Case study of Wal-Mart

1. Introduction
After realizing the limitation for growth in western countries, the US multinational

retail giant Wal-Mart seeks to expand its business in some growing but under-served

emerging market region such as Africa. Then, Wal-Mart chose South Africa as its

stepping stone to open up Africa market. Accordingly, Wal-mart decided to enter into

South Africa through the process of joint venture, offered to buy 51% of South

African retail giant Massmart Holdings Ltd (Bernhardt 2011). However, there is

controversy over entry of this American multinational retail giant.

This essay is written to analyze Wal-Mart’s business operation in South Africa which

includes identifying potential challenges in the process of gaining entry permission,

introducing detailed screening approach required for market in South Africa and

adaption in business strategy, analyzing the pros and cons of Wal-mart’s strategy of

entering into a joint venture with Massmart, and finally listing the actions that should

be taken to relieve the tension between Wal-Mart and objection coalition.

2. Analysis of Wal-Mart doing business in South Africa

2.1 Potential challenges in the process of gaining entry permission

Although the developing market possesses huge retail opportunities, entering into

emerging market is widely recognized to be complicated due to some potential

challenges.

Firstly, one of the inevitable challenges that Wal-Mart will face in the early stage of

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the process of its entry is that how to manage relationships with stakeholders in South

Africa such as government, trade unions, parliament and competition tribunal

(Bernhardt 2011). Actually, most of these stakeholders’ reactions toward Wal-Mart’s

entry into South Africa were negative because of Wal-Mart’s bad reputation for

squeezing out margins from suppliers and being anti-union and aggressive in dealing

with staff and competitors. These stakeholders’ motives and roles are listed in the

Figure1.

Figure 1: Summary of Stakeholders’ Motives and Roles (Bernhardt 2011)

Secondly, institutional restriction is also a tough challenges for Wal-Mart gaining

entry permission in South Africa (Bernhardt 2011). For instance, South Africa merger

regulation requires all large mergers, such as the merger between Wal-Mart and

Massmart, to be notified to the Competition Commission (Bernhardt 2011). After the

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Commission assess the merger, it must make a recommendation to the Competition

Tribunal to ask for approval for the merger. However, it is difficult for Wal-Mart to

get approval from the different agencies.

Furthermore, the bureaucracy and government restriction on foreign firm’s

participation in the retail sector intensified the hindrance of Wal-Mart gaining entry

permission (Andile 2010). More seriously, with trade liberalization slowing or even

reversing, and the emergence of more intervention in industrial policy which in

response to the economic recession on the impact of industry and employment has

increased the difficulty for Wal-Mart to gain entry permission.

2.2 Detailed screening approach required for market in South Africa

There are many indicators which influence Wal-Mart considering choose South Africa

market for its maiden foray into the Africa market. Compared to Asian and South

American countries, South Africa is much less attractive to global retailers. However,

the South African market has its uniqueness and offers a relatively stable gateway to

the African continent (CORIOL ISRESEARCH 2001). From the Figure 2, the detailed

screening approach will be listed below.

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Figure 2: Regional supermarket retailing overview (CORIOL ISRESEARCH 2001)

Firstly, from a population perspective even though the population of South Africa is

relatively small, Wal-Mart could benefit from the dynamic fueled by growing young

population of workers and consumers in South Africa (Eaglestone Advisory Limited

2015).

Secondly, by graphing the results, the retail food sales through supermarkets in

developed countries has been up to around 80% and there are also large number of

supermarkets, it means retailers in developed countries face saturated markets with

fierce competition and low consumption growth. Oppositely, developing countries

such as South Africa can offer better investment opportunities for international

retailers as there is so much potential space for South African retail trade, and the

competition is relatively small.

However, the high unemployment level and local suppliers protection in South Africa

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have brought Wal-Mart many social pressures ( Bride 2011). Most South African

brands, products and tastes are still national and most food sales occur outside

supermarket. Besides that, poor infrastructure and facilities, in particular,

time-consuming logistic and poor traffic infrastructure will influence the development

of Wal-Mart ( Brown 2010). But it also denotes opportunities for Wal-Mart as it can

differentiate Wal-Mart from local competitors for its advanced procurement processes

and creative product offering.

Actually, through the detailed screening, Wal-Mart has recognized the considerable

interest on entering into Africa market. South Africa has been growing to be an

important emerging economies in the world trade and could also be used as the

stepping stone for Wal-Mart’s business expansion in Africa.

2.3. Adaptation of Walmart which could have done in its strategy to

enter the sector

Drawing on lessons from successful experiences in entering other international

markets, Wal-Mart finally decided to make joint venture with South African retail

giant Massmart (Bernhardt 2011). Actually, Wal-Mart has tried a variety of strategies

to enter international markets, as can be seen in Figure2, the major entry mode of

Wal-Mart in the international market are joint venture and acquisition.

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 Figure 3: Walmart International Activities (CORIOL ISRESEARCH 2001)

Considering South Africa was geographically and culturally too distant to Wal-Mart.

Using other kinds of entry mode such like exporting or license may not benefit

Wal-Mart, it may even cause Wal-Mart losing sufficient control to its assets and

consistency of brand image. However, it does not mean that Wal-Mart always gains

success from joint venture and acquisition entry mode. Wal-Mart has once failed in

Korean market because of the selection of despoiling control right as method of

acquisition (Bride 2011). Therefore, determining entry mode is very important, but the

timing and method of entry are important as well. Entering a new market as early as

possible or wait for first mover is quite different. As Wal-Mart's influence in South

Africa is relatively small, it is important for Wal-Mart to enter South Africa at an early

period to preempt rivals by spreading its brand influence.

Therefore, establishing joint venture with Massmart could be considered as a suitable

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choice for Wal-Mart. Once Wal-Mart has localized itself well and built a good

relationship with South African stakeholders, it can completely merge the partners to

expand its business.

2.4. Pros and cons of Walmart’s strategy of entering into a joint

venture with Massmart

Pros

Picking Massmart as its joint venture partner can bring many advantages to Wal-Mart

when making it entry into South Africa.

Firstly, Massmart is considered to be the fourth largest successful retailer in South

Africa and its African Operations have done extremely well. It possesses the

experience and knowledge of doing business in South Africa which can be able to

help Wal-Mart reduce the likelihood of being trapped with indigenous cultural and

political issues (Soni & Karodia 2014).

Secondly, Massmart and Wal-Mart are similar in their store formats. It is considered

to be the most natural fit for Wal-Mart amongst South Africa. Therefore, it will cut

many unnecessary processes when making joint venture with Massmart.

Thirdly, facing the unfamiliar markets, right partner’ insights can give much guidance

in business developing. Wal-Mart can draw insights from Massmart experience in

terms of dealing with political and legal environment. It will help Wal-mart to manage

relationships with various stakeholders.

Cons

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There are also existing disadvantages for Wal-Mart establishing joint venture with

Massmart.

Firstly, if Wal-Mart entering South African market by establishing a wholly owned

subsidiary, it will gain more revenue without having to share with partner.

Secondly, South African stakeholder’s reaction toward Wal-Mart establishing joint

venture with Massmart was negative. In order to establish joint venture with

Massmart, Wal-Mart had made many compromises to the stakeholders and operating

business based on a number of conditions. The coalition against the merger kept

monitoring of Wal-Mart’s operations in South Africa. Therefore, it will influence

Wal-Mart’s further development in the South African market.

2.5. The measures to ease the tensions between the company and the

opposing coalition after getting approval for its joint venture

As can be observed above, Wal-Mart has a very tense relationship with South African

stakeholders. However, there is a widespread recognition that identifying and

managing of stakeholders is imperative for companies to maintain the presence in

South Africa (Bonakele 2011). Therefore, it is significant for Wal-Mart to take

effective measures to alleviate conflicts with South African stakeholders.

Firstly, Wal-Mart needs to ease its labor relations as there was a coalition of key

stakeholders especially government and trade union against its bid because of its poor

labour practice. South Africa has been facing pressure from unemployment crisis, so

they have raised their concerns over fear of job losses. Wal-Mart should make

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guarantees that there will be no job cuts in the near future and promise enhancing

worker’s welfare and job satisfaction.

Secondly, the motives of the South African government against the merger between

Wal-Mart and Massmart are mainly to protect local suppliers. They have raised

concerns that Wal-Mart’s buying power would lead it to shift to imports, hurting the

local manufacturing in the process (Bonakele 2011). Accordingly, Wal-Mart should

commit to buy certain volumes in South Africa and ensure that some procurement

continues at a local level.

Furthermore, greater recognition of the social responsibility is also required for

Wal-Mart. Wal-Mart can use its strengths to help South Africa's economic

development. Additionally, Wal-Mart should also fulfill its social obligations to

protect the environment such as adopting recycle materials as package and focus on

waste-related issue. Because developing countries will ignore the protection of the

environment during the high-speed economic development.

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3. Conclusion
In conclusion, the process of Wal-Mart gain entry permission into South Africa is

complex. As these developing countries generally face huge social challenges, high

levels of activism around social issues usually abound. Firms entering these markets,

therefore, face the challenge of understanding and engaging with various stakeholders

( Bonakele 2011). It is vital for Wal-Mart to build a good relationship with South

African stakeholders and taking effective measures to alleviate conflicts with South

African stakeholders.

For Wal-Mart, strategy on acquiring Massmart is favored in consideration of abundant

resources of Massmart which could be applied by Walmart and enriched product

offering and opportunity that benefit locals and local suppliers. However, objection

parties still argued with concerns of detrimental effect of this joint venture, such as

job security and union relationship.

Therefore, after obtaining approval in joint venture, Walmart is still required to be

deliberate in labor retrenchment, providing considerable assistance and funds to

support local suppliers and engaging in environmentally sound issues to relieve

tension between the company and the opposing coalition.

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Reference
Andile, X 2010, “Fee-fi-fo-fum, Wal-Mart giant steps towards SA”, Independent

Online (South Africa), vol.1, no.1, p.2-5

http://ezproxy.utas.edu.au/login?url=http://search.proquest.com/docview/757023840?

accountid=14245

Bernhardt, A 2011, “Wal-Mart’s Potential Effects on South Africa”, International

Labour Community, vol. 1, no. 1, p.12

Bride, M 2011, “Wal-Mart: juggernaut or job creator?”, Cape Times, vol.1, no.1, p.9

<http://ezproxy.utas.edu.au/login?url=http://search.proquest.com/docview/848511070?

accountid=14245>

Brown, J 2010, “inside retail Wal-Mart faces tough challenges in SA market: Business

Report”, General Interest Periodicals--South Africa, vol.1, no.1, p.3

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Bonakele, K 2011, Entry of Wal-Mart into South Africa: A stakeholder management

perspective, viewed in 1 October 2015,

<http://repository.up.ac.za/bitstream/handle/2263/25419/dissertation.pdf?sequence=1

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Eaglestone Advisory Limited 2015, Inside Africa, viewed 7 October 2015,

<http://www.eaglestone.eu/xms/files/Inside_Africa_Eaglestone_Advisory_5_June_2
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Soni, P & Karodia, AM 2014, “Unpacking the Walmart Debate: A Discussion of the

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