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DECEMBER 10, 1999 VOL. 25 NO. 49

Goodbye, Shanghai
How a foreign grocer bit the dust in China
By FONS TUINSTRA Shanghai

When interviewed in October, the local manager of a TOPS supermarket in Shanghai beamed with pride. "We are No. 101 on the Fortune 500 list," he said, referring to the grocery chain's half owner, Royal Ahold of the Netherlands. Many in Shanghai consider it an honor to work for well-known multinationals. So why aren't Chinese shopping at TOPS? "Maybe it is for the same reason," said the manager. "The outlets look more expensive than the average supermarket. The feeling is that they must make a fortune from their customers. It is better to do your daily shopping in a place where they do not make a fortune out of you."

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Which is exactly what happened. Weighed down by debt and lackluster sales, Royal Ahold is making a quiet exit from Shanghai. It injected 40 million renminbi ($16.9 million) into the TOPS chain and turned over control to local partner Zhonghui Non-Staple Food Corp., which had wanted to file for bankruptcy. Another China horror story? Read on, because in the euphoria of Beijing's impending membership in the World Trade Organization, foreign businesses are likely to forget the difficulties of cracking this huge market. Retailers, especially, should beware. Wooing the Chinese consumer away from wet markets and local grocery stores is not easy, even as China promises to ease restrictions on foreign players.

Royal Ahold's departure is in stark contrast to its high-profile entrance three years ago. "We are here to teach the Chinese how to set up a really good supermarket," expatriate executives declared grandly at that time. Royal Ahold was setting up in Asia after notching successes in Europe and the U.S. Through its regional headquarters in Singapore, it invested in supermarket chains in the Lion City and in China, Indonesia, Malaysia and Thailand. Shanghai was to serve as its beachhead in the mainland. Royal Ahold transformed Zhonghui's 16 Shanghai stores into TOPS supermarkets in 1997. Last year, it formed another venture with Zhonghui to buy 22 more grocery stores from Japan's bankrupt Yaohan group.

"Our company became what it is today by listening to its customers," said general manager Johan Dreijer in 1996. So Royal Ahold commissioned an extensive research study to find out what Shanghai shoppers wanted. The results seemed to confirm the Dutch group's assumption that local consumers would react to TOPS in the same way that shoppers in Europe and the U.S. do. Middle-class employees in Shanghai were expected to go for convenience over slightly higher prices. "After work, the yuppies do not want to spend hours shopping and cooking like their parents did," said Dreijer.

He was right - and wrong. Shanghai's white-collar workers indeed do not want to spend hours on street markets and in the kitchen. But they are not enamored of convenience shopping either. They drop by their mother's house for dinner or eat at one of Shanghai's 25,000 restaurants. It is the older Chinese who shop for food and other essentials, and they are more at home bargaining in local stores and wet markets. Dreijer conducted a postmortem last year. "You know, these consultants only repackage your own opinion and add a nice cover to it for a lot of money," he said. "But in a large company like ours, you need that kind of research so you are covered internally."

The second mistake was over-reliance on government support. Many companies, foreign and local alike, still see China as a classic communist society in which citizens follow the top official's orders without hesitation. That is not now the case, if it ever was. "There are many questions I cannot answer anymore," Shanghai mayor Xu Kuangdi told foreign investors earlier this year. "In the past, we had a planned economy and I could give you answers to any question. Now, we have a socialist-market economy. Often, that means that I know as much as you do." Or even less, as the consumer increasingly calls the shots.

Royal Ahold boasted a line to the powers-that-be. Partner Zhonghui is partly owned by the agency that oversees a Shanghai district's wet markets. And the TOPS outlets fitted neatly into the municipal government's "green baskets" drive to rid the city's streets of crowded wet markets in favor of hygienic indoor stores. Royal Ahold was given preferential treatment in sourcing the freshest produce from state-owned distributors. But the wet markets managed to match freshness for freshness, at cheaper prices too. Meanwhile, locally owned supermarkets bitterly complained about Royal Ahold's produce privileges, forcing officials to rescind the preferential treatment.

And so on to the Dutch group's third mistake. It underestimated the local competition. Supermarket chains like Hualian and Lianhua reacted quickly when the newcomers came. They copied the clean well-lighted look, the efficiency of displays and the emphasis on fresh produce. And they expanded fast. Lianhua expects to open 200 new branches this year to add to its 400 outlets. Royal Ahold's business plan called for just 50 supermarkets by 2000. These days, the rage is hypermarkets selling wholesale, owned by Thailand's Lotus, Germany's Metro and France's Carrefour. "We should have done this three years ago," sighs the TOPS local supermarket manager. He is now looking for another job. "Anything but retail," he says. Wise move.

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