In the first quarter of 2022, large retail giants continue to close their superstores in China. We use the activities of Carrefour, the world’s second-largest retailer, as one of the key examples in this article, along with a few others, to reflect on this milestone phenomenon of retailing in China, the world’s largest consumer market.
Carrefour is escalating the speed of its superstore closures (supermarkets or hypermarkets) in China. In 2022, three superstores closed in the first two months, including Wanguo store in Guangzhou, Shaping store in Chongqing, and Shanghai Road store in Nanchang. This happened after it had sold 80 per cent of the shares in its Chinese stores to the Suning Group, a Chinese electronics retailer, in June 2019. Carrefour, which currently operates 200 superstores across China, is likely expecting more closures of their large retail sites.
Carrefour brought the one-stop shopping format to China by entering the country in 1995. Since then, supermarkets and hypermarkets have become the most important distribution channel for consumer-packaged goods (CPG) or fast-moving consumer goods, and important places for displaying branded products. During the first 15 years of Carrefour’s operation in China (1995-2010), foreign retailers that offered one-stop shopping became the ‘kings of the distribution channel’.
Since 2010, the expansion speed of foreign retail giants started to slow down, thanks to the increasing competition of domestic retail businesses such as RT-Mart, Hualian and Yonghui, as well as online retailing. Carrefour’s store closures have accelerated, with China becoming the world’s largest e-commerce market by 2017. Compared to owning 228 superstores in 2015, Carrefour owned 210 stores in 2019, when it sold the majority of its China’s share to Suning, decreasing to 200 stores in 2022.
In the digital era, superstore closure is not an uncommon phenomenon in China, as it happens to both foreign and domestic retailers in the market. Walmart and Metro, as well as Chinese retailers Yonghui and Lianhua, have all closed a number of their large stores. For example, Walmart closed 80 stores between 2016 and 2020, and 30 more in 2021. This large number of store closures shows that the superstore era has passed in China. It is worth reflecting on the reasons behind these closures.
Key reasons for store closures
Superstore Format Losing Value
In the 2010s, the one-stop shopping format attracted Chinese consumers. With many consumers not having cars at that time, customers took the advantage of large retailers, which almost all offered minibus services to convey shoppers between their homes and superstores, including Carrefour and Walmart.
Now, China’s transportation system has improved dramatically. The fast growth of underground and high-speed trains allows consumers to travel faster and more easily. Car ownership has risen sharply to over 70 percent. While Chinese consumers enjoy going to physical stores, they also have the choice of benefiting from the fast delivery of online shopping. Some Chinese retailers, such as Yonghui, can deliver orders in only hours. The delivery time for groceries has been shortened as a result of customer demand, especially during the lockdown times of the pandemic. From this perspective, it is not surprising that retailers tend to close large stores and start to innovate other formats.
Costs Advantage is Weakening
In the past, superstores attracted consumers with a variety of products at relatively low prices. In comparison, e-commerce offers even more product categories. To compete with online retailing in this aspect, superstores tend to increase their product categories. However, as a result, they lose their economies of scale, thus becoming less price-competitive.
Regional characteristics are more favourable to Chinese consumers
In the West, similar types of cuisine may be shared across the country, supported by rich livestock and abundant agriculture. In China, tastes and preferences are diverse in different provinces and regions for cultural and climate reasons. Therefore, local (being regional and more Chinese-style) grocery stores at a smaller scale, such as convenience stores, are more favourable to local consumers across China.
Power of local landlords
In fact, not all the foreign superstores that were closed experienced losses, but they faced issues with the use of premises. For example, Carrefour’s Wanguo store in Guangzhou, the first Carrefour store in the city, opening 20 years ago, had been profitable until it closed in 2022. The closure was because, when its lease expired, the landlord chose another enterprise to rent to.
In other cases, landlords requested to increase the rent due to rising costs. In February 2022, Walmart closed its Fuzhou East store, in Fuzhou city, in the south-east of China. The company acquired this ex-Chinese Haoyouduo supermarket in 2011. The closure was because, when its lease expired, its landlord increased the rent. Walmart believed that the store’s potential profit might not offset the increased rent cost, and so made the strategic decision not to continue with the lease .
One of the KPIs for retailing is the performance per square metre. One-stop shopping experiences emphasise product variety as well as availability. With its SKU (stock-keeping unit) usually being overall 10,000, its per-square-metre performance is much lower than that of convenience stores, especially relevant when considering rental costs.
When many foreign retailers expanded their stores between 2010 and 2011, they normally signed a lease of 10 years, with an expiration date from 2020 to 2021. When a renewal of lease increases costs, it is not surprising to see more such store closures.
Relationships with suppliers
When retail superstores were popular, benefiting from their channel advantages and large space, retail giants such as Carrefour were able to request display fees from brand owners and suppliers, taking advantage of fee-margin-oriented profitability. However, this behaviour has not created a healthy relationship with their suppliers. There were several cases of Chinese suppliers deciding to stop supplying their products as Carrefour increased its prices. For example, Kangshifu, a large instant-noodle firm, stopped supplying Carrefour for one month for this reason.
In Carrefour’s new membership stores, it implements a ‘choosing one from two’ policy with its suppliers. That is, if the suppliers’ goods are sold in a Carrefour membership store, they must stop selling them in non-Carrefour stores; similarly, if their products are sold in non-Carrefour stores, they must buy back their goods displayed in Carrefour. Such a policy damages their relationship with suppliers.
Ways forward for superstores in China
Retailers that operate large stores are adjusting their retail formats, establishing more membership stores in China. Imitating Walmart’s Sam’s Club, other retailers, including Carrefour, Metro and Yonghui, are opening their warehouse stores for members who pay a fee.
Walmart’s Sam’s Club, which was introduced in the 1990s, is now the guru of membership stores in China. By November 2021, Walmart had opened 40 Sam’s Clubs in China. This diversity in retail formats helped Walmart convert loss to profit in the last quarter of 2021. As for Carrefour, their membership store journey is just starting, with the first one opened in late 2021. The company plans to transform half of the existing 200 superstores into membership stores in the next three years.
There is still hope. Retail experts believe that physical stores have great potential in China. Retailers may have become more familiar with the existing pandemic climate and the changes it has brought to retailing. While China is still implementing its ‘Zero Covid Infection Rate Policy’, customer demands for grocery shopping in a lockdown situation remain, raising hygiene issues for the in-store environment. New policies are on the way, such as an anti-monopoly policy. The ultimate success of brick-and-mortar stores will depend on the integration of their online and offline retail strategies to closely reflect customer values, coordinate with dynamic consumer behaviour, and accomplish the successful transformation of retail digitalisation.
About the Author
Dr. Lisa Qixun Siebers (Lisa.Siebers@stir.ac.uk) is Associate Professor of Marketing at Institute for Retail Studies, Stirling Management School, University of Stirling. She specialises in retail internationalisation, retailing in China, and Chinese businesses in sub-Saharan Africa.