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Table of Contents INTRODUCTION ........................................................................................................................................ 3 SITUATION SUMMARY............................................................................................................................ 6 Current goals objectives and strategies in China .................................................................................. 6 Past strategies of Wal-Mart China ........................................................................................................ 7 SITUATION ANALYSIS ............................................................................................................................ 8 Company ............................................................................................................................................... 8 Collaborators ......................................................................................................................................... 8 Customer ............................................................................................................................................... 9 Competitors ........................................................................................................................................... 9 Political ............................................................................................................................................... 10 Economic ............................................................................................................................................ 10 Social................................................................................................................................................... 11 Technological ...................................................................................................................................... 12 SWOT Analysis .......................................................................................................................................... 13 Strengths ............................................................................................................................................. 13 Weaknesses ......................................................................................................................................... 14 Opportunities ....................................................................................................................................... 14 Threats................................................................................................................................................. 15 CONCLUSION ........................................................................................................................................... 17
Wal-Mart in China
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INTRODUCTION
Good case studies give information experienced by the company and explain their current situation. The reader is to predict their future move. From the name of the case “Wal-Mart in China” you can indicate learning what happened when Wal-Mart, probably the biggest retailer corporation in USA & Canada, expanded to China. Wal-Mart is well known internationally, they have expanded to Europe, Korea, Mexico, and other countries. In fact, Wal-Mart branches are seen in more than 20 countries. Probably everybody knows Wal-Mart, but definitely everybody knows China. It would be obvious to want to expand to the largest, most populated, & growing nation. Wal-Mart decided to enter the Chinese market in 1995, and by 2012 they had expanded to 140 Chinese cities owning 370 stores. During the 17 years in China Wal-Mart has learned from many challenges, as mentioned in the case. Varying from cultural issues to governmental regulations they have faced those challenges with relative changes promising success. This report highlights the major points in the different parts of the content. The case being analyzed was written in 2012 by Ali Farhoomand and published by ACRC “Asia Case Research Center” in the University of Hong Kong. This report will not analyze what happened to Wal-Mart after 2012 and is bounded by the information given by Mr. Farhoomand.
Wal-Mart Corporation Wal-Mart America
Wal-Mart International
Wal-Mart Europe
Wal-Mart Asia Wal-Mart China
Figure 1: Global Wal-Mart structure
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The organizational structure of Wal-Mart is shown above. If Wal-Mart international is valued outside the larger Wal-Mart Corporation it would be ranked as the third largest retailer in the world. The current direction that Wal-Mart International is planning to take is to use its capital to drive new store growth with particular emphasis in the emerging markets of China, Brazil, and Mexico Wal-Mart has the following types of stores operation in China:
Table 1: Wal-Mart presence in China Total Retail units
374
Supercenter
334
Sam’s Club
6
Neighborhood market
2
Compact Hypermarket
3
Trust-Mart Hypermarket
29
The timelines below show the major events that took place in Wal-Mart China related to its management and expansion of Wal-Mart in China.
1 2
Chan resigns as WalMart China CEO. COO Mr Scott Price becomes and CFO resigned interim CEO of Walbecause of Wal-Mart Mart China International’s plans to introduce its EDLP pricing strategy in China
Wal-Mart in China
3 Mr Greg Folan, senior vice president of WalMart-International is promoted to president and CEO Wal-Mart China
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1996
2010
Wal-Mart opened its first supercenter and a Sam’s Club, its members only bigbox store, in the special economic zone of Shenzen.
Wal-Mart’s presence in China grew to 189 units in 1010 Chinese cities.
Early 2012
Wal-mart doubled its presence with 360 stores In 140 cities
“Wal-Mart in China” has started with the new CEO of China Division Mr. Foran, who was promoted to CEO Wal-Mart China in early 2012. After that, the case showed us briefly what Wal-Mart China is. Showing the economic situation of China, and shinning the opportunity for foreign investments to target the growing nation, the interest to continue reading was warming up. The case highlighted what Wal-Mart experienced not only during their in life in China, but some relative points from their experience in Asia. Foran would benefit from reading the Case and this analysis at least once. The case gives very useful information for him to focus on and consider in his decisions.
He should ask
himself, why did the previous CEO resign? So he can fulfill the expectations of the IGD, which is a non-profit grocery watcher. IGD predicts that: “China would be the biggest grocery market in the world, with total sales possibly reaching US$1.4 trillion...” (Wal-Mart in China, Farhoomand, 2012)
It seems that Mr. Foran has a great challenge in front of him. He has to triple the grocery sales of 2010, in order to fulfill IGD expectations.
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SITUATION SUMMARY
Greg Foran, the CEO of Wal-Mart China, is probably always thinking of why Mr. Chan resigned. What could he do to meet what is expected of Wal-Mart China. Would the UK grocery watcher IGD prediction be correct? Foran had to focus and learn about the Chinese market, customer behaviors, workers rules, reputation, maintain EDLP, and always the increasing safety policies. Luckily for Mr. Foran, Wal-Mart strategy has adapted to Chinese customer behaviors. The stores have more features to satisfy customer expectations. Chinese customers are product selective, especially fish, meat, & vegetables. Many, if not all, Wal-Mart stores in China have live fish tanks, and displayed meat for customer selection. They also have fresh rabbit corners for customers to get fresh rabbit meat. This is very difficult to maintain, where health policies are critical to meet. Wal-Mart has experienced the Chongqing customer complains. Wal-Mart implemented their health inspections, but would that satisfy EDLP strategy. Wal-Mart has established a good reputation to contribute to society. About a million kilowatt-hour of electricity and 860 tons of carbon dioxide emission cut were contributed by Wal-Mart in their “Earth Month” green campaign. Wal-Mart China has to maintain the good reputation and make sure the Chongqing scandal issue doesn’t affect customer perception. Wal-Mart EDLP strategy was chosen to still be the method they want to use in the Chinese market. Wal-Mart management knew that they had to face major issues. Supply chain efficiency plays a big role in EDLP. Wal-Mart had succeeded in pushing suppliers to cut cost and be more efficient. They worked with the Environmental Defense Fund, the National Resources Defense Council and Business for Social Responsibilities to suppliers to cut costs. The Chinese market introduces many challenges to management. The customer expectations of fresh products and maintaining an EDLP strategy is challenging. The corporation reputation is critical especially with the increasing health regulations. Wal-Mart has to maintain the good image and put a good strategy to move forwards. The SWOT analysis is a very important task to support developing the marketing strategy leading to success. Current goals objectives and strategies in China
Now that Mr. Greg Foran is CEO of Wal-Mart China, he has to frame a better strategic focus based on various factors that are present in China. At present, key information in the case points out to the current goals and objectives and strategies that the management in China including him, and Wal-Mart International propose. Wal-Mart in China
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The key goals and objectives that they are focusing on include: 1. A winning strategy to combine “local relevance and global leverage” to woo the ever -growing market of Chinese middle-class consumers. 2. Improve returns through increased profitability in China by focusing on middle income customers in high-growth markets. 3. Expand into growing secondary and tertiary cities in China 4. Emphasis on leveraging globally its vast network of IS, sourcing, business processes and shared services to Reduce costs, focus on its core EDLP policy that is followed worldwide and provide differentiated, value-led products on its shelves The strategies that management is contemplating to implement its objectives and goals for Wal-Mart China include: 1. Introducing compact stores format in China’s second and third tier cities which would keep costs down and reach customers not geographically close to a supercenter or hypermarket. 2. Continue implementing EDLP strategy and expansion in China to help Chinese customers save money so that they can live better. 3. Increase Wal-Mart’s online presence. This included plans for Chinese shoppers to pick their Web orders at physical locations. Past strategies of Wal-Mart China
In the past Wal-Mart China has followed the following goals and strategies: 1. Implementation of EDLP strategy by offering more products at consistently lower prices instead of having sales or temporary discounts and seasonal sales. 2. Utilize synergies of multi-sales channels by expanding into online sales 3. Steps taken to be locally relevant and corporate social responsibility initiatives. 4. Creation of a global position, global compliance officer to monitor bribery related issues and end the completely. 5. Failing strategies in Korea, Germany and Russia because of failing to do a proper analysis of consumer market and having a relevant strategy. In the sections that follow we will do a situation analysis, a SWOT analysis and finally suggest proposed strategies for Mr. Greg Foran based on Wal-Mart China’s current objectives, goals, strategies and our analysis.
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SITUATION ANALYSIS Company
Wal-Mart, the American corporation running a chain of largest departmental stores around the world, is renowned for providing cheap and high range of products on low prices. In August 1995, Wal-Mart arrived in china with collaboration with Shenzhen International Co. Ltd, with an ambition to conquer the wide retail landscape. Wal-Mart, ranked number 2 in the Chinese market, enjoyed much success but faces a tarnished image backed by scandals such as bribery issues, personnel change and food safety concerns which had also forced many of its stores to shut down. Eventually, Wal-Mart had to hired an image consultant to lessen the impact of scandals that had wracked Wal-Mart. Learning from its failure, WalMart finally learned to become locally relevant by gaining insight of the Chinese culture and decided to deploy its evergreen everyday EDLP strategy in china which have been success in other international markets such as Argentina, South Africa, India and Chile.
Collaborators
Currently Wal-Mart strategic focus is to expand its multi-sales channels throughout its emerging market. Since its debut in china, Wal-Mart had high spirits regarding its expansion in the Chinese market. After arriving in china with a joint venture with Shenzhen Intl., Wal-Mart started opening its Sam’s club, its member’s only superstore store. Later Wal-Mart acquired 35% stake in Trust-Mart, a Taiwanese-owned chain of retail supercenters. By early 2012, it nearly doubled its presence to 370 stores in 140 Chinese cites. Wal-Mart further introduced its brick and motor type land contained stores as opposed to its traditional giant warehouse. The move made possible for customers to conveniently shop without hassling over finding products on multiple floors. Wal-Mart has also created technology platforms in seven different countries to execute a global e-commerce strategy. By observing the immense growth in Chinese online market, Wal-Mart invested US$500 million in 360buy.com, the fastest growing retailer company privately held in Beijing. Later Wal-Mart also staked on a le ading online Chinese grocery store company, Yihaodian. Wal-Mart acquired majority of its shares in Yihaodian in efforts to reach the young online consumers by providing them unique online shopping experience. .
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Customer
Among the leading supermarket chains in china, Wal-Mart ranks second with a customer market share of 2.98% and sales reaching 50 Million Yuan (RMB). With the booming middle class, a decade after will earn china a status of a true middle class surpassing china. China’s online customers are increasing at an extraordinary rate with a whopping 161 million online shoppers who frequently purchase various products. According to the statistics of china information network center(2010), food segment make up to 2% of the online shopping, which is still great considering the densely population of china. As the middle class gains strength trend shows that Chinese are becoming more status conscious and are no longer satisfied with cheap imitations, paying premium is preferred if a product or service enhance their status. Chinese customers are different than their western counterparts. Traditionally a Chinese buyer is interested in food, cosmetics, package size, variety and store location as compared to American buyer who persists with non perishable items such as electronics. The buying process for them is impulsive as they frequently visits the store to see what’s new on the shelf and often tend to purchase items in small bundles and only if they are locally relevant.
Competitors
Euromonitor, the world leader in strategy research for consumer markets, states that china had at least 32 hyper market operators (2010). On the other hand United States had only 10 with Wal-Mart being the largest with 80% of the market. Regardless such success it is still not easy to conquer Chinese market as one of the major problems multinational companies encounter by the government are the trade barriers and favorable governmental regulations toward local merchants. In 2012, Chinese government announced to reduce exports and increase its own customer spending. Such changes will renew the competition from domestic Chinese retailers for Wal-Mart by other multinationals. According to the Trade sources and company information, Wal-Mart along with its acquired company, Trust-Mart, is ranked at second in terms of market share in china with Sub Art Retail Group leading the chart. Carrefour, the French retailer and also Wal-Mart’s largest international rivals resides at number 4 with the market share value of 2.57 %( 2010). Carrefour who entered the Chinese market a year later than Wal-Mart achieved much success. According to the head of Carrefour china, Mr. Chereau, success in was due extensive study of Taiwanese culture and lifestyle which share high resemblance with Chinese culture. In 2012 Carrefour announced to accelerate in the china and was set to open 30 new stores by the end of the year. After the Trust-Mart Wal-Mart in China
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acquisition, Wal-mart doubled its presence in the country throwing back its French retail rival, Carrefour. But with one acquisition it was still not enough to dent other domestic competitors such as China Resources and the Shanghai Brilliance Groups who at the times runs 8000 stores and had US$3billion in sales combined. Wal-Mart also gambled on its Smartchoice compact stores in 2008. Soon after its opening, Wal-Mart closed all its three stores in Shenzhen denying the closure claiming that they were only test sites. The reason being the highly competitive convenience store market in china at the time. Approximately 80% of the convenience stores were owned by Chinese with only 20% held by foreign owners. Chinese online shopping market is one of the largest growing markets with online sales expecting to cross US$159.4 billion by 2015. With the competitors gaining shoppers through swiftly and cheaply reaching customers by local bicycle couriers, Wal-Mart sensed an opportunity to grasp. Wal-Mart thus invested in 360buy.com which was the fastest growing retailer in china. Apart from that Wal-Mart also purchased majority of shares of Yihaodian, a leading online grocery company.
Political
Like any corporation, Wal-Mart has to consider political situation before expanding internationally. WalMart in China faced some political challenges, like government requests of having Chinese partners for foreign investors. The Chinese government allowed foreign businesses to carry out operations on its special economic zone site; however, it’s compulsory to have a joint venture with one Chinese partner with not more than 49% of the stake. Wal-Mart had to sign a contract with Shenzhen International Fiduciary Investment Co, Ltd, China. In 1995. Wal-Mart experienced a challenge dealing with labor unions. The Chinese government practiced sending union representatives directly to workers.
It is
important for Mr. Foran to look at more recent political issues. In 2012, the Chinese government announced to reduce exports in order to upsurge own consumption, which makes it even coarser to conquer the booming Chinese market. Economic
China continues to dominate the world as a second largest economy. According to the Chinese national bureau of statistics, grocery retail market will continue to grow in the country. The market grew 11% in China as compared to US at only 4.2%. This signifies the future of the Chinese market as the US and Wal-Mart in China
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European economies slump continues in 2012. Chinese citizens are more inclined towards improving their lifestyle. Many Chinese workers are moving in first and second tier cities to earn a better living. A survey result shows an increase in domestic consumption. The pursuit of better lifestyle is further supported by the credit card balance rise in 2009 to 17% from the previous year. Today, globalization is in fact one of the major proponents worth analyzing in the company's economic environment. As the middle class brought prosperity to china, it also opened the doors for high end foreign retail stores to reach second tier cities. With the prosperity segment population in low million, the demand for luxury goods is far more widespread.
Social
Market acceptance and customer presence are the integral part of company external and internal analysis, it leads them to define their focus and future target markets. Only after underlining the difference between diverse cultural values, Wal-Mart China can achieve high customer intimacy, hence brand loyalty. It is important to always think of what the customer wants, and expect to appreciate. Wal-Mart had to adapt to Chinese culture by changing their way of food display, especially meat, and vegetables. Chinese customers prefer to have fresh fish than frozen, actually most prefer to capture alive. Meat had to be displayed differently so customers find attractive. There are two major trends observed in Chinese shoppers as opposed to its American counterparts. Firstly, they check what is new on the shelf and tend to visit the market on a daily basis and prefer a variety in products. Secondly, they don’t purchase in bundles, as they shop frequently and buy in small quantity. As the middle class status conscious attitude prevails in Chinese culture, it opens the opportunity for foreign investors to invest in their second tier cities. This renovation is well supported the experts, who estimate by 2020, Chinese population will earn a reputation of a true middle class. Wal-Mart should do research before assuming people behavior. Entering a market without understanding their buying behaviors might end up like trying to sell radios to deaf customers. Mr. Foran knows the importance of studying culture; for example Wal-Mart had a bad experience when implementing EDLP in the Korean market. Korean culture is brand consciousness; people would pay a premium price if a branded product or service that adds into his status. Also Wal-Mart did not study customer trends in Germany and Korea and a result failed badly.
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Technological
Wal-Mart has a good experience in supply chain and supports suppliers to become more efficient. WalMart had succeeded in pushing suppliers to cut cost and be more efficient. They worked with the Environmental Defense Fund, the National Resources Defense Council and Business for Social Responsibilities to help suppliers cut costs. With an enhanced technology platform, e-commerce can be a great dimension to capture customer demand. China Internet Network Information Center reveals that nearly 161 million users shop online spending $48.8 billion sales. Forecasts s Suggest the sales wound hit a whopping $159.4 billion by 2015. Such an impressive growth is a significant potential in Chinese e-commerce sector.
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SWOT Analysis Strengths
Global business strengths: Wal-Mart had global network of information systems, sourcing, business processes and shared services. Strong CEO to implement strategies: To deploy the strategy of Wal-Mart, Mr. Greg Foran was made the new CEO and President in China. He had a distinguished career in retail, and was uniquely qualified to lead the retail business in China, based on his previous experience as head of an Australian supermarket chain. Low expense structure: The Company’s expense structure was among the lowest in the industry. Previous successes in China: Wal-Mart created 50,000 local jobs in China. By 2012, Wal-Mart doubled its presence in 2012 with 370 stores in 140 cities. Reliable co-partner in China: Wal-Mart acquired a company to operate in Chin a. This acquisition “TrustMart” had key strengths that helped Wal -Mart to operate efficiently. Trust-mart had national sales, distribution and purchasing networks that were key to Wal- Mart’s entry in China. Strong e-commerce platform: Wal-Mart had a strong e-commerce platform around the world. It successfully invested in e-commerce by acquiring many companies in China. Multi-channel usage by Wal-Mart: Wal-Mart used online tools and mobile applications to sell to consumers in China Strong initiatives in China: Wal-Mart established relationships with more than 20,000 Chinese suppliers sourcing 95% of the products in its stores locally. It also implemented many women empowerment initiatives in China such as the Women’s Leadership Development Commission. Othe r initiatives included using sustainable energy, and CSR initiatives. Steps to reduce substandard selling: Wal-Mart took strong steps to reduce the selling of expired products in China which was praised by Chinese authorities.
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Weaknesses
Top management resignations might reduce effectiveness: Most of the top management of Wal-Mart had resigned including the Chief operating officer and the Chief financial officer and the previous president. Weak performance in China: Wal-Mart had low profit margins in China of around 2-3%. No clear plan for Wal-Mart’ in China: Due to land constraints, Wal-Mart’ build two types of smaller supermarkets in 1 st tier cities but later reversed the decision and closed them. The management had failed to study the differences in culture and consumer perceptions of Chinese customers. Flawed decision making around the world: Wal-Mart did not do a proper analysis and failed in its attempt to implement the EDLP strategy in Korea, Germany and Russia, because it did not study the consumer market properly and did not have a proper strategy for Non-American markets. Bribery incidents damaged the company’s reputation: Between 2004 and 2005 the company’s internal reports showed that there were 90 such cases in China. Instances of selling wrongly marketed products and expired products: In China it was found that WalMart was selling expired products and selling products that were different from how they were marketed. This caused closing of 13 stores in of Wal-Mart. Poor local management in China: The problem of selling expired and falsely marketed products stemmed from the lack of professional attitude from local Chinese management.
Opportunities
China’s thriving economic condition: Foreigners could operate businesses in China in a streamlined manner. It had more prosperous growth compared to western economies. Promising retail sector in China: China’s retail sector was estimated at US $ 7803 bill ion and was expected to grow at 11% to reach US$ 1.5 trillion by 2015. Consumer buying power high in China: Consumers in China had high purchasing power that was seen in the rise of credit card balances. Also 75% of all urban households traded in at least one product category
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of spending according to a study. Additionally Chinese consumers had more money than officially reported in statistics. China is expected to be the largest consumer market in the world in 2020. Demand for premium price products was high in China: Chinese consumers were willing to pay premium prices and buy luxury goods. Shift of middles class consumers to secondary and tertiary cities: Chinese middle income customers were moving out of large urban cities into smaller ones. Premium prices could be charged for products and services that might enhance their status. Strong online-buying culture: China had 161 million online shoppers with a market of US$48.8 billion and is expected to reach US$159.4 billion. Strong consumer loyalty: Despite the closure of 13 Wal-Mart stores, many Chinese customers still preferred Wal-Mart as they liked the product selection and prices.
Threats
Previous closure of Wal-Mart might influence customer perceptions: 13 Wal-Mart’ stores in China had closed for two weeks due to selling expired products and falsifying the features of most products. This will be a new challenge to address for the new CEO. Dependence on making JVs in Chain: All foreign retailers like Wal-Mart were dependent on the companies they made a joint venture with in China. Competition in Chinese 2 nd tier cities: These cities witnessed the opening of many European and American retailers that might break Wal-Mart’s market share. High competition in China: China had around 32 hypermarket operators, while the US had just 10. This increases competitive pressure for Wal-Mart’. One of the competitors, Carrefour, used its experience in Taiwan to be successful in China. High competition in convenience store segment in 1 st tier cities Reduction in exports could lead to lower market share: China planned to reduce its exports. This might encourage local and foreign retailers to increase their market share to absorb consumer spending.
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Mergers are an inefficient of operating: Chinese law required retailers to merge with a local company to operate in China. Mergers are commonly thought of inefficient use of company’s capital, as the main focus is to integrate, leaving aside core day to day operations. This will be a hindrance for Wal-Mart to operate to its true potential like elsewhere. Small customer segment: Price-conscious customers made up the vast majority of Wal-Mart customers. Any change in this segment will drastically affect the sales of Wal-Mart. The EDLP strategy would work for this segment but not the ones who are not price conscious Small merchants that sold at very low price: The EDLP strategy of Wal- Mart’s was facing competition in China from many merchants who were selling cheaper than Wal-Mart.
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CONCLUSION
Based on the SWOT and situation analysis, we have concluded the following: 1.
Introducing compact stores format in China’s second and third tier cities is recommended because there is a significant shift of middles class consumers to secondary and tertiary c ities. Failure of such stores in first tier cities was because there was intense competition in the convenience store segment in those cities. For 2 nd and 3rd tier cities no such competition exits and Wal-Mart should capitalize on this opportunity. If management discovers that it is not feasible to have smaller scale stores then a supermarket or hypermarket could be established in these cities.
2.
It is not feasible to continue implementing EDLP strategy in China as it is done at present. Regarding the market reach of such strategy, the EDLP strategy only appeals to small customer segments that are price-conscious. Any change in this segment will drastically affect the sales of Wal-Mart. The EDLP strategy would work for this segment but not the ones who are not price conscious. At present Chinese customers are demanding premium price products and are willing to buy luxury goods. This shows that a price-conscious segment is diminishing. Furthermore, The EDLP strategy of WalMart’s is facing competition in China from many merchants who were selling cheaper than Wal Mart. What we suggest management is to study the customer perceptions of EDLP in China, the proportion of customers who will be interested in products that are sold through this EDLP strategy and analyze if they can compete with other merchants who are selling at lower prices. Previously Wal-Mart International did not have a proper system to study consumer sentiments in Korea, Russia and Germany and which is why they failed there. A new framework should be introduced to study the customers and devise relevant strategies. However Wal-Mart should still continue utilizing the efficiency part of EDLP which strives to reduce costs and streamlines process. It is only the marketing and pricing side of the EDLP strategy that has to be revisited.
3.
The current goals and objectives of Wal-Mart China state that it will provide differentiated, value-led products on its shelves. However, no strategies to fulfill these objectives are being implemented by Mr. Foran. Our analysis clearly point out to the fact that Chinese customers are getting interested to
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buy luxurious products and those that enhance their status. Therefore Mr. Foran should have a relevant strategy to provide differentiated products.
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