Plop. A middle-aged woman, brandishing a small fishing net looks down in consternation. She stoops and deftly picks up a sea bass squirming on the floor and drops it into a plastic bag before dipping the net back into a grubby-looking tank to resume her fishing. Once she's finished she walks over to a fishmonger who kills her supper in front of her.
Welcome to supermarkets Chinese-style - not a pursuit for the squeamish. In Shanghai as elsewhere in this vast nation, shoppers prefer to buy their food so fresh it's alive. And the international retailers are happy to oblige - even if it does generate the odd bit of bad press as Tesco did over live turtles in January (it subsequently stopped selling hard-shell turtles).
With China on course to overtake the US as the world's largest economy and already developing at a faster rate than India, it's not difficult to see why chains are fighting for a piece of the action - especially when prospects in their domestic markets look shaky. But they face sizeable obstacles such as the popularity of wet markets, competition from domestic players and woefully inadequate logistics infrastructure.
The other issue is price sensitivity. With inflation sending food prices soaring, shoppers are more motivated than ever by discounts - with tragic consequences last week when three people died in a stampede for cooking oil at a Carrefour in Chongqing. So can retailers really make the returns they're after?
Despite the challenges, over the past 12 months the international retailers have increased their presence in China or unveiled highly ambitious expansion plans. Tesco increased its stake in its Hymall joint venture to 90% and has been rebranding its stores Tesco Le Gou; Wal-Mart acquired a 35% stake in Taiwanese group Bounteous, which operates 101 Trust-Mart stores in the country; and Marks & Spencer confirmed it planned to open stores in Shanghai and Beijing. Hypermarkets remain the format of choice and most chains have so far focused their attentions on the Eastern corridor, but now they're eyeing second and even third-tier cities. To give a sense of the potential of such markets, Chengdu in the mid west has a population of 12 million and could be used as a distribution hub reaching a further 50 to 60 million. That's an untapped market the size of the UK and there are plenty of other cities like it.
This sort of scale coupled with the hugely differing tastes and levels of affluence across the country make centralised logistics networks a distant prospect, however. Unscrupulous third-party logistics companies don't help. Imagine the frustration felt by the major grocery retailer who discovered that its latest delivery had been spoilt because the driver from the third-party logistics company decided to dump the load by the side of the road, do another job and then return a week later to complete the delivery.
Unfortunately, such incidents are not unusual. And it's no surprise third-party distributors are so opportunist. According to management consultants AT Kearney, there are only 30,000 refrigerated trucks in the whole of China, a country with a similar area to the US and with four times the population. In the US there are 280,000 such trucks.
Problems in the chilled food chain serve to illustrate how serious an issue food safety has become in China.
While the world press has pounced on stories about lead paint on toys, fake baby milk and poisonous petfood, the Chinese media has gone to town on domestic food scares - one TV station even making up a story about steamed buns containing cardboard. In response, the government has adopted an increasingly hardline stance - even sentencing the food and drug administration head to death earlier this year for his involvement in a scam to sell fake drugs.
By introducing Western safety standards and products that consumers inherently see as safer than domestic equivalents, even if they are manufactured in China, international retailers believe they can assuage consumer and government concerns. But, given the sheer number of suppliers they're trying to police and the fact most are delivering direct to store or via a very limited distribution network, it isn't easy. Neither is trying to offer greater assurances by developing stronger private label propositions (see box on p32).
It's almost impossible to overstate the impact the sheer size of the market has on every aspect of doing business in China. "It's massive," says Greg Sage, Tesco's international spokesman. "It is effectively three different markets: north, east and south."
Tesco makes a big play of its ability to adapt its offer to local markets and is confident it will be able to leverage the growing popularity of Western brands with its new Tesco Le Gou fascia and more overt Tesco signage instore. But raising brand awareness in such a huge market is a major challenge especially given the level of competition posed by domestic players - both those operating modern formats and those operating the traditional wet markets..
The Shanghai Brilliance Group dominates the modern retail scene in China, while wet markets dominate traditional grocery. Despite the hypermarkets' efforts to replicate wet markets, shoppers still prefer to buy their meat and fish from the traditional outlets where they can haggle over prices and fresh remains a traffic rather than profit engine for the hypermarkets.
As a result, many are scratching their heads over how much space to devote to fresh and this isn't the only area in which their business models start to come under scrutiny.
Carrefour may have had early-mover advantage, having entered the market first, in 1995, but it has taken the view that speed is of the essence. It has tended to set up shop quickly and worry more about adapting each store to the local market than developing any supply chain infrastructure.
However, Wal-Mart, which entered a year later, has developed an infrastructure-based model and consolidates its goods through two DCs, one in Shenzhen in the south and the other in Tianjin in the north, though because it has only two, it has not yet come close to the scale it requires to be efficient. Meanwhile, Tesco, which has only been in the market for three years, operates a more integrated model than Carrefour but not as integrated as Wal-Mart's - though it plans to create three centralised chains, which Sage says will give it a "real point of difference".
Questions have been raised over profitability. Stores have to rely on a high volume of small transactions, and, say experts, upwards of €20m needs to be generated per store per year to make money.
Yet most hypermarket revenues hover at €15m-€20m and as retailers expand into third and fourth-tier cities, it will become even harder to generate the required sales. At the moment, most of the retailers are operating on just 2%-4% profit margins. However, although these are lower than in Europe or the UK, a few operators are "making extremely good money", says one analyst.
Although it is a challenging market, it is one that the international retailers can crack - but it will take time, says José Luis Duran, president of Carrefour's management board.
He puts Carrefour's success down to three factors. "First is our local employees who give us local knowledge," he says. "Second is our local partners, who help us understand the local environment, and we've kept these partners even though, since 2005, Chinese law has allowed us to operate without jv partners. Third is we recognise from a commercial point of view that you have to address each store, region and town differently."
By the end of this year, Carrefour will have opened 22 taking its total number to 110. "In the next four years, we want to double that figure, but I'm not obsessed about the number of stores we have," says Duran. "I'm obsessed about our sales per square metre and they're around double that of any other international retailer."
Mike Duke, Wal-Mart's vice chairman, is equally upbeat. He admitted last month the retailer had had a "shaky start", but pointed out its comparable sales were up 20% in the third quarter versus Carrefour's 9.6% and he was confident it would double its return on investment as it expanded.
There's all to play for. But it's important to remember China's average GDP per capita just exceeded $2,000 last year, below that of Angola. As the woman who went fishing for her supper found, it's easy to drop a slippery catch.n