IN CHINA

Does Wal-Mart’s Successful US

Business Model Work in China?
--Economic Analysis --
By HKUMBA2011

Amer Bukhari, Phyllis Chiu, Rachel Yu, Prince Wong, Michelle Dagenais, Tony Tung, Albert Liu
 Introduction/Background
Wal-Mart's success in the US

Sam Walton – Leader, Entrepreneur, Visionary

Every Day Low Price - Wal-Mart’s Business Model

Small town USA, flying under the radar
Cost Control leads to Uniform Low Pricing
The One-stop shop. Single trips, Large carts, Fat.. Inventory
Rule #1, the Customer’s always right. Rule #2, see Rule #1
Distribution, Logistics, Supply-Chain, Infrastructure / IT, JIT
 Introduction/Background
Wal-Mart International
 International accounts for 20% of total Sales

 Projections: 439 Million US Consumers by 2050. China – 1.4 BILLION.

Annual compound growth to $2.4 Trillion by 2020
How much shampoo can you sell, if everybody washed their hair everyday?

 1996 China market growth. Chain stores, following a phased approach

proposed by State Government

 2001, WTO. China opens it doors. Hypermarkets, small cities, retail akin
to the US/European model.. the unruliness ensues

Does Wal-Mart’s successful US business model work in

China?
 Market Challenges

Competitive Markets
 Industry saturated with international and domestic players
 International renowned retailers have management expertise and
deep pockets
 Domestic retailers have knowledge of consumer preferences and
consumptions patterns
 Supermarket segment primarily dominated by domestic players
 Local demand, supply and distribution provides an edge for domestic
retailers

High store density in larger cities – productivity per store declines

By Phyllis
 Market Challenges

Income Disparity
 Market demand is an average estimate of the demand for an individual

Average income does not accurately reflect market

Low Income Groups – limit purchases to daily necessities

Middle Income Groups – purchase consumer durables and commercial
housing
High Income Groups – purchase sophisticated products and advanced
information services

By Phyllis
 Market Challenges

Income Disparity
 China market is less homogeneous compared to the US market
 Broad gap between rich and poor, urban and rural populations
 Local income low in rural areas

Difficulty to develop uniformed market or pricing strategy

Unable to implement US-bred strategy of locating stores in

smaller communities

By Phyllis
 Economies of Scale to Achieve
EDLP
Economies of Scales
 Cost advantages that a business obtains due to expansion
 Reduction in unit cost as the scale increases

US
 Small-Town Locations
 Relentless Cost Control
 Partnerships with Suppliers
 Unrivalled Distribution and Logistics Management

What about in China?

 Hypermarket business model – cost efficiency

By Rachel
Challenges to Achieve Economies of
Scale in China

High
Operating
Cost

By Rachel
 Challenges to Achieve Economies of
Scale in China - Location

Location
Doubts to operate large supercentres in rural areas with
low income
Strong regional dominance of domestic players in prime
areas with extensive networks e.g. Bailian

Increase operating cost

By Rachel
 Challenges to Achieve Economies of Scale
in China - Consumer Behavior

Shopping Pattern - Many Trips, Little Purchase

 Consumer Flow ≠ Consumer Purchase

 Impulsive purchase rather than planned
 Shop around for best bargain
 Frequent shopping than purchase in bulk

Increase average cost of serving a customer

By Rachel
 Challenges to Achieve Economies of Scale
Consumer Behavior

Food Quality - Fresh Means Alive

 Demand for absolute freshness – animals alive like fish, eels, frogs and snakes

 Procured
Shoplifting locally instead of through Wal-Mart’s centralized
 Presence of a considerable mass of transient population or immigrants from the poorer provinces; Employees
procurement system
 Lost of 5% of sales compared to international standard of 0.3%

Diminished economies of scale and interrupted supply

chain meant higher costs in satisfying Chinese consumers

By Rachel
 Challenges to Achieve Economies of
Scale Distribution

Distribution and Logistics Management

 Dependent on under-developed highway network
 Goods often had to be warehoused while in transit, leading to higher costs and
more waste
 Backward transportation network added to the cost of inter-regional distribution

My Story

By Rachel
My Story : Strategy Thinking

About ten years ago, in the dinner between my last day in the
academy and the first day I step into the society, I talked to my
father that:
I want to start my own business, not to be an employee.
Father give me six words.
They are 天時 , 地理 , 人和
(Timing, Geography and Relationship )
Then, I start with these 6 words and 20K from student loan…
At last, I found out these 6 words come from The Art War, a
great book about strategy thinking by Sun Zi.
The Art of War
By Sun Zi
Why the Wal-Mart’s business model does not work in China?
 BECAUSE:
Infrastructural Deficiency
Total Length of Expressways:
CN US
>1997 >2004 VS >2004
no expressways 34,288 km (28%) 120,000 km
(100%)

The Density of Land Transport System: km per 1000 square km

CN US
157 km (21%) VS 720 km (100%)

Under-developed Highway Network In China:

Wal-Mart distribution system depends on different forms of the transportation:
Warehouse Warehouse Warehouse Warehouse Retail Shops
Distribution
Port Railway Highway Centre

Leading To High Cost and More Waste

Why the Wal-Mart’s business model does not work in China? By Prince
 BECAUSE:
Distribution Center Not Fully Functioned

Distribution centers were underused

Two Distribution Centers:
 Located in Shenzhen and Tianjin
Slow the speed of transportation
Do not able to reduce the cost

Wal-Mart CN
Wal-Mart US Map of Store 2005
Map of Store 2004

Why the Wal-Mart’s business model does not work in China? By Prince
 BECAUSE:
Lack of IT Network

“The biggest obstacle Wal-Mart faced in mainland China was

the lack of an information-technology network with suppliers,
making purchasing and distribution difficult.”
--John Menzer, Chief of international operation of Wal-Mart

Network was critical to Wal-Mart’s success in the US:

The Web-based system allowed to:
 Tracking of sales, inventory, pricing
 Real Time Communication: Headquarter >> Store >> Suppliers
 In total 15,000 local suppliers:
More than 70%, received orders through fax, not by IT network

The lack of IT network impaired the retailer efficiency

Why the Wal-Mart’s business model does not work in China? By Prince
 Wal-Mart’s Disadvantaged
Government Relationships

Local Government Protected

 Source of taxes, political power, private benefits

Wal-Mart centralized its operations in Shenzhen and

settled all accounts in this area, most specifically
tax
 Slowed municipal approval

Welcomed by most Chinese city governments,

Carrefour set up accounts and financial controls in
each store
 Carrefour had the first mover advantage by entering the China
market in 1995. Establishing itself before government regulations
were implemented

By Michelle
 China’s Influence on Wal-Mart’s No Union
Policy

1962 – 1996 Strict Policy -no unions-

 5,000 failed attempts
 Shut down store in Quebec
 Texas store switched from butchers to repacked meat

By Michelle
 Wal-Mart’s Strategic Moves in 1996

Horizontal integration, Wal-Mart purchased Trust-Mart

providing 100 already established stores in China
 Bypass Chinese city governments red tape for opening new stores
 Avoid complexities in purchasing land

Allowing ACFTU to set up branches in all its 66 Chinese

outlets
 Strategic move – better relationship with government results in fewer
regulations.

By Michelle
 Wal-Mart’s Unions
Why Now?

Wal-Mart can maintain growth strategy

China can maintain control of foreign enterprise
Repercussions of not allowing
 Accused of breaking law that states companies are not allowed
to ban or impede the creation of unions
 Blacklisted
 Endless audits
 Tax examinations
 Logistical restrictions
 Inaccurate news coverage in the media
 Unwanted visits from union reps every couple of weeks

By Michelle
All China Federation of Trade Unions

By Michelle
 Wal-Mart vs Carrefour
Wal-Mart ranked 14th in 2006
Entry Strategies
Wal-Mart:
 Entered China in 1996
 Later entry
 More flexible choices of
location for its entry
 Followed government
regulations strictly - open
stores much slower
 Account, financial control &
taxes settled in Shenzhen
headquarter
 Relationship with local
government - not as good as
Carrefour
Carrefour ranked 6th in 2006
Carrefour:
 Entered China in 1995
 First-mover advantages
 Establishing strong brand
reputation and stable customer
groups
 Exploited the loophole of
regulation - open stores quickly
[bypassed central government
approval process]
 Account, financial control &
taxes settled in each store
 Better relationship with local
government
By Tony
 Wal-Mart vs Carrefour
Expansion Strategies
Wal-Mart:
 At the end of 2006, WalMart
the 14th by opening 71 new
stores
 Locate stores in second tier
cities
 Start in smaller cities and
then move to larger ones.
Carrefour:
 At the end of 2006, Carrefour
ranked the 6th by opening 95
new stores
 Emphasizes its stores to be
located in big cities and city
centers
By Tony
 Wal-Mart vs Carrefour
Positioning Strategies
Wal-Mart: Carrefour:
 Emphasizes “Low Prices  “Happy Shopping in Carrefour”,
Everyday” aims to emphasizing its good
shopping environment.

Local Adaptation Strategies

Wal-Mart: Carrefour:
 At the early stage, same  Adopted the Chinese traditional
form of selling food in wet market selling models
America or Europe

By Tony
 Wal-Mart vs Carrefour
Sourcing Strategies
Wal-Mart:
 Centralized purchasing
 High development cost
 Low utilization
 High uniformity in service
 Good quality and delivery
control
Carrefour:
 Decentralized purchasing
 Low development cost
 Flexible
 Challenges of uniformity in
service, quality and delivery
control
However, it is more suitable to
Chinese inter-provincial
conditions and save a lot of
costs and time in purchasing
and delivery
By Tony
 Suggestions
Go with the Flow
Don’t impose foreign ideas into centuries of state authority
 Cooperate with regional government
 Technology advances counter traditional provincial
autonomy and self-efficiency
 Increase flexible supplier chain and logistic management

Appropriate Technology Level

China’s abundant labor supply
 Manual labor / Automatic process
 Tradeoffs: accuracy and quality
 Shift to “Mid-Tech”

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By Albert
 Suggestions
Nontariff Trade Barriers
Find other means to protect its domestic consumer market
as China complies with WTO
Keep Chinese products on-shelves and imported products
off -shelves
 International brands manufactured
in China slowly count as “local” in the
government’s eyes

New Frontier
Focusing from main cities to hinterlands

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By Albert
 Suggestions
Financial Matters
Regional fragmentation of finance regulation, tax laws and
payment systems counters efficiency similar to logistics in
the supply chain
 Computer approval vs. stamped-happy culture
 Appoint a provincial lead to handle financial matters

Education
 Training and workshops for suppliers

Flexibility
 Hire “local” people and Adopt “local” view
 Adjust Utilization Rate to meet local demands
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By Albert
 Suggestions
Prisoner’s Dilemma
 Price Competition – Capture Market Share

(Carrefour, Wal-Mart)
Wal-Mart - $69.8 RMB
Carrefour - $72.7 RMB

 Wal-Mart supply chain prowess offers “Everyday Low

Prices”
 Product Market Share vs. Disposable Household
Expenditure
 Why? Focus Product Differentiation
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By Albert
 Suggestions
Wal-Mart's “Wal-Co”
 Create partnership program with local suppliers
ex. Similar to “Ebay Motors Certification” or
“Alibaba TrustPass”
 Incentivize local suppliers
ex. Trial shelf space at national level
 Save the Environment
 Local Business Benefits
Private Label
 Hybrid System – Local and Focal (from distribution center)

Louis Vuitton sues Carrefour in China -

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By Albert
Question & Answer
 Sources

1. Farhoodmand, Ali (2006) “Wal-Mart stores: Every Day Low Prices In China”, Asia Case Research Centre The
University of Hong Kong
2. Naughton, Keith. (Oct. 30, 2006) “The Great Wal-Mart of China”, Newsweek
3. Huffman, Ted P. (Sept.-Oct. 2003) “Wal-Mart in China: Challenges Facing a Foreign Retailer’s Supply Chain”,
The China Business Review
4. ChinaRetailNews.com Editor (Oct. 19, 2006), “Wal-Mart Acquires Trust-Mart For US$1 Billion”, China Retail
News
5. Foreman, William (Oct. 12, 2008), “Wal-Mart’s New Market: Small Town China”, Huffington Post
6. Management Team, Oct. 24, 2007, “Wal-Mart Q1 2009 Earnings Call Transcript” Seeking Alpha
7. FastCompany.com Editor (2003), “Game On”, FastCompany.com
8. Fishman, Charles (Dec. 19, 2007), “The Wal-Mart You Don’t Know”, FastCompany.com

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