Attack of the Superstore

After Tesco entered the Thai market in 1998 with its brand of colorful, well-stocked superstores, angry local competitors tried to impede the powerhouse U.K.-based retailer’s progress with a wall of lawsuitsincluding one that would have forced Tesco Lotus, the company’s regional subsidiary, to shut off air conditioning because chilly stores posed a public health hazard to the equatorial Thai people. Frivolous legal actions were a minor nuisance compared with what came next. Over a five-month period last year, two Tesco Lotus outlets were bombed, another peppered with automatic weapons fire and yet another hit by a rocket-propelled grenade.

You would think a reception that warm would force a company to consider relocating to more hospitable lands. But Tesco Lotus, Thailand’s No. 1 retailer with 26 stores, plans to open morea lot of them. So do other “hypermarkets,” giant retailers from Europe and America that are taking over some of Asia’s prime selling grounds. Despite threats by governments to ban them, not to mention rocket attacks, chains, including France’s Carrefour and U.S.-based Wal-Mart, are ramping up plans to open hundreds of new outlets throughout the region over the next several years. The onslaught threatens to run local retailers right out of business. Says Boonyoong Vimuttayon, a Bangkok grocery store owner who has seen her sales decline by more than half since a Tesco Lotus store opened up the street four years ago: “The foreigners get richer and richer, while we get poorer all the time.”

Hypermarkets have already changed the retail landscape in their homelands by being brutally efficient, selling a mind-boggling range of productsfrom groceries to pharmaceuticals to clothes to big-screen TVsat cut-rate prices. U.S.-based Costco operates spartan warehouses where bulk goods are stacked on pallets and sold to the public wholesale. The mammoth Wal-Mart chainannual revenues of $218 billion made it the largest company on this year’s FORTUNE 500 listemphasizes customer service to bring in the crowds while keeping prices in check with high-tech inventory managementand by using its clout to cow suppliers. Charles Holley, senior vice president for Wal-Mart International, calls his company’s formula for wringing profits out of low-margin merchandise “the productivity loop.”

Asian retailers call it dirty pool. Cluttered neighborhood grocery stores, dingy street-front shops and noisy central-market stalls that have long served the region’s consumers are no match for the modern, monolithic superstores. Boonyoong, the Bangkok grocer, can’t beat superstore prices and selection and never will. Mom-and-pop operations have no economies of scale. “I was thinking my business might be in trouble when Tesco Lotus first opened,” says Boonyoong. “Today I know it is.”

Up the street, 42-year-old Bangkok accountant Suntorn Sukanand explains why, as he loads jumbo packs of instant noodles, fish sauce and Thai beer into his cart at Tesco Lotus. “I stop at the local shops only when I have forgotten to buy something in the superstore,” he says. “It’s clean, and it’s cold.” Says Bangkok housewife Sunee Veerachai: “I can get everything I need here in one trip on Saturday. Besides, the kids like this place.”

Local retailers are not the only ones displaced when the superstore comes to town. Because of their high turnover, hypermarkets can throw their weight around with local suppliers by demanding lower prices. Costco buys directly from manufacturers to stock its two stores in Japana practice that disrupts the country’s entrenched but inefficient distribution networks, which have multiple layers of middlemen. Security expert John Muller, president of McFadden Protection Agency Thailand, theorizes that Tesco’s Thai stores may have been attacked by Mafia-like cartels he says control the flow of goods in the country. (Thai police have made no arrests and the cases are unsolved.) Foreign superstores “upset the whole chain of distribution of commodities in Thailand,” Muller says. Tesco Lotus officials declined to comment.

That’s not to say the foreigners are unstoppable. Both Wal-Mart and Carrefour, the world’s second largest retailer, tried and failed to crack the Hong Kong market in the 1990s. Hong Kong consumers seemed to prefer familiar neighborhood chain stores. Carrefour lost $400 million between 1996 and 2000 on four Hong Kong outlets. “It all ended in tears, really,” says Alan Treadgold, director of retail research for ad agency Leo Burnett Worldwide in Sydney. “They just couldn’t make the format work.”

Undeterred, foreign hypermarkets have learned to adapt, often by forming joint ventures with domestic partners and by stocking local wares. “A lot of people make the mistake of thinking that when Wal-Mart comes to town, we set up exactly the same system as we do everywhere,” says Holley of Wal-Mart. “But we take our best practices and customize it to each market.” On Wal-Mart’s shelves in China, for example, consumers can find indigenous delicacies such as whole roasted pigs and live frogshardly staples at corporate headquarters in Bentonville, Arkansas.

Mike Sinegal, head of Costco’s Japan operations, agrees that stores must trim their sails according to prevailing winds, but dismisses the notion that Asian consumers are very different from shoppers in, say, Los Angeles. When Costco entered Japan, he says, local suppliers insisted American shampoos wouldn’t sell because Japanese hair is different. But Costco’s private-label brand quickly became one of its top-selling products. “The bottom line is that the uniqueness of these markets is overrated,” says Sinegal.

Costco is not yet turning a profit on its Japanese operation, but still plans to build up to 70 stores there. Wal-Mart is edging into this market too, having recently taken a stake in ailing, 400-store food-and-clothing chain Seiyu. In fact, hypermarkets have aggressive expansion plans throughout Asia. Superstores face slowing growth in saturated home markets. They need to expand their territory to maintain growth rates. Wal-Mart intends to boost its international salesnow less than 20% of its total revenueto a third of total revenue within five years. That means building new stores not just in established economies like Japan but also in countries with fast-emerging consumer cultures like China, where there are already 42 Wal-Mart and Carrefour outlets and dozens more on the way. In South Korea alone, analysts predict the number of hypermarkets to swell to 230 within three years, up from nine in 1996.

The onslaught is causing backlash in protectionist-minded countries. In Malaysia, which hosts Carrefour among other hypermarkets and soon Tesco stores, the government last month announced a freeze on all applications to build new outlets. Thailand, too, is considering limiting where superstores can be located.

While China has dropped or eased restrictions on foreign businesses to appease the World Trade Organization, tussles over details like licensing have blocked Carrefour’s bid to win approval for stores in Beijing. In February, Guangdong province in southern China introduced tax cuts and other incentives to aid domestic retailers. Seven Chinese chainsincluding one called Wu-Marthave drafted a plan to jointly open 1,500 hypermarkets and other stores over the next five years to compete with the expansionary interlopers. “Compared with the foreigners, Wu-Mart is more aware of the Chinese people and their consumption customs,” says Wu Jianzhong, Wu-Mart’s vice president.

Shoppers, however, don’t seem to care. “Because of economic globalization, it doesn’t matter if you are a foreign store or a domestic store,” says Wu Ping, a Beijing businessman who shops at a Carrefour on the city’s outskirts. “What’s important is that you provide what local customers really need at a price that most people can afford.” If the invaders can continue to do that, it will take more than rocket attacks to stop them.