Foreign retailers shop for new growth model

Foreign retailers aim to pursue new business models in China to compete with their mainland counterparts, as a surge in e-commerce crimps margins across the industry.

In its latest attempt to find the right model for growth in the nation, global retailer Tesco Plc opened a large shopping mall, called Tesco Lifespace, in April in Guangzhou, the capital of Guangdong province.

Tesco owns the mall, which will help the Britain-based retailer maintain sustainable development amid fierce retail competition, according to Chen Pei, operations manager of Tesco Property Ltd.

The company has nine Lifespace stores and 117 hypermarkets across China. The Lifespace mall in Guangzhou includes top international brands, providing food, entertainment and fashion.

"We will continue the policy of buying land and building our own properties for future growth in China," said Chen.

According to Chen, Tesco plans to expand the number of such stores to 15 to 20 in South China within the next five years.

"China remains an ideal destination for retail business expansion. We will concentrate on building the right business model and finding the right market position for sustainable growth," Chen said.

After entering China in 2004, the chain established its property business in the nation in 2008.

Last year, Tesco closed four stores in China as it sought to focus on what company sources called "strategically important areas".

A boom in e-commerce, coupled with a slowing economy, has made retail, characterized by razor-thin margins, even more challenging in recent years.

According to sources at www.china-consulting.cn, retailers in China experienced a 10.4 percent decline in net profits last year, the first contraction in the past four years.

"For both Chinese and foreign retailers, the traditional model relying on fast expansion to raise leverage with suppliers and therefore increase profits is no longer working amid weakening purchasing demand," said Sun Xiong, director of the Guangdong Chain Management Association.

Sources with the association said the net profit of the top 50 chain retailers in Guangdong plunged in 2012 due to rising costs.

For example, a local retail giant, Guangzhou Grandbuy, reported a net profit decline for the first time since it was publicly listed in 2007. Its operating revenue grew just 2.3 percent year-on-year in 2012.

Sun attributed the weak numbers to rising online shopping and increased operating costs for retailers.

"Foreign retailers need to change their strategy in China amid fierce competition, rising costs and consumers' changing demand," Sun said.

Following the closure of some hypemarkets in recent months, Wal-Mart Stores Inc plans to open more Sam's Club stores (membership-only warehouse clubs) to sustain growth in the Chinese market.

The company has 620 Sam's Club stores in the United States, which have proved successful growth engines. The Sam's Club stores in the US generate $49 billion in sales annually.

The world's largest retailer by revenue plans to open seven Sam's Club stores in China in the next two or three years targeting affluent local families, sources with the company said.

The Guangzhou Sam's Club store, in the city's booming Panyu district, also began selling fresh and frozen products online.

The online service delivery area covers most of Panyu district and will soon expand to other districts such as Haizhu and Tianhe.

"We have always attached great importance to e-commerce service in our stores. We will have more products covered in the online purchasing service in the near future," said Yan Haiyun, deputy director of the Sam's Club marketing and e-commerce department.

Also, in an effort to boost Chinese buyers' confidence, Wal-Mart said it will invest 100 million yuan ($16.3 million) in food safety management in its stores across China over the next three years.

In its latest initiative, the company launched a mobile testing program in Guangzhou, covering its 70-plus stores in Guangdong province.

"We hope to provide safe goods and good services to our Chinese customers to boost consumption," said Greg Foran, president and CEO of Wal-Mart China.