Opinion: China Expansion Will Test Wal-Mart’s Darwinism
Posted on October 19, 2006 by webteam
From Bloomberg News:
Wal-Mart Stores Inc.’s plan to double its presence in China will test whether failed adventures in Germany and South Korea have persuaded the world’s largest retailer to abandon corporate creationism in favor of Darwinism.
Wal-Mart is considering paying about $1 billion for Trust- Mart, a closely held chain of grocery and appliance stores, a person familiar with the proposal told Bloomberg News this week. A report published this month by the University of Pennsylvania’s Wharton School of Business and Boston Consulting Group Inc. suggests Wal-Mart risks throwing good money after bad if its selling strategies fail to evolve to suit local preferences.
China ranks as the fifth-most-attractive opportunity out of the 30 countries on consulting firm AT Kearney Inc.’s 2006 Global Retail Development Index, down one place from 2005. India, Russia, Vietnam and Ukraine topped the list.
Some 400 million of China’s 1.3 billion people live in urban areas, where income growth is about 10 percent per annum compared with just 1 percent in rural areas. The Wharton/BCG report estimates there are 25 million to 30 million middle-class households with annual income of $4,300 to $8,700, and 8 million affluent homes earning at least $11,600 per year.
Gross domestic product in China grew 10.4 percent in the third quarter, compared with 11.3 percent in the second quarter and 10.3 percent in the first three months of the year. Retail sales are growing at an annual pace of almost 14 percent.
“Because international retailers are fueling this growth, market saturation is also on the rise,” AT Kearney said in its 2006 report on retailing in emerging markets. “More than 40 foreign retailers have entered the market to date.”
Korea Closed, Germany Gone
In May, Wal-Mart abandoned its South Korea business after shoppers shunned its gloomy, no-frills warehouse stores that emphasized bulk frozen foods over the fresh produce favored by Koreans. At the time of its exit, the company had just 3.8 percent of the country’s $30 billion-per-year discount market.
Two months later, Wal-Mart sold its 85 stores in Germany to Metro AG after underestimating the loyalty of shoppers to their local retailers, including privately owned Aldi Group and Lidl. Clashes with German workers over labor policies sparked strikes, contributing to $1 billion of losses in Wal-Mart’s eight years in the country.
Wal-Mart’s ambitions to expand its Seiyu Ltd. business in Japan were thwarted earlier this month when Aeon Co. won exclusive rights to acquire the supermarket company Daiei Inc.
Overseas Earnings
Wal-Mart, based in Bentonville, Arkansas, aims to generate a third of its sales and earnings from the company’s international division, up from about a fifth currently. It operates 66 stores in 34 Chinese cities, employing about 36,000 people. Acquiring Trust-Mart would add more than 30,000 employees selling about 20,000 items from at least 100 stores in 20 Chinese provinces.
In the next five years, most of the growth in retail sales will come from China’s smaller cities, which are typically harder for overseas companies to crack than larger, more-cosmopolitan population centers, the Wharton/BCG report says.
“With global strategies, global products and global go-to- market, it becomes very difficult,” writes Deepak Advani, chief marketing officer of Lenovo Group Ltd., the world’s third-largest personal-computer maker. “You need to develop products that appeal to them, speak to them with messaging that is relevant to them. You need channels that are more accessible to them—like storefronts, which are very popular in China.”
Conspicuous Consumption
As it expands, the U.S. company risks falling into the crack between the market for basic consumer goods, dominated by local stores, and the luxury segment of global brands that already have acceptance among Chinese buyers.
“They don’t spend money on products their friends and neighbors can’t see,” writes Hubert Hsu, the Hong Kong-based head of Boston Consulting Group’s unit for Asia-Pacific consumer goods and retail. “They may not be willing to pay premium prices for brands like Windex window cleaner or Kiwi shoe polish.”
About 70 percent of retail goods are sold in the nation’s “mom and pop’’ stores, according to the Wharton/BCG report. What’s missing in China’s retailing market, the report suggests, is the middle ground that Wal-Mart has targeted so successfully in its domestic market.
“It’s important for companies to segment consumers and understand where they’re willing to trade up and trade down,” writes BCG’s Hsu.
Collective Capitalism
Among more-affluent consumers, China has 1.6 million households with $500,000 or more of assets, and about 250 million worth $100,000 to $500,000. Much like anywhere else, the most successful brands are those deemed to enhance social standing. Unlike in many countries, however, conformity is important.
“The higher-order needs in China are still collective rather than individualistic,” writes Harjot Singh, China planning director for Omnicom Group Inc.’s BBDO advertising agency. “Everyone in China wants to conform to standards in a way that gives them social acceptance. It’s no longer a game about creating esteem, it’s a game about creating popularity.”
Wal-Mart needs its overseas expansion to succeed, after disappointing sales in its home market and the cost of shuttering the German operations contributed to its first profit decline in more than a decade in the second quarter. This week, it appointed a new head of its retail business in China.
Ed Chan will join in February from Dairy Farm International Holdings Ltd., where he was regional director for North Asia. Dairy Farm, which is based in Hong Kong and listed in Singapore, operates supermarkets, convenience stores and drugstores across Asia, including about 250 7-Eleven shops in China.
It’s not hard to see why China appeals to Wal-Mart. The trick will be figuring out how to make Wal-Mart appeal to China. The company’s failed overseas expeditions have been marked by an inability to adapt to local conditions; that one-size-fits-all approach will have to become more adaptable to its environment if Wal-Mart is to avoid another costly misadventure.
