in China 2012 Amy Rasplicka MOR 492 ICA January 29th, 2014

Transcription

1 in China 2012 Amy Rasplicka MOR 492 ICA January 29 th, 2014

2 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 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 3 Expanding on Regional Success: Wal-Mart Decides to Go Global Regional Expansion Timeline 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 Wal-Mart s Five Imperatives for Going Global 1. Efficiency 2. Knowledge 3. Customer Globalization Wal-Mart had excellent economies of scale. 5. Growth 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. 4. Competitor Globalization Carrefour SA, Wal- Mart s main competitor, entered China in 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/

4 4 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 Wal-Mart saw the opportunity to convert China s emerging middle class into consumers. USD (billions) 9,000 8,000 7,000 6,000 5,000 4,000 3,000 2,000 1,000 0 China GNI, USD (billions) China Retail Sales, Source: The World Bank Source: Wal-Mart in China, % 10% 5% 0% US and China Grocery Retail Market Growth, US China Sales (billions of USD) China Grocery Market (projected) 1,600 1,400 1,200 1, Source: Wal-Mart in China, 2012 Source: Wal-Mart in China, 2012

5 5 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 Little corporate network transparency Increased labor available in cities as Chinese migrate to urban areas Chinese unions are extension of government Macro Forces Social/Political Openness Government plays large role in business regulation Increased number of economic-zoned cities where foreigners could operate a business o Location Foreign business must be in cooperative o Unions agreement with Chinese partner that has Bribery 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% Partial 100% License Franchise Joint Venture Affiliation Acquisition Greenfield Operation

6 6 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. Economies of Scale Aggregation high low Global International 4 Basic Global Strategies Transnational Multi-Domestic low Adaptation Local Responsiveness high 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. Cultural Distance: consumer buying habits Admin/Political Distance: government regulations Geographic Distance: less land Boosted Chinese Economy Live fish, uncovered meat Cosmetic demo stations Changed out products more often Accepted unionized labor Opened small format stores 99.9% of associates were Chinese 95% of products sourced locally Smaller packaging

7 7 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 Price Competition --> Lower Prices Lack of land --> smaller stores Chinese buy in small amounts Chinese price sensitive only for non-status items Local and international supermarket competition Proliferation of local convenience stores Supermarket Chains in China, 2010 Sun Art Retail Group Convenience Store Ownership in China, 2012 Wal-Mart + Trust-Mart China Resources Enterprise Carrefour NGS Supermarket Lianhua Supermarket Holdings Shenzhen Chinese Foreign Wumart Stores Other

8 8 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 United Kingdom Japan Success Success Success Consumer preference: cheap prices > good customer service or quality products Consumer preference: cheap prices > good customer service or quality products 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.

9 9 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 December 2008 August 2010 October 2010 October 2011 May 2011 June 2011 October March Wal-Mart acquires 35% stake in Trust-Mart First small-format SmartChoice store opens in Shenzhen 189 units in 101 Chinese cities First Trust Mart opens Wal-Mart acquires minority holding in Yihoadian (online grocery company) Wal-Mart board member Zhou Jiali arrested for involvement in bribery scandals with Yunnan Province trade official and governor 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 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 CFO and COO resign 90 cases of bribery in Asia bribe claims in Mexico (Wal-Mart didn t investigate) VP Hypermarkets resigns Wal-Mart China CEO and Sr. VP HR resign 370 stores in 140 cities More bribe claims in Mexico Wal-Mart investigates Creates global compliance officer position Wal-Mart closes SmartChoice stores Foran appointed new CEO of Wal-Mart China Sr. VP/CMO of Hypermarkets resigns

10 10 Frustrated with Brick-And-Mortar Expansion, Wal-Mart Invests in E-Commerce Forecasted E-Commerce Growth in China, Sales (billions of USD) 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.

11 11 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 Change Adds Status? Electronics and Accessories 60% 26% -34% YES Apparel, Accessories, and Footwear 0% 24% 24% YES Jewelry, Watches, and Accessories 0% 2% 2% YES 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 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 Analysis 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. Big online growth, but Wal-Mart can t capitalize on this because these are status items in China. 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.

12 12 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: [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. 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 Ongoing training and Internal Bribery monitoring processes Internal External External External High employee turnover rate Chinese consumer spending habits are not conducive to EDLP Highly competitive retailer and convenience store market Chinese political environment Fine-tune EDLP and reduce corruption through training and monitoring employees will be more likely to stay Offer only non-status items instore and online in China Slowly add clusters of Trust- Mart s in successful locations in China 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.