Walmart in China

Introduction Walmart, founded by Sam Walton in 1962, is the largest retail company in the world. The low cost strategy and hence the “Every Day Low Prices” (EDLP) strategy allowed Walmart to outperform competitors in the US. Besides having stores in the US, Walmart has also expanded its market worldwide. Walmart’s entry into China was not surprising, given its population and growth potential.

Nevertheless, Walmart China had been struggling with its sales volume. It was only ranked twentieth in sales out of all the Chinese chain stores in 2005. Walmart’s strategic move in the US does not seem to be applicable in the Chinese market. Different factors in the Chinese market blunted the cost advantage of Walmart. This paper will analyze and discuss the strategic issues of Walmart in China with SWOT analysis and Porters’ five forces.

SWOT Analysis Strength * Offers a large variety of products, with recognized labels * Low cost strategy allows Walmart to achieve “Every Day Low Prices” * International linkages around the world Weaknesses * Labor issues arose due to union pressure Opportunities * Chinese consumers are more concern about the value that a product can bring about, they demand for higher quality and service * Expansion of the middle sector implies increasing consumer spending * Entry into the World Trade Organization (WTO) in 2001 lifted restrictions and opened up the market Threats

* Competition from both foreign retailers like Carrefour and local retailers * Income disparity (Gini coefficient over 0.4 – the alarm level) and difference in rural and urban areas result in difficulty in pursuing a uniformed strategic move across nation * Red tape and local protection policies add to cost, which restrict the Walmart’s further expansion in China

* Under-developed infrastructure like poor transportation network, difference in consuming habit between Chinese and Americans, and prevailing shoplifting trends raise the operating cost * Chinese consumers prefers shopping around and look for the best deals, they seldom buy products in bulk, so it does not match the idea behind normal US strategy

Key Issues Logistics and supply chain management is by far the most pressing issue for Walmart China. Walmart in the US is known for its cost leadership strategy, achieved by investing heavily in IT and inventory management. However, given the under-developed infrastructure and the absence of extensive IT networks, the efficiency of supply chain and the speed of transportation was greatly reduced.

Having only two distribution centers in China does not help to reduce cost significantly (Farhoomand, 2006). Therefore, it is hard for Walmart China to achieve economies of scale and hence raises the barriers to entry to deter potential entrants (Porters, 2008).

Moreover, the demand of freshness of food from the Chinese consumers further increases the complexity of inventory management. For instance, they have to keep the product like fish alive, but that does not quite match with what other Walmarts elsewhere have been doing – selling meat and seafood in plastic containers. This further interrupted the supply chain management in China. Furthermore, it is difficult for the Chinese suppliers to adapt to the modern supply chain management used in other Walmarts worldwide (Gereffi & Ong, 2007).

Walmart China is sourcing from 15,000 suppliers and more than 95% are local suppliers (Gereffi & Ong, 2007). The bargaining power of suppliers should be greatly reduced because Walmart China has so many choices. In fact, many suppliers are willing to reduce prices since they wish to stay in business with Walmart – the shoppers’ paradise. As a result, they have to cut costs in order to offer a low price to Walmart.

However, the implication is that the suppliers are going to be less concern about labor working conditions, as that adds to costs. Therefore, while having low supplier bargaining power, Walmart China might face pressure from the labor unions regarding to the working conditions.

The intensity of rivalry is quite high in the Chinese retailing industry. Not only does Walmart China have to compete with all the foreign retailers like Carrefour and Tesco, but also with the local ones. The local retailers pose an even bigger threat to Walmart owing to their well-established network and prime locations.

Moreover, exposing to foreign competition allows the local retailers to imitate the foreigners’ techniques and hence improve their own supply chain efficiency. Also, the fact that the local retailers have entrenched customer, supplier and distribution bases, further intensified the rivalry in the retailing industry. (Farhoomand, 2006)

Lastly, the presence of income disparity in China makes the national merchandising plan more challenging. China’s Gini coefficient of 0.4 suggested that income inequality is at an alarming level. There are poor individuals that cannot even afford buying daily necessity while the affluent customers are constantly looking for luxurious products (Farhoomand, 2006). Given this huge income disparity, Walmart China has been finding it difficult to develop its cost leadership strategy as they cannot standardize their products easily and have to provide different products that meet different customers’ needs.

Strategic Approaches and recommendations All the factors in the Chinese retailing industry show that the cost leadership strategy adopted in the US Walmart might not be applicable in China. There are certainly cultural differences that Walmart China has to be aware of. Customers’ needs differ significantly between nations and within nations.

Therefore it might be appropriate for Walmart to adopt multi-domestic strategy. Walmart China as a Strategic Business Unit should make their decisions and tailor their products and services to the local market. For instance, in response to the demand for freshness of food, Walmart China has introduced indoor wet markets with alive eels and fishes, which allows the customers to walk around and pick the food they want. Also, Walmart collaborated with schools and government, introduced education programs to increase the appreciation of the vast development of retail industry in China (Gereffi & Ong, 2007).

Given the income disparity in China, Walmart could use access-based positioning (Porter, 1996). Farhoomand (2006:11) suggested, “While urban markets for certain goods may have become saturated, their consumption may have just stared in more remote, rural markets.” With access-based positioning, activities can be tailored for different needs. For instance, it might be more suitable to set up Walmart Supercenter in the urban area, whereby people may want a full service supermarket. On the other hand, Walmart Express, which provides simple grocery shopping, might be enough to satisfy the needs in the rural area (focus on low price necessity). (Farhoomand, 2006)

In particular, Walmart should further tailor their products to the more affluent individuals in the urban area. Walmart continued to rank first with the brand value of $139.19 billion (Enright, 2012). With such brand value, Walmart has signaled to the outside world that it has persistence value proposition.

Coupled with the fact that Walmart is a multinational corporation and it has to compete on worldwide playing field, products with better quality are likely to be guaranteed. Chinese consumers are constantly pursuing for better quality products and the middle class segments are growing continuously (Farhoomand, 2006). There is a potential for Walmart to attract these groups of consumers and establish customer loyalty.

With regards to the supply chain management in Walmart China, Walmart can first try to invest in new inventory control technologies, like bar code scanning tools to closely monitor the inventory level. However due to the physical obstacles like poor infrastructure as have mentioned before, this investment can only facilitate better inventory control but may not be helpful in reducing the overall costs hence achieving economies of scale.

To achieve low costs, Walmart can redesign their stores and become a no-frill retailer. For instance, it could charge for plastic bags so as to reduce Walmart’s operating costs. It should avoid aisles decoration and just stack up the products along the side. Adopting the no-frills strategy to achieve low costs has trade-offs – Walmart will be less able to satisfy the customers who look for higher service level. Nevertheless, to be at a strategic position, trade-offs are required to widen the wedge between costs and prices.

Conclusion To sum up, given the business outlook in China, Walmart should definitely formulate its strategy accordingly. The tailored made strategy, coupled with continuous focus on product quality and customer service, Walmart China should be able to achieve EDLP easily. More innovations in the marketing front would also help in boosting sales.

Reference Enright, A, 2012, ‘RETAILERS IMPROVE BRAND VALUE BUT STUMBLE ON CUSTOMER SATISFACTION’, internet retailer, URL: http://www.internetretailer.com/2012/02/22/retailers-improve-brand-value-stumble-satisfaction , accessed on 12/10/2012

Farhoomand, Ali, 2006, ‘WAL-MART STORES: “EVERY DAY LOW PRICES” IN CHINA, Asia Case Research Center, The University of Hong Kong

Gereffi, G., Ony, R, 2007, ‘WAL-MART IN CHINA: CAN THE WORLD’S LARGEST RETAILER SUCCEED IN THE WORLD’S MOST POPULOUS MARKET?’, Harvard Asia Pacific Review 9.1, pp.46-49

Porter, M.E, 2008, ‘ THE FIVE COMPETITIVE FORCES THAT SHAPE STRATEGY’, Harvard Business Review, Volume 86, Issue 1, pp.78-93

Porter, M.E., 1996, ‘WHAT IS STRATEGY?’, Harvard Business Review, Volume 74, Issue 6, pp.61-78