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£59 3) An implementation plan including WBS (with total estimated time), cost-benefit analysis, RACI plan, risk assessment, and Critical Success factors (CSFs) of your proposed solution.
Adapted from TAO and TOLLEFSON
In 2008, Marks and Spencer (M&S) announced its entry into China. The iconic high-street British retailer wanted to tap growth in emerging markets. China fit the requirements: a rapidly growing middle class with increasing disposable income and a preference for Western brands.
The company opened a company-owned store on the busiest and most expensive street in Shanghai: West Nanjing Road. M&S’s decision to enter China’s retail market without a local partner reflected management’s concerns to retain full control over operations rather than share decision making, a strategy that differed from many Western retail competitors. However, the company struggled: most stores broke even at best, and M&S lacked brand awareness. By late 2016, management faced a stark choice: continue to operate at a loss or leave the country.
Foreign retailers in China chose a local partner for various reasons. The earliest retail entrants (pre- 2004) chose the joint venture (JV) structure out of legal necessity: pre–World Trade Organization (WTO) accession China required foreign retailers to partner with a local JV firm for market access. For example, in 1996, Walmart entered China with state-owned CITIC, opening the first Walmart Super Center and Sam’s Club in Shenzhen. Some later retail entrants, however, envisioned benefits associated with local partners. Tesco, one of M&S’s UK competitors, initially entered China alone and later entered into a JV with Chinese Resources in 2014 to help turn around the business. The partnership helped Tesco establish a more localized and robust regional presence. Retail Partnerships in China
M&S, however, entered China’s retail market alone. This decision was partially due to the scars of the first (failed) wave of international expansion, but was also part of a larger branding strategy. The company viewed the M&S brand as a key advantage in the Chinese market; any factor that diluted it was to be avoided. Thus, M&S exported its UK retail model wholesale to China, albeit with some input from Hong Kong franchisees.
The store’s first operational year was marred by a raft of preventable problems. Grocery, one of the store’s largest revenue categories, suffered from routine shortages due to supply chain failures. M&S’s food operations in the UK not only depended on sourcing from a range of organic farmers, but also had intricate logistical handoffs that were not established in China. Operational Problems and Lack of Strategic Clarity
The company also wrongly assumed that what worked for consumers in Hong Kong would work for consumers in Shanghai. For example, it based decisions for product sizes on existing consumers’ preferences in Hong Kong; in Shanghai, clothing in smaller sizes sold out much more quickly than larger sizes, leaving many customers empty handed. Finally, the M&S CEO’s conception of the company’s target consumer group likely differed from the ideal. CEO Stuart Rose identified the store’s target demographic as “over 30s” Chinese, who eschewed shopping malls and focused on luxury brands. The store, however, seemingly failed to target this group; it also failed to establish its value proposition at the start, and adjustments thereafter were equally unsuccessful. Even with an admittedly rough start, M&S expanded its presence in China. It added a second and third store in Shanghai in 2010. As M&S added to its brick and mortar presence, however, the tectonic plates of the retail industry were rapidly shifting under it.
When M&S entered China in 2008, China’s retail sector was posting double-digit annual growth rates. As Exhibit 3 illustrates, the CAGR of the retail sector was 12.5% from 2008 to 2016. In the midst of this rapid growth, the sector was being transformed by two factors: the rapidly shifting retail landscape and the rise of e-commerce. China’s Rapidly Changing Retail Environment
Although M&S was a multi-category retailer, the stores in China primarily comprised two categories: grocery and clothing. M&S’s grocery products, from chips and tea to warm rolls, were imported from the UK. Other multinational grocery retailers with a major presence in China, however, were pursuing a localization strategy and offered an increasing selection of groceries sourced domestically. M&S’s unique and pricey offerings allowed it to establish a luxury niche in the growing grocery market. Looking at China’s fast-moving consumer goods (FMCG) space in 2012–2013, Chinese competitors already dominated. Looking at Exhibit4, 7 of the top 10 enterprises by sales were Chinese, many with a comprehensive national presence. Walmart and Carrefour in the top 10 had effectively localized to the point where many product lines were indistinguishable from those of local retailers. Tesco, a direct competitor to M&S, ranked 11th overall in sales. Even Tesco, however, pursued a hybrid strategy: it maintained a supply of UK-imported goods, along with local product offerings .M&S, however, did not plan to localize its grocery business. An Increasingly Localized Grocery Market
The company expanded further in China. By 2012, M&S had eight stores in eastern China and vowed to double that in one year. Although food sales were a bright spot in comparison to clothing, it appealed to a limited demographic group in tier-one cities, and even then, its products were not commonly among customers
M&S was traditionally one of Britain’s biggest clothiers. In China, however, clothing emerged as the Achilles’ heel of the retailer: operational mistakes, such as not having the right sizes for customers, were one reason. M&S also failed to position its clothing for the right customer, as a mismatch existed between its offerings and what customers wanted. Indeed, CEO Rose tried to position M&S’s clothes between “luxury” providers at the top end and “value” providers at the bottom, such as local producers. His target consumer was middle-class consumers above the age of 30. M&S, however, may have erred with its decision to maintain its UK middle-class image. In 2013, the average age of the M&S shopper in the UK was 49, a substantial gap from the desired demographic in China. As one industry observer commented, “[That’s why] I am very bearish on M&S as their DNA is very middle class. You buy your clothes because you want to present yourself as middle class—that’s not something that any Chinese person I’ve ever met wants.” Fast-fashion retailers filled this image and age gap. A Clothing Market That Didn’t Fit
Fast-fashion retailers stormed onto the global scene in the early 2000s. Cut from a different cloth than traditional clothier competitors, these retailers focused on establishing highly efficient supply chains that would turn out fashionable clothes faster than every calendar quarter for consumers on a budget. The entrance of fast-fashion retailers into China provided a challenge to domestic and foreign retailers alike. In 2002, Uniqlo was the first to enter China, opening its first store in Shanghai. By 2013, the retailer had opened 189 stores across the country. Zara, an Inditex brand, entered in 2006. H&M, the Swedish fast-fashion juggernaut, entered in 2007. Both followed a similar trajectory to Uniqlo: they started small with the opening of several stores and gradually expanded. In some senses, fast-fashion retailers fulfilled the elusive promise of retail success in China. They excelled in two key areas that eluded others in the industry: demographic targeting and localization. Fast fashion created a new price point for clothing in China between luxury and local clothing producers, a sweet spot for the middle class ranging from students to white-collar workers. Fast-fashion retailers also successfully expanded their operational footprint beyond competition rich first-tier cities to second and third-tier cities. Eighty percent of new stores opened by Zara and H&M in 2012 were in non-first-tier cities. Fast Fashion: Establishing a New Price Tier in China
Although they produced designs for global distribution, fast-fashion retailers also pursued localization more aggressively than M&S and other more traditional clothiers. They tailored (at least some) of their fashion designs to local tastes, including using local designs. Zara based designers in Shanghai that understood Chinese consumer preferences for size and color. H&M went even further: it not only adopted fashion designs and materials that were based on local preferences, including creating hybrid “luxury fast-fashion lines,” but also drafted unique branding messages for the Chinese market, rather than simply adopting those from overseas.
Among rapid changes in the retail sector, a far more disruptive force emerged e-commerce. Indeed, while eBay and Amazon were founded in the 1990s and had transformed how consumers shopped online in the early 2000s, China’s e-commerce space was relatively underdeveloped until the advent of Alibaba. Alibaba, China’s leading e-commerce website, started in 1999 and gradually expanded, offering a consumer-to-consumer marketplace, Taobao, in 2003 and a more upscale business-to- consumer marketplace, Tmall, in 2008. Rise of eCommerce: From Location Matters to Channel Matters
The online retail market grew quickly in China. Exhibit 5 shows that the online retail market had a CAGR of roughly 60% from 2008 to 2016. Alibaba also experienced rapid revenue growth, with a CAGR of 52% from 2008 to 2016.Perhaps more importantly for M&S, e-commerce and online payments were most popular among consumers in their 20s and 30s, a substantial portion of the demographic group that M&S targeted. According to China Internet Watch, roughly 75% of online shoppers were between the ages of 18 and 39.37 Alibaba estimated that 70% of its users on Taobao were between the ages of 20 and 39 while an eMarketer survey found that 78% of consumers who utilized online payments were between the ages of 20 and 39.
For many foreign retailers in China with a significant physical presence, the emergence of ecommerce posed a dilemma: what strategy should they pursue? For Walmart, a foreign retailer with many stores in China, a hybrid strategy emerged. It opened new stores while it built an online presence.
Walmart announced that it would open 115 new stores in China from 2014 to 2016 to boost flagging growth. At the same time, Walmart’s online strategy focused on building local logistical capacity to integrate with stores. In 2011, Walmart acquired a 17% stake in Yihaodian, a leading Chinese e- commerce marketplace. The company was started by two Dell China executives in 2008, and held the number three position for total e-commerce revenue behind Alibaba and online retailer JD.com by 2010. Walmart’s initial strategy was to integrate its logistics into Yihaodian’s emerging supply chain allowing for delivery of products across the country, particularly groceries. Walmart gradually increased its investment in Yihaodian as a means to strengthen strategic collaboration; it became the company’s majority investor in 2012 and bought out the company in 2015. Walmart: Bricks-and-Mortar to Online
Walmart’s strategy, however, ran into the scale and ambition of Alibaba’s vision. In 2015, Alibaba controlled 59% of China’s e-commerce market, with JD.com in second place at 22.8%; Yihaodian only had around 1% of the market. Even more important, Walmart’s dependence on Yihaodian failed to improve on its two main weaknesses: lack of geographical reach (particularly into rural markets) and scale of participants.
Walmart sold Yihaodian to JD.com in 2016 for a 5% stake in the company. Walmart choseJD.com as the only other market player with a competitive position. More importantly, JD’s strategy focused on building infrastructure such as fulfilment centers that would help Walmart expand its coverage area presence. JD.com’s vision to ultimately build self-automated fulfillment centers that would deliver products by drone and self-driving cars was compelling to Walmart: the company wanted to turn from a brick and mortar retailer to become the Amazon of China.
Firms that entered China after the e-commerce boom had the option of establishing an online presence before building stores. Numerous advantages accrued from this option: retailers could gather intelligence on the market, spend less money, and maintain operational control. Online to Bricks-and-Mortar
Examples of this strategy included two brands from UK’s Arcadia Group: Topshop, a women’s clothier, and Miss Selfridge, a store for teenage females. Both established an online store on Shangpin.com, a trendy female e-commerce site, in 2014. Their strategy focused on establishing an online store first based on the already crowded mid-market retail market of domestic and foreign retailers; they also focused on cultivating brand recognition among consumers by using social media. After a positive response to the online store, both stores planned to open five physical stores in China in 2018, with the option to open 75 more.
Online OnlyOther foreign retailers chose an online only strategy. Costco, a popular American wholesaler, opened its store on Alibaba’s Tmall in October 2014. 49 The store posted significant revenues in a short time. Tesco posted USD3.5mn during Alibaba’s Single’s Day on 11 November 2014. Between 2014 and 2016, Tesco continued to maintain its online only presence and did not open any brick-and-mortar stores in China.
As the tectonic plates of retail change shifted under M&S’s feet, the company reacted in two ways: a renewed emphasis on internationalization and e-commerce. M&S’s Response: Globalization and “Bricks and Clicks”
Following the historical trajectory, in 2014 M&S put a new emphasis on international markets. CEO Mark Bolland, who took over from former CEO Stuart Rose in 2010, stated that M&S had erred leaving Europe in the early 2000s, and it aimed to earn 25% of revenue and 40% of profits from stores abroad. In 2015, internationalization took on another interpretation for the business in China. The company announced that it was seeking a JV partner in China to expand the business, as the company had established “flagship stores” and was looking to develop in other locations. M&S also closed five stores in the Shanghai area, announcing two new store openings in first-tier cities Beijing and Guangzhou.
Second, the company pursued the bricks-and-clicks strategy, which translated into building both an online and a physical presence in new markets. In China, M&S joined Alibaba’s Tmall in 2012, offering apparel and food; it also opened a store on JD.com in 2015.Were the changes too late? M&S was changing course midstream amid major developments in China’s retail industry. As M&S executives witnessed further declines in brick-and-mortar stores, they faced an important decision: what should M&S do in China?
Adapted from TAO and TOLLEFSONYour company Super Consulting ltd is appointed to advise M&S on its strategy in China. You are asked to come up with a consultancy report, which will comprise of: 1) An analysis of the problems faced by M&S in China using appropriate consultancy tools. 2) List of alternative solutions and justification of your best proposed solution. 3) An implementation plan including WBS (with total estimated time), cost-benefit analysis, RACI plan, risk assessment, and Critical Success factors (CSFs) of your proposed solution.
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