Why did Western hypermarket retailers retreat in China and Taiwan?

After I published my first Costco post, a Singaporean investor asked this question on my English version of the post. I would like to thank my friend David in advance. I notice this problem and I think he is a very hard-working investor. I was going to publish in a while, and I have already mentioned this difference in the draft of the article that I have written about halfway for “Amazon and Alibaba”. But in the palindrome I exchanged with David, I decided to write this observation more clearly.

The two blog posts about Costco are:

• “Costco has been disrupting retail industry“
• “How does Costco make money? Is it a great company?“

Why should we talk about this issue?

• I have mentioned a lot of evidence in many articles that China will soon surpass the United States to become the world’s largest market and the first in gross national product. But before this happened, China’s retail market had long been the largest in the world.
• The retail industry is the oldest industry, and it is also ranked among the top three industries in various countries, including online retail, which is an industry that must be contended for, because this industry has a huge upstream and downstream supply chain. In almost all countries, this industry employed the largest number of people and is highly related to people’s livelihood.
• The retail industry (including online e-commerce) is characterized by huge revenue but very low net profit. Due to the huge cash flow, it is also an area where major fintech are vying to enter. It can almost be said that the payment industry has to deal with the cash flow of the retail industry.
• The retail industry (including online e-commerce) will give rise to many derivative industries due to the huge supply chain, especially the e-commerce that combines traditional retail, internet technology, and logistics, creating Alibaba in the East and Amazon in the West, just two of good example.

The Western hypermarket retailers in China

In December 2001, China formally joined the World Trade Organization WTO. In 2004, all foreign retail hypermarket merchants were allowed to enter the Chinese market. Suddenly, none of the international retail hypermarket operators was absent. They all coveted the household market of the world’s most populous country, and they all entered China one after another.

As far as I know, with the exception of Walmart (ticker: WMT), all major Western hypermarket retailers have closed their operations in China. Over the years, Walmart has been reducing its business in China. Unless there is any miracles, Walmart will be the next Western hypermarket retailers to withdraw from China.

• Carrefour (US stock code CRRFY)
  • In 1995, Carrefour opened China’s first store in Beijing.
  • It was sold to Suning Tesco in 2019 and has already withdrawn from China.
• Metro China sold to Wu Mart (2019)
• Auchan withdrew from China in 2018 and the brand was changed to RT-Mart China (2021)
• RT-Mart China sold to Alibaba (ticker: BABA) (2017)
• Tesco (ticker: TSCDY) officially withdraws from China (2012)
• Home Depot (ticker: HD) closes its China business (2012)
• Walmart
  • In 1991, Wal-Mart surpassed Kmart and Sears to become the largest hypermarket retailers company in the United States, and entered China in 1996. By the climax of 2014, more than 400 stores were opened in more than 100 cities in China.
  • However, since 2012, an average of one president of China has been replaced every two years, and it has begun to decline. Has sold its online sales business in China (2016), and has closed 100 stores in the past 5 years.
• Amazon: Shut down its domestic business in China (2019).

However, there are a few “non-hypermarket” foreign businessmen who live well and live well. The key is that they have been highly localized for China and have adopted different operating methods, including:

• Yum (ticker: YUM) has sold all the shares of its Chinese branch. And Yum China (ticker: YUMC) has independently listed on the US and Hong Kong stock markets.
• McDonald’s (ticker: MCD): In 2017, China’s CITIC Co., Ltd. has completed the acquisition of McDonald’s business in China and Hong Kong, and will operate and manage McDonald’s 2,700 branches in China and Hong Kong.
• Starbucks (ticker: SBUX): In 2017, Taiwan’s UniPresident sold 50% of the shares of Shanghai Starbucks to Starbucks HQ, and bought the 50% shares of Starbucks Taiwan; the Starbucks HQ used this to take back the fast-growing Shanghai Starbucks.

Western hypermarket retailers in Taiwan

Taiwan’s hypermarket retailers industry is the same as China’s, and most foreign hypermarket retailers can hardly survive here. Carrefour is now the only surviving company, but rumors continue to spread that Carrefour plans to sell to Taiwan counterparts. All signs show that I personally think that Carrefour will withdraw from Taiwan soon.

Both Starbucks and McDonald’s have sold their shares in the Taiwan branch. In 2017, UniPresident group sold 50% of Shanghai Starbucks shares and bought 50% of Starbucks shares in Taiwan. Ambassador Hotel takes over McDonald’s management rights in the Taiwan market, including nearly 400 McDonald’s stores in Taiwan, of which more than 90% are directly operated by the company.

The commonality of hypermarket retailers across the Taiwan Strait

Regardless of Taiwan or China, the hypermarket retailers on both sides of the strait have many common points, and these common points are completely different from those in the West. This is why the Western-dominated retail business cannot survive in China:

• The achievements of at least ten to twenty years in the past proved everything: Western industry-led operations have proven to be unsuccessful, and the result is a complete failure, unable to beat the local Chinese counterparts.
• Must be localized: This includes being taken over by the local company, with local people leading the business, adding local products, menus, services, and flavors.
• Operating costs: Just like the semiconductor industry, MIT and Intel have proposed their calculated operating costs. The cost of semiconductor plants in East Asia is 30% lower than that in the United States, and if it is in China, it can be reduced further by 50%. When foreign businesses and their Western business logic is forced to apply to China, it is obvious that it will reduce competitiveness, because unnecessary indirect costs (called Overhead in English) are too high.
• After all, the two sides of the strait have the same language and the same kind: this will result in a high degree of consistency in taste, culture, values, standards, operating methods, language, and slogans; but it is completely different from the West, which is difficult for Westerners to understand.

My second idea is based on Taiwan’s import history, which is worth copying. Think of Starbucks, McDonald’s, Coca-Cola (ticker: KO), Pepsi Group (ticker: PEP), and KFC’s Yum. These well-known large foods and retailers began to become popular in Taiwan 30 years ago, Starbucks, Costco, and KFC had the world’s No. 1 revenue branch in Taiwan 20 years ago.

Although the total revenue of the Taiwan branch is now much lower than that of China, these brands are still very popular here, and past experience is worth learning. The point I want to say is that “there are many similarities, including culture, behavior patterns, tastes, operating models, product preferences, clothing trends, and food tastes.”

I believe that Costco’s management also did some homework before deciding to enter China in 2019. You can say that they have discovered that the recipes for successful operations of hypermarket retailers in Taiwan and China must be different from those in the United States or Europe. Point them should be clear.

Costco’s Richard Chang is the former general manager of the Taiwan branch and is currently the vice president of the Asia-Pacific region. He has established the successful model of Taiwan’s Costco in one hand. He has endorsed the achievements of more than 20 years and is currently leading the management of the former Taiwan Costco. The team actually manages operations in China. This is another reason why Costco’s management is highly confident that it can replicate the successful model of Taiwan Costco.

Western franchise back-offices are more advanced than China

The franchise and back-end of the western retailer are still more advanced than those of China, not just the retail areas we mentioned earlier. Convenience stores are a good example. After 30 years operation in Taiwan, currently there are only two large and two small players, both of which are licensed labels from the West and Japan.

However, they have all been localized in operation (if you enter 7-11 in the United States and 7-11 in Taiwan, except that the logo are the same, they are already very different; including all the products on the shelves have been localized, providing more services, and high efficiency), becoming the life center of the community, and the competition is very fierce-the four major convenience stores have the influence on Taiwanese society, their power are very strong, it has changed the daily life style of Taiwanese, and even decide the survival of many industries. The concentration of the four major supermarkets in Taiwan is the second highest in the world, second only to South Korea, but the gap is not large.

This is also the second chapter 2-3 of my “The Rules of Super Growth Stocks Investing” as an example to illustrate that Taiwanese supermarkets actually have an oligopolistic moat. Japan’s 7-11 also merged with the US head office’s 7-11, which can be said to be another proof. China is still in the Warring States Period and is continuing to merge. I believe that in the end, it will be the same as the current situation in Taiwan. Only a few companies can survive.

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