological and product innovation it is important to collect information on
               foreign innovation and research and development systematically over a period
               of time. This information collected can then be used by the organization in its
               own research and development, marketing and other areas.
ii.    All retail is local. Hence, the mail-order/e-commerce segment maybe aside, retailing
       is special in the sense that exports are not a viable option in order to expand one‘s
       business across national borders. Consequently, other entry modes strategies have to
       be pursued are as follows:
       Organic growth: This involves setting up of businesses in an international market
       from scratch. When a company grows, the growth may be either organic or inorganic.
       Organic growth means that the company itself has grown from its own business
       activity and its own resources, while inorganic growth means that the company has
       grown by merger or take-over.
       Joint ventures: In a foreign joint venture, a domestic small business forms an
       alliance with a company in the target nation. The host partner brings to the joint
       venture valuable knowledge of the local market and its method of operation as well as
       the customs and the tastes of local customers. Sometimes foreign countries place
       certain limitations on joint ventures. Some nations, for example, require host
       companies to own at least 51 percent of the venture.
       Strategic alliances: A Strategic Alliance is a formal relationship formed between two
       or more parties to pursue a set of agreed upon goals or to meet a critical business need
       while remaining independent organizations.
       Franchising: Over the past decade, a growing number of franchises have been
       attracted to international markets to boost sales and profits as the domestic market has
       become increasingly saturated with outlets and much tougher to wring growth from.
       International franchisers sell virtually every kind of product or service imaginable —
       from fast food to child day care — in international markets. In some cases, the
       products and services sold in international markets are identical to those sold in the
       United States. However, most franchisers have learned that they must modify their
       products and services to suit local tastes and customs.
       Mergers and acquisitions: A merger is a tool used by companies for the purpose of
       expanding their operations often aiming at an increase of their long term profitability.
       Acquisition may be friendly or hostile. In the former case, the companies cooperate in
       negotiations; in the latter case, the takeover target is unwilling to be bought or the
       target's board has no prior knowledge of the offer. Acquisition usually refers to a
       purchase of a smaller firm by a larger one.
       Foreign Licensing : Rather than sell their products or services directly to customers
       overseas, some small companies enter foreign markets by licensing businesses in
       other nations to use their patents, trademarks, copyrights, technology, processes, or
       products. In return for licensing such assets, the small company collects royalties
       from the sales of its foreign licenses. Licensing is a relatively simple way for even the
       most inexperienced business owner to extend his reach into global markets.
iii.   Entry mode adopted by Carrefour:
       Joint venture as an entry mode: In China, a joint venture was the only way for a
       foreign company to set up operations. As per the guidelines issued by the State
       Council, in the retail industry, Sino-foreign joint ventures were allowed to operate
       only at a few locations.
       Carrefour entered China in 1995 by forming a joint venture with the Chinese
       management consulting firm Zhong Chuang, and established a firm called ‗Jia
       Chuang‘, in which it held the majority of shares.
       Carrefour decided to creatively circumvent central government regulations
       prohibiting foreign ownership, because they believed it was strategically imperative to
       enter the market quickly. Their operations were illegal, but their relations with local
       officials gave them the opportunity to proceed without informing the central
       government. However, in 2001 Carrefour was cited for its failure to secure the
                                          Page 26 of 33
            central government‘s approval for opening all of the stores it operates, relying instead
            on the goodwill of local authorities. Due to this citation by the State Economic and
            Trade Commission (SETC), Carrefour‘s expansion plans have been derailed.
            Local partner: As Joint ventures help a firm benefits from the local partner‘s
            knowledge of the host country‘s culture, language and political systems and in
            addition, a firm can share the costs and risks of opening and running a new business
            with its local partner. This is particularly important in China as it is culturally very
            different and had complex negotiations, prevalent bureaucracy and corruption.
            Expansion: Carrefour partnered with 27 holding companies, one for each store, but
            later after reached an agreement with SETC, Carrefour has reduced 27 holding
            companies to 13.
            It has entered into associations with various local partners in various cities like
            Hanshang Group in Wuhan , Lian Hua in shanghai, Kunmig department store in
            Kunmig, Jin Hua group in Xi‘an, Guangzhou dept store in Guangzhou, etc. In 2003,
            Carrefour opened its first hard discount store, Dia, in China by entering into a joint
            venture agreement with Shanghai Lianhua Supermarket.
            Carrefour opened its 28th Chinese store in Hangzhou, Capital of Zhejiang province, in
            June 2002 and by the end of 2002, its sales in the country had increased to €1.19
            billion as compared to €1.18 billion in 2001.
            By 2003, Carrefour had a presence in 15 cities and its sales had reached to €1.32
            billion.
            They planned to open 300 discount stores in different residential areas in Shanghai by
            the year 2007. The joint venture was set up with total capital investment of RMB 90
            million.
            In 2004, Carrefour introduced the Champion Supermarket format in China, in
            association with a local partner The Beijing Shoulian Group.
            Carrefour believes that its entry strategy was correct; after all, it is profitable in China.
            Carrefour‘s new strategy was to pursue both local and central approval
            simultaneously. In order to generate goodwill with the central government, Carrefour
            has shifted its expansion plans to the west of China and has expanded its retail export
            business beyond its current needs. These moves are intended to demonstrate to the
            central government that Carrefour intends to invest in China long-term.


3.   Strategies followed by Carrefour in China:                                                       < TOP >
     Flexible approach: Carrefour adopted a different approach in China. While many of the
     retailers and consumer product companies considered China to be a single huge market. It
     considered the country to be comprised of several small markets and approached these
     markets with flexible procurement, store management, marketing, and service strategies.
     Consumer conscious: Carrefour always tried to keep their prices low by keeping in mind
     the fact that for Chinese consumers, price was the main consideration. This has bought
     Carrefour a huge popularity for its hypermarkets. By keeping the consumers‘ convenience in
     mind, Carrefour sold a different variety of goods by attracting the consumers to the stores. A
     Chinese consumer, instead of visiting several places for various items, he/she can obtain all
     the items under one roof that is in a Carrefour store. As Chinese consumers prefer buying in
     smaller quantities, Carrefour provided them with different small size baskets than compared
     to European stores.
     Expansion of operations in China: Carrefour planned the expansion of its operations in
     China in a systematic manner by establishing regional offices. The headquarters of the East
     China region in Shanghai took care of expansion activities in that region. Similarly,
     headquarters of the Northwestern region was located in Xinjiang and it was responsible for
     expanding business in that region.
     Choosing appropriate store locations: Carrefour was careful in selecting its store location.
     Before opening new stores, it sent a team to conduct a detailed study of the store location,
     available space, purchasing power of people, their habits followed by a study on the culture,
     customs, and traditions of that region. Carrefour stores were located at the center of the city,

                                                 Page 27 of 33
as many of the consumers went either on their bicycles or by public transport. Carrefour did
not follow a particular store format and encouraged the local store managers to come out
with the best format for the store and sales plans to ensure that the store broke even within
two to three years.
Exploring the potential: Carrefour explored the potential markets in Shanghai and opened
three hypermarkets at Nanfang Shopping Center in Minhang district, the Lianyang Thumb
Square in Pudong New area and in the Dragon City shopping mall in Minhang district‘s
Qibao area. These shopping malls had many resources including stores, counters, and
restaurants that attracted more and more customers from various parts of the China.
Decentralization: Decentralization was one of the important factors for Carrefour‘s success
in international markets, with store managers being given the authority to take decisions
according to their local traditions and customs. Every store of Carrefour was managed by a
store manager and department heads. The store manager allotted a particular portion of the
store to each department head, who was responsible for managing that portion, including the
products stocked, promotions to be carried out, etc. He along with the department head
decided on the product mix for that portion of the store and also decided on the products to
be sold in the stores according to the needs and preferences of the customers. The
performance of the store managers was judged by their ability to meet the forecasts and
profit targets. The monthly performance of individual stores was communicated to all other
store managers in China. Good performance was rewarded with higher incentives and an
increase in salary.
Efficient supply chain management: Carrefour adopted a quite flexible supply chain
system in China. As it has procured most of the goods from within China to cater to its local
operations, it helped Carrefour to maintain lower prices compared to other foreign retailers,
who sold imported products. Buying and stocking local products was part of Carrefour‘s
strategy to cater to the needs of the local customers. Stores that were located in places that
had a large expatriate population had more imported goods, different kinds of European and
American food items, and the prices charged were also higher. In order to differentiate the
imported products from the Chinese products, the flag of the country from which the product
had been obtained was displayed on its label.
Localization: Most of Carrefour‘s stores in China were spread across several floors and
ramp escalators were provided to move shopping carts between the floors. The sides of the
escalators were stacked with snacks and eatables. The department selling fresh food and
groceries was designed to resemble the local outdoor markets. Carrefour catered different
products according to the different tastes of people living in various parts of China.
Consumers near the coastline of china, consumers preferred live fish so Carrefour sold live
fish. In the middle and western China, consumers preferred frozen fish. It opened a fresh
food section that made the products available that were similar to the products available in
the other local fresh food markets. It ensured that these food items were available at lower
prices and in a clean environment. Carrefour decorated its stores according to traditional
practices and stacked the stores with several items like paper lanterns that were used during
the festival.

Strategies Adopted by Wal-Mart in China:
Ensure the good quality of the products: For ensuring better quality of products, Wal-Mart
has sent many of its managers to suppliers‘ factories and maintained an extranet site for
sharing sales information and the consumers‘ expectations from the suppliers. Even though,
Wal-Mart started its operations in China with American workforce, later on it employed
several Chinese as mangers and shop assistants. It also took enough care to train the
suppliers and employees and regularly featured on the list of most preferred employers in
China.
Ambience of the stores: Wal-Mart tried to create an ambience that gave a Chinese feel for
its stores and also by selling Chinese goods and having Chinese employees. The stores had
wider aisles and smaller checkout counters to cater to the needs of the Chinese customers
who shopped frequently and in small quantities. It also designed the packaging, uniform of
the shop assistants, and the décor according to the preferences of the Chinese consumers.
Responsibility to associates: Wal-Mart was the largest private employer where the

                                         Page 28 of 33
associates were given recognition and a share of the profits and were expected to be totally
committed to the company and its success. The training given to the associates was extensive
for giving them an overall perspective of the business.
Everyday-low-prices: Wal-Mart offered brand name products at prices consistently lower—
approximately 2–4 percent—than those found at department or specialty stores. The
everyday-low-price strategy implied that there were few promotions. Although other major
competitors, including Carrefour, typically ran 50 to 100 advertised circulars per year—
spending 2.1 percent of discount store sales on advertising—Wal- Mart produced only 12–13
major circulars per year—spending 1.5 percent of sales.
Using superior technology: Technological superiority was seen as a competitive advantage
by Wal-Mart. Technology was used not only in setting price and product offerings, but also
in areas such as communication, distribution and the control of supplier relations. Wal-
Mart‘s information systems expense was estimated to be 1.5 percent of sales compared with
1.3 percent for its direct US competitors.
Difference in distribution system:
As of January 2006, Wal-Mart operated through 56 stores in China. As the stores were few
and widespread, the distribution centers could not be utilized fully. Another obstacle was the
absence of nation-wide distribution system, which limited Wal-Mart‘s economies of scale. In
2006,Wal-Mart has finished the construction of a central distribution center in Kengzian
(China). The place is a massive 40000 sq m facility with 70 huge doors designed to handle
deliveries from trucks. While Wal-Mart is making a central distribution center in China but
Carrefour, the French competitor, has a different strategy.
Carrefour relies more on local distributors to deliver direct to the stores because it believes
that flexibility matters more especially when the market is new. In other words, Carrefour is
building a network store by store and while it faces the challenges of uniformity in service
and quality control, the cost of development is lower.
Competitive edge:
Wal-Mart‘s limited exposure to international markets also proved to be an impediment to its
operations in China. Moreover, China was the first Asian country in which Wal-Mart had
started its operations. As the Asian market was quite different from the other markets in
world, Wal-Mart took time to expand in the market, which gave a chance to other domestic
and foreign retailers to consolidate their position in the market. Well, after nine years of
presence in China Wal-Mart is still loss-making but Carrefour is profitable on the other hand.
So we can conclude that at least till this stage, Carrefour is having a competitive edge over
Wal-Mart in China.
Carrefour has its eye on the customer and Wal-Mart is spending on the back-end. Many
believe that this approach will guarantee Carrefour's growth in the future but at the end of the
day it will have different products in its stores. So in the future many people may see
Carrefour investing in the back-end to benefit from the synergy between its stores.




                                          Page 29 of 33
4.   i.    Significance of SCM:                                                                       < TOP >
              Excellent retail supply chain management revolves around understanding and
               balancing three key dimensions of availability, inventory and cost. Managing
               these trade-offs efficiently can result in supply chains that improve business
               performance and drive competitive advantage.
              Today's supply chain leaders are working with their business partners to design,
               develop, move, store, sell and service their products with ever greater speed and
               economy. Now, more than ever, supply chains are regarded as sources of
               business value and competitive advantage. Differentiated supply chain models
               are emerging to address different merchandise characteristics. "One size fits all"
               no longer applies.
              Short-lifecycle fashion products require a supply chain that can cope with fast
               lead-times and accelerated time-to-market — tight integration with the supply
               base is critical. Repeatable continuity products demand integrated and optimized
               replenishment and forecasting. Regardless of type, all supply chains need to be
               supported by effective core processes and capabilities.
              Supply chain leaders develop robust basic processes and disciplines, and then add
               new and differentiating capabilities that drive supply chain excellence. These
               new capabilities enable leading retailers to transform and differentiate their
               supply chains. Creating change in an existing supply chain can be daunting.
               Given the breadth and depth of impact, virtually all areas of a business are
               affected.
     ii.   The SCM challenges that are dealt by the retailers while globalizing:
           1.     Poor infrastructure: One of the key challenges facing the SCM is the state of
                  the country‘s transport infrastructure. At present, despite some large-scale
                  projects, companies in the region complain of insufficient integration of
                  transport networks, IT, warehousing and distribution facilities. Outside of the
                  main economic centers, the logistics sector tends to be of low quality, highly
                  inefficient and with little technological competence.
           2.     Regulation: Regulation exists at a number of different tiers, imposed by
                  national, regional and local authorities. Regulations often differ from city to
                  city, hindering the creation of national networks.
           3.     Bureaucracy & Culture: Getting the go-ahead for any logistics project still
                  relies heavily on the strength of contacts within host-country bureaucracy.
                  Many western companies find it difficult to repatriate profits generated in the
                  country.
           4.     Poor training: Training in both the third-party logistics (3PL) sector and the
                  manufacturing and retailing sectors is very weak both at a practical level, such
                  as IT, driving and warehousing, as well as at a higher strategic level. Many do
                  not realize the benefits of best practices in logistics and are not interested in
                  outsourcing or supply chain management techniques. This has been
                  compounded by the failure of the government and other regulatory authorities
                  to promote logistics programs
           5.     Information and communications technology: Outside of the main logistics
                  centers, information and communications technology and infrastructure is
                  unreliable. There is a lack of IT standards and poor systems integration and
                  equipment. At a very basic level, the consistent supply of energy is also
                  problematic leading to interruptions in communications.
           6.     Undeveloped domestic industry: If the host-country‘s logistics sector is
                  fragmented and dominated by commoditized and low quality transport and
                  warehousing, then it provides little base to build a modern industry. This also
                  makes it difficult to meet the growing supply chain demands for industrial and
                  commercial enterprises.
           7.     High transport costs: Some estimates put the cost of transporting goods in
                  countries like China at up to 50 percent more than in developed regions such

                                              Page 30 of 33
                  as Japan, Europe and North America. These costs are increased by high tolls
                  on roads. Logistics costs (including warehousing, distribution, inventory
                  holding, order processing, etc.) are estimated to be two to three times the norm
                  and in excess of 20 percent.
            8.    Poor warehousing and storage: Poor facilities and management are to blame
                  for high levels of loss, damage and deterioration of stock, especially in the
                  perishables sector. Part of the problem is insufficient specialist equipment, i.e.
                  proper refrigerated storage and containers, but it is also partly down to lack of
                  training.
            9.    Regional imbalance: If the host-country‘s economy is characterized by wide
                  variances in levels of economic activity and development then it is problematic
                  in terms of distribution as there is a major imbalance of goods flows from the
                  one part of the country to another part of the country.
            10.   Domestic trade barriers: Although the various countries in accession to the
                  WTO has lowered trade barriers such as tariffs and quotas for international
                  shipments, there are still problems related to moving goods around the country
                  itself. Goods can be subject to unofficial border tolls when moving between
                  provinces. This is particularly evident when shipping from an inland
                  manufacturing location to a port city or vice versa.
     iii.   Carrefour’s SCM in China:
               One of the secrets to their success in bringing the new model of SCM to China
                has been the use of Third-party Logistics (3PLs) to manage the distribution
                process. Carrefour procured most of the goods from within China to cater to its
                local operations. This helped Carrefour maintain lower prices compared to other
                foreign retailers, who sold imported products.
               Carrefour‘s strategy is to buy and stock local products to cater to the needs of the
                local customers. The items stacked were also different depending on the location
                of the store. Stores that were located in places with the large population had more
                imported goods, different kinds of European and American food items, and the
                prices charged were also higher. The outlets in other locations were designed to
                cater to the needs of the local Chinese population and stacked predominantly
                Chinese products and food items.
               Carrefour set up its global purchasing center in Shanghai, through which goods
                were sourced across the country.
               Carrefour introduced its own label of products that were of good quality which
                included food, grocery, daily necessities, and clothes. These products were sold
                at priced 20-40% below the market price of competing branded products.
               Carrefour taught the suppliers how to do business efficiently and provided them
                with the required support. Many of the suppliers were provided with computers
                and software to manage inventory and standardize their products and orders.
                Carrefour chose to use the services of local distributors who were well versed
                with the local networks. The company was not in favor of building a national
                network for distribution or an automated supply chain system in the country.
               The training program, called Agricultural Products Quality and Safety, was
                launched .The farmers and suppliers were taught about food safety, health, and
                hygiene and about preserving the freshness of their products. Carrefour had
                conducted ten training programs at eight different locations within one year. The
                company was of the view that such training would help it in providing the
                consumers with products of higher quality and safety.
               By adopting all the above given strategies Carrefour is successful in having
                efficient supply chain management.
5.   The role, responsibilities of store managers along with skills required to carry out these < TOP >
     responsibilities in general:
     The retail store manager should take the responsibility for the conduct of the store personnel
     and maintenance of service standards of the organization as well as protection of the
                                               Page 31 of 33
merchandise in a retail store. The responsibilities of a store manager can be broadly divided
into four categories:
Managing the Store Personnel
In order to adapt to the highly competitive conditions, Carrefour had to adapt its human
resources and vendor relationship management. Department heads were much more
autonomous then their French counterparts. They had the responsibilities of a business-
within-the-business for their department— handling everything from supplier relationships to
hiring, promoting and firing staff and from price definition to full product selection. All the
pressures of sales and margin were on their shoulders. To incentivize performance,
department heads and store managers had a bonus linked to store results and a base salary. A
typical ―Carrefour-man‖ would start from the bottom of the store level and work his/her way
up through dedication and performance. Although this path has changed in recent years,
Carrefour promoted managers internally, hiring from the outside only when the skills needed
could not be found in-house. On-the-job-training was applied to all the levels in the store. All
managers and department heads were trained in existing stores for at least a year. A
prospective store manager would move through all the departments of the store, and if they
were appointed to a new store, they would be on-site at the beginning of the construction.
Each level in Carrefour was responsible for training and developing the level below.
A store manager can increase the productivity of the store by managing the store's human
resources effectively and efficiently. To increase the productivity of the store personnel, a
store manager should.
Minimizing the Cost of the Retail Store
The payment of salaries and other compensation benefits to employees constitute a major
part of the cost of a retail store. Other costs of the store include cost for control and
maintenance and inventory loss due to shoplifting and employee theft. The store manager
should try to reduce these costs by efficiently managing the store personnel as well as
providing security and maintenance to the store. At Carrefour, store managers and
department heads were the key people in the stores. The store manager and his/her
department heads had nearly total responsibility and control over their store. The store
manager allocated the area for each department within the store and was in charge of general
advertising and decoration policies for the store. Jointly with department heads, s/he would
decide on the product mix and make sure that all departments presented coherent positioning.
Each department was a profit center, with its own targets and income statements. The
department head had full responsibility over purchasing, promotion, pricing and motivating
and training his/her assistants.
Managing the Buying and Selling Activities
A retail store can manage the buying and selling activities through displays and visual
merchandising. The retail store manager can work along with buyers and suggest new
merchandise plan and manage special events, and, decide on markdowns to increase the sale
of merchandise. At Carrefour, department heads decided what they wanted to buy and from
where. They would buy centrally through Carrefour‘s central purchasing only when the
advantages of mass purchasing outweighed the advantages of local buying. This meant that
the range of products varied from store to store and that a supplier would (at least initially)
have to negotiate with all the stores in order to guarantee the presence of its products in a
certain region or at a national level. In order to leverage its purchasing power, Carrefour had,
over the years, centralized negotiations with some suppliers at the headquarters level. With
aggregate agreements covering all stores, these suppliers could be confident of their
products‘ presence in most all stores, both regionally and nationally (depending on the
arrangement). Nevertheless, for many products local buying was essential. This was
especially the case in areas where regional specialties and highly perishable products were
seen as sources of differentiation. Generally, product mix varied from store to store and local
products could represent up to 30 percent of an individual store‘s food sales.
Pricing was the complete responsibility of department heads, both for the products purchased
locally and centrally. In order to ensure the veracity of its aggressive pricing policy Carrefour
conducted extensive price scanning of all competitors within 5 minutes driving time of any
store. These scanning were done 3 to 4 times a week for the top 20 percent of products,
which accounted for 80 percent of sales, and once a week for the remaining products. Prices
                                           Page 32 of 33
were then set either equal to or below the competitor‘s level. Invariably because of its
decentralized pricing system, customers at four Carrefour stores in a large city could find the
same product being offered at four different prices.
Providing Customer Service
To retain customers and increase traffic flow in a retail store, the store manager has to
provide customized services, which add value to the merchandise sold. At Carrefour, the
western style hypermarket was customized to effectively cater to the needs and preference of
Chinese consumers. Carrefour stocked products preferred by the local population, in a
manner they demanded.


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