They have tried different approaches in China, and now they need to take stock

In early October, 37 employees of the supermarket chain Walmart were detained and 13 local stores in Chongqing temporarily closed as a result of what was dubbed a green pork scandal. Not only that, but the CEO and the head of human resources stepped down.

The US-based retailer may be the single headline grabber this time, but it is by no means alone in seeing high-level personnel reshuffles among its global peers in China this year.

According to China Chain Store & Franchise Association, four of the largest global retailers - Walmart, Carrefour, Metro and Tesco - have all announced they were changing their CEOs in China in the past eight months. It all seems like too much of a coincidence.

The personnel reshuffles reflect not only the operational loopholes of these global giants in China, as demonstrated by Walmart's pork scandal, but also the strategic challenges that they face in China's retail market. Changing CEOs is just a symbol of the restructuring that the global giants need to make to tackle these challenges. There are at least three challenges.

Challenge 1: High market saturation in China and the resulting shortage of talent

Honoring a promise it made on its accession to the World Trade Organization, China completely opened its retail industry to foreign investment after December 2004. Since then, global retailers have been pouring into the market and expanding rapidly. In the meantime, local retailers have also flourished. Both foreign and local competitors fought heavily to open new stores and penetrate into key markets, especially along the coastal areas and in provincial capitals. As a result, China's first-tier cities are now teeming with retail stores and extremely competitive.

This fact was evidenced in the 2011 A. T. Kearney Global Retail Development Index published in September, an index that has guided global retailers over the past 10 years to identify which emerging markets in the world are the hottest and bursting with investment opportunities. In this year's issue, China dropped to No 6 from last year's No 1, specifically because of its low score in the "market saturation" category.

A natural result of over-heated competition among retailers is a war for talent, which in turn results in higher staff turnover. Many retailers are complaining about how hard it is to find and keep capable and experienced employees for their stores. This is especially true for the retailers that are expanding fastest. Interestingly, the four global retailers that changed their CEOs this year were the top four foreign expanders in the past two years. They must be experiencing more severe talent shortage problems. If this is true, operational loopholes like Walmart's pork scandal come as no surprise.

Challenge 2: Struggling with finding the right localization business model in China

Although many global retailers have operated in China for more than 10 years, they are still struggling to find a business model that works well. The key issue is how localized they should be, and Walmart and Carrefour are examples at opposite poles.

At one extreme, Carrefour adopted an outright localization model from the very moment it entered China. It established a decentralized system in which local stores are given a free hand in buying, promotion and human resources. It also charged suppliers heavily, as is usually the case with local retailers. The benefit of this model is obvious. It allowed Carrefour to tailor its product lines and displays to cater to regional differences. It also put profitability in closer reach. In fact, Carrefour was the first, and for a very long time the only, foreign retailer to make a profit in China.

However, there is a glaring drawback in this model: localization and decentralization increase the risks of legal and ethical problems such as commercial bribery in purchasing, and charging suppliers tends to pit the supermarket and local suppliers against one another.

At the other extreme, Walmart adopted a globalization model at the start of its journey in China. It set up a centralized system just as it had everywhere, especially in its US home market. Under this system, all rights including purchasing and promotions reside in its China headquarters in Shenzhen. It also ignored the normal local practices of charging suppliers, but tried to squeeze in profits through economies of scale by making large standardized purchasing orders for all local stores. The merit of this model is that Walmart successfully set up a bright public image as an honest and trustworthy multinational company with great integrity. But it also sacrificed profitability as local differences are not easily addressed by centralization and standardization.

In the past few years most foreign retailers have started to restructure in order to make a balance between localization and globalization, or between centralization and decentralization, a move that I believe is the right way to go. For example, Carrefour set up what it called CCU purchasing centers, which in effect have served as regional headquarters, and transferred many powers upward to CCU centers from local stores, where they previously belonged. This change successfully reduced legal and ethical problems such as bribery. But it also led to increasing human resource problems as many experienced local store managers chose to resign, feeling that they were being stripped of their powers.

As for Walmart, it started a decentralization movement last year in which it regionalized the whole China market and tried transferring purchasing powers downward from China headquarters to regional headquarters. It also started charging suppliers, a practice of Carrefour and many local competitors for more than 10 years. These measures did indeed generate profitability, but at the cost of rapidly deteriorating supplier-retailer relationships. In addition, decentralization increased the operational loopholes and ethical and legal problems, as evidenced by the increase in the cases of product quality problems and price cheating. The recent "green pork scandal" in Chongqing may just be the tip of an iceberg.

Challenge 3: Strengthening public relations and crisis management capabilities

At the end of 2009 the Chinese government finally abolished previous favorable taxation policies for foreign investors. This was widely interpreted as evidence, among much more, of the tightening policy environment for multinational companies operating in China. In the case of the Walmart pork scandal, many complained that similar problems may also exist among local retailers and that the government and local media were simply making Walmart, a multinational firm, a whipping boy.

Even if there is an element of truth in this, for what it is worth all foreign retailers now need to understand that the era of being given an easy, and even privileged, ride in the Chinese market simply because of their multinational credentials is clearly gone. They are now no different to their local peers under policy scrutiny. Worse for them, they may be given higher media exposure in cases of public crisis simply because of those multinational credentials.

So instead of complaining, foreign retailers need to sharpen their public relations and crisis management skills in China.

They should keep investing in China but try adopting a multi-channel approach. For example, focus more on second-tier, third-tier, and even fourth-tier cities where the future consumption potential would be huge.

They should also look out for any mergers and acquisitions opportunities, because high market saturation normally leads to industry consolidation.

The author is a research fellow at Samsung Economic Research Institute. The views expressed in the article do not necessarily reflect those of China Daily.

(China Daily 12/02/2011 page8)