HONG KONG/SINGAPORE When Wal-Mart Stores Inc (WMT.N) drew a rush of 80,000 shoppers on the opening day of its first China supercentre in 1996, the world's most populous country looked like easy pickings for the top global retailers.
Flash forward to 2012 and China has been a tougher market than expected. Overseas names from Britain's Tesco Plc (TSCO.L) to Germany's Metro AG (MEOG.DE) are slowing their Chinese expansion, while Hong Kong-listed Sun Art Retail Group Ltd (6808.HK) has overtaken Wal-Mart as the country's top hypermarket chain.
The move last month by U.S. home improvement chain Home Depot Inc (HD.N) to close its big box stores in China served up the latest evidence of foreign retailers' struggle with a crowded market, slowing economy and tough competition in a country that was once their best hope for growth.
"The rapid growth era for such types of hypermarket operations is over and it's not as easy as before to generate profit by simply opening new stores," said Steve Chow, an analyst at Kingsway Group Research in Hong Kong.
Wal-Mart, which now has 364 China stores, may no longer draw the monster crowds seen in the early days, but its initial success has attracted plenty of competition -- perhaps too much.
China's hypermarket segment, with retail sales estimated at 506.9 billion yuan ($80 billion) last year, includes the world's three largest retailers in Wal-Mart, France's Carrefour SA (CARR.PA) and Tesco, and a crowded field of domestic players led by Sun Art.
Hong Kong-listed Sun Art said the marketplace was full and the next phase might be consolidation.
"We don't see much room for newcomers unless their business model is very different from others," Sun Art Chief Executive Bruno Mercier told Reuters in late August, after the company reported a 75 percent jump in first-half net profit.
Metro, which in 2010 said it saw potential for 100 of its Media Markt consumer electronics stores in China, is now more cautious on expansion. Its chief executive, Olaf Koch, said earlier this year the group would decide later on whether to open "100 or 50" of the stores in what he termed a "very tough" market.
Home Depot's struggle partly reflected the cultural challenge of winning over Chinese shoppers with a U.S.-style do-it-yourself model -- why would consumers take on home improvement projects themselves when hiring contractors is cheap?
It was also a sign that retailers are feeling the pinch as the world's second-biggest economy heads for its slowest year of growth since 1999.
"The reality is that the economy in China is slowing, and with it there will be some impact on our China growth," a Wal-Mart spokesperson said in an emailed response to questions from Reuters. "Customers in China have become more conscious about their spending, and we believe that now, more than ever, our (low price) promise is resonating with Chinese customers."
To be sure, overall retail sales growth remains high by international standards -- year-on-year growth has held above 13 percent every month this year, and in fact has not posted an increase smaller than 10 percent since 2006 -- but it has slowed from 17-18 percent growth late last year.
And big-box retailers haven't come close to keeping up with that overall sales growth rate in a country where the vast majority shop at local markets. A t Carrefour, 2011 sales at its China stores open at least a year fell 0.8 percent. Even Sun Art has been singed: its same-store sales growth cooled to 4.3 percent in the first half of this year, from 11 percent a year earlier.
BIG IN CHINA
When Wal-Mart opened its first China store, the main competition was Carrefour, which launched its first Chinese store in 1995. Sun Art, a joint venture between Taiwan conglomerate Ruentex Group and privately held French retailer Groupe Auchan SA AUCH.UL, followed three years later and quickly caught up.
On a global scale, Sun Art can't touch Wal-Mart or Carrefour, the world's two biggest retailers with combined annual revenue of more than $550 billion.
But Sun Art's success in China -- its $10.8 billion in 2011 revenue was 40 percent larger than Carrefour's China total -- shows how the giants can be tamed.
Sun Art, which operates stores under the RT-Mart and Auchan banners, controls 12.8 percent of China's hypermarket segment, topping Wal-Mart's 11.2 percent and Carrefour's 8.1 percent, according to research firm Euromonitor. Sun Art overtook Wal-Mart in 2010 and extended its lead in 2011, the data shows.
At a Sun Art-owned store in Shanghai's working-class Yangpu district, 66-year-old Yao Jinghua spent 138 yuan ($21.87) buying meat, eggs and some honey and crackers that were on sale. A Wal-Mart store is about a five minute drive away and Yao said a free bus to the store stops in front of her house, but she doesn't shop there.
"I don't like Wal-Mart because it's not convenient," she said in a television interview with Reuters. "Their products are good, but it's relatively expensive. Yeah, more expensive."
Sun Art's success has not gone unnoticed on the Hong Kong stock exchange. Its shares trade at 27 times its 12-month earnings estimates, according to Thomson Reuters StarMine data, well above Wal-Mart's ratio of 14.3 and Carrefour's 12.1.
The stock also leads its larger global rivals on analyst revision scores, a StarMine measure of analysts' earnings and revenue estimates and rating changes. Sun Art scores a strong 85, above Wal-Mart's 74 and Carrefour's 46.
China has no shortage of smaller players that could be acquisition targets to help the big global players regain the top spot, but the food and staples retailing segment as a whole looks pricey compared with the rest of the world. Hong Kong- and mainland Chinese-listed companies in that sector trade at about 20 times the next 12 months' earnings estimates, compared with a global average of 14.6.
If consolidation is coming, Sun Art does not seem keen to take the first bite.
"We don't see many M&A opportunities because not many stores are up to our requirements in terms of scale, standard and quality," said Peter Huang, Sun Art's executive director.
"We came across these kinds of opportunities before but we gave up eventually as we didn't want to eat four pieces of cake we didn't want, in order to have two pieces of cake we were fond of," he said. ($1 = 6.3093 Chinese yuan) (Additional reporting by Jane Lanhee Lee in Shanghai, James Davey in London, Victoria Bryan in Frankfurt, Dominique Vidalon in Paris, Patturaja Murugaboopathy in Bangalore and Jessica Wohl in Chicago; Editing by Chris Gallagher)