Reference no: EM132739698
CHINA - LAND OF OPPORTUNITIES?
While the Japanese market is approaching saturation, in contrast, the CVS industry in many emerging markets is booming. Among them, China, which is currently the world's second largest economy, is the one with the most potential. Though the average individual consumption level is relatively low, the rapidly growing economy and the huge size of the market have attracted many foreign companies into the Chinese market.
In 1991, the Chinese government opened up the previously restricted retail, finance and construction sectors, triggering an investment boom. China began to gradually remove market-entry barriers and liberalize FDI restrictions after its accession to the WTO in 2001. Retailers were allowed to enter the Chinese market without significant restrictions regarding location. Also, investors were permitted to run all kinds of distribution businesses.
In China, the convenience and discount formats were underdeveloped, not only in rural areas but also in big cities. Food health concerns created strong consumer sentiments about food safety and food origin, giving positive effects on sales of processed food. These factors motivated worldwide retailers to come to China.
After Lawson, another Japanese CVS Chain entered Shanghai in 1996, the CVS industry in China started to grow rapidly and competition became fierce. After Lawson brought the "real CVS operation" into the Chinese market, several new chains appeared in the market with a similar business concept. In 2002, the number of the CVS in Shanghai was 2,000 and it exceeded 5,000 in 2004. Including Lawson, the five main chains in Shanghai occupied more than 90% of the market share, creating serious competition in the CVS industry.
Although the Chinese CVS chains grew quickly, sales per store were relatively low in comparison with those of foreign chains. A lacking ability to develop original goods, an absence of an integrated system, and poor distribution system were some reasons behind this situation. By providing common goods, the local chains fail to differentiate their merchandise from those available in supermarkets, where consumers can purchase the same product for a lower price. Without an integrated system, the Chinese CVS chains can only provide a limited variety of goods, making it difficult to attract customers.
Finally, without a well-constructed distribution system, the storage of products (in particular the ready-to-eat items) becomes insufficient, hampering the management of the chains.
When the pioneering foreign CVS chains entered China, Lawson established Shanghai Hualian Lawson Co., Ltd. in 1996 through a joint venture with a local company. Eager to introduce the Japanese CVS concept to the new market, Lawson at first copied the operation model directly from Japan. Although the Japanese concept became very popular in Shanghai, Lawson did not succeed in expanding the chain swiftly. Seven years after the entry, the store number did not reach 100 and the company was in deficit. Reasons for this development were the company's inability reach a profitable scale due to low store numbers, and communication problems with the local staff.
Holding the majority stock of the joint venture, Lawson ran the company with strong leadership. The business structure was very similar to the Japanese one, with the top management consisting of Japanese, and decision-making processes going through the Japanese head office. However, by failing to bring up the chain, in 2001 Lawson modified its strategy and accelerated the degree of localization. Furthermore, Lawson reduced its stock portion and gave the partner more freedom to lead the business. With the new HRM system designed for the local staff and with the assistance of the Chinese partner, a more localized business model had been adapted and the Lawson chain started growing.
Question: Critically evaluate and discuss the factors that contributed to the failure of Lawson's initial entry into the China market.
(Using the knowledge of managing the multinational)