Foreign retailers feel the pinch of rapid expansion

In October, Wal-Mart closed more than a dozen stores in Chongqing following allegations that it had labeled regular pork as organic pork in some stores. Two employees were arrested, another 35 were detained, and the company was fined 2.69 million yuan.

Only hours after the problems, Wal-Mart released a statement saying that it had set up a special team to carry out comprehensive and detailed inspections and that it would strengthen supervision of pork products.

At the time, national and local media reported that the US retailer doesn't pay enough attention to food safety issues and that the company has been penalized many times for food safety problems in China over the last years.

"First a sincere apology, and then they continue to make mistakes. Are these the principles that Wal-Mart has always insisted on in the Chinese market?" said the China National Radio website at the time.

"Foreign supermarket chains did not react well after the scandals," said Li Yaru, an expert with Tongji University in Shanghai. "The scandals could cause serious damage to their corporate reputations. If a company does not enhance management after they happen, it could mean much bigger troubles later on."

Shortly after, more than 100 Tesco employees went on strike in eastern China. The employees blockaded and prevented shoppers from entering a Tesco store due to a labor dispute.

"Tesco's management and operation models have long caught the attention of retail insiders," said Liu Hui, an analyst with Beijing Uni-Retail Business and Management Co Ltd. "But the recent problems showed a relatively slow-paced management, as the British retailer expanded too fast in the past year."

Peng Jianzhen, deputy secretary-general of the China Chain Store & Franchise Association, said that retailers need to slow their growth to better control the supply and distribution channels.

James Sinclair, managing partner and consumer and retail specialist at InterChina Consulting, a strategy and M&A advisory firm headquartered in China, said that international chains used their joint venture partners to leverage local relationships and gain access to good locations in the past.

"At present, we are seeing the chains forming strategic relationships with property developers, or investing in commercial complexes - all with the intention of their stores becoming anchor tenants," he said.

Meanwhile, in sharp contrast with foreign retailers, the Fujiian-based Yonghui supermarket has achieved stunning development over the past years.

CTR, a Chinese research firm, said that Yonghui emerged as the fastest-growing retailer in the first quarter of the year, while the overall grocery market is showing signs of slowdown.

By the end of 2011, the number of Yonghui stores was 204, a year-on-year increase of 31 percent. In the latest quarter, the retailer has grown 69 percent compared to the same period a year ago.

"The success of Yonghui is mainly due to our own business model, focusing on the fresh products section, which occupies around 40 to 50 percent of store areas," said Ye Changqing, a representative of Yonghui's chairman office. "In order to save costs, we are selling fresh goods directly from the production bases.

"Compared to local retailers, the foreign retailers have better logistics and management skills, but they have less resources in regional areas," said Peng.

Industry experts said many foreign-owned companies operating in China are used to preferential policies provided by the local governments, lack of serious domestic competition and government supervision, which makes them arrogant and leads them to not respect customers.

In addition, the vulnerable position of Chinese consumers makes it difficult to protect them - filing a lawsuit against foreign retailers is both time- and money-consuming - which encourages big companies to not correct their bad business practices.

liwoke@chinadaily.com.cn