CARREFOUR'S STRATEGIES IN CHINA

"Carrefour has gotten it right in China and, in fact, they're doing mass retailing globally much more successfully than the iconic Wal-Mart, earning twice Wal-Mart's revenue. What Carrefour is doing right (in additional to grabbing and building as many retail outlets as it can in the big cities) is simple: They're selling in a Chinese way to Chinese consumers. You can pull your own seafood from tanks. You can select from bins of fresh produce. It's more like a Shanghai outdoor market than a Paris indoor one. That's the customer experience the Chinese consumer wants."'

- Paul K. Ward 2 , CRM Consultant, in 2005.

"China represents a huge market when it has acquired its WTO membership. But it's no easy way to stand out a winner here. China is nearly as big as Europe and each area differs from any other. We have to keep on learning something new. We must know customers' wishes and expectations, therefore offering them more added values. "3

- Jean-Luc Chereau, Chairman, Carrefour China, in 2004. THE 'GREAT MALL' OF CHINA In 2006, France-based Carrefour Group (Carrefour), the second largest retailer in the world, successfully completed eleven years of its operations in China (Refer to Exhibit I for the top 25 food retailers in the world in 2005). As of September 2006, Carrefour operated in China through stores s . China was Carrefour's sixth largest its 80 hypermarkets and around 250 hard discount (Refer to Table I for the top six markets of 2.06 billion in 2005 market; with sales of over E 6 Carrefour). Being one of the first foreign companies to enter the Chinese retail industry, Carrefour played a major role in bringing about a retail revolution in the country. It leveraged on its experience in the international markets and introduced a few of its global best practices into the Chinese market. Carrefour had adopted a decentralized management structure, where all store managers in China operated stores with complete freedom. Carrefour sold private label products and designed the stores according to the convenience of Chinese customers. By procuring the majority of its products locally, Carrefour was able to ensure their freshness, an attribute considered important by Chinese consumers. In China, where vast economic, social, and cultural differences existed among different provinces, Carrefour was able to cater to the needs of different customers successfully. TABLE I CARREFOUR TOP SIX MARKETS (2005) I Revenue (In E million) Country
Paul K. Ward, "Goofing up Global CRM," www.crm2day.com , September 06, 2005. branding and Paul K. Ward is known for his work in the area of CRM, Perceived Customer Value, 2 strategy in China. "No Easy Way to Win in China: Carrefour," People's Daily Online, March 31, 2004. 3 Carrefour's hypermarkets occupied floor space between 5,000 sq meters and 20,000 sq meters. They 4 offered more than 70,000 food and non-food products like household products, medicines, and clothes. products. occupied area between 200 and 800 sq meters and sold a range of 800 food 5 Hard discount stores

Carrefour's hard discount stores were named Dia, Ed, and Minipreco.
6

As of October 24, 2006, 1 Euro = US$ 1.254. 1

France 44,468 Spain 13,619 Italy 7,320 Belgium 5,285 Brazil 3,944 China 2,064 Source: Carrefour Annual Report, 2005. Till the 1980s, the retail industry in China was fully controlled by the Government. The department stores run by the Government provided little in the way of conveniences. According to Wang Zhirong, General Manager of Tian Bai department store in Dalian, concepts like customer service and choice were unheard of. She said, "It didn't matter how you did your job, when customers came they had to wait until the shop assistants were in a good mood before begging them for help."' Carrefour entered China in 1995, when the Chinese Government had partially opened the retail sector. The country's economy was in the growth phase and the urban consumers were shifting their preferences from the wet markets 8 and state-owned stores, to foreign retailers like Carrefour which provided convenience along with a wide range of products in hygienic surroundings (Refer to Exhibit II for a note on retail industry in China). Carrefour went on to strengthen its position in the country and by 2005; it had emerged as the sixth largest retailer in China. It was also the largest foreign retailer in the country (Refer to Table II for the leading retailers in China in 2005). TABLE II CHINA'S LEADING RETAILERS (DECEMBER 2005 Retailer Sales (RMB Billion) No. of Stores Bailian Group 72.1 6,345 Gome 49.8 537 Suning 39.7 363 Vanguard 32.0 2,133 Wumart 19.1 659 Carrefour 17.4 70 China Paradise 15.2 225 Trust-Mart 13.2 96 Parkson China 11.0 36 Lotus 10.1 61 Wal-Mart China 9.9 60 B&Q China 5.2 48 Source: China Chain Store & Franchise Association and www.carrefour.com . According to Beijing-based CTR Market Research 9 , Carrefour was the major retailer in 15 of the largest cities across China, with a market share of more than 5%. Between 2006 and 2010, Carrefour projected revenue growth of above 20% in China per annum and planned to open about
Rebecca MacKinnon, "China's Reforms Produce Winners, but More Losers," www.cnn.com , October 1999. 8 In China, wet markets can be found all across the country. These markets sell fresh fish, chicken, and live mammals and reptiles, generally in an open environment. 9 Founded in 1995, CTR Market Research is the leading market research company in China. CTR provides different services that include interpretation of information, market segmentation, advertising, media research, and business research.
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80 more hypermarkets in the country by 2009. Commenting on Carrefour's success in China, Los Angeles Times reported, "By joining with Chinese partners, adapting to local culture, and employing a supply chain that includes 18-wheel trucks and three-wheel bicycles, Carrefour has become the biggest foreign retailer operating in China " 1 BACKGROUND NOTE In the early 1950s, the grocery industry in France consisted mostly of family-owned stores. Though there were some big department stores, these charged exorbitant prices. At that time, the concept of free service" was gaining popularity and there were very few stores in France that were providing such services. In 1959, two entrepreneurs, Marcel Fournier (Fournier) and Louis Defforey (Defforey) from Annecy in Eastern France decided to establish a large discount supermarket. Initially, they offered 7,000 shares to 10 stockholders and purchased a facility that was under construction. On the ground floor of the building, the duo started constructing a supermarket. They sold the upper floors, thereby obtaining the required capital to run the business. Fournier was the President of the venture and Defforey's son Denis was the General Director. Fournier decided to name the venture Carrefour (Crossroads), as the store was located at the convergence of five roads in Annecy. At that time, another businessman announced his intentions of opening a similar store in Annecy. Fournier and Defforey decided to open a store at other premises as their facility was still under construction. Fournier used the basement of his office to open a store in January 1960. As the threat of competition was looming large, the duo offered products at the lowest prices. Soon, the store became very popular among customers. Before the new store at Annecy was opened in June 1960, a campaign was launched to familiarize customers with the concept of supermarkets. The campaign was highly successful and in the first two days, Carrefour attracted more than 15,000 customers. To accommodate the vehicles of the customers, Carrefour expanded the parking lot, but this was not enough to cater to the growing number of visitors. Several traffic jams were reported in the store's vicinity and the founders concluded that locating supermarkets in the congested urban areas was not practical and decided to move to the suburbs. The next supermarket that was opened was also in the Annecy region in Cran-Gevrier. It had a large parking lot and a discount service station that sold petrol on a no-profit, no-loss basis. In 1962, Carrefour decided to open a store at Sainte-Genevieve des Bois, a Paris suburb 30 km away from the main city where land was easily available at low prices. Before the store was constructed, Defforey and his brother went to the US to observe the retail practices prevalent there. After observing the huge stores, the discounts offered, the low prices and services that the customers were provided with, they decided to adopt similar practices in France. In 1963, they opened a new store. It occupied an area of 2,500 square meters and had enough space to park more than 400 cars. The store provided a wide range of items, including grocery at discounted price, stocked items like clothing, sporting equipment, electronic goods, and auto accessories. The store was inaugurated in June 1963 and its huge size earned it the name 'hypermarket' in the media. Carrefour offered products at the lowest prices as compared to its competitors by

I Don Lee, "A Chinese Lesson for Big Retailers," Los Angeles Times, July 02, 2006. II Prior to the advent of free service, the sales clerks picked up the necessary items for consumers from the

shelves. Under free service, the customers were given shopping carts or baskets, which they used to collect
the individually priced items placed on the shelves on their own.

negotiating well with wholesalers and suppliers. The concept of a hypermarket found instant acceptance among the younger people, suburban dwellers, and price conscious consumers. In 1965, Carrefour formed two divisions Carrefour Supermarche led by Fournier and Denis and Grands Magasins Carrefour, headed by Defforey and Fournier's son. Carrefour continued its expansion, opening huge stores in France. In 1966, a 10,000 sq. meters hypermarket was opened in Lyon and a 20,000 sq. meters hypermarket was opened in Vitrolles. In 1967, Carrefour opened an office in Paris to coordinate the activities of its different stores. In 1970, the company's shares were listed on the Paris stock exchange. By 1971, Carrefour operated 16 wholly owned stores in France, had an equity interest in five stores, and also operated seven stores through its franchises. GOING GLOBAL Carrefour started making efforts to enter international markets after a law was passed in France in 1963 to restrict the development of large stores. For international expansion, Carrefour adopted the route of forming alliances with local partners. Its first international venture was in Belgium, where it opened an outlet in association with Delhaize Freres-Le-Lion 12, in 1969. Carrefour expanded its operations outside Europe by opening a hypermarket in Brazil in 1975. In 1978, Carrefour developed a hard discount store format, under the banner Ed in France. The store offered a limited range of products at very low prices. By 1985, Carrefour was operating in ten countries and had introduced private label products that were priced 10-20% lower than the branded products and were of superior quality. In 1988, Carrefour entered the US market by opening a 330,000 sq. feet hypermarket in Philadelphia. Another hypermarket in the country was set up in 1991 13 . In 1992, Carrefour reported sales of E 17.86 billion and a net income of E 271 million. In the early 1990s, Carrefour concentrated on establishing larger stores (area greater than 2,500 sq. meters) and sold off the smaller stores. In 1996, a law was passed in France under which food wholesalers were not allowed to give any extra discount to supermarkets 14 and hypermarkets. They were to charge an equal price from all retailers. Due to this, the advantage the bigger stores had in terms of cost was lost and the price of the products was uniform across different types of stores. The legislation was passed with the aim of protecting the small retailers from the onslaught of supermarkets and hypermarkets, which got a higher discount from the wholesalers and offered products at a lower price. The legislation led to the growth of discount chains that stocked private label brands. The chains started providing products at prices much lower than those at Carrefour. By then, Carrefour's European operations were spread across Austria, Britain, Switzerland, The Netherlands, Germany, Italy, Belgium, and Spain. Ed was operating in Britain and Italy. Carrefour's South American markets were doing well and the company was aggressively
12 Delhaize Freres-Le-Lion is a part of The Delhaize Group, a food retailer headquartered in Belgium. Founded in 1867, the group operates food supermarkets in North America, Europe, and Southeast Asia. As of December 2005, the group operated 2,636 stores. It recorded sales of E 364.9 million and profit of E 18.6 million. 13 Subsequently, Carrefour suspended the US operations in 1993, as the stores were not profitable. 14 The supermarkets were between 1,000 and 2,000 sq. meters in area and offered mostly food products and household merchandise at competitive prices. Carrefour's supermarkets were called Champion, GS Norte, Gb, and Marihopoulos.

,{

expanding into those markets. In 1996, Carrefour opened 30 hypermarkets across the world, of which 15 were in Argentina, Brazil, and Mexico. By 1997, the number of stores in South America had increased to 60. Some of the acquisitions made in the late 1990s helped Carrefour in becoming the top retailer in Europe. In 1998, Carrefour acquired Comptoirs Modernes SA, which brought 790 supermarkets into Carrefour's fold. In 1999, Carrefour acquired Promodes SA 15, which owned several hypermarkets, supermarkets, convenience stores, and discount stores in France and other European countries. This acquisition made Carrefour the second largest retailer in the world. By December 2005, Carrefour was operating in 29 countries with 12,028 stores (including franchisees and partners) and employed 436,000 people (Refer to Exhibit HI for Candour's consolidated store network excluding partners as of December 2005 and to Exhibit IV for sales per store format and region). For the financial year ending December 2005, Carrefour generated revenues of E 74.49 billion and net income of E 1.58 billion (Refer to Table III for financial summary of Carrefour for the financial years 2004 and 2005). TABLE III FINANCIAL SUMMARY OF CARREFOUR Net Sales Other Income Total Revenue Cost of Sales Margin of current activities SG&A Activity contribution before depreciation & provisions Depreciation & Provisions Activity contribution Non-current income & expenses EBIT Net debt and other expenses Income before tax Income tax Net income from recurring operations Total net income
Source: www.carrefour.com .

(In E million 2004 2005 72668.0 74496.8 1038.6 1011.3 73706.6 75508.1 (58626.5) (57052.8) 16653.8 16881.6 (12232.7) (11888.2) 4765.6 4648.9 1494.7 1474.2 3270.9 3174.7 (76.0) (20.4) 3154.3 3194.9 (484.5) (454.6) 2710.4 2699.6 (805.9) (793.9) 1905.7 1904.5 1582.1 1859.6

CARREFOUR IN ASIA During the late 1980s, the economy of several Asian countries like Taiwan, Singapore, South Korea, Thailand etc. was rapidly growing. In order to reap the benefits of this growth, Carrefour started its Asian operations by entering Taiwan in 1989. It established a joint venture with Uni President Enterprises Corporation 16. Initially, Carrefour aimed at building a hypermarket of
Established in 1950, Promodes SA played a major role in promoting supermarkets in France. During the 1960s and 1970s, Promodes expanded its operations into other countries in Europe and South America. 16 Uni President Enterprises Corporation is one of the leading business conglomerates in Taiwan and the
15

largest food retailer.

10,000 square meters, similar to its hypermarkets in France. On studying the Taiwanese market, Carrefour realized that the store format which had been successful in other parts of the world would not be successful in Asia as the Asian retail markets were different from the other markets, in terms of the layout of the stores, the products offered, the frequency of shopping, and highly price sensitive customers. Carrefour decided to adapt the stores, the products, and management culture to suit the local environment. Carrefour changed its strategy of building the hypermarkets in large open urban lands and began operating in high density urban areas in pre-existing buildings, when it found that the consumers in Asia did not wish to travel long distances to purchase groceries and other items as they shopped frequently and in small quantities. The first store in Taiwan was located in Kaohsiung and occupied an area of around 3,500 sq. meters. The number of products offered was limited and Carrefour concentrated on selling high volumes at competitive prices. Tapping the Taiwanese market was a big challenge for Carrefour as the tastes of the people in the country changed rapidly. The best selling products in a typical Taiwanese store changed within a span of just six months. In order to assess the trends, Carrefour opened pilot departments in the stores, where new products were tested. These departments interviewed some of the customers and studied their purchasing habits to monitor the changing customer preferences. The information was later communicated to all their other stores in the country. Local store managers and department heads were given more autonomy. The department heads were made responsible for the hiring of staff, procurement, product selection, and vendor management. They were responsible for achieving the budgeted sales and maintaining profit margins. In the initial years, senior executives from France were made department heads. Later, local employees were trained and promoted to assume higher responsibilities. Carrefour leveraged upon the experience it had gathered in Taiwan to expand into other Asian markets. The next destination was Malaysia, followed by China (Refer to Table IV for details of Carrefour's entry into Asian countries). Carrefour's Taiwanese experience acted as a prelude to its Chinese venture. The hypermarkets that Carrefour opened initially in China were similar to the ones that existed in Taiwan. According to Eric Deliers (Deliers), Regional Manager, Carrefour China, "Our Taiwanese experience was very important. It was Carrefour's laboratory not only for China but for all Asia." 17
TABLE IV CARREFOUR ENTRY INTO ASIA Country Year of Entry Taiwan 1989 Malaysia 1994 China 1995 South Korea* 1996 Thailand 1996 Singapore 1997 Indonesia 1998 Japan* 2000
Source: www.carrefour.com . *Carrefour exited Japan in 2005 and South Korea in 2006.

ENTRY AND EXPANSION IN CHINA

17

Hayet Sellami, "Carrefour China: A Local Market," www.cityweekend.com , April 28, 2005.

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Si II 0 11.11 4 I

Carrefour identified China as one of the most important foreign markets, after the country partially opened its retail sector for foreign investments in 1992. Carrefour entered China in 1995 by forming a joint venture with the Chinese management consulting firm Zhong Chuang, and established a firm called `Jia Chuang', in which it held the majority of shares. During that time, consultancy firms in China were not allowed to invest in any other businesses so Thong Chuang set up another company, Chuang Yi Jia as a commercial enterprise. The joint venture company, `Jia Chuang' managed the hypermarket that was opened in Shanghai, in a residential area, to cater to the needs of the middle class in the city. The hypermarket was named Chuang Yi Jia. As Carrefour had a major say in running and managing the store, the signboards had the name `Carrefour' displayed on them. The next store was opened near the International Exhibition Center, in the north-east part of Beijing, one of the prominent localities in the city. In China, as per the guidelines issued by the State Council, in the retail industry, Sino-foreign joint ventures were allowed to operate only at a few locations. As per the next set of guidelines issued in 1999, the foreign retail joint ventures were allowed to operate in more cities. Some of the conditions stipulated were that the joint ventures should be approved by the Central Government, and that only three outlets could be opened in each of the approved cities (Refer to Exhibit V for regulations in the retail industry in China). Instead of approaching the Central Government of China for approval, Carrefour entered into direct deals with the local governments of various provinces and convinced them that it would create employment opportunities' s in their region, generate taxes for the government, and help in the overall development of the region. The local government officials were quick to grant Carrefour the required approvals. By 2000, Carrefour had established hypermarkets in Shanghai, Beijing, Chongquing, Qingdao, Shenyang, and Wuhan. Carrefour expanded its operations in China rapidly and by early 2001, it had 27 hypermarkets in 12 cities across the country, some of which were fully owned by the company. At that time, Carrefour was the third largest retailer and also the largest foreign retailer in China. Though foreign retailers were allowed to open only three outlets per city, Carrefour managed to open more than three outlets in several cities with the approval of local authorities. But there was trouble brewing for Carrefour. In early 2001, a cabinet level body, the State Economic and Trade Commission (SETC), carried out an investigation into Carrefour's entry and expansion in China, after receiving complaints from its competitors. It was widely reported in the Chinese media that Carrefour had flouted Government stipulations regarding the ownership stake in retail joint ventures and the number of stores in each city. During the course of investigation, it was found that in some of the stores, Carrefour owned a 100% stake. The Commission ordered Carrefour to suspend further expansion in the country, in order to regularize its position according to the Chinese retail industry regulations. During the investigation, it was found that Carrefour had opened stores at locations that the Central Government had not opened up for foreign investments 19. Industry analysts opined that Carrefour had deliberately flouted the rules and set up stores without approval from the Central
18 Each store employed about 500 people at different levels including the store manager, department heads, and store management staff. 19 According to China's WTO commitments in 2001, foreign retailers were allowed to establish joint

ventures in five economic zones and six Chinese cities. In the next year, all provincial capitals were to be opened up to foreign investors and in the third year, the limitations regarding investments were to be lifted. 7

Government. They felt that the company's management was of the view that once its operations had spread widely across the country, Carrefour would be among the major employers and tax payers, a fact which would force the Central Government to subsequently grant the required approvals. This episode led to the then CEO and Chairman of Carrefour, Daniel Bernand, tendering a public apology during his visit to China in March 2001. On the bureaucracy in China, Chief Economist of Retail Forward Inc 2 0 pointed out, "They can overlook rules and then suddenly decide to enforce them. That happened with Carrefour recently." 21 By November 2001, Carrefour announced that the differences with the Chinese Government had been resolved and that the SETC had allowed the company to continue expanding its activities. As per the agreement reached with the SETC, Carrefour agreed to set up 10 procurement centers across the country, to procure Chinese goods which would be sold through its stores all over the world. Carrefour also admitted local partners and all its stores in the country were 35% owned by the local partners with the remaining held by the company. According to Jean-Luc Chereau (Chereau), Chairman, Carrefour China, "Sometimes we may have problems in understanding Chinese laws and regulations. But we always respond positively to the government's requirements when problems arise, by rectifying our operation to make sure that the law is fully observed."22 In April 2002, SETC and Carrefour reached the final agreement, according to which the number of holding companies was to be reduced to 13. Earlier, Carrefour had 27 holding companies, one for each store. After the agreement, Carrefour formed one holding company for each of the 13 local partners (Refer to Table V for some of Carrefour's partners in China). In June 2002, Carrefour transferred 35% of its ownership in three hypermarkets to two local firms Chengda and Harbin Dongli Equipment Company. Carrefour opened its 28 th Chinese store in Hangzhou, Capital of Zhejiang province, in June 2002 and by the end of 2002, its sales in the country had increased to E 1.19 billion as compared to E 1.18 billion in 2001. By then, the number of hypermarkets had increased to 30, with four hypermarkets in Beijing and six in Shanghai. By 2003, Carrefour had a presence in 15 cities and its sales had reached to E 1.32 billion. In 2003, Carrefour opened its first hard discount store, Di; in China by entering into a joint venture agreement with Shanghai Lianhua Supermarket 23 . They planned to open 300 discount stores in different residential areas in Shanghai by the year 2007. The joint venture was set up with total capital investment of RMB 24 90 million. The goods sold through the discount stores were to be priced 10-15% lower than the goods sold through the hypermarkets. These stores were targeted at
20 Retail Forward Inc. is a Columbus, Ohio, based firm that focuses on management consultancy services, market research, and executive development. 21 Jenny Summerour, "The China Connection," Progressive Grocer, January 01, 2002. 22 "No Easy Way to Win in China: Carrefour," People's Daily Online, March 31, 2004. 23 Owned by the Bailian Group and controlled by the Shanghai City Government, Shanghai Lianhua supermarket is the largest retailer in China. Established in 1991, it operated through different store formats including hypermarkets, supermarkets, convenience stores, chain drug stores, and e-business stores. In 2003, Shanghai Lianhua and Shanghai Hualian merged to form the Bailian Group. 24 RMB (Renminbi) is the Chinese currency; it means people's money. The unit of Renminbi is a yuan & with smaller denomination called jiao and fen. The conversion among the three is 1 yuan = 10 jiao = 100 fen. The currency exchange rate as on October 24, 2006 was 1 US$ = 7.89 RMB

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!If I

low and middle income customers and stocked only 1,500 varieties of goods as against the 35,000 varieties stocked by a typical hypermarket.
TABLE V CARREFOUR PARTNERS IN CHINA

Year 1998 2000 2002 2002 2002 2002 2002 2002

City Wuhan Shanghai Kunmig Xi' an Guangzhou Liaoning Harbin Tianjin

Partner Hanshang Group LianHua Kunmig Department Store Co. Jin Hua Group Guangzhou Department Store Co. Liaoning Chen Da Harbin Dong Li Tianjin Quart Ye

Source: Jean Kinsey, Min Xue "Supermarket Development in China," Globalization, China and the Industry Studies Program, Solan Workshop, MPI Worcester Polytechnic Institute, June 16-17, 2005.

In 2004, Carrefour introduced the Champion Supermarket format in China, in association with a local partner The Beijing Shoulian Group 25. By 2005, there were eight Champion supermarkets spread across the country. These stores were different from hypermarkets and were located in residential areas. According to Philippe Pauze, President, Champion Supermarket, "Champion supermarkets are specifically engaged in providing various fresh foods, including vegetables, fruits, meat, seafood, and snacks to the customers, so our chain stores are all set up in residential communities."26 In 2004, Carrefour recorded total sales of E 1.62 billion. During the year, Carrefour opened 21 new hypermarkets and total hypermarkets in China increased to 62. By the end of 2004, the restrictions on the number of outlets that foreign retailers could operate per city were lifted and the foreign retailers were allowed to have 100% ownership. The Chinese Government also announced that the remaining restrictions in the retail sector would be removed by the end of the year 2007. In late 2005, Carrefour had stepped up efforts to acquire complete ownership of its Chinese stores. It bought the remaining stake owned by most of the local joint venture partners in its stores. Between 2004 and 2005, Carrefour's revenues in China grew by 25% and it remained the largest foreign retailer in the country. In the first half of 2006, Carrefour generated sales of E 1.26 billion in China, a growth of 28.1% as compared to the first half of 2005. As of May 2006, Carrefour had opened 230 Dia outlets in China. The number of hypermarkets had grown to 79 by July 2006. THE STRATEGIES While most of the global retailers and consumer product companies considered China to be a single huge market, Carrefour adopted a different approach. It considered the country to be comprised of several small markets. The company approached these markets with flexible procurement, store management, marketing, and service strategies. According to Chereau, "China does not have an easy market, the country is more like a continent where the variety of cultures
The Beijing Shoulian Group is an enterprise group with more than 10 retailers. It is a state owned company engaged in logistics and department store operations. 26 "French Firm Opens First Asian Store in Beijing," People's Daily Online, June 25, 2004.
25

and traditions set up challenges for us in how to adapt our concept to each area. We have to deal with strong differences between cities and provinces, and with different institutional levels in the country. However, it is a fantastic challenge to adapt our concept to each area of the country." 27 Since the initial years of its operations in China, Carrefour concentrated on keeping the prices low, keeping in mind the fact that for Chinese consumers, pLiceavas the main consideration. This made Carrefour's hypermarkets very popular among the Chinese consumers. Even when the first outlet was opened in Shanghai, the managers were confident that their prices were lower than the prices charged by any other store in the city. Carrefour sold a wide variety of goods, which attracted consumers to the stores. Convenience jjencewas another factor that the company promoted. The Chinese consumers had to visit several places like wet markets for purchasing fish, grain markets to pick up grocery items, and small specialty stores to obtain other items . n Carrefour provided the convenience of obtaining all these items under one roof. The basket size in the Chinese stores of Carrefour was much smaller than that in the European stores, as Chinese consumers bought in small quantities, several times a week. They also liked to test new products by buying in small quantities, before they made bulk purchases. Daily shopping for fresh foods was widely prevalent in China, especially during summer.

OPENING NEW STORES

Carrefour planned the expansion of its operations in China in a systematic manner by establishing regional offices. For instance, the headquarters of the East China region in Shanghai took care of expansion activities in that region. The headquarters of the Northwestern region was located in Xinjiang and it was responsible for expanding business in that region. Carrefour chose the store location based on the available space and the purchasing power of the people in that location. Before opening new stores, it sent a team to conduct a detailed study of the store location followed by a study on the culture, customs, and traditions of that region. As a part of the study, the team also assessed the purchasing potential of the local people and assessed their purchasing habits. Carrefour was careful in choosing the locations and opened stores in highly populated areas. Few consumers in China owned cars and they went to stores either on bicycles or by public transport. Therefore, unlike in the western countries, where the stores were located on the city outskirts, most of the Carrefour stores were located at the center of the city with easy access to public transport. As Carrefour expanded its operations into smaller Chinese cities, the capital investment in stores was comparatively lower as the stores were smaller. The volume of goods at these stores was less and they were in small assortments. Carrefour did not follow a particular store format and encouraged the local store managers to come out with the best format for the store and sales plans to ensure that the store broke even within two to three years.

Hayet Sellami, "Carrefour China: A Local Market," www.cityweekend.com , April 28, 2005. The Chinese meal consisted of carbohydrate rich products like rice, noodles, and steamed buns accompanied by dishes made of vegetables, meat, or fish. The meal usually ended with fresh fruits or a sweet.
22 28

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11 1. 1 114141111.11111

In early 2006, Carrefour decided to explore the potential for establishing hypermarkets in major shopping malls. Carrefour initially explored the opportunities in Shanghai and opened three outlets by January 2006. These hypermarkets were located in the Nanfang Shopping Center in Minhang District, the Lianyang Thumb Square in Pudong New Area, and in the Dragon City shopping mall in Minhang District's Qibao area. Commenting on this strategy, Wang Xiaozhong, Corporate Communications Manager of Carrefour, said, "The shopping mall has many resources including stores, counters, and restaurants that will attract many more customers than if we opened an independent store somewhere. Since opportunities to locate stores in the downtown are getting scarce as the city becomes more crowded, we'd like to make use of big shopping malls and their adjoining neighborhoods in suburban areas." 29
STORE MANAGEMENT

As a part of its global strategy, Carrefour had decentralized its operations, giving full freedom to store managers to operate their stores. Decentralization was one of the important factors for Carrefour's success in international markets, with store managers being empowered to take decisions according to the local traditions and customs. Each store was managed by the store manager and department heads. The store manager allotted a particular portion of the store to each department head, who was responsible for managing that portion, including the products stocked, promotions to be carried out, etc. The store manager along with the department head decided on the product mix for that portion of the store. All personnel of a particular department reported to the department head. Each store was treated as a profit center. The store managers decided on the products to be sold in the stores according to the needs and preferences of the customers. The suppliers had to negotiate prices with each store separately. This policy was highly useful in China, where centralized supply system and logistics network were not well developed. As each store was free to procure the required products, the store manager and department heads procured products that were in high demand at that store. The managers carefully monitored the shelf space and if the products stacked in the shelves did not generate enough sales within 45-60 days, they were removed. The performance of the store managers was judged by their ability to meet the forecasts and profit targets. The monthly performance of individual stores was communicated to all other store managers in China. Good performance was rewarded with higher incentives and an increase in salary.
SUPPLY CHAIN MANAGEMENT

The supply chain system that Carrefour had in China was quite flexible. According to Christophe De Nays Candau, In-charge of Organization, Systems and Supply Chain in Carrefour, China, "It's (supply chain system) highly fragmented, so we have to keep our flexibility. We still use the bike if it's the lowest cost and most efficient." 3 Carrefour procured most of the goods from within China to cater to its local operations. Since its initial years of operation in China, about 85% of the stock sold was procured locally. This helped Carrefour maintain lower prices compared to other foreign retailers, who sold imported products.
29 30

"Carrefour Focuses Growth on Mall-based Retail Outlets," Shanghai Daily News, January 20, 2006. Don Lee, "A Chinese Lesson for Big Retailers," Los Angeles Times, July 02, 2006.

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Buying and stocking local products was part of Carrefour's strategy to cater to the needs of the local customers. However, the items stacked were also different depending on the location of the store. Stores that were located in places that had a large expatriate population had more imported goods, different kinds of European and American food items, and the prices charged were also higher. The outlets in other locations were designed to cater to the needs of the local Chinese population and stacked predominantly Chinese products and food items. In order to differentiate the imported products from the Chinese products, the flag of the country from which the product had been obtained was displayed on its label. Carrefour established the global procurement headquarters at Shanghai and the first procurement center was opened in the southern Chinese province of Guangdong in July 2001. In 2002, Carrefour set up its global purchasing center in Shanghai, through which goods were sourced across the country. Through this center, Carrefour procured Chinese products to be sold in the international markets. The total procurement from China was valued at US$ 1.6 billion in 2002, US$ 2.15 billion in 2003, and US$ 3.2 billion in 2004. The purchasing centers were located in Beijing, Guangzhou, Wuhan, Ningbo, and Dalian. By 2006, 11 purchase centers had been established across the country (Refer to Table VI for the products procured by Carrefour from China). Carrefour sold its own label of products that were of good quality. As of 2006, there were over 2000 products that Carrefour sold under its own label which included food, grocery, daily necessities, and clothes. These products were priced 20-40% below the market price of competing branded products (Refer to Exhibit VI for the private label products sold by Carrefour in China). Carrefour faced several supply chain related problems in China owing to its size of operations and the country's underdeveloped logistics infrastructure in some of its store locations (Refer to Exhibit VII for a note on supply chain and logistics network in China) For instance, it took more than seven days to cover the distance between Shanghai in the East of China and Urumqi in Western part of the country by truck. In December 2005, Carrefour had more than 9,000 suppliers who supplied 250,000 different products. On an average, each of Carrefour's stores had around 40,000 products. A distributor with a countrywide network was not present in China. The country had more than four million transport companies with a combined fleet of around five million trucks.
TABLE VI CARREFOUR PRODUCTS PROCURED FROM CHINA (200 Food/Fresh Products: Grocery, fruits, vegetables, flowers, aquatic products. Hard Goods: Household ware, kitchen ware, household tools, stationary, outdoor products, car

accessories, luggage, furniture, toys, gifts, sports and fitness products. Electronics: Kitchen appliances, air conditioners, fans, refrigerators, cameras, audio and video products, computers. Textiles: Baby and children wear, home textiles, women's wear, men's wear, shoes, gloves, ties, other accessories. Source: www.sourcing.org.cn. Vendor relationship was another issue that Carrefour had to deal with, in China. Local suppliers were not conversant with how to maintain optimum inventory levels. They did not maintain a standard size for delivering goods, nor a standard as far as product reference or order forms were concerned; concepts like service levels were unheard of. Carrefour taught the suppliers how to do business efficiently and provided them with the required support. Many of the suppliers were 12
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provided with computers and software to manage inventory and standardize their products and orders. Carrefour chose to use the services of local distributors who were well versed with the local networks. The company was not in favor of building a national network for distribution or an automated supply chain system in the country. Commenting on the supply chain problems, Philippe Rion, Executive In-charge, Supply Chain Development, Carrefour China, said, "The distribution is not mature. The producers are adjusting to the production network and many companies merge and go into partnerships, making it difficult for us to have a stable source and very difficult to design a proper, efficient network." 31 Carrefour China Foundation for Food Safety, a Hong Kong-based non-profit foundation, organized training programs for fanners and other fresh food suppliers in China. The training program, called Agricultural Products Quality and Safety, was launched in 2005. The farmers and suppliers were taught about food safety, health, and hygiene and about preserving the freshness of their products. Within one year, Carrefour had conducted ten training programs at eight different locations. The company was of the view that such training would help it in providing the consumers with products of higher quality and safety.
LOCALIZATION STRATEGIES

Carrefour believed that its stores should reflect the local environment and complement the local culture. The western style hypermarket was customized by Carrefour to effectively cater to the needs and preferences of Chinese consumers (Refer to Exhibit VIII to see a few visuals of a typical Carrefour hypermarket in China). Most of Carrefour's stores in China were spread across several floors and ramp escalators were provided to move shopping carts between the floors. The sides of the escalators were stacked with snacks and eatables. Carrefour stocked products preferred by the local population, in a manner they demanded. In some of the company's stores in China, the department selling fresh food and groceries was designed to resemble the local outdoor markets. According to Sherry Ding, Analyst with AT Kearney Inc., "There are ladies calling out to the customers, saying: 'Come here, this is fresh and good,' just like in street markets." 32 For instance, for selling fish, Carrefour adopted different methods. In its stores near the coastline, consumers preferred live fish so Carrefour sold live fish. In the middle and western China, away from the coast, consumers preferred frozen fish and this was stocked by the stores there. In many of the Carrefour stores in China, consumers could buy live fish, turtles, and meat that was usually not available in Europe. Other products like instant noodles, the most preferred snack among the Chinese, was sold across all Carrefour stores in the country. The fresh food section was located at the entrance of the store and products that were available there were similar to the products available in the other local fresh food markets. However, Carrefour ensured that these food items were available at lower prices and in a clean environment. This made customers who purchased fresh food several times a week visit Carrefour regularly.

Maria Trombly and Berta Plebani, "In China, Complex Supply Chains Yield to Simple Systems, www.ciocentral.com, November 07, 2005. 32 Carol Matlack, Wendy Zellner, Frederik Balfour, "Carrefour in a Corner," BusinessWeek Online, October 11, 2004.
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In a store in Uighur33 populated mostly by Muslims, Carrefour did not sell pork 34. All the products sold at this outlet was certified halal products 35 . Other local products sold in the store were 20 varieties of raisins, roasted mutton, sausages made of horse meat, and locally popular snow lily tea. When the store was opened, the store displayed 20 varieties of French wine priced above US$ 10. However, not much wine was sold, as it was very expensive going by the Chinese standards. Carrefour soon replaced these with local wine priced at US$ 1 per bottle. For important festivals like the Spring, which fell on the 15 th day of the first lunar month according to the Chinese calendar (between January and February), Carrefour decorated its stores according to traditional practices and stacked the stores with several items like paper lanterns that were used during the festival. According to one of the shoppers at a Carrefour store in Beijing, "I like to do my pre-festival shopping in Carrefour. They have got all the stuff from imported cheese to homegrown fresh fruits and vegetables." 36 Christmas was widely celebrated in China by the retailers, as the Western holidays were also gaining popularity in the country especially in the urban areas, with several Chinese returning home from foreign countries. Carrefour displayed a wide variety of Christmas trees and sold several Christmas goods like Santa Claus toys, hats, items to decorate Christmas trees, etc. at all its stores.

THE CHALLENGES
Industry analysts opined that customizing its store formats to suit local needs had been Carrefour's main strength and this had helped the company penetrate large and tier II cities in China. Despite rapid growth, Carrefour's share in China was only at around 1.5% of the organized retail market. According to ENCOS 37 market research report 2005, China's retail market was valued at around US$ 756 billion, with organized retail accounting for 20% of the market. Analysts feared that though the Chinese Government had opened up its retail sector to foreign retailers, foreign retailers may continue to face regulatory problems in China. It was widely reported in the Chinese media that the Government was drafting new rules to restrict the expansion of large foreign retailers. These rules were expected to be announced in December 2006, and were likely to impede Carrefour's growth plans. According to the new rules, foreign retailers would be asked to file details of their proposed expansion plans and hold public hearings on the impact of their outlets on the communities. The public hearings that included regulators, industrial associations, academic experts, competitors, and local residents were widely practiced in North America and Europe and China was believed to be interested in adopting a similar

Uighur, also known as Xinjiang Uyghur Autonomous Region, is located in the west of China bordering Tibet, Mongolia, Russia, Russia, Kazakhsthan, Pakistan, and India. Uighur is populated by Uyghurs (45.21% of the population according to 2000 census) and Kazakhs (6.74% of the population) who are the Muslim Turkic groups. The number of Han Chinese in the region stood at 40.58% as of 2000. 34 As per Islamic law, the Muslims are forbidden to consume pork. 35 The Arabic word Halal refers to food that is permissible according to the Islamic dietary laws, which specify the type of food Muslims can consume. The laws also specify the method of slaughtering animals, and sea food that is permissible to consume. 36 "Foreign Businesses Cash on Chinese Holiday Economy," www.peopledaily.com.cn , January 20, 2004. 37 RNCOS is a market research consulting services company that specializes in the pharma, IT, telecom, retail, and services industries.
33

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I .tti1 4104441 1 1,,,,11

practice. According to Robert Gregory, Retail Analyst with M+M Planet Retail 38, "The Chinese authorities seem intent on protecting the local retailers and it is likely that they will continue to give the locals more favorable treatment in the future maybe preferential treatment when it comes to store locations, for example."" Apart from regulatory challenges, Carrefour faced several other problems in China. The price of commercial property, especially in the urban areas in China where Carrefour had a significant presence, was increasing rapidly. Due to this, the rent and lease costs were growing along with the marketing and advertising expenses of the company. Moreover, Carrefour's Champion supermarkets in which Carrefour owned a 65% stake (35% was held by local partner Shoulian) were not able to withstand the onslaught of competition. In April 2006, Carrefour sold its stake in four of its Champion supermarkets to Shoulian and planned to sell its stake in the remaining four by the end of the year. Carrefour's Dia venture also faced problems and incurred losses in 2006. The local partner Lianhua had signed a termination agreement to exit from the venture. The company's procurement policy, under which the individual store managers and department heads were free to decide on the merchandise to be purchased at their store, was also criticized. Due to this policy, widespread corruption was reported in several stores of Carrefour in China. For instance, in April 2006, the Shanghai court imposed a fine of 25,000 on Carrefour for selling fake Louis Vuitton handbags through its stores. The judge criticized Carrefour's purchasing policies that had allowed counterfeiters to sell their products through the company's stores. Three bags each priced at 3.60 were sold before the stock was removed from the shelves. The official from Carrefour said, "It is true that fake bags appeared in our store, but we did not intend this to happen. It is impossible for us to check every product. Perhaps we can only say our staff didn't have much knowledge of luxury products?" 40 In June 2006, Carrefour was reported to be selling fake Adidas footballs. In Carrefour's Fangzhuang store in Beijing, fake Adidas footballs were sold at RMB 59.90, while the original Adidas football that was used for the World cup was priced at RMB 900. This problem was also attributed to the flaws in Carrefour's local procurement policies. In order to address these issues, Carrefour formed a special investigation team, which conducted surprise checks on the stores and interacted with the suppliers. In 2006, consolidation and expansion had become the norm in the Chinese retailing industry. WuMart" acquired a 75% stake in MerryMart" in January 2006. With this acquisition, 100 stores of Merry Mart in Beijing became a part of Wu-Mart and its share in Beijing's supermarket business increased to 10%. GOME Electrical Appliance Holding Ltd. (GOME)" acquired China Paradise"
M+M Planet conducts research on grocery retailers and retail markets. The company maintains a database of leading grocery retailers along with details of trends and happenings in the industry. The firm functions from London, Frankfurt, Brussels, and Tokyo. 39 "Chinese Rule Change to Spark Retail Growth," www.foodanddrinkeurope.com , March 19, 2004. 40 "Carrefour Admits Selling Fake Louis Vuitton Handbags in China Store," www.finanznachrichten.de , April 20, 2004. 41 Wu-Mart is one of largest retail chain store operators in China and is a non state-owned enterprise. It operates hypermarkets, supermarkets, and convenience stores in several major cities across China. MerryMart Chainstore Development Co. Ltd. is the fourth largest supermarket in Beijing. GOME opened its first retail outlet in China in 1987 and adopted the name GOME in 1993. The company began its expansion in China in 1999. In 2004, it was recognized as one of the 'Key and Strategically important enterprises' by the Ministry of Commerce, China.
38

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in July 2006, creating a US$ 10 billion retail chain. Other competitors like the Thailand-based Lotus Supercenter were on an expansion spree. Lotus Supercenter announced plans to increase its store count in China by 100 in 2006. Several local retail chains like GOME were also expanding at a tremendous pace, opening one store every thirty hours. On October 17, 2006, Carrefour's global archrival Wal-Mart, announced the acquisition of Taiwan-based Trust-Mart for US$ 1 billion. Trust-Mart operated through its 108 stores across 20 provinces in China. The company had 30,000 employees in the country. Wal-Mart planned to acquire Trust-Mart in a phased manner, acquiring 31 stores initially. The other Trust-Mart stores were to be acquired by Wal-Mart in the next three years. With this acquisition, Wal-Mart would be able to lay its hands on a wide spread, well-developed network of stores. Industry analysts opined that the acquisition would also help Wal-Mart in sprucing up its supply chain. They felt that after this acquisition, Wal-Mart could give a tough competition to Carrefour in China and would be in a position to challenge leading Chinese retailers like Milan Group. Carrefour was strong only in some regions in China and the competitors were gaining ground in several other regions (Refer to Exhibit IX for geographical spread of Carrefour's operations and its competitors in China). Notwithstanding these challenges, Carrefour remained positive about its future prospects in China. According to Patrick Ganaye, General Manager of Carrefour China-East, "Competition is fierce, but we don't view it as bad news as long as we can figure out new ways to attract consumers. >745 Carrefour had several plans to retain customers and attract new customers in China. It planned to introduce loyalty cards in China by the end of 2006. Another area that Carrefour was looking at was offering consumer credit for the purchase of home appliances. Carrefour's management appeared to be well aware of the competition it had to face in the Chinese markets. According to Deliers, "This is not a chess game, where you kill the king at the end. Rather, it is like the game of Go, where you have to continuously develop a new strategy to expand on the map." 46

China Paradise Electronics Retail Ltd., established in 1996, is the leading retailer of household appliances and consumer electronics products. 43 "Carrefour Focuses Growth on Mall-Based Retail Outlets," Shanghai Daily News, January 20, 2006. 46 Hayet Sellami, "Carrefour China: A Local Market," www.cityweekend.com , April 28, 2005.
44

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EXHIBIT I TOP 25 FOOD RETAILERS IN THE WORLD (DECEMBER 2005

Rank 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Company Wal-Mart Carrefour Tesco Metro Group Kroger Ahold Costoco Rewe Schwarz Group Aldi Walgreens Auchan Edeka Albertsons AEON Safeway ITM Leclerc Seven & I Tengelmann Sainsbury Casino Woolworths Coles Myer Delhazie Group Headquarters USA France UK Germany USA Netherlands USA Germany Germany Germany USA France Germany USA Japan USA France France Japan Germany UK France Australia Australia Belgium Sales (In billion US$) 312.4 92.7 69.6 69.3 60.6 55.3 52.9 51.8 45.8 45.0 42.2 41.8 41.3 40.4 40.2 38.4 37.7 35.4 35.3 29.8 29.2 28.3 28.0 27.9 23.1 No. of Stores 6,380 12,028 2,365 2,458 3,726 6,422 460 11,242 7,299 7,788 4,953 2,686 19,001 2,541 10,132 1,914 3,932 581 21,136 7,730 808 9,388 2,744 2,755 2,637

Source: www.supermarketnews.com and www.carrefour.com .

EXHIBIT II A NOTE ON THE RETAIL INDUSTRY IN CHINA (2005-06)

China is among the fastest growing economies in the world with a population of over 1.3 billion. In the recent years, there has been a rapid growth in the disposable income of the middle class population. Their collective spending is estimated to cross US$ 500 billion by 2010. According to the consulting firm Retail Forward, China was the seventh largest retail market in the world as of 2005. The top six markets are the US, Japan, the UK, Germany, France, and Italy. By 2008, China was expected to climb up to the fifth position. The eastern parts of China are comparatively wealthy and the markets in these regions are well developed. Even among the well-developed regions, cities like Beijing, Tianjin, Shanghai, and Guangdong are very well developed and the retail spending by the consumers in these cities is much higher than the average in the country. According to the estimates by research firm IGD, the urban population of China would reach to 874 million by 2030 from 529 million in 2004 with the influx of 345 million people from rural to urban areas. This would provide vast opportunities for the retailers.

17

In 2005, retail spending in China stood at US$ 756 billion. The retail sales in 2006 were estimated to grow by more than 13% to reach US$ 860 billion. 47 With an estimated compounded annual growth rate in the range of 8-10%, the retail sales in China is estimated to grow to US$ 2.4 trillion by 2020. The growth is estimated to be fueled by increase in income levels across China. According to McKinsey, the number of households in China with annual earnings between RMB 25,000 and RMB 100,000 is likely to grow to 200 million by 2015 from 42 million in 2003. However, organized retailing has yet to penetrate in several regions of the country. The top 100 chains in China account for only 10% of the total retail sales." The share of the foreign firms was 23% when the total sales of top 100 chains in China was considered. The sales of the top 100 retailers in China in 2005 stood at RMB 707.6 billion 49 , registering a growth of 42% as compared to 2004. The number of stores operated by the top 100 retailers reached 38,260. In 2005, the Chinese economy grew by over 8% and the events like the Olympic Games in 2008 and the Shanghai Expo slated for 2010 are expected to further accelerate the economic growth. These events would have a positive impact on the consumer spending, further fueling the growth of the retail industry. RETAIL INDUSTRY DEVELOPMENT IN CHINA Time Period Development Details 1980s Traditional Mainly state owned and collectively operated. Some are grocery privately owned and operated. Stores Early 1990s Emergence of Stores of 300-800 sq. meters, which sold packaged foods Supermarkets and items for daily use. The fresh items sold were very few. Late 1990s Store Formats Superstores in area of 20,000 sq. meters, along with hyper markets and convenience stores were introduced. Foreign Entrance of multinational companies like Carrefour, WalInvestment Mart, Metro and 7-Eleven. Coastal Cities Development was rapid in coastal cities like Shanghai and Shenzhen. 21 st Century More new European style discounters, warehouse clubs and Minimarts formats were introduced. Geographic Retail chain expand outside their home provinces. Expansion Merchandise Wider variety of items, including more fresh produce and Structure organic foods. Emergence of private-label store brands. Mergers Chinese supermarket chains merge with both domestic and foreign players. Reform of Traditional stores including mom and pop groceries, state traditional owned grain and oil shops, and kiosks were transformed into Stores small supermarkets and convenience stores. Small independent supermarkets have also emerged. Adapted from Geping Guo, "Development of Supermarkets in China," Supermarkets and Agricultural Development Conference, Shanghai, May 2004 (www.fas.usda.gov ). .. . ono e from various sources.
47

"Ready for the Warfare in the Aisles," Economist, August 05, 2006. "Ready for the Warfare in the Aisles," Economist, August 05, 2006.

48

49

Zhang Lu, "China Sees Slower Sales Revenue Climb in 2005," www.chinadaily.com , March 23, 2006.
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EXHIBIT III CARREFOUR - CONSOLIDATED STORE NETWORK (DECEMBER 20051*

Hyper- SuperHard Market Market Discount Argentina 28 114 319 Brazil 99 35 201 Colombia 21 Americas 148 149 520 China 70 8 225 Korea 31 Taiwan 37 Indonesia 20 Malaysia 8 Singapore 2 Thailand 23 Asia 8 225 191 France 179 782 595 Spain 136 143 1891 Belgium 56 79 Switzerland 9 Greece 19 148 267 Italy 50 238 Poland 32 71 Portugal 7 292 Turkey 12 86 339 Europe 321 765 2789 Total Group 839 1517 4316 Source: www.carrefour.com . Does not include stores owned by partners. Convenience Cash & Carry Total 461 335 21 817 303 31 37 20 8 2 23 424 1664 2170 135 9 486 459 103 299 437 4098 7003

108

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52 155

16 124

207 207

EXHIBIT IV CARREFOUR - CONSOLIDATED NET SALES PER FORMAT/REGION (2005)

FORMAT/REGION France Europe Americas Asia Total Hypermarkets 18717 15424 3989 5672 43802 Supermarkets 7515 5020 694 13239 10 2227 Hard Discount 3784 369 61 6441 7119 3873 23 11015 Other 74497 Total 35577 28102 5075 5743 6.8% 7.7% 47.8% 37.7% 100.0% % Region Source: "Carrefour, Creatmg a New Growth Platform,' www.carrefour.com , March 2006.
million % Sales 58.8% 17.8% 8.6% 14.8% 100.0% -

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EXHIBIT V REGULATIONS IN THE RETAIL INDUSTRY IN CHINA. PRE AND POST 2004
PRIOR TO 2004:
Prior to July 1992, foreign investment in the form of joint ventures or wholly-owned subsidiaries was totally prohibited in the retail industry in China. In July 1992, the Central Government, on an experimental basis, allowed foreign investment in the retailing industry through the establishment of joint ventures in Beijing, Shanghai, Tianjin, Guangzhou, Dalian, Qingdao and the five special economic zones (Hainan, Shenzhen, Zhuhai, Shantou, and Xiamen). In June 1995, the Central Government listed the retail industry in the Directory for Foreign Investment, although under the "restricted" category, to encourage foreign investment in the industry. By the year-end, the provincial and state governments had approved up to 300 joint ventures. In mid-1998, the Central Government disallowed local government approval and asked foreign-invested joint venture companies, which had taken such approval, to restructure to conform with the 1992 provisions or close down. In June 1999, the Central Government issued more liberalized provisional rules on foreign investment in the retailing industry. The rules allowed foreign retailers to establish joint ventures, cooperative retail, or wholesale companies in Central Government administered cities, the five special economic zones, and the capital cities of provinces and autonomous regions with certain restrictions. The restrictions were: The stake of the Chinese partner in any newly established wholesale joint venture had to be at least 51%. Specific requirements as per sales and assets were to be followed by the joint ventures. Franchising and other forms of indirect chain-store formats were prohibited. Foreign commercial joint ventures were not allowed to act as a commodity import or export agent. Commercial joint ventures were allowed to import products they sold, limited to 30% of their total yearly sales revenue.

POST 2004:
After 2004, the Chinese Government allowed wholly-owned foreign retailers to own their Chinese subsidiaries and open stores at any geographic location of their choice without government permission. With the restriction on the number of stores having been lifted, foreign retailers can open unlimited number of stores in any city. Also foreign retailers do not have to meet any minimum criteria for sales, capital or assets, to enter the Chinese market. Foreign companies are allowed to source global brand merchandise locally without any stipulation that the goods purchased should be exported. Foreign retailers are allowed to run all distribution activity inclusive of transportation, wholesaling, and retailing.

FOREIGN INVESTMENT IN CHINA'S RETAIL INDUSTRY Before 2004 After 2004

Geographic Restraints Form of Vehicle Retail limited to certain cities like Beijing , Shanghai, etc Only Joint Venture Restriction on retail lifted from December 2004 onwards. Wholly foreign-owned enterprises (WFOE) allowed from December 2004 onwards. Good reputation.

Prerequisites

for Annual sales volume of at least

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US$ 2 billion, assets at least US$ No breach of national laws. 200 million. Pre requisites for Annual sales volume of at least Good reputation. Wholesale W US$ 2.5 billion, assets at least No breach of national laws. US$ 300 million. Minimum registered RMB 50 million (US$ 6.4 RMB 300,000 (US$ 36,245). Capital for retail million). JV/WFOE Minimum registered RMB 80 million (US$ 9.7 RMB 500,000 (US$ 60,408). Capital for wholesale million). JV/WFOE Approval authority Ministry of Foreign Trade and Provincial commerce authorities, Economic Cooperation MOFCOM (MOFTEC) Source: US-China Business Council (Retail Outlook for China, KPMG, October 2005). With the removal of the restrictions, hypermarkets, supermarkets, and convenience stores have mushroomed in the wealthy coastal cities in China. The number of specialty stores that sell nonfood items like apparel, electronic goods, furniture, etc. has also grown significantly. Not only foreign retailers like Carrefour, Wal-Mart, Metro, Ikea, and B&Q but several local stores like Lianhua, Hualian, and Wu-Mart were also operating hypermarkets and supermarkets of international standards. Compiled from various sources.

Retail JV

EXHIBIT VI CARREFOUR PRIVATE LABEL PRODUCTS SOLD IN CHINA Carrefour Quality Line
The Carrefour quality line consisted of fresh products and was sold to customers only after they met stringent quality standards, which included origin, traceability, and supply chain principles. Carrefour sold pork, salmon, apples, oranges, litchi, etc. under this line. Carrefour Brand The Carrefour Brand was launched in 2004 and was sold in all stores across China. Carrefour sold more than 900 food and non-food products under this line. To ensure the quality of the products, Carrefour made outside laboratories conduct quality checks on the products. Firstline Brand Firstline is Carrefour's own brand under which it offered a wide range of kitchen appliances, audio accessories, and video accessories. In 2006, Carrefour also introduced the European line of kitchen appliances, including coffee makers, juice extractors, sandwich makers, toasters, egg beaters, electronic ovens, etc. French Touch Brand French Touch offered a wide range of clothing and household products of high quality. Bang Products Bang is the label under which Carrefour sold popular low priced items.
Source: www.carrefour.com.cn .

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EXHIBIT VII A NOTE ON SUPPLY CHAIN AND LOGISTICS NETWORK IN CHINA

China has a vast size and a varied topography. Despite initiatives taken for improving regional motorways and national highways, the quality of road and rail network varies drastically between the urban and rural areas. Roads are easily damaged due to the weight of overloaded freight trucks. Until recently, drivers were given licenses based on truck size rather than truck loads. China's logistics industry is fragmented. Logistics accounts for an estimated 20 percent of GDP compared with about 8 percent of GDP in the US. In China, 21% of large corporations (including multinational corporations) outsource logistics to third-party logistics providers as compared with 45% in the European Union and the US. In Chinese firms, outsourcing accounts for only 5 percent of all logistics spending, leading to massive duplication and underutilization of supply chain assets, such as ocean shipping containers. With this fragmentation, railway and trucking traffic in China far exceeds the capacity the infrastructure was designed to handle, leading to shortages of key commodities and increased logistics costs.
Adapted from Jeff Richards, Jihong Sanderson and Roger MacFarlane, Understanding RFID Adoption in China, http://www.rfidjournal.com , February 07, 2005 and other sources.

EXHIBIT VIII VISUALS OF A TYPICAL CARREFOUR HYPERMARKET IN CHINA

Source: www.crienglish.com .

22
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Source: www.admirabledesign.com .

Source: www.admirabledesign.com .
EXHIBIT IX CHIN South West Wal -Mart Carrefour Lianhua Wu- Mart North North West North East 11 9 East Central South

3 7 0 16 10 3 15 9 10 60 0 23 3 10 45 0 0 0 Stores with floor space > 4,000 sq.meters. Adapted from China Resource Enterprise Limited, Global Roadshow, 2006.

6 7 8 1

20 13 7 0

23

1100