Amy Rasplicka MOR 492 ICA

January 29th, 2014

in China 2012

2

Executive Brief Recommendations 1. Offer only “non-status” items in-store and online in China. 2. Slowly add clusters of Trust-Mart’s in successful locations in China. 3. Ensure quality products and upright business practices through ongoing training and

monitoring processes. 4. Carefully analyze market and macro forces in next country being considered to ensure

feasibility of EDLP. Wal-Mart’s Issues in China

INTERNAL • Food quality scandals • Bribery • High employee turnover rate

EXTERNAL • Chinese consumer spending habits are not

conducive to EDLP • Highly competitive retailer and convenience

store market • Chinese political environment

Urgency and Penalty Wal-Mart needs to adapt to Chinese consumer buying habits, achieve economies of scale through aggregation, and perfect its EDLP strategy in China as soon as possible. If Wal-Mart fails to do this, it will miss out on a huge opportunity. China is projected to become the world’s largest consumer market by 2020, and China’s online retail market is projected to grow 227% from 2010-2015. Rationale Wal-Mart should save valuable floor space and reduce inventory costs by no longer carrying “status” items, which Chinese consumers aren’t interested in buying at cheap prices, in its stores or online. Wal-Mart especially needs to be focused on correctly tailoring its online product offering in order to capture a portion of China’s growing online retail market. Wal-Mart can slowly add clusters of Trust-Marts in currently successful markets in China. Through setting up Trust-Marts, which are small to medium-sized retail stores, Wal-Mart can achieve purchasing power while saving on real estate costs and catering to Chinese customers’ preference for small quantities and rapid product rotation. Trust-Marts should be grouped together to ensure efficient distribution. If Wal-Mart decides to expand to another country, it should carefully analyze the market and macro forces to ensure the feasibility of EDLP there.

3

Expanding on Regional Success: Wal-Mart Decides to Go Global Regional Expansion Timeline

Wal-Mart’s Five Imperatives for Going Global 1. Efficiency 2. Knowledge 3. Customer

Globalization 4. Competitor

Globalization Wal-Mart had excellent economies of scale.

Wal-Mart had excellent knowledge of supply chains.

Wal-Mart believed Chinese consumers, like North American consumers, would be interested in its products and EDLP strategy.

Carrefour SA, Wal-Mart’s main competitor, entered China in 1995.

5. Growth

By 1994, the U.S. grocery retail market was rather mature. Wal-Mart had already expanded to Meixco and Canda and was looking for new growth opportunities.

[blue = Wal-Mart, green = Sam’s Club] Sources: “Wal-Mart in China, 2012”, corporate.walmart.com, projects.flowingdata.com/walmart/

1962: Wal-Mart

founded in the US

1990: Wal-Mart is #1

US retailer

1991: Wal-Mart

expands to Mexico

1993: First $1 billion

sales week

1994: Wal-Mart

expands to Canada

Walmart decides to go

global

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Why China? Since 2010, China has been the second largest economy in the world, after the US. Even when US growth slowed in 2011 and 2012, the Chinese economy continued to grow. China was projected to be the world’s largest consumer market by 2020. Wal-Mart saw the opportunity to convert China’s emerging middle class into consumers.

Source: The World Bank Source: Wal-Mart in China, 2012

Source: Wal-Mart in China, 2012 Source: Wal-Mart in China, 2012

0 1,000 2,000 3,000 4,000 5,000 6,000 7,000 8,000 9,000

1995

19

97

1999

20

01

2003

20

05

2007

20

09

2011

USD

(bill

ions

)

China GNI, 1995-2012

620 640 660 680 700 720 740 760 780 800

2011 2012

USD

(bill

ions

)

China Retail Sales, 2011-2012

0%

5%

10%

15%

US China

US and China Grocery Retail Market Growth,

2012-2015

0 200 400 600 800

1,000 1,200 1,400 1,600

2011 2015

Sale

s (b

illio

ns o

f USD

)

China Grocery Market (projected)

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Macro and Market Forces Shape Wal-Mart’s Entry Into China

Five Contexts: Market and Macro Forces in China Market Forces

Product Market Labor Market Capital Market • Local, not national supplier

network • Increased labor available in

cities as Chinese migrate to urban areas

• Chinese unions are extension of government

• Little corporate transparency

Macro Forces

Social/Political Openness • Government plays large role in business

regulation o Location o Unions

• Bribery

• Increased number of economic-zoned cities where foreigners could operate a business

• Foreign business must be in cooperative agreement with Chinese partner that has stake >51%

Source: “Wal-Mart in China 2012”, “Strategies That Fit Emerging Markets”

CAGE: Measuring Distance Between the U.S. and China

Cultural Administrative/Political Geographic Economic • Different

language • Different religions • Different social

norms

• Chinese government regulates businesses more than US government does

• 8000 miles from Wal-Mart HQ in Bentonville, Arkansas

• 20 miles from Wal-Mart Asia HQ in Hong Kong

• Less land available in China than in the U.S.

• Walmart has only 2-3% profit margins in China, vs. >3% in the US

Source: “Wal-Mart in China, 2012”, infoplease.com/atlas, ycharts.com

Due to government restrictions, Wal-Mart had to enter China using a cooperative agreement with at least one Chinese partner that held a stake greater than 51%. In 1995, Wal-Mart entered China through a joint venture with Shenzhen International Fiduciary Investment Co, Ltd, China.

Ownership Control

0%

License Franchise

Partial

Joint Venture Affiliation

100%

Acquisition Greenfield Operation

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Adaptation and Aggregation: Wal-Mart’s Strategy in China According to Wal-Mart International CEO Doug McMillon, Wal-Mart China’s strategy was “local relevance and global leverage”.

high

Econ

omie

s of

Sca

le

Agg

rega

tion

low

low high Adaptation

Local Responsiveness

Adapting to Become Locally Relevant

After some trial and error, Wal-Mart found ways to account for the cultural, administrative and political, and geographic distance between China and the U.S. and be locally relevant.

Global Transnational

International Multi-Domestic

4 Basic Global

Strategies

Cultural Distance: consumer

buying habits

Live fish, uncovered meat

Cosmetic demo stations

Changed out products more

often

Smaller packaging

Admin/Political Distance:

government regulations

Accepted unionized labor

Geographic Distance: less land

Opened small format stores

Boosted Chinese Economy

99.9% of associates were

Chinese

95% of products sourced locally

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Customers and Competitors Make EDLP Difficult in China As the second part of its global strategy, Wal-Mart wanted to use aggregation to take advantage of its proficiencies in sourcing, business processes, shared services, and IT systems. Wal-Mart’s EDLP strategy had been very successful in the US, and Wal-Mart thought it could use this strategy to establish itself as a major player in the Chinese supermarket market. However, Wal-Mart struggled to establish EDLP in China. Smaller quantities of products sold resulted in decreased revenues, and high price competition resulted in lower profit margins for Wal-Mart in China versus other locations.

Decreased Revenues

Smaller Quantity Being Sold

Lack of land --> smaller stores

Chinese buy in small amounts

Chinese price sensitive only for non-status items

Price Competition --> Lower Prices

Local and international supermarket competition

Proliferation of local convenience

stores

Supermarket Chains in China, 2010

Sun Art Retail Group

Wal-Mart + Trust-Mart

China Resources Enterprise

Carrefour

NGS Supermarket

Lianhua Supermarket Holdings

Shenzhen

Wumart Stores

Other

Convenience Store Ownership in China, 2012

Chinese Foreign

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EDLP: Not Always a Competitive Advantage EDLP had been successful for Wal-Mart in some countries, but not in others.

EDLP in: Result Reason

United States Success Consumer preference: cheap prices > good customer service or quality products

United Kingdom Success Consumer preference: cheap prices > good customer service or quality products

Japan Success Consumer preference: cheap prices > good customer service or quality products

Germany Exited Didn’t adapt or aggregate enough

Russia Exited

Too slow to enter the market

South Korea Exited Consumer preference: cheap prices < good customer service or quality products

China ??? Consumer preference: cheap prices < good customer service or quality products

Wal-Mart needs to adapt EDLP in order for it to succeed in China.

Wal-Mart could adapt EDLP primarily by slowing or stopping its growth of Sam’s Clubs, supercenters, and neighborhood markets (it had already closed its SmartChoice stores in 2012), and focusing on slowly adding Trust-Marts in successful markets in China. Trust-Marts should be grouped together to ensure efficient distribution. Trust-Marts, the second smallest Wal-Mart store type (after SmartChoice), fit well with the constraints present in China. They are large enough for Wal-Mart to achieve purchasing power when stocking the store (or group of stores). Their small size fits Chinese customers’ preference for small product quantities and rapid product rotation, and means decreased real estate costs for Wal-Mart.

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Other Issues in China: Pork, Personnel, and Politics In addition to struggling to establish its typical competitive advantage of EDLP, Wal-Mart also had internal issues relating to food/product quality and HR turnover, and external issues related to the unstable political and business environment in China.

expansion exit internal scandal personnel change external issue

DATE EXPANSION/EXIT IN CHINA ISSUES IN CHINA ISSUES ELSEWHERE

August 1995 Walmart arrives in China

1996 First supercenter and Sam’s Club open in Shenzhen

2004 Further expansion (enabled by eased trade restrictions)

2005

Late 2005

Wal-Mart board member Zhou Jiali arrested for involvement in bribery scandals with Yunnan Province trade official and governor

2006

• 90 cases of bribery in Asia

• bribe claims in Mexico (Wal-Mart didn’t investigate)

2007 Wal-Mart acquires 35% stake in Trust-Mart

December 2008 First small-format “SmartChoice” store opens in Shenzhen

August 2010 189 units in 101 Chinese cities October 2010 First Trust Mart opens

Pork scandal in Chongqing • dozens of employees

detained or arrested • stores had to shut for 2 weeks

+ pay $572,000 USD in fines • Wal-Mart strengthens

processes and training

October 2011 Political upheaval in Chongqing:

Community Party provincial chief removed from office and put under house arrest due to links to treasonous appoint police chief and murder of businessman

May 2011 Wal-Mart acquires minority holding in Yihoadian (online grocery company)

CFO and COO resign

June 2011 VP Hypermarkets resigns

October 2011 Wal-Mart China CEO and Sr. VP HR resign

2012

370 stores in 140 cities More bribe claims in Mexico • Wal-Mart

investigates • Creates global

compliance officer position

March 2012 Wal-Mart closes SmartChoice stores

Foran appointed new CEO of Wal-Mart China

2012 Sr. VP/CMO of Hypermarkets resigns

10

0 20 40 60 80

100 120 140 160 180

2010 2015

Sale

s (b

illio

ns o

f USD

)

Forecasted E-Commerce Growth in China, 2010-2015

Frustrated with Brick-And-Mortar Expansion, Wal-Mart Invests in E-Commerce Due to high competition for physical retail stores and high growth projections for e-commerce, Walmart invested in an online retailer in 2010 and bought a stake in an online grocery company in 2011.

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Changes in Online Purchase Categories May Benefit Wal-Mart If electronics are a status item, and the other categories continue to grow, Wal-Mart could benefit from its status as an online retailer. If this is not the case, Wal-Mart may find itself falling quickly behind in e-commerce in China. Wal-Mart sells apparel and accessories in stores and online in the US, but it is unlikely that status-conscious Chinese consumers would want to buy these items from Wal-Mart, whether in the store or online. At 24%, apparel, accessories, and footwear represents a large portion of the online market in China – a portion that Wal-Mart will be able to capture very little of.

2004 2010 Change Adds Status? Analysis

Electronics and Accessories 60% 26% -34% YES

Decrease in online sales means people are probably buying these at retail stores. Walmart could sell more electronics in their stores if consumers do not consider electronics status items.

Apparel, Accessories, and Footwear 0% 24% 24% YES

Jewelry, Watches, and Accessories 0% 2% 2% YES

Big online growth, but Wal-Mart can’t capitalize on this because these are “status” items in China.

Cosmetics 0% 4% 4% NO Home General 0% 9% 9% NO Foods 0% 2% 2% NO Sports and Stationaries 0% 2% 2% NO

Maternity and Baby Products 0% 2% 2% NO

Wal-Mart should focus on selling these item types on its website in China. These didn’t exist in 2004 or increased significantly since then.

Others 11% 6% -5% NO CDs, DVDs, and Books 9% 5% -4% NO Home Appliances 7% 9% 2% NO General 7% 0% -7% NO Game/Cell Phone Cards 5% 9% 4% NO Gifts and Decorations 1% 0% -1% NO

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Conclusion Wal-Mart executives were attracted to China due to its high growth and seeming similarity to the US market (due to the open retail landscape and growing middle class). However, Wal-Mart executives did not account enough for cultural and political distance, and found that their EDLP pricing strategy was not succeeding in China as they had hoped. According to Wal-Mart International CEO Doug McMillon:

Source: “Wal-Mart in China, 2012” McMillon was right. The external issues in China were surmountable, and Wal-Mart China’s internal issues were fixable. Problem Source Problem Solution Internal Food quality scandals Internal Bribery

Ongoing training and monitoring processes

Internal High employee turnover rate

Fine-tune EDLP and reduce corruption through training and monitoring employees will be more likely to stay

External Chinese consumer spending habits are not conducive to EDLP

Offer only “non-status” items in-store and online in China

External Highly competitive retailer and convenience store market

Slowly add clusters of Trust-Mart’s in successful locations in China

External Chinese political environment Makes for tough, but feasible business environment

By ensuring upright business practices and quality products, adapting to Chinese consumers’ buying habits, and achieving economies of scale through aggregation, Wal-Mart can use its EDLP strategy to succeed in China.

“[W]e should be better merchants. China is a great market and there is nothing externally that concerns me – it’s all really internal at this point.”