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As Prince William arrived in Shanghai this week on a rare royal visit aimed at boosting British business in China, two of the UK’s most famous retailers demonstrated just how hard it is to succeed in the country — even for well-known brands.
Marks and Spencer announced the closure of five stores in and around Shanghai and said it would revamp its strategy in China. At the same time, China Resources, Tesco’s joint venture partner in the country, warned on profits, in part because of the costs of integrating the struggling UK grocer.
The dispiriting news has raised fresh questions among investors about the prospects in the world’s most populous nation for another big British name: House of Fraser.
The UK department store chain was last year acquired by Chinese conglomerate Sanpower and is set to enter the blighted Chinese department store market with three stores in unfashionable second-tier cities next year.
China’s love affair with quintessential British brands such as Burberry and Cath Kidston’s chintz prints has never extended to M&S and Tesco, the two biggest UK names in China.
But local retail analysts say the Britishness is not to blame: foreign retailers from around the globe have faced humiliating reversals in China in recent years. US household names Best Buy and Home Depot have both pulled out of the country, along with Germany’s Media Markt.
Even some of China’s best-loved fast food brands, such as Yum’s KFC and McDonald’s, have recently struggled to keep up with local competition and changes in dining tastes. And foreign businesses from hypermarkets to department stores have failed to keep pace with the rapid shift from offline shopping to ecommerce.
Yan Qiang, retail analyst at Beijing’s Adfaith Consulting, believes that the problem for most foreign retailers, not only UK ones, is that they did not pay enough attention to what Chinese consumers want.
“They were too proud of the good quality of their products and assumed that as long as the products were good, Chinese consumers would buy them,” says Mr Yan.
“But a man will not marry just any pretty girl, he will only choose the one who really suits him. They failed to win the hearts of the Chinese and now they’ve missed their moment as the Chinese economy is not doing well enough to support rapid consumption growth.”
For example, M&S’s early days in China six years ago were marred by problems with its flagship store in Shanghai not stocking enough small sizes.
“It always takes more time than most companies want to acknowledge to deeply understand the culture and behaviours,” says Patrick Bousquet-Chavanne, international director at M&S, who first visited China in 1989 when he was with Estée Lauder.
Over the past six years M&S has learnt valuable lessons, he says. For instance, temperatures between different cities can vary by up to 20 degrees. This has a big impact on the range of products those different stores carry.
Tastes are also changing. The emerging middle class in China has become more sophisticated, demanding products such as good quality red wine. Consequently, M&S has expanded its range of imported wines, including French Merlots.
At the same time, it has developed its baby and childrenswear ranges, where foreign brands appeal to Chinese parents concerned with the safety of goods. M&S’s baby and children’s wear are doing “disproportionately well”, according to Mr Bousquet-Chavanne.
“It’s fair to say that since 2008, M&S has greatly progressed on that learning curve,” he says.
Kingfisher, the do-it-yourself retailer, also ploughed into China, lured by the prospect of rising wealth encouraging the middle classes to spruce up their homes. But DIY, as it is known in Britain, was non-existent. For a start, Chinese consumers were concerned about the toxicity of paint fumes and labour costs are low so they can pay others to do the work.
Sir Ian Cheshire, former chief executive, said as he announced a shake-up of the Chinese business three years ago that the Chinese “don’t paint up the bathroom over the weekend”.
Kingfisher has now sold a controlling stake in its lossmaking B&Q China business in a £140m cash deal.
Vastness of the country
The far from optimal location of stores has been another issue for British retailers.
“The sheer vastness of the country means that there are so many customer types, in so many different regions and cities,” says one British retailer with experience of the market.
Grocery is a notoriously local industry, with Chinese consumers still favouring the feel of a traditional street market. While Tesco sought to localise its offer — from live seafood in tanks to recreating the market atmosphere — it also opened scores of hypermarkets and developed “Lifespace” malls anchored by big supermarkets. But it gradually scaled back its ambitions before striking the deal with China Resources in 2013.
M&S initially followed a path of clustering its stores in the Shanghai region, rather than what it termed “flag planting” across the country. Now it is reversing that strategy, closing some of the Shanghai outlets and opening flagships in key cities such as Beijing and Guangzhou.
Mr Bousquet-Chavanne insists its initial plan was the right one, as this “important chapter” gave it valuable insight into the Chinese consumer. It also now gains information on Chinese demand from its online tie-ups with Alibaba’s Tmall and JD.com.
“We probably would not be entering Guangzhou and Beijing if we didn’t have any orders coming from these two regions on Tmall,” he says.
Addressing an audience at UK Trade and Investment’s Great Festival of Creativity in Shanghai this week, Nigel Oddy, HoF’s chief executive, declared that Britishness will be an advantage in China. “We represent everything that is good about Britain and that will give us a point of difference with other stores currently trading in China,” he said.
At the same event, Peter Gross, HoF’s chief operating officer, argued that it would be wrong “to compare us to another retailer. We are different from other department stores: we don’t want to be luxury, we want to be mid-market; that should lead us to succeed.”
Additional reporting by Zhang Yan