The Woes of Foreign Retailers in China

Marks & Spencer Group PLC plans to close five China-based stores by August 2015， as the Britain’s largest apparel retailer is facing the agony of not being acclimatized to the Chinese soil yet.

Back in 2008， Marks & Spencer opened its first store in West Nanjing Road， Shanghai， making its presence felt in the world’s largest market. After several years of gung-ho expansion across the Chinese mainland， the UK retail giant now has 15 stores in China with seven in the most prosperous metropolis Shanghai. However， the number is soon to become ten.

UK Retail Giants Fall from Grace

Businesses rise and they fall. Marks & Spencer is not the first British retail giant to lose its luster. UK supermarket chain Tesco PLC， as well as home improvement retailer B&Q PLC， had faced setbacks in the Chinese market.

Last year， Tesco snapped its nine-year go-it-alone expansion and entered into a joint venture with state-owned China Resources Enterprise Ltd， merging its unprofitable operation into the JV. China Resources Enterprise dominates the newlyestablished company with an 80% stake， while Tesco only has a 20% stake.

According to Tesco， the JV combines its retail practices， international sourcing and multichannel capabilities with China Resources Enterprise’s strong local knowledge and brand. In fact， however， with Tesco only taking a minority stake in the China-based JV， the tie-up marks a humiliating r©etreat for the UK retailer in many people’s eyes.

Tesco said problems negotiating with suppliers and regulators， coupled with soaring rent and labor costs， caused its failure on the Chinese mainland. Growing fierce competition from rivals Carrefour SA and Wal-Mart Stores Inc， as well as the online retailers， also exacerbated the plight of Tesco.

B&Q， UK’s largest home improvement company owned by Kingfisher Group， tells the same tale. The home improvement retailer made its first foray into China in 1999， in a bid to ride the crest of the country’s first housing boom.

In 2005， B&Q finalized the acquisition of the Chinese operation of the world’s fourth-largest building material supplier OBI. After the acquisition， the retailer enjoyed robust growth with 63 outlets in China at its peak.

However， the heyday just lasted for two years， as its busin¢ess model faced challenges， which largely reduced its advantages against the local rivals. Since May 2009， the once-fabled retailer has closed 22 stores in China. In December 2014， Kingfisher sold a 70% stake in its loss-making B&Q China business to Wu Mart Holding Group Co Ltd for a consideration of 140 million pounds （1.4 billion yuan）， marking an embarrassing retreat from the market.

Tesco， B&Q and Marks & Spencer are just three prime examples of foreign companies trying to penetrate Chinese mainland but ending with a failure. The three UK retail giants all experienced huge success in the British retail market but finally found that their British business model transplanted into China was not acclimatized to the country’s soil， which caused them to fall from grace.

Humiliating Retreat or Strategic Adjustment

The five Marks & Spencer stores to be closed are respectively located in Shanghai Jiangqiao Wanda Plaza， Changzhou Wanda Plaza， Changzhou Injoy Plaza， Wuxi Wanda Plaza.

The retailer explained that the move was a part of resource integration rather than representing an embarrassing retreat out of the country. Marc Bolland， chief executive of Marks & Spencer， said the five stores would eventually be replaced in better locations such as first-tier cities Beijing and Guangzhou this year and next year.

Marks & Spencer stressed it would continue to invest in its existing flagship store portfolio with the complete modernization of its West Nanjing Road store in this autumn. Besides， it also said it would further expand its online business in order to enhance its brand across the country， and consider taking a similar way Tesco and B&Q have taken， seeking cooperation with a local partner to grow its business in China，.

However， it is undeniable that it recorded a poor performance in China. Insiders say that the combination of internal and external reasons contributes to the current plight of Marks & Spencer， such as the overall downtrend of retail industry， strong competitors from fast fashion and fast-changing consumer habits in the country， as well as the management’s conservative and inefficient strategies.

Unwise Entry Strategy

Since 2008 when Marks & Spence made its entry into the country， its Chinese business operation has been keeping in a low profile， without putting star-studded advertising to attract public attention like other foreign companies.

However， the low-profile entry strategy is considered as one of main factors contributed to the plight of the once fabled retailer. Marks & Spencer’s low-profile image that earned a lot of praises in British market made it nearly unknown by the majority of consumers in China. “When a brand enters into a new market， a right entry strategy is very important，” says a brand marking expert.

“Compared with Marks & Spencer’s low profile in China， its strong competitor H&M spent a ton of money on wrapping a huge advertisement around all double-decker buses in Shanghai at the time when it made its first foray into the country.”

Such a high-profile advertising strategy made H&M soon known by the Shanghainese as a pioneer of fast fashion. By contrast， as it insists in its traditional low-profile strategy in a country where is largely different from Britain in many aspects， Marks & Spencer is not only little known by the consumer but also by its local counterparts.

“Marks & Spencer failed to shape a clear brand image well known to the Chinese consumers， which is the main problem，” says Liu Hui， chief consultant at Jion Uni-retail in Beijing.

Besides， the clothing retailer’s unwise strategy in store locations is undoubtedly another contributory factor in Marks & Spencer’s plight. According to an insider， Marks & Spencer is too unfamiliar with the local business to obtain good locations.

Even if it is enough lucky to get one， it must pay a much higher ☃rent. In contrast， its local competitors often enjoy a natural advantage here with government connections.

In addition， seeing from the layout of Marks & Spencer stores， it can be deduced that the retailer takes Shanghai as the ผcenter and expands into its surrounding second-tier cities， such as Qingdao， Changzhou， Ningbo， Suzhou， Wuhan， and Wenzhou， rather than secure the market in first-tier cities Beijing and Guangฌzhou before moving downward to second-tier cities as other retailers do.

“It is a dangerous path to expand into second-tier cities before securing a presence in first-tier cities，” says Liu.

Overall Retail Downturn

The plight of Marks & Spencer also reflects the fall of chain retailers in China， whether foreign firms or local firms.

Before the UK retail giant announced the plan to close the five stores， Malaysia--headquartered retailer Parkson has already closed seven stores in the country. Japanese retailer Ito Yokado also shut down three stores in Beijing over the past one year due to consecutive years of losses.

According to data from China’s largest commercial property consultancy firm RET， largest-sized retailers closed 26 department stores in 2014. To be specific， Parkson， Zhongdu and Ito Yokado all shut down three of their outlets， while Balloon， Simgo and Wangfujing also closed several stores in second- and third-tier cities.

Statistics from China Chain Store and Franchise Associa- tion （CCFA） also showed that in 2014， the like-for-like sales growth of top 100 chain retailers in China was just only 5.1%， setting a new all-time lowest record， with stores closed in the year outnumbering the newly-opened ones.

“The golden age of department store industry has been over，” says Li Zhiqi， chairman of Beijing Zhiqi Weilai Marketing and Consultancy Group.