In recent days, China's foreign retailers have one after another made headlines. While Tesco is withdrawing its brand from China, Walmart announced a layoff of more than 100 staff, including dozens of senior managers. Meanwhile, Carrefour is transforming itself into a convenience store to survive. 

BEIJING — After 10 years in China, Tesco, the world's third-largest retailer, has decided to withdraw its stores from the country and its massive consumer market.

In May, Tesco created a joint venture with the state-owned China Resources Enterprise (CRE), which effectively merged most of Tesco's existing stores with CRE's under the name Vanguard. It's a deal that gives the Chinese outfit an 80% stake.

Tesco already started to close some of its stores in the northeast province of Shandong in early November, marking the end of the British supermarket's ambitious expansion into China.

It was back in 2004 when Tesco announced its first foray into China with the purchase of a 50% stake in Hymall, a supermarket chain owned by Ting Hsin, a Taiwanese group and China's leading food supplier. Two years later, Tesco increased its stake to 90% to take control of the joint venture. Aiming to make it the chain's most important market in the Asia-Pacific region, Tesco could never have imagined that after 10 years not only had the number of stores opened been far lower than expected, but also that is has been bogged down with years of losses.

The company had been set to invest 400 billion RMB ($65 billion) over five years with an increase of 50 stores and 30 shopping centers, with forecasts of a three-fold sales growth. Zhang Tianli, who joined the company eight years ago, can still recall "the hope and excitement when I and my colleagues saw, for the first time, the crowded shops laid out in the 'Tesco China Plan.'"

Though it launched in China 10 years later than its rivals Walmart and Carrefour, "Tesco upheld the steady and pragmatic style of British business," says Zhang, who had previously worked for Walmart for six years. The retailer's first move was to shut down all outlets without profit potential.

To many people in China's retail sector, Tesco's managerial style is like a suited British gentleman compared to its rough-and-ready Chinese competitors. As Chinese retailers plunged into price wars, Tesco responded with upscale merchandise imported from Britain.

A Tesco store in China — Photo: Lynn B

Looking to plant roots in the Chinese market for the long term, Tesco invested massive infrastructure so it could expand quickly. Initially, the UK company set an annual sales goal of 100 billion RMB ($16.3 billion), and all of its information system capacity, management structure, layout settings, logistics and supply chain were designed around this target.

Inability to adapt 

But Tesco's big British plans and smart management model were bound to lose their luster gradually in the face of China's economic slowdown and rising costs. Last year Tesco's China sales totaled 22.3 billion RMB ($3.6 billion) with an overall loss. In the first half of 2014, the company's pre-tax profits dropped 91% year-over-year, while its sales fell 4.6%.

When Tesco first entered China, it brought its very British DNA and upper-tier management with it. For several years, its executives there included only two Chinese, one responsible for working with the Chinese authorities and the press and the other for human resources.

In choosing its locations, Tesco also followed the British way, assuming that people would drive significant distances to shop in the suburbs.

"These foreign managers didn't care too much about whether the stores were outside the business district, or whether there were enough consumers near the chosen locations," says Jin Jian, manager of Tesco's Shanghai Guangxing store. Jin is convinced that many Chinese cities are plagued with traffic jams even though vehicles per capita are still relatively low. Many consumers still prefer to simply shop at the nearest location.

Before Tesco purchased the majority stake from Hymall, each outlet enjoyed a certain individual autonomy. But after integration, the retailer's management became centralized. Regional offices and outlets were there just to execute decisions made by Tesco China and the company's UK headquarters.

This operational model works in Britain where differences between regions and markets are relatively small and where management centralization and standardization could exert an intensive advantage and synergy.

Local tastes

Unfortunately, Tesco's application of these British customs were disastrous in China. As one senior Chinese manager notes, China's market is a huge body mass with fundamental differences in consumption habits and countless unique local products and variations in taste. For instance, sastern Chinese favor sweet-and-sour food, whereas in Sichuan people like food spicy.

A unified national procurement system can't cope with such regional market needs. Tesco has always had far fewer stocks of local products than its rivals. Many of its goods have poor sales because of their inability to adapt to local people's taste.

The layers of hierarchy in the reporting system because of centralization also hurt Tesco's response capabilities withiin a fiercely competitive market. As one procurement manager of the Company's Wuxi outlet points out, for example, when seasonal wet market goods were in and other rivals were increasing their promotional efforts, Tesco always seemed to be half a beat slower. This seems to be a common problem for all of China's foreign retailers.

In the face of increasingly poor results since 2011, Tesco resorted to changing its CEO frequently for China in the hope that a new leader with decades of retail experience would be able to reverse the tide.

"They came and went, usually in less than one year," says a senior executive of Tesco China. "Every newcomer is a total stranger to Chinese culture and national conditions. They had to start from scratch with everything, including the etiquette of how to communicate with Chinese workers, government, press and the public. The market requires a certain time to explore. Yet by the time they were more familiar with the situation, they were already replaced again because of their poor performance."

Moreover, says the company insider, each chief executive had his own ideas, which meant company decisions vacillated and the brand failed to build a following. Outside consultants were also typically foreigners, who were no better at understanding China.

So now, according to the agreement signed in May, Tesco will merge its 134 stores and 19 shopping malls in China into the joint venture with the brand Vanguard, China's largest retailer. It also injected assets and cash worth of $554 million to maintain a 20% stake in this joint venture.

But even if Tesco's brand now disappears from China's shopping centers, there's still a chance that shareholders will make out OK in a retail market sure to keep growing. It's just one more reason that business in China stands alone.