China Business Strategy : Walmart and Chinese culture

Things have not been easy for Walmart in China. Some things just don’t seem work in China as well as they did in the US. Actually, China isn’t the first location Walmart’s been facing difficulties at, with the pullouts from Germany and South-Korea.

This quick analysis of Walmart in China is based on a case-study I read for the "Doing Business in China" course at Hong Kong University of Science and Technology’s Management of Organizations titled "Wal-Mart Stores: ‘Everyday Low Prices’ in China" by Asia Case Research Center, University of Hong Kong.

Wal-Mart’s business model and success factors

Walmart has had a phenomenal success at the US due to a few key factors.

Cost control – Walmart’s key slogan was around offering the lowest prices in the market all year around, making an emphasis on cutting down any competitors’ offer, averaging around 20% less than their competition.

Targeting a neglected niche – Walmart started up by focusing on the customers that everyone else seemed to neglect, the small town shoppers. The strategy was especially successful as it achieved instant market saturation leading to very strong loyalty. This strategy also helped stay below leading competitors radar while building up their competitive advantages (distribution centers, etc.) that allowed them to grow bigger into mainstream.

Supplier partnership – Walmart was able to build a win-win partnership with their suppliers while still acting as a very strong negotiator. Insisting on lower prices, Walmart was also working with suppliers to help them achieve those prices by providing them with support and consultancy and going into details to achieve efficiency for their businesses.

Distribution system – Walmart has managed to build one of the most efficient distribution systems in the US. Distribution centers were constructed so that any Walmart’s stores will always have a distribution center less than a day’s drive away and operating its own truck fleet has led to 99.5% on time delivery record.

Employees – Walmart awarded its employees differently, shifting the focus from salaries and into profit-sharing stock based rewards, working to improve the employees skills, trust and involvement by doing constant job shifts and sharing the corporate information with them.

Challenges in China’s retail market

It currently seems that the opportunities envisioned by looking at China high growth market, uprising middle class and still unexplored markets are being undermined by the serious challenges this market entails. Following is a brief description of some of those challenges.

Diverse population – the Chinese people experience some huge differences in income, depending on their employment and social status, province they live in, and whether they’re from an urban or a rural place. Some of the population is very poor and perhaps have different purchasing habits that pose new if not impossible challenges for retailers.

Too many players – the China retail market is now exploding. Foreign companies in the market enjoy relatively strong liquidity and international backing while local companies have an advantage in their in-depth knowledge of the local market, being very quick to adapt and establish wide spread and cheap distribution systems.

Local protectionism – Local governments no always following directions given by central government. There seems to be a strong local bias against foreign companies and for local and state-owned companies. State regulations against it are rarely enforced.

Backward infrastructure – infrastructure is lacking and costly – roads are still not up to modern standards and are usually toll-based, distribution from port to destination by rail extremely slow and often requires overnight storages. IT communications still far behind in most areas on both speed and connectivity.

Regulatory restrictions and bureaucracy– at the beginning – confining growth to 3 stored per city, and only a few cities in southern China. Government had to approve each branch. Walmart abided to regulations while competitors bended those.

Employees – relatively unsatisfied, high turnover, low pay could not be compensated by stocks, China’s mandatory labour union relatively more hostile towards foreign brands, especially Walmart.

China’s entry to the WTO

China’s entry to the WTO removed most of the restrictions that retailers were facing regarding the number, location and size of branches, eliminating barriers for foreign competitors to compete in China – atleast officially. Those restrictions were among the key reasons for Walmart’s lagging build up of their China branches and distribution channels that made it difficult for them to effectively compete using their original competitive advantages from the US.

 

 

Wal-Mart suggested business model in China

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 seem 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).

 

Suggestions

Walmart needs to adjust to the Chinese market, while leveraging its source of competitive advantage. This requires a delicate balance. At the US, the brand Walmart is associated with low price rather than quality. In China, where everyone is going for low prices and providing low quality to do so, Walmart’s own brand could be an assurance for low prices but with quality by making the Walmart name about more than just retailing. The suggested strategy in the 2008 Walmart supplier meetings shows that it’s heading in that direction (Business Week). This also follows Gome’s strategy of renaming its suppliers to their own brand (Business Week), but goes beyond it as the foreign brand in China is already associated with higher reliability and quality assurance. This actually holds true in China were retailers do a better job of enforcing supplier quality than the local regulations. With that, Walmart is still able to use its expertise and knowledge in supplier negotiation and distribution system to keep costs down.

Although Walmart is a Joint-Venture, the sources do not mention any attempt to leverage the local partner to meet the local market, which seems the opposite to some other joint ventures discussed like Danone and Wahaha. 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 (The Economist).

Most of what we mentioned about the Chinese consumer habits in previous cases is especially relevant for Walmart. The Chinese consumers go shopping to get out of the house, not necessarily to shop. They’re more impulse driven and like on-site promotions. 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 (The McKinsey Quarterly). This seems a bit off the original Walmart strategy and so Walmarts needs to go deeper in trying to understand who the consumers are and what they’re looking for (“How to Market to Asia’s Masses”). 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 (熱鬧) might be more to the local taste than the American style shops. (CCRRCA)

Last, the strong centralization that has helped the American Walmart seems to hold back Walmart in China. China is less homogeneous than America and that calls for decentralization, giving more power to local managers and their supplier-network or perhaps even moving to franchising in some of the more remote locations (“Bringing best practice to China”, The McKinsey Quarterly).

References:

1. "Ready for warfare in the aisles – Retailing in China”. The Economist, August 5, 2006.
2. "Outsmarting Wal-Mart”, Darrell K. Rigby and Dan Haas, Harvard Business Review, December 2004.
3. "GOME is tops in China”, Business Week, September 10, 2008
4. "Wal-Mart’s new sustainability mandate in China”, Business Week, October 28, 2008.
5. "What’s new with the Chinese consumer”, Ian St-Maurice, Claudia Sussmuth- Dickerhoff and Hsinhsin Tsai, The McKinsey Quarterly, October 2008 .
6. "Food Retail Formats In Asia – Understanding Format Success”, A study for the Coca-cola Retailing Research Council Asia.

I find it fascinating that Carrefour made its first entry to Taiwan using the exact same slogan of "Low prices everyday" and has done exceptionally well. Some interesting comparisons to be made between the China and Taiwan market and the challenges of adjusting to the local consumer. Carrefour seems to have been playing both sides of the strait much better than Walmart (though not as successful in eastern Europe). Maybe more on that later.

Last, here is a video section from CNBC’s China segment about some of the challenges Walmart’s been facing with the Chinese consumer and how they’ve been trying to adjust.

Comments welcome.