Walmart-world’s largest retailer, is a successful as a king of retailing in US market. After this success, Wal-Mart Stores started eyeing areas beyond its home country and looking at unchartered waters in the overseas markets. Wal-Mart’s mature discount concept and business model were ready to be exported. The management firmly believed that consumers were alike everywhere around the world in searching for quality products at great prices and desiring to be treated well. So, Walmart began its expansion strategies in the Chinese market.
The article mentions the reasons for Wal-Mart's decision to go global , discusses in detail the entry strategy and the localization strategies including procurement and store management. The corporate governance practices followed by the company in China is also discussed. We now analyze the problems the company faced in China because of the differences between the operational and cultural environment of its home market and the Chinese market. Finally, a discussion on the future prospects of the company in the Chinese market and my recommendations is presented.
Success of Walmart in US- Key factors Strategy in US: Market Capture: Wal-Mart has aimed to serve customers who had to travel long distances to save money. It opened “one horse”, rural, backwater towns ignored by other retailers. It grew outside competitors' radar screens to a substantial size to command economies of scale. Public listing provided Wal-Mart with ample resources to finance there by leading to more rapid expansion. Strategy to win strong customer base: It sold brand products for less by offering multiple store formats, including discount stores, supercentres, warehouse stores, and neighborhood markets. This strategy brought customers from all income levels.
Competitor Restriction: With its unique combination of culture and strategies, Wal-Mart set itself apart from its competitors. It entered the market as discount stores in small towns which avoided direct competition from stronger players. Due to small populations it served once Wal-Mart opened a store, the town could not support another store of similar size. Lastly, rural backwaters also reduced costs due to lower land and real estate prices.
Cost Controls: This can be attributed as one of company's core capabilities. With a goal they tried every possibility to drive down the price of products to the lowest they could possibly be . The huge purchasing power created a huge supplier base with 68,000 suppliers. Wal-Mart demanded lower price, high quality, efficient bookkeeping and punctual delivery from their suppliers. It helped suppliers improve inventory management and efficiency by weeding out extra costs. It forced its suppliers to search hard for ways to eliminate the inefficiency in their own processes in order to drive costs to a minimum and to improve the quality of their products Logistics Management:
Use of technology gave Wal-Mart great efficiency in the supply chain arrangement and a distinct competitive advantage.Using electronic data interchange (EDI), satellite technology it wasable to connect all stores to home office enabling its customers the right product mix at the right time while keeping inventory and associated costs as low as they could possibly be. Benefits to Workers: Wal-Mart started profit sharing plans for rank and file workers, which led 2/3 of the American workforce own stock in Wal-Mart.
By cross training people are allowed to switch jobs to enable them to understand different parts of the company's operation, which gave them more variation in their jobs. It strived to promote open door policy so that employees could channel complaints. There are several factors which customers usually consider and these factors are never ignored by Walmart. The following factors gave Wal-Mart a competitive advantage:
- Quality of merchandise
- assortment of goods
- price level
- store environment
- customer support
- store hours
Customer Service: There are two cardinal beliefs in which walmart-believed. (1) Providing great customer service, (2) Showing respect for the individual. “Sundown rule” required for employees to answer requests from customers by the end of business hours
WALMART IN CHINA Key problems in China Market: Wal-Mart faced many problems such as backward infrastructure, diverse regional consumption patterns. Since the store is located in remote locations so as to facilitate ease, they had lot of trouble with the count of people turning over to the stored o purchase. The main reason for this was, growth in rural areas was much slower.
Moreover the industry was crowded with both internationally renowned retailers and domestic players which resulted in high store density in larger cities. Tough competition with local rivals was another problem because local rivals were competing head on with foreign operators. The supermarket segment was primarily dominated by domestic players .
The localized demand, localized supply base, and localized distribution in China also provided domestic players with an edge in establishing strong regional dominance when foreign retailers found it hard to leverage national presence in a regional market. Though China saw substantial growth but many factors either a legacy of history or few phenomena born of reform still impeded the fast development of national market.
Disparity in Income levels: There is a broadened gap in wealth between rich and poor and between urban and rural populations . It was a challenge and almost impossible to develop a uniformed national merchandising or marketing strategy. Satisfying consumer's demand in different regions became a costly practice. Low income in rural areas raised concerns on Wal-Mart's US-bred strategy of locating stores in smaller communities.
Lack of support-Local Protectionism : The local governments had incentives to protect state-owned enterprises under their jurisdiction as they were the base of their political power and a source of private benefits as well as fiscal revenue .
Wal Mart's entrance to Shanghai: It has published a new commercial plan to restrict the opening of new supercentres in the inner city which delayed in obtaining municipal approval. This has put Wal-Mart in a much disadvantaged position against major competition in Shanghai's retail market. Unfavorable Infrastructure: Infrastructure was another hurdle for Walmart. The highways were costly to use, toll fees reached as much as 10% or more of total freight costs. In fact, toll collection at the local level was arbitrary and illegal.
Due to the under-developed highway network that Wal-Mart depended, caused an increase in costs and more waste especially with perishable goods. Regulatory Restrictions: If a distribution centre served a large enough number of stores, economies of scale would be achieved thereby pushing costs down.But, only three stores were allowed to be launched in one city and only a handful of cities were open to foreign retailers . Every store opening had to be approved by the central government which made Wal-Mart's expansion very slow.
Stores in China were supported by two distribution centres, and using the distribution centres did not enable Wal-Mart to reduce costs. IT Network problem: Lack of proper IT infrastructure and regulatory ban of satellite usage impaired retailer's efficiency in communicating with its 15,000 local suppliers Chinese Consumers Culture: Purchase was often impulsive rather than according to plan. Consumers were brand conscious. Ad loyalty was very hard to cultivate when consumers always shopped around for best bargain.
People would rather pick up a small amount of goods at one time because most shoppers biked or walked which limited bulk buys. Demand for freshness: Customers' demand for absolute freshness with poor transportation network required that a large variety of foods had to be procured locally instead of through Wal-Mart's centralized procurement system. Reduced economies of scale and interrupted supply chain meant higher costs in satisfying Chinese customers .
General analysis Walmart has been through a lot in China and many of the lessons learned are perhaps easier to think about in retrospect, but it looks as if making the key-decisions about the China entry in real-time and under an extreme situation of uncertainty is a much more complicated task. Now, even though China has been opening to the WTO, there is still much that’s unknown about the retailing future in China and with the financial crisis emanating from Walmart’s home market the right path for Walmart is a tough call.
Looking back, it seems that there are some major differences between Walmart and Carrefour’s strategy that contributed to Carrefour doing better in comparison to Walmart. The main difference seems to be around the issue of adjusting to local culture. While Carrefour was mainly trying to localize and do things “the Chinese way” by encouraging local branch decision making, building local supplier contracts, stretching local rules and regulations, and using local promotion marketing schemes, Walmart was more focused on doing things the American way – the way that made Walmart was it is today in the American market.
This contributed to the fact that Walmart has been struggling throughout many of the difficulties described above with the local customer, government and suppliers. China is considerably different than the states and yet Walmart has been slow to try to adjust to that, which just might cost Walmart the entire Chinese market (as it has in Germany and South Korea). Recommendations:
Primarily, Wal-Mart should try to fit culturally more into the Chinese market while continuing its policies or factors for significant advantage. This transition must happen in a balanced manner.
Though Wal-Mart -US is recognized for the lowest prices for best brands and best quality, it is not being recognized in the same way in China. In China, everyone is going for low prices and providing low quality to do so, Walmart musty try to create its own brand that assures for low prices but with quality. This can make it more appealing than just a retail supply chain.
Walmart needs to be recognized more as a local brand than a foreign brand. For this, Walmart can depend more and more on the local suppliers. With that, Walmart should use its expertise and knowledge in supplier negotiation and distribution system and keep costs down.
Walmart must pull its local partner into picture, rather than just mentioning it as a Joint Venture. Working together with the local partner to understand where and how the local regulations can be used or adjusted for Walmart’s success and gaining a stronger hold of the potential customer’s heart might help Walmart’s growth and dominance in the Chinese market.
Walmart must understand more deeply the consumer base. The typical qualities of a consumer from China and his purchasing habits what we mentioned above is especially relevant for Walmart. The Chinese consumers go shopping to get out of the house, not necessarily to shop. They’re brand conscious but not loyal. They’re frequent shopper of small amounts and especially appreciate freshness (alive) due to limited space at home.
Though this is not the original Walmart strategy , it should still change its way. A I mentioned they need to better understand who the consumers are and what they’re looking for. Following those characteristics it might be more relevant to focus on the shopping experience and salesperson fleet using aggressive promotion methods. A bigger number of smaller shops with a more of wet-market feeling might be more to the local taste than the American style shops.
Lastly, Walmart must make a decentralized system of management rather than a homogenous one. Decentralization causes the power to be distributed to local managers and supplier network. As Chinese are not much lenient to the homogenous style, a decentralized style can be a better option. In fact , franchising its stores in remote locations will be a good recommendations for Walmart.`