Carrefour Takes Investment From Tencent and Yonghui: What's Left in the Hands of a Company in Retreat Across China?

We count six things it still has — but everything depends on how they get used.

For Carrefour, the world's third-largest retailer, China has become a burden.

On January 23, Carrefour announced it had signed a preliminary letter of intent for an equity investment with Tencent and Yonghui. Neither the amount nor the resulting stakes were disclosed, but Carrefour remains Carrefour China's largest shareholder. "This investment combines Carrefour's global retail expertise, Tencent's outstanding technology and Yonghui's rich operating experience, particularly its deep knowledge of the fresh food business," Carrefour said in its announcement.

That didn't quite match the rumors that had been flying beforehand. Just five days earlier, the French paper Les Echos reported that Carrefour planned to sell its China business, naming Alibaba and Auchan as the buyers. On December 21, 2017, the French outlet Capital cited anonymous sources saying Carrefour had already hired three investment banks to study ways of divesting its businesses in China, Argentina and Poland. Carrefour denied both reports at once.

"Everyone in the industry has been saying it anyway," an analyst covering retail at China Merchants Securities told QDaily. "Carrefour actually wanted to sell a long time ago. It probably talked to Alibaba as well as Tencent, and there were disagreements over price." Caijing magazine also said it had exclusive information: before negotiating with Tencent, Carrefour had planned to sell its whole China business to Alibaba, but Alibaba chose instead to take a stake in Sun Art Retail, owner of RT-Mart and Auchan. Carrefour then moved quickly to open talks with Tencent and closed the deal within two months.

A multinational under losses that walks away from China is nothing unusual — 2017 in particular saw a long list of them leave, which made the rumors sound all the more plausible. And Carrefour had shown similar signs before: the centralizing reforms Carrefour China launched in 2007 to cut costs were read at the time as connected to the wish of Carrefour's largest shareholder, the French billionaire and LVMH chief Bernard Arnault, to turn Carrefour into a "cash machine" — "cutting more costs in China to support growth in overseas markets."

On January 18, Carrefour lowered its 2017 profit forecast for the second time in six months: it now expects 2017 revenue to grow 1.6% to 88.2 billion euros (the earlier guidance was 3% growth), with operating profit down 15% to about 2 billion euros. The main drag was China. Same-store sales grew 0.8% in France, fell 3.7% in Asia and fell 5.5% in China. In the report, Carrefour flatly called 2017 "a difficult year."

"From the data we've tracked over the long term, Carrefour is clearly the weakest of China's top five retailers," Yu Jian, Greater China general manager of Kantar Worldpanel, told QDaily. "Carrefour was fourth for the full year, but by the fourth quarter its market share had already dropped below Yonghui's."

Carrefour China's market share has fallen every year since 2012. In 2009, RT-Mart passed Carrefour in mainland sales; in 2010, Walmart passed it in store count. In 2016, RT-Mart took in 264 million yuan per store, against 158 million yuan for Carrefour. Yonghui, which is now buying into Carrefour China, has been the supermarket chain whose market share has climbed fastest in recent years; in 2017 it overtook Bailian Group to become China's fifth-largest retailer.

Alongside the China deal, Carrefour globally also laid out a "Carrefour 2022" transformation plan: a simpler, more open organization (2,400 job cuts at the French head office, new partnerships); 2 billion euros a year to make its goods more competitive, along with 2 billion euros of cost cuts by 2020 and the closure of 273 stores of its Dia discount chain; an omnichannel sales network and new store formats; and a reworked service structure that leans above all on fresh food, with the goal of adding a million fresh-food customers by 2022.

"Carrefour will not leave China!" Thierry Garnier, Carrefour's president for Asia-Pacific, made a point of saying so in Chinese not long ago. But there is no longer any doubt that Carrefour is handing over power in China.

"What matters in the end is who calls the shots," said a former Carrefour executive who asked not to be named. It is a little like Britain's Tesco buying Master Kong's Hymall (later Tesco China), or Wumart in the north buying CP Lotus — both took the same route of stepping in and taking over by degrees.

"All of China is a burden for Carrefour. It loses hundreds of millions of yuan a year and there's no dawn in sight. Easy Carrefour, e-commerce — both lukewarm. The long leases are coming due, labor costs keep rising, and the losses will only grow. The French have sat in the top jobs for years and the good people have all left. All I can say is that if Carrefour goes it alone, it has no chance at all." Judging from the transformation plan Carrefour has published, this former executive guessed, the company may end up treating China as a reference point for its global overhaul.

Yu Jian takes a similar view of the China market: "China has the fastest-growing e-commerce sector in Asia apart from South Korea, so Carrefour's steps have to be very big — it needs a genuinely different path to hold its position."

Carrefour, the French chain that came to China 23 years ago, does look as though it has finally made up its mind to change. The question is how many cards Carrefour China, in steady retreat, still holds.

A channel for showing off products, which may still be worth something

In 1995, Carrefour was the first retailer to bring the hypermarket to China. In that era of few retail channels, it also brought the business model it used in developing countries: charge suppliers slotting fees (also called entry fees), sit on their payments, take the profit at the back end, and expand fast and cheaply on that basis.

Its grip on the channel left hypermarket buyers lording it over everyone — "Yili and Mengniu both had to beg their way onto Carrefour's and Walmart's shelves." Getting a new product onto a Carrefour shelf was then what a splash-screen ad on Tmall is now: a mark of status and a guarantee of sales, of traffic.

Carrefour's slotting fees rose year after year. By some accounts, by 2010 they had gone from around 12.5% a few years earlier to 21%, "pushing right up against the line where suppliers can survive." At the end of that year, Master Kong wanted to raise the price of some instant noodles by 10%; Carrefour refused, and Master Kong stopped supplying Carrefour nationwide. Earlier still, the paper goods industry and the roasted-snack industry had both boycotted Carrefour over the fees. A line went around the trade for a while: "Go into the supermarket and you die; stay out of it and you wait to die."

But as sales and marketing channels multiplied and consumer tastes moved up, the hypermarket — built on value for money and one-stop shopping — was no longer the only game in town.

Mizone's 2015 launch Suiyue, Mengniu's premium custom milk "Hi Milk," Qiaqia's new "Cute Wuxia" sunflower seed packaging, Quaker high-fiber oat milk, Whisper liquid sanitary pads: all of these new products launched online first.

"Using the internet as the first channel for a launch gets you consumer feedback fast, builds a digital connection with consumers quickly, and makes failure cheaper," Yu Jian said.

Still, a new product can build word of mouth online and reach only so many people, especially in lower-tier cities where e-commerce hasn't spread that far. For a new brand to make a large jump in sales, Yu Jian believes, it still has to move offline, at least as things stand.

Take Jian'ai, the Guangzhou plain-yogurt brand that at first sold only through WeChat; it has lately begun moving into bricks-and-mortar supermarkets such as Freshippo. "It depends on the category. For brands that need more physical stores for tasting and hands-on experience, Carrefour's hypermarkets are still a decent channel."

The hypermarket used to matter mostly as the place where a new product went from zero to one. Now it more likely comes in later, once a product has an initial base of buyers and needs to scale — which still counts for a great deal to a new or growing brand.

A global supply chain that was never fully built out in China

Five to ten years ago you could find plenty of imported goods at Carrefour: French wine, cheese, packaged food labeled in English. Chinese shoppers had never seen such things, and they drew in the first wave of middle-class customers and got them into Carrefour every week.

Today imported goods are standard stock on e-commerce platforms, and fresh food — which hypermarkets used to run for traffic rather than profit — has become retailers' last line of defense against e-commerce.

In its early years, to expand faster in China, Carrefour gave regional store managers enormous freedom: apart from contracts signed globally with companies like Procter & Gamble, everything was bought locally by local staff. There were no distribution centers; local suppliers delivered straight to each store's warehouse.

This asset-light model let Carrefour plant itself in China quickly, but it also killed any appetite for putting a local supply chain together.

"It's easy to get drunk on a situation like that," the unnamed former executive said. "Walmart in the US and Carrefour in France both have their own supply chains, but in China they both ran a 'sub-landlord' model. Lose that chance and it's very hard to win it back. It was China's e-commerce companies that ended up running the buyer system in their place and building their own logistics. Yonghui had a hard time surviving in the early days — it came out of the farm-to-supermarket conversion movement, sourced and bought on its own, and dug a deep moat in the fresh food supply chain."

We looked closely at the advantage Yonghui built on fresh food in an earlier piece: from 2015 on, Yonghui kept spending money raised from investors to strengthen its upstream supply, the foundation for its later private-label brands and further cost cuts.

Carrefour, by contrast, had no distribution center of its own, and no centralized purchasing, until 2015. "Back then Carrefour and RT-Mart each made billions of yuan a year, while a supplier made less than 100 million. Now it's the other way round — the retailers are even losing money. But what if, back then, you'd bought Yili outright?"

In theory, of course, Carrefour's global supply chain is still worth a great deal; Yonghui spent a lot of time and effort developing international supply resources of its own. In the eyes of the two investors in this deal, Tencent and Yonghui, Carrefour also has more advanced merchandise management skills and experience.

Thierry Garnier, though, seems to see a way out for Carrefour China beyond fresh food. Speaking earlier in January at a meeting with Gu Guojian, a professor at Shanghai Business School, he said China's new retail began by breaking down the online-offline divide in fresh food, but that "the good life can't consist only of ordering on your phone and eating seafood." He revealed that Carrefour is working with the French designer Oliver Saguez on an entirely new large-format supermarket aimed at senior white-collar workers and above in city centers, due to open in March or April this year.

A name that once won over middle-class shoppers

The detailed plan for that "entirely new large-format supermarket" hasn't been published. The one sure thing is that the Carrefour name still carries some weight.

Carrefour's Chinese stores sit mostly in the richer first- and second-tier cities. Its own analysis before entering the market in 1995 said: "China's largest consumer group is its emerging middle class, roughly 150 million people, with annual incomes between $1,500 and $3,000, and a readiness to accept new products."

That is the order in which most foreign companies expanded in China, starting in the first- and second-tier cities and working down. But the hypermarket Carrefour introduced here stayed popular in those cities for nowhere near as long as it had in France.

Unlike Walmart's "worry-free price," Carrefour has always used high-low pricing, applying different pricing rules to four kinds of goods with different characteristics in order to balance profit against sales volume. The price-insensitive goods and the imported goods were the key to how Carrefour once won the middle class.

Shoppers who have stopped caring about imported goods now walk into Freshippo and Yonghui's Super Species for "live seafood." Yet fresh food is the category closest to daily life, and many people won't necessarily go to a hypermarket for it: you have to plan the time, find a parking space, walk the aisles…

The question now facing Carrefour is where it finds new "exclusive products" for another cohort of middle-class shoppers, one already steeped in years of consumerism.

Formats beginning to diversify: finer stores and 39 convenience stores

In November 2015, Carrefour opened Asia's largest flagship store near the Siyuan Bridge in Beijing's Wangjing district — also its first "shopping mall on property it owns."

The hypermarket inside that mall is bigger than any other Carrefour, about 11,600 square meters, with a wider range of goods and functions; the leasable space is three times the size of the hypermarket itself and holds nearly 100 brands and restaurants. The store was part of a set of China transformation plans announced in 2015 by CEO Thierry Garnier, by then in his fourth year in the job.

The giant Carrefour mall was never rolled out at scale. Instead it became the prototype for a later, finer Carrefour store format, the first of which opened on Chengshan Road in Shanghai in January 2017 — Carrefour's 31st store in the city, 21 years after it arrived there. With only 6,000 square meters of selling space, set against a larger leasable and leisure area, the store added a coffee bar, a customer rest area, an ice machine, a drinking-water fountain, self-service packing and light-bulb testing; the third floor even has a cinema. By function it, too, resembles a small shopping mall.

The same "compact" format has turned up at two Walmart test stores, in Wuhan and Kunming: the display style changed, shelves stand at eye level, large appliances are gone, and category signage has been simplified as far as possible. Carrefour has said publicly that this kind of experience-first store will carry over to every new store it opens in first- and second-tier cities.

The 2015 Siyuan Bridge mall in fact points to another problem: most of Carrefour's stores in China are leased, which means that 23 years in, many of the leases it signed at the start are running out. Moving or paying double the rent — either is a heavy blow to an older store. At the China Retail Leaders Summit in November 2013, Thierry Garnier announced plans to increase the number of stores on property Carrefour owns.

That round of transformation also included a brand-new convenience store format: in November 2014, Carrefour China's first "Easy Carrefour" opened in Shanghai, each store 160 to 400 square meters with about 4,000 product lines. There are now 39 of them, in Shanghai and Wuxi.

Under the 2022 plan, Carrefour aims to open at least 2,000 convenience stores in major cities worldwide over the next five years. Against its single format in China, Carrefour's mix in Europe is far richer: besides hypermarkets it runs convenience stores and discount supermarkets. "One format is very hard to defend with," Yu Jian said. "Hypermarkets especially lack flexibility — unlike a 500- to 1,000-square-meter format, they're hard to convert to any other use."

The former Carrefour executive, for his part, is not optimistic about Easy Carrefour. "People who are good at hypermarkets are suited to hypermarkets. Put them on small stores and they simply don't know where the know-how lies. Fine-grained operations and army-scale operations are two different management systems to begin with."

Judging by site selection, layout and SKU count, Easy Carrefour looks more like a neighborhood convenience store along the lines of Yonghui Life.

Since Yonghui set up Yonghui Yunchuang in 2015 to explore new businesses, Yonghui Life had opened 102 stores by the third quarter of 2017. Easy Carrefour, in other words, has had half a year longer and has not grown quickly at all.

"I think the changes and new formats Carrefour is making will take longer to show results — you need hundreds of stores, even thousands, especially for convenience stores, a model that demands enormous economies of scale," Yu Jian said. Since Carrefour's own changes are unlikely to pay off fast, partnering with Tencent and Yonghui may be the better bet for a return in the short run.

A nationwide market, and the value of scale

Sun Art Retail (RT-Mart plus Auchan) ranks first with only 8.2% of the market, which tells you how fragmented this industry is.

"Consumer preferences differ a lot from place to place in China, so being too centralized doesn't work well, but being too scattered makes it hard to build economies of scale," Yu Jian said. Carrefour's stores are concentrated in first- and second-tier cities, but it has not leaned too heavily on any one region; its national footprint is fairly even.

For Tencent, which wants to counter Alibaba, and for Yonghui, which is speeding up its expansion across regions, Carrefour is a ready-made national market. If the partnership produces any new chemistry, scale will still deliver its old promise of thin margins on big volumes.

Only buying at scale can push prices down. Walmart got to "everyday low prices" precisely by squeezing suppliers without let-up, using large, steady orders to coax them into cutting costs and margins alongside it.

Looking at how many stores Carrefour has been opening, and at Sun Art Retail's growth rate under pressure from e-commerce, the China Merchants Securities retail analyst said: "Carrefour's value is its brand and its number of stores nationwide. Its supply chain operating ability is not as good as RT-Mart's or Walmart's."

"More than 300 stores is a big scale, and it's what Carrefour got from more than 20 years of working the China market," the unnamed former executive said. "For Yonghui it means a huge expansion, and Carrefour's bench of people is an asset too." E-commerce companies and traditional retailers are now poaching staff from each other. "If Yonghui can move in gently on personnel afterwards, and borrow and absorb Carrefour's modern corporate management systems, it should work out well."

"That said, Yonghui's share price hasn't risen much, which shows the capital markets are of two minds about this as well."

E-commerce: late, but at last getting real money

Under Carrefour's global 2022 plan, spending on digital development will reach 2.8 billion euros by that year.

In 2016 Walmart paid $3.3 billion for Jet.com, an American e-commerce company that had been running for a single year — a little under 2.7 billion euros. But Walmart also spent $1.5 billion on a stake in JD.com, which makes Carrefour's 2.8 billion euros look less than impressive.

Walmart's e-commerce attempts go back to 2011. They didn't go well either, but after that many rounds of investment the company has at least picked up some online instincts; Jet.com's founder now runs Walmart's e-commerce business. Walmart went on to buy four more e-commerce companies for $511 million in total.

Carrefour China, by contrast, only started talking about e-commerce in December 2015. From 2018, "Carrefour Online Mall" says it is entering six new cities, which with the 12 it already covered brings the total to just 18.

Last year we tested the e-commerce apps of China's five biggest supermarket chains; Carrefour Online Mall was the worst of them.

And by now e-commerce has stopped being one business line among others for retailers and become the single thing called new retail. Yonghui Life and Freshippo, the standard-bearers, both push fairly deep into online-to-offline service, which widens the pool of customers a single store can reach.

This plan — rescuing a China business in trouble, and defending the global business against Amazon's steady advance — is late, but it has at last arrived.

Once the Whampoa Military Academy of Chinese retail. How much is still possible?

When Huang Mingduan started building RT-Mart in 1997, the store design, the T-shaped traffic flow, the shelving, the merchandising, the management systems — all of it was learned from Carrefour.

Carrefour has been called the Whampoa Military Academy of Chinese retail, for the sheer number of people it trained for the industry. An employee who joined in 1999 and stayed 12 years described, in a 2011 post titled "Reflections on Carrefour's Present State — a Parting Word on Resigning," how he felt walking in to interview at Carrefour after leaving a state-owned enterprise: "I was full of excitement. Watching a few foreigners who looked like bosses walk out with several people behind them, everyone looking very serious."

This employee, who called himself one of Carrefour's "backbone type," wrote: "The most basic reason Carrefour went into decline is people. The more stores it opened, the fewer good people it had."

In 2007, Eric Legros replaced Jean Luc Chereau as president of Carrefour China. By setting up City Commercial Merchandise Units organized city by city, he gradually took power back from the stores, and he held down labor costs through punishing performance reviews and other means. Many employees' pay fell rather than rose, and mid-level managers left in large numbers.

Then, in 2008, the Beijing Olympic torch was treated badly in Paris, and public anger turned on Carrefour as a French company; the boycott lasted close to a month. On April 26, 2008, the word "Carrefour" was blocked on search engines including Baidu, Google China and Yahoo, and was not restored until May 4. Afterwards, some local governments cut back the policy favors they had been giving Carrefour.

So 2008 turned out to be the peak of Carrefour's performance in China. As one person close to the company told Caijing, back then Carrefour "had more money than it could spend, so all it could do was smarten up the stores a bit and use better paint."

In 2009, RT-Mart's mainland sales passed Carrefour's; its parent, Sun Art Retail, is now China's biggest retailer with 8.2% of the market.

Strictly speaking, though, the biggest retail company in China today is Alibaba.

For Carrefour China, taking Tencent and Yonghui by the hand may be the best plan it has: e-commerce, its own logistics and supply chain, convenience store formats, converting old stores — every one of them takes heavy investment.

With the internet giants stepping in, a retail industry that used to open its next store only after the last one turned a profit now moves at a speed it has never had before. Hou Yi, founder of Freshippo, said not long ago, discussing how he is working with Tmall to remake RT-Mart: "We've solved fresh food, but there's still the supermarket side we haven't solved. Nobody makes money on B2C e-commerce today — whoever does it, it burns cash."

Carrefour, having taken money from Tencent and Yonghui, may be about to start burning cash too. With that, every one of China's top five retailers apart from the state-backed China Resources Vanguard has now lined up behind an internet giant.

Running a nationwide retailer is harder in China than anywhere else, and Carrefour once did it well. The former executive who asked not to be named described the momentum of those days like this: "What it brought then was something new, a sea of goods, rock-bottom prices — and it swept out like a whirlwind."

The internet companies charging into retail with traffic and capital look as though they are trying to finish the same job: something new, a sea of goods, rock-bottom prices, and it has to sweep out like a whirlwind.

Cover image from Pixabay

Graphics: Feng Xiuxia