Membership may have its privileges, but many Chinese consumers are passing up the chance to shop at some of China's foreign-operated warehouse stores.

Sluggish sales have forced several major operators, most notably Wal-Mart, the world's largest retailer, to revise their strategies and overhaul their business models in China.

These companies have been applying in China for many years business models that have proved successful in other markets. Wal-mart, for instance, opened its first Chinese stores eight years ago.

Retail analysts say that foreign retailers have obviously over-estimated their abilities to influence Chinese consumers' spending habits. They may also have overly inflated Chinese consumers' purchasing power, the analysts say.

The Chinese consumer market has remained a star attraction for foreign investors as the nation's economy continues to grow at a brisk pace. Indeed, many foreign retailers have made inroads into the Chinese market.

But those which have attained success have all stuck to the "mainstream" model of traditional supermarkets. As highly popular as they may be in the US and elsewhere, membership warehouse stores seem to have failed to win the support of Chinese consumers.

To counter this, Wal-Mart announced in February it would restructure its Sam's Club in Changchun, in Northeast China's Jilin Province, into a shopping center.

Customer surveys conducted by the company show that local consumers prefer to do their shopping in supermarkets rather than at membership stores.

Similar surveys in Kunming produced the same results, prompting Wal-Mart to change its Sam's Club in that city in Southwest China's Yunnan Province into a supercenter, which is no longer a membership store.

So far, Wal-Mart still retains three Sam's Club warehouse stores in China. It is not clear at this time whether they too will be transformed into more traditional retail outlets.

Other warehouse store operators in China have also seen the need for restructuring.

Last year, US-based PriceSmart changed three of its membership stores in Beijing, Guangzhou, and Kunming into N-Mart chain hypermarkets. In fact, hypermarkets have become the main business model for the company in China.

Makro, though not insisting on paid membership, opened only four stores in China in eight years.

In contrast, Carrefour, the French retail giant, has opened 44 hypermarkets throughout the nation in nine years.

But this success has not been the case for Wal-Mart, analysts say.

"Warehouse stores, which specialize in selling high volumes of merchandise in large packages at discount prices, are not a mainstream business model in the country's mass consumer market," says Pei Liang, secretary-general of the China Chainstore & Franchise Association.

"Therefore, there can only be a few such stores in each city," he says. According to Pei, warehouse stores cater mainly to small businesses such as restaurants, offices, caterers and groceries.

However, small- and medium-sized businesses in the cities can source their supplies at wholesale markets and farmers' markets at lower cost than at foreign membership stores, Pei says.

That is because the vendors in those traditional wholesale markets buy directly from the farm collectives and they don't charge their customers any "membership" fees to do business with them.

The prospects of warehouse stores in China are further constrained by the entrenched buying habits of the majority of consumers who favor the convenience of neighborhood supermarkets.

Chinese consumers are not known to be loyal shoppers. This notion was reflected in a survey by world-leading strategy consulting firm McKinsey & Company.

Easily swayed by promotion campaigns, the average Chinese consumer prefers to shop around for the best bargain, according to Wang Yao, director of the China General Chamber of Commerce's information department.

They are shrewd shoppers who are reluctant to pay membership fees that may limit their choice of stores, Wang adds.

"Many consumers don't see the benefit of shopping at membership stores because they don't usually buy in bulk," he says.

Wal-Mart's Sam's Club is an example. The annual membership fee is 150 yuan (US$18), while its prices are 5 percent lower on average than in supermarkets.

To offset the membership fees, a member will have to buy more than 3,000 yuan (US$360) worth of goods per year at the store. That's a "significant" amount of money to spend on groceries for an average Chinese family, Wang says.

Moreover, most warehouse stores are located in the suburbs quite a long way away from the city center. For most consumers, the cost of traveling to these stores usually offsets the benefits of lower prices.

Also, the concept of buying foodstuff in bulk does not fit into the lifestyle of the many Chinese consumers who have a strong preference for fresh produce.

For that reason, neighborhood supermarkets suit their needs, while warehouse stores appeal only to the relatively more Westernized younger consumers.

"There is a market niche for warehouse stores," says Pei of the China Chainstore & Franchise Association. He believes membership stores are not going to fade away. But instead, they will gain growing acceptance by group purchasers and the increasing numbers of dual-income families with more spending power but less time to shop for groceries everyday.

"Currently, in a less mature market, members-only warehouse store operators should adopt much stricter measures in management, as well as choosing the more convenient locations for their stores," Pei suggests.

At least one such stores has proved that the concept works in China. German-based membership store operator Metro has been enjoying healthy growth in China, thanks to its relatively more customer-oriented strategy, Pei says.

The average sales volume of each of Metro's 18 stores amounted to 312 million yuan (US$37.7 million) last year, ranking second among foreign retailers, according to statistics from the Ministry of Commerce.

A company executive says eight out of the company's 18 stores began to make profits last year.

The company opened its 19th cash-and-carry store in the country in Dongguan, in South China's Guangdong Province this month, and has planned to set up another 10 stores throughout China this year.

Makro, the only such store that offers membership cards to customers free of charge, also plans to open several new stores in Beijing and other cities.

"Member cards help us adjust our product structure in accordance with consumer demands," said Yang Xiaohong, vice-general manager of CTA Makro Commercial Co Ltd.

She believes that Makro's free membership system will gain popularity among group purchasers as the market environment improves.

"More customers like hotels, kindergartens, schools and caterers are turning to our stores, instead of wholesale markets, which could not guarantee their product quality," Yang says.

(China Daily April 6, 2004)