Sea Bass with Barbie dolls challenge Wal-Mart in China

Shelves stacked to the ceiling with low-price hot sauce, Barbie dolls, and noodles stand near tanks where shoppers can fish out live sea bass for dinner. Welcome to RT-Mart, China’s version of Wal-Mart Stores Inc.

From Shanghai to Chengdu, the outlets run by China’s largest big-box retailer, Sun Art Retail Group Ltd., are recreating American-style Wal-Marts, with one big difference: They’re giving them the feel of local street markets with hairy crabs laid on table tops and discounted hot-pot ingredients.

That formula has helped it crack the country’s 507 billion yuan ($81 billion) hypermarket industry overseas rivals Tesco Plc., Wal-Mart and Carrefour SA have struggled to get a handle on.

Sun Art succeeded in outdoing Western rivals through more localized management, sharper knowledge of the Chinese consumer, tailoring shopping experiences and offering discounts on regional specialties, said George Ren, a Shanghai-based analyst at industry consultant Roland Berger.

“Foreign retailers have yet to understand local consumer preferences and create the image they are perfect for them, while Sun Art has,” said Ren.

Tesco on Dec. 5 reported a drop in China comparable sales, three weeks after Wal-Mart posted lower operating income. That’s a setback for the overseas retailers who are increasingly counting on Asia to offset a slowdown in developed markets and the global fallout of Europe’s credit crisis.

PROFIT SURGE
Sun Art, a venture between Taiwan’s RT-Mart and France’s Groupe Auchan SA, posted a 75% jump in first half profit. Its Hong Kong-listed stock has surged 70% since a 2011 public offering. Analysts from HSBC Holdings Plc, Barclays Plc, and Sinopac Securities Corp. are predicting it will extend its lead by winning a bigger share of China’s retail industry.

Sun Art had a 12.8% market share last year among operators of hypermarkets in China, Euromonitor’s data showed. This compares with 11.2% for Wal-Mart and Carrefour’s 8.1%.

Sun Art “are localized, and hired local people as store managers so they know what the customer needs,” said Linda Huang , a Hong Kong-based analyst at Macquarie Securities Ltd.

The company’s profit is poised to rise 20% next year to 2.8 billion yuan, according to the median estimate of eight analysts surveyed by Bloomberg.

Global retailers have been taking steps to advance in China for more than a decade. They got a boost from the country’s 2001 entry into the World Trade Organization, which eased restrictions on foreign investment.

Regional competitors and a weakening economy have since turned into a hurdle for them. Bentonville-based Wal-Mart told investors last month that customer traffic in China fell, and operating income in the country saw a“slight decrease” in the third quarter even as net sales rose 6.1%.

Same-store sales at Carrefour, the first foreign retailer to enter China in 1995, fell 6.1% in China in the third quarter, excluding currency swings.

LEADING SHARE
While Sun-Art might, for instance, offer a discount on soy sauce, a Western chain in China may put Coca-Cola sodas on sale, said Ren.

“Overall, their prices are not cheaper, but in categories in which the Chinese consumer pays more attention – they are,” Ren said.

Tesco closed four China outlets in August, and plans to open 16 hypermarkets this year, down from an earlier forecast of 20 stores, it has previously said. By contrast, Sun Art will likely add a total 105 hypermarkets this year and the next, a higher-than-usual expansion, according to a report from Sinopac analyst Vivian Liu. Sun Art operates 240 hypermarkets under the RT-Mart and Auchan brand in China, it said while reporting interim results.

Boulogne-Billancourt, France-based Carrefour has 212 stores in China, with plans to open 24 new ones this year, the company’s external press relations agency Blue Focus said. It declined to comment on competition from Sun-Art in China.

BUYING FISH
At an RT-Mart in Shanghai’s Yangpu district on a recent morning, customers used plastic baskets to select fish from large tanks. Fish are killed and de-boned on the spot by store staff, similar to informal neighborhood markets in China.

To draw shoppers in a country where ready dishes such as fried noodles and steamed pork buns are popular, the Yangpu store had a fully functioning kitchen where staff in white aprons prepared food in full-view of grocery shoppers.

A Wal-Mart hypermarket a five-minute drive away appeared to have less customer traffic, despite a subway station below. That store discounted roasted almonds and snacks. No customers lingered about its line up of live fish tanks and it had no kitchen.

While foreign retailers also try to appeal to local tastes, they haven’t had as much success as Sun Art. The Shanghai RT- Mart had live clams, hairy crabs and several clean tanks of fish. By contrast, the nearby Wal-Mart had a smaller line of tanks, and much of its other seafood was frozen.

Sun Art declined to comment on its China strategy.

Wal-Mart does not comment on competitors, Ryan Zhang, a spokesman from Wal-Mart China said in an emailed statement on Dec 7. The company is “fully confident” about the prospects of the Chinese market and plans to open more than 100 stores on the Mainland over the next three years, he said.

SUN ART CHALLENGES
Sun Art isn’t immune to weaker economic growth in China, where gross domestic product may grow 7.7% this year, the slowest since 1999, according to a Bloomberg survey of 54 economists. It also faces local competitors such as the government-backed China Resources Enterprise Ltd.

Sun Art has become so successful, it has spawned copycats among smaller regional hypermarket chains, which modeled several new stores after them, said Lina Yan, an analyst with HSBC Holdings Plc., who has an overweight rating, the equivalent of a “buy,” on the stock.

Part of the challenge will be to hold on to shoppers such as Shanghai resident Xu Zhong Qing, who choses to buy her groceries at RT-Mart rather than a Wal-Mart outlet located close by.

“There’s a warm, neighborly-feeling here,” said the 28- year-old mother, while waiting for her turn to buy pork. “You also know you get the best value for your money when you see all the other housewives and the average person on the street shopping here.”