2009 2 9

Stra ategic Market Plannin ng Aut thor: Praveer Khaitan Stud dent ID: 21 10618098 06/1 10/2009

[W MA STORES WAL ARTS S

EV VERYDAYLOW WPRIC CESINCH A] HINA
This is a Case Ana alysis of Wa al-Mart in C China based on the HBR case give to us in Strategic d en S Market Planning class and represents the origina work of the autho Use of outside al f or. informa ation has b been only to augmen case arguments an wherev used ha been nt nd ver as referenc Exhibits referred t in the an ced. to nalysis are the ones giv in the case. The ca is set ven ase in the y year 2006 a we will be analyzing it at tha point of time. Furthe developm and at er ments by Wal-Ma in China since 2006 have been ignored for the purpos of case an art a 6 n r se nalysis.

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Introduction
Wal-Mart the global retail giant with sales of USD 285 BN and effective operations across nine countries with over 5000 stores and over 1.6 million employees worldwide was the undoubted king of discount retailing. With its retail portfolio comprising discount stores, supercentres, Sams club and neighbourhood markets, consistently healthy net margins of around 3-4% (from Exhibit 3), revenue CAGR of 12.80% over the last 5 years (from $156 BN to $285BN) and with the confidence of having conquered the US market and having driven competitors like Kmart & Woolco to bankruptcy, Wal-Mart clearly had its eyes on the international market, more specifically, the emerging markets.

SituationalAnalysis:WalMartinChina
With the opening up of the Chinese Retail Industry in 2005, the retail world had gone into a tizzy. The worlds most populous state, an emerging middle class with purchasing power and willingness to spend, no wonder they were salivating. Wal-Mart had additional strategic interest in it, with over USD 20 BN worth Chinese goods flowing through its inventories worldwide; a successful Chinese model would have significant cost repercussions. However, over the past decade since its entry into China, Wal-Mart had lagged behind leading retailers like Carrefour, and ranked a lowly 20 (from Exhibit 1). It had been driven out of Brazil, Indian retail market was out of bounds till 2005, and with no operations in Russia, China was the only BRIC country where Wal-Mart could make its presence felt in the near future. With a forecasted CAGR of 8-10% translating into a total retail market of US$2.4 trillion by 2020, Wal-Mart just couldnt let this opportunity slip.

KeySuccessFactors(KSFs)intheUS
Before analysing and dissecting the China strategy in detail, it would be useful to see what made Wal-Mart the insurmountable mountain it was in the U.S. market. Location, price and assortment were the top 3 factors consumers treasured (as per Exhibit 5) and Wal-Mart

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ensured it was always exceeded consumer expectations, prime focus being price and quality. Listed below are the major factors which gave Wal-Mart its competitive advantage: Entry Strategy: Wal-Mart entered by trying to solve the peoples problem in rural backwater towns and expanded quickly to saturate small one horse towns. Saturated regions didnt face direct competition from big players like Kmart who thought that <50,000 population towns could not support a retail store. This strategy also meant reduced costs due to lower land and real estate prices. Positioning: All successful firms came into existence because they solved a problem, Wal-Mart solved two; the second being the customers frustrations with timing their purchases right. Every Day Low Prices meant that one didnt have to wait for a sale to get their moneys worth. They simply owned the lowest price positioning category. Pricing and competitor surveillance: They just didnt carry the slogan, but implemented it, crashing prices as soon as they saw a competitor offering any good for a lesser price. They sold the same merchandize for 20% less (customers saved approximately 15% on every cart of groceries) Supplier Partnerships: Described as a love-hate relationship, Wal-Mart improved the efficiencies of its supplier partners too and carved out long standing deals at unbelievable prices. Their Roll Back philosophy passed on benefit of drop in producers price to customer adding value.(Case in point being the price of fans dropping from $20 to $10) Distribution System: Wal-Marts hub and spoke model giving its own fleet of trucks and 99.5% on time delivery record gave it unparalleled economy in distribution. It invested heavily in its unique cross-docking inventory system by which goods were continuously delivered to stores often without having to inventory them, lowering costs as well as giving the individual managers more control at the store level. This is the prime reason

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why they could maximise floor area by not having to stock inventory in their stores itself, resulting in astonishing sales of US$414/sq. feet compared to US$222/sq. feet for Kmart. Assortment: Wal-Mart was a one stop shop for all household needs and facilitated buying quality goods at affordable prices in bulk. Investment in IT: David Glass pioneered the use of technology and Electronic Data Interchange (EDI). For example, Wal-Mart built an automated reordering system linking computers between Procter & Gamble ("P&G") and its stores and distribution centres. The computer system sent a signal from a store to P&G identifying an item low in stock which would then sends a resupply order, via satellite, to the nearest P&G factory and proceed to ship the item to a Wal-Mart distribution centre or directly to the store. A winwin proposition, it helped P&G can lower its costs and pass some of the savings on to Wal-Mart. (Thompson & Strickland, 1995, p. 866) Wal-Marts geographic locations, cost-leadership, assortment & distribution systems, all played a vital role in Wal-Marts success. Though some more important than others, each part of this giant machine was required to function smoothly. Not only did these sources provide competitive advantage, but also were inimitable. Why couldnt competitors like K-Mart copy their strategies? The devil lies in the details, and a man of such detail was Sam Walton. In fact, Kmart founder once claimed that Walton "not only copied our concepts, he strengthened them. Sam just took the ball and ran with it" (Thompson & Strickland, 95, p. 859) Culture: Each organisation has its unique culture which is not duplicable. This culture, described as "one part Southern Baptist evangelism, one part University of Arkansas Razorback teamwork, and one part IBM hardware" has worked to Wal-Mart's advantage (Saporito, 1994, p. 62), with Sam Waltons close association with day to day operations rubbing off on each and every employee. His going in disguise to competitors stores is like the stories told in books.
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o Employee culture: Wal-Mart was completely non- unionised with an open doors policy. It had low turnover and extremely happy employees. Cross training removed boredom for them, while stock options and profit sharing were motivating and imbibed self-esteem amongst rank and file workers also. o Frugality & cost control: Not only was the frugal culture restricted to lower rung employees, top managers too flew economy class and stayed at budget hotels. Saving was as important as earning, and everyone abided by this rule. Strategy execution: Ideas come a dime a dozen, and often execution is key. Here is where Sam Walton excelled, with his speed and perfection, immediate entry and fast expansion before others could even blink meant that he captured and saturated underserved markets long before anyone else realised their potential. Thus their locational strategy became impossible to copy as there was no scope left in those markets. Focus on Service: While the stores could have given the consumers the same assortment of goods, the combination with price and service made Wal-Mart unbeatable. Great Customer service, respect for individual and striving for excellence were the 3 cardinal principles everyone abided by and rules like the Ten Feet Rule, Sunset rule, etc. meant the customers had an experience very different from other stores in respect of service.

StrategicModelinChinaCanitreplicatetheAmericanModel?
As described earlier, Wal-Mart had not been able to deliver the same results in the Chinese market. It was thus clear that the Wal-Mart could not create the competitive advantages in China based on its American Model. Many factors contribute to large scale differences between the two countries leading to dilution of Wal-Marts competitive edge in China: Diverse Population and Income Disparity: A look at Exhibit 14 clearly shows the income disparity in every region, with GDP per capita (US$) ranging from $381 in Guizhou to $4909 in Shanghai. The rural market in China was not like America, where
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the size of population determined the urban/rural status, but was actually lacking in purchasing power making their rural entry strategy redundant here. Local Protectionism: This greatly hampered Wal-Mart as evidenced in the case through the Shanghai example and made their centralised accounting policy a handicap for them as each state wanted to get their own share of taxes from Wal-Marts profits. The 2001 ruling against local protectionism bodes well for Wal-Marts future in China. Impossible to reproduce logistics model: China suffered from lack of adequate infrastructure to reproduce the distribution model which was a key competitive advantage in the US. Density of land transport was only 157/1000 km compared to 720/1000 in US and 3138/1000 in Japan and there were high tolls on expressways. Regulatory restrictions and bureaucracy: Growth was confined to only 3 stores per city, and only a few cities in southern China. Government had to approve each branch and these combined with Wal-Marts own ethics of doing business correctly and abiding by regulations hampered its growth while competitors openly flouted rules. Also the magic number of 120 stores per distribution centre was simply unattainable in this scenario. Employees: The same source of strength was a weakness in China where there was the concept of unionized work force and Wal-Marts policies did not go down well. Management turnover was high and labour officials condemned Wal-Mart for squeezing suppliers and making workers suffer. Other important factors like lack of a well developed IT Network and regulatory ban of satellite usage, Chinese culture of many trips little purchase, fresh means alive mentality for groceries, and shoplifting (5% compared to 0.3% worldwide) meant that the American model was clearly unsuited to China and clearly required a rethink.

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TheChineseRetailIndustry
Having understood the differences that exist between the Chinese and American markets, it is imperative we carry out a macro level analysis of the industry in China before proceeding to recommending the way ahead for Wal-Mart in China. A look at the Industry forces would reveal the following:
Porters Five Forces Analysis of the Chinese Retail Industry

Suppliers Power : Low

-Retailers command huge bargaining power -Switching cost is low for retailers -Many potential suppliers and inputs readily substitutable

Barriers to Entry : High

-Economies of scale for existing large firms -Access to distribution channel not easy -Retaliation by existing retailers to newcomer

Rivalry : High
Many competitors High industry growth Differentiation aspect very subtle

Buyers Power : Moderate

-Buyers Switching cost is low -Price sensitivity is high

Threat of Substitute : Moderate

-Low level of differentiation between similar format stores. -Large unorganized sector which operates on a smaller scale and competes against giants.

Thus we can see that that the Chinese industry is an attractive one from the point of view of the incumbents, the only major drawback being intense competitive rivalry.

ExternalAnalysis
A look at the political, economic, social, and technological fabric of China would reveal: Political: Chinas 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. Those restrictions were among the key reasons for Wal-Marts 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. Going forward we can only see more opening up of the sector.
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AYLOWPRIC CESINCHI INA] WalMartStores [EVERYDA

Eco onomic: Ch hinas middl class is g le growing. Ho owever, at th moment, the rural market is he , m not that strong and there is large inc g come dispar betwee people/re rity en egions. It fo ollows a dece entralized m model of tax collection GDP gro x ns. owth rate in China (06) was a whopping n w 10.6 (GOV.c Thursday Jan 25, 2007) & fore 6% cn, y, ecasted to g grow at doub digit rate ble e.

Soc cial: The lif festyle of pe eople in Ch hina was cha anging with people att h taining bette living er stan ndards in ge eneral. Con nsumer buyi trend was to purch ing w hase small quantities multiple m time and more than 70% of the pop es e % pulation was between 1 s 15-64 years with a med dian age of 3 32.7 years in 2006, 1wh n hichbodewe ellforthesto oreformatso ofWalMart.

Tec chnological: As descri ibed earlier China lag r, gged behind in terms of technolo and d ogy gov vernment re egulations m made thing worse. However, g gs H going forwa one ca see a ard an libe eralized econ nomy for th entire wo includin China. he orld ng

The abo analysis reveals it i an industr with high entry and high exit co and a changing ove s is ry h osts c external environme (for the better from Wal-Mart viewpoin making it a good but risky ent m ts nt), b y. ve forces and e external ana alysis comb bined with W Wal-Marts internal industry The abov industry f forces w would throw up the foll w lowing inter SWOT matrix for Wal-Mart i China rnal T in
Strengths S Powe erful Brandknow for quality wn y & pri ice Logis stics and IT netwo ork Huge Financial e muscle Weaknesses W Inab blity to adjus to st loca needs al Am merican learni ing curv not ve repl licable in Ch hina Perceived as ally an' tota 'America Opportuniti ies G Growing Chin nese Market M O Opportunity fo for M&As M O Opening up of f markets not ju in m ust China but worldwide w A Alternate Form mats Threat ts Competitors like s Carrefour pr roving tough outsid US de res Global failur may have lo run ong implications on s competitive even in advantages e US

Compe etitor Analy ysis: The m main differe ence betwee Wal-Mar and its C en rt Chinese com mpetitors seems t be around the issue o adjusting to local cu to d of g ulture. Whil Carrefour was mainl trying le r ly to local lize and do things the Chinese w e way by en ncouraging l local branch decision making, h

http://w www.indexmu undi.com/en/ /facts/2006/ch hina/demogra aphics_profile e.html

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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. This contributed to the fact that Walmart has been struggling throughout many of the difficulties described above with the local customer, government and suppliers.

TheRoadAhead:Recommendations
With the withdrawal of their President Cassian Chueng at this delicate juncture, the strategic direction for the road ahead for Wal-Mart in China needs careful attention. We can draw the strategic road map for Wal-Mart as follows:

ProductMarketInvestmentStrategies
Mergers & Acquisitions: The Chinese Industry as seen above is a highly fragmented one with a lot of small players. The next natural step in the industry would have to be that of consolidation and Wal-Mart can use its extensive financial muscle to negotiate good deals to expand into other cities wherever possible, and pursue organic growth where not. New Store Formats: New store formats should be invested in for the Chinese consumer. 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.2 Invest more in own brands: Own brand sales are much more profitable for retailers, and in China where Wal-Marts cost competencies in the US do not hold, increasing own brands on shelves will add to profitability and also improve cost efficiencies.

CustomerValueProposition
Emphasis on Quality: Wal-Mart is known for low prices, and in China where everyone is going for low prices (often at the expense of quality), Wal-Mart should position itself as a quality retailer where you not only get low prices, but also the best quality.

"Whats new with the Chinese consumer, Ian St-Maurice, Claudia Sussmuth- Dickerhoff and Hsinhsin

Tsai, The McKinsey Quarterly, October 2008

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Create an experience: We have seen that the Chinese customer is different. They often treat malls as a source of leisure. It is important to change store formats to create an experience along the lines of maybe an IKEA store.

Image Makeover: Seen as an out and out American brand while a strength in the US, is obviously a weakness in China. There have been lot of protests against Wal-Mart in China for it supplier squeezing and anti-unionization policies,3 and adapting to local culture is imperative for building customer loyalty.

Assets,CompetenciesandSynergies
New competencies for logistical efficiency: The lack of a well developed infrastructure means that Wal-Mart will have to rethink its operations. A few options are: o Asset sharing with companies like Carrefour to negate the 3 store per city rule and move towards the magic number of 120 stores per distribution centre. As China is a growing market, it would be a win-win situation as it is not a zero sum game. o Stocking in store: If asset sharing is not feasible, the older model of stocking more in store for reducing transportation costs might be more viable in China. Leveraging local partner: Working together with the local partner to understand where & how the local regulations can be used or adjusted for Wal-Marts success.4 Finally, at a functional level, Wal-Mart might be better off following a decentralized policy in China, giving more power to local managers and supplier network as it is a less homogenous market as compared to the US (Bringing best practice to China, The McKinsey Quarterly) We should keep in mind that as the Chinese economy grows expands; it will ultimately resemble a developed one in the long run, one where Wal-Mart is unbeatable. The above strategic & tactical recommendations should ensure a profitable survival till that point.

3 4

TheWalmartyoudontknow:http://www.fastcompany.com/magazine/77/walmart.html "Ready for warfare in the aisles Retailing in China. The Economist, August 5, 2006

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