Walmart in China

Linda Garrett prepared this case under the supervision of Professor Ali Farhoomand for class discussion. This case is not intended to show effective or ineffective handling of decision or business processes. © 2012 by The Asia Case Research Centre, The University of Hong Kong. No part of this publication may be reproduced or transmitted in any form or by any means—electronic, mechanical, photocopying, recording, or otherwise (including the internet)—without the permission of The University of Hong Kong. Ref. 12/516C

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ALI FARHOOMAND

WAL-MART IN CHINA (2012)

Introduction

Summer was making its picture-perfect debut in New South Wales that day in October 2011, but Mr Greg Foran hardly noticed. Newly hired away from his role as head of Australia’s leading supermarket chain, Woolworth’s Supermarket Division, he was set to work as a senior vice president at Wal-Mart International, the fastest growing division of the world’s largest retailer, Wal-Mart Corporation. However, what exactly he would be doing was still open to discussion. It was not until the sudden and somewhat mysterious departure of Mr Ed Chan, the president of Wal-Mart China, that Foran’s new role suddenly emerged.

That Australian summer, far from the approaching winter back in Bentonville, Arkansas, Wal-Mart’s corporate headquarters in the United States, Foran tried to learn more about why Chan had resigned after only four years at Wal-Mart China’s helm. China promised Wal-Mart a market potential like none seen since the company’s own monumental growth and retail dominance in the United States decades earlier. Was it the pork-labelling probe that temporarily shut all 13 of Wal-Mart’s stores in the southwestern Chinese city of Chongqing (not to mention the detaining of over two dozen employees) nine days earlier that forced Chan’s departure? Or was it the resignations, only five months earlier, of Chan’s chief financial officer and his chief operating officer? Although all the executives cited “personal reasons”, the financial media suggested that it was Wal-Mart International’s plans to introduce its Every Day Low Price (“EDLP”) pricing strategy in China that prompted the resignations. But how could such a successful model for cost reduction be viewed as negative in the Middle Kingdom?

Foran found out the answers to many of his questions when, five months later, in early February 2012, Mr Scott Price, then president and CEO of Wal-Mart Asia and the interim CEO for Wal-Mart China, announced Foran’s promotion to president and CEO of Wal-Mart China. Foran was moving to Futian District, Shenzhen, a nine-hour plane ride, some 4,500 miles, from Sydney. At the press conference announcing Foran’s new role, Price proudly presented Foran as a man with a “distinguished career in retail” and “uniquely qualified to lead our growing business in China”. Only three months later, with Foran only in the job a

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little over a month, Price told the investment community that Wal-Mart China must work harder to become the dominant player in China.1

But it was when Price announced the following that Foran finally knew where his future would lead: “I’m very pleased he (Greg Foran) is bringing his talents to help us continue Wal-Mart’s expansion (in China) and enhance our efforts to help Chinese customers save money so that they can live better.”2

Price’s challenge to Foran, made publicly for the world to witness, was to expand in China, increase Wal-Mart China’s online presence, and work to contain its costs.

Price’s comments probably left even more questions in Foran’s mind. However, with his second summer of the year approaching, it appeared that Foran was indeed in for an endless summer.

Background

Wal-Mart’s Growth in China In 1996, China’s national economy was growing at a rapid pace. The gross domestic product reached over US$1,064.4 billion, an increase of 9.7% over the previous year. It was also the first year of China’s implementation of its Ninth Five-Year Plan for National Economic and Social Development. There was a marked improvement in China’s economy. To further increase and attract foreign investment, the Chinese government increased its numbers of experimental, special economic-zoned cities in which foreigners could operate a business. There were, however, restrictions set forward by the government. One restriction in 1996 was that all foreign businesses would have to be in a joint venture or other type of cooperative agreement with at least one Chinese partner, with that Chinese partner getting a stake greater than 51%.

In August 1995, Wal-Mart, the great American retail chain and Middle America success story, arrived in China, establishing a joint venture with Shenzhen International Fiduciary Investment Co, Ltd, China. In the following year, 1996, Wal-Mart opened its first supercentre and a Sam’s Club, its members-only big-box store, in the special economic zone of Shenzhen, in the southernmost Guangdong Province. However, it took the Chinese government’s removal of further trade restrictions for foreign retailers in 2004 for Wal-Mart to kick-start its expansion plans. Three years later, in 2007, Wal-Mart acquired a 35% stake in Trust-Mart, a Taiwanese-owned chain of retail supercentres operating in the Middle Kingdom. By 5 August 2010, Wal-Mart’s presence in China grew to 189 units in 101 Chinese cities, with the creation of over 50,000 local jobs. By early 2012, Wal-Mart nearly doubled its presence with 370 stores in 140 cities.

1 Burkitt, L. (15 April 2012) “Wal-Mart to Work Harder on Growth in China”, Wall Street Journal,

http://online.wsj.com/article/SB10001424052702304356604577340912309012378.html (accessed 18 April 2012). 2 Wal-Mart China (7 February 2012) “Wal-Mart News—Greg Foran Named President and CEO of Wal-Mart China”,

http://www.wal-martchina.com/english/news/2012/20120201.htm (accessed 18 April 2012).


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EXHIBIT 1: NUMBER OF WAL-MART STORES OPENED IN MAINLAND CHINA BY OUTLET TYPE

Total Retail Units 374 Supercentre 334 Sam’s Club 6

Neighbourhood Market 2 Compact Hypermarket 3

Trust-Mart Hypermarket 29

Source: Wal-Mart stores’ website: http://www.walmartstores.com (accessed 31 May 2012).

EXHIBIT 2: GEOGRAPHICAL DISTRIBUTION OF WAL-MART STORES BY TYPE (SUPERCENTRE, SAM’S CLUB, SMALLER FORMAT) IN MAINLAND CHINA IN 2004

AND THEN UPDATED TO PRESENT DAY

Source: Wal-Mart (2005), Wal-Mart stores’ website: http://www.walmartstores.com (accessed 13 July 2012).


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Source: Atlantic Monthly (11 November 2011)

What’s at Stake: The Chinese MarketBy the late 2010s, doing business in China was no longer optional for any Western corporation that hoped to survive into the next century. As the US and European economies slumped in late 2011 and into 2012, the world’s number-two economy became an even more important growth market. In the first quarter of 2012, China’s retail sales climbed 15% to US$783.03 billion, according to the country’s National Bureau of Statistics.3 Furthermore, China’s grocery retail market was predicted to continue growing at a rate of 11% from 2012 to an estimated US$1.5 trillion in 2015. Over the same period, according to the Institute of Grocery Distribution, a food-industry research firm, US growth would peak at less than half that rate, at only 4.2%.

Growth in the Middle ClassIn the late 1990s and early 2000s, scores of Chinese workers left their villages to work and prosper in China’s first- and second-tier cities. With their growing prosperity came an increase in domestic consumption by the Chinese in their pursuit of a better life. In 2009, credit card balances rose more than 17% from the year prior. That same year, it was estimated that roughly 75% of all urban households in China had traded up in at least one product category of spending.4

Several opportunities emerged for international retailers as China’s middle class gained power. Even beyond what was reported, many analysts believed that most Chinese had more money than reported. Chinese households hid “grey income” that was never reported. Specifically, in


http://online.wsj.com/article/SB10001424052702304356604577340912309012378.html (accessed 18 April 2012). 4 Seeking Alpha (30 March 2012) “5 Ways to Invest Into the Chinese Consumer”, http://seekingalpha.com/article/468641-5-

ways-to-invest-into-the-chinese-consumer (accessed 18 April 2012).


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late 2011, Forbes reported that many state companies in China gave big bonuses that were not accounted for as official salaries.

Also, middle-class status brought a more selective Chinese consumer. No longer satisfied with cheap imitations, the Chinese became status conscious. Paying premium prices for products and services that might enhance their “status” was quite common. Interestingly, if the product or service did little or nothing to boost their status, then the Chinese consumers were very price conscious, eg, a man who bought and proudly wore a genuine Rolex watch might haggle over his taxi fare or, when traveling, skip the taxi and take public transportation.

Finally, the rise of the middle class brought more prosperity to China’s second-tier cities, which numbered in the hundreds. By 2011, with populations that numbered in the low millions, the second-tier cities, such as Chengdu, Xi’an, Guilin and others, also sported high-end European and American retail stores such as Cartier and Louis Vuitton like their larger neighbours Beijing and Shanghai. In the United States, such brands would be found in only a handful of first-tier cities, such as New York, Chicago or Los Angeles. In China, the demand for luxury goods was clearly far greater and far more widespread.

EXHIBIT 3: PER CAPITA INCOME GROWTH OF CHINESE CONSUMERS (FROM 2000 TO 2010)

Source: WDI and GDF (2010)

The world’s number-two economy was an important growth market throughout the early 2010s for Wal-Mart. With a population of 1.3 billion people, China was slated to emerge as the largest consumer market in the world, surpassing the United States, by 2020. By then, experts suggested, the Chinese population would be firmly planted into a true middle-class status. In contrast, during this same period in the early 2010s, the European sovereign debt crisis brought fiscal ruin to key European states. Although designed to rescue its failing members, the European Union’s 750 billion euro bailout package, titled the European Financial Stability Facility, did little to ease international retailers’ woes, especially in the short term. In the United States, Wal-Mart faced consumers who were tightening their belts and not spending amid that country’s slow growth and stubborn unemployment.

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010China 2340 2560 2830 3180 3590 4090 4750 5580 6230 6870 7640US 35690 36460 37070 38400 40680 43170 45680 46800 47320 45440 47310

05000

100001500020000250003000035000400004500050000

GNI PER CAPITA, PPP (US$)


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In contrast, China’s retail sales climbed 15% to US$783.03 billion in the first quarter of 2012, according to the country’s National Bureau of Statistics. China’s grocery retail market was predicted to grow 11% in 2012 to roughly US$1.5 trillion in 2015, compared with a 4.2% growth in the United States over the same period. This stark contrast in growth projections only reinforced why China was so critical for Wal-Mart’s future.

But was the Chinese market so easy to conquer for a multinational player like Wal-Mart? The country announced in 2012 that it planned to reduce exports and increase its own consumer spending. Such changes were expected to bring renewed competition from domestic Chinese retailers, China Resources and the Shanghai Brilliance Groups, as well as other multinationals—and there were plenty of them. According to Euromonitor, in the early 2010s, China had at least 32 hypermarket operators, or food and beverage outlets with more than 2,500 square meters. At the same time, the United States had only 10 operators, with Wal-Mart being the largest and controlling 80% of the market.

Wal-Mart Strategy in China—2012

In 2012, as Wal-Mart approached its second decade in China, it continued to struggle to reaffirm its strategic presence. But how exactly was Wal-Mart planning on using Foran to emerge from its less than stellar performance in China?

According to Wal-Mart International’s CEO, Mr Doug McMillon, Wal-Mart China would set forward a winning strategy to combine “local relevance and global leverage” to woo the ever-growing market of Chinese middle-class consumers.

Expansion through Multiple Channels In the company’s 2012 annual report, CEO Michael Duke reported that its Wal-Mart International Division was the company’s “primary growth engine.” With US$125 billion in sales at the time, the international business division, if valued outside of the larger Wal-Mart Corporation, would have been ranked as the third largest retailer in the world. As Wal-Mart looked at its China business in particular, it chose to improve returns through increased profitability in the Middle Kingdom. Its focus, according to the CEO, would be on middle-income customers in high-growth markets. The middle-income customers, according to the hypermarket data, were moving out of the large urban centres like Beijing, Shanghai and Shenzhen and into smaller urban settings. By expanding into these growing secondary and even tertiary cities, Wal-Mart would target these ever-more prosperous consumers.

With low profit margins of between 2% and 3% in China, according to estimates from Shanghai-based consulting firm China Market Research, Wal-Mart had to build up its scale to win long-term.5


http://online.wsj.com/article/SB10001424052702304356604577340912309012378.html (accessed 18 April 2012).


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Competition in China EXHIBIT 4: PERCENT BY MARKET SHARE OR SALES VOLUME OF THE TOP EIGHT

HYPERMARKET OPERATORS IN CHINA

Source: Access Asia, CCFA, Trade Sources and Company Information

When Wal-Mart began expanding outside North America in the 1990s, its largest international rival was the French retail chain Carrefour SA. The world’s second-largest and Europe’s largest retailer, Carrefour opened its first big-box superstore in France in 1963. Carrefour, meaning “crossroads” in French, entered Beijing, China, in 1995, only a year before Wal-Mart. Never one to enter a new market on a small scale, Carrefour was determined to open large stores at a steady pace throughout the Middle Kingdom. At the time of Carrefour’s entry, however, foreign retailers were only allowed to operate in a select few mainland cities in China. All foreign ownership was also limited to no more than 49% of the shares in any Chinese joint venture or cooperative enterprise. Working under such tight controls, Carrefour formed a joint venture with Zhongchuang Commercial Company.

Mr Jean-Luc Chereau, the head of Carrefour China in 2006, believed that it was the company’s entry into Taiwan in 1989 that brought it its advantage when entering China six years later. Simply put, Chereau believed that Carrefour learned how to adapt and work within China by first learning in Taiwan.6 Chereau believed that, although the economic systems were different between Taiwan and mainland China, both countries shared similar lifestyle and business cultures. Such beliefs and preparation paid off. By the end of 2006, Carrefour was ranked sixth in the Chinese retail market in terms of sales with 95 sales.7

Carrefour’s success seemed to continue, with only a few setbacks along the way. In early 2012, the company announced it would accelerate its new store openings in China. 8

Averaging 20 to 25 new openings per year in the late 2010s, Carrefour was set to open 30 new stores in 2012.

At the same time it announced its decision to accelerate its growth in China, Carrefour issued its fifth profit warning when its third-quarter 2011 sales in Western Europe and Asia revealed a downturn. In 2010, profits were so poor that Carrefour closed or sold some of its stores in Malaysia, Thailand, Singapore, South Korea, Russia and China’s western city Xi’an. In addition to profit warnings, Carrefour shared Wal-Mart’s own revolving-door personnel changes in the early 2000s when its CEO, Mr Lars Olofsson, a former Nestle executive,

6 Roberts, A. and Matlack, C. (20 October 2011) “Once Wal-Mart’s Equal, Carrefour Falls Behind”, Bloomberg Businessweek

Magazine, http://www.businessweek.com/magazine/once-walmarts-equal-carrefour-falls-behind-10202011.html (accessed 19 March 2012).

7 For details, see Carrefour’s website: www.carrefour.com.cn.8 Li, W. (31 May 2012) “Carrefour to Hire Chinese MBAs”, China Beverage News,

http://chinabevnews.wordpress.com/category/china-hypermarket-stores (accessed May 2012).


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became the company’s third CEO in seven years in 2009. Four other top executives were replaced in just 12 months between 2011 and 2012. By this time, Chereau was long gone.

Why China?

China was considered, by many Wal-Mart watchers, as the best place to export the US merchandising powerhouse that Sam Walton founded in 1962. With its wide-open retail landscape and its growing middle class, the company entered a marketplace, at least on the outside, similar to the United States. In 2006, many retail experts suggested that China would be as big and as successful a market for Wal-Mart as the United States.

Expansion through Acquisition

Trust-Mart AcquisitionWal-Mart’s first acquisition in China took place in 2007 when it acquired a 35% stake in Trust-Mart Group, a Taiwanese-owned, low-end retail supermarket chain, for US$264 million. The integration of Trust-Mart’s 30,000 employees and 100+ store outlets took five years, with Wal-Mart’s rebranding efforts spanning across 20 provinces.

The acquisition kick-started Wal-Mart’s expansion plans, promoted as a way to boost Wal-Mart’s competitive position in China. In particular, the China Daily reported that it was “Trust-Mart’s national sales, distribution and purchasing networks” that would be key to strengthening Wal-Mart’s Middle Kingdom presence.9 The deal, at least on paper, catapulted Wal-Mart past its main international rival, French retail giant Carrefour, which it outbid for the chain. With the single acquisition, Wal-Mart more than doubled its presence in the country.

But was this one acquisition enough? At the time, China Resources and the Shanghai Brilliance Group, Wal-Mart’s chief domestic competitors, combined, had more than US$3 billion in sales and more than 8,000 stores in China.

Five years after the Trust-Mart acquisition, there were no other moves to purchase another company in China. In 2012, Ms Cathy Smith, Wal-Mart International’s CFO, claimed, at a 2012 Investor Conference, not to be a fan of acquisitions as a means of securing new sales growth. Financially speaking, acquisitions were an inefficient use of a company’s capital.10

According to Mr Ben McClure, Director of Bay of Thermi Ltd, a financial consultancy company involved in early-stage ventures, historical trends revealed that two-thirds of big mergers never provided the benefits ascribed to them. If Wal-Mart focused too intently on cutting costs after the Trust-Mart acquisition (in support of its EDLP strategy), its revenues and profits would suffer. According to the global consultancy company McKinsey & Company’s quarterly newsletter article entitled “Where Mergers Go Wrong”, when companies merged, most of the shareholder value created went not to the buyer, but to the seller.11 Often the buyer overestimated the synergies a merger would yield. Rather, when too much focus was put on the integration, with the desire to also cut costs, buyers often neglected their day-to-day business and often, their customers. No customers, no revenue. No revenue, no value to shareholders.12

9 Li, W. (25 August 2011) “Walmart China Has Big Plans in Small Cities”, China Daily,

http://www.chinadaily.com.cn/business/2011-08/25/content_13189621_2.htm (accessed 13 July 2012). 10 Christofferson, S. A., McNish, R. S. and Sias, D. L. (May 2004) “Where Mergers Go Wrong”, McKinsey Quarterly,

http://www.mckinseyquarterly.com/Where_mergers_go_wrong_1402 (accessed 24 May 2012). 11 Ibid. 12 Bekier, M. M., Bogardus, A. J. and Oldham, T. (November 2001) “Why Mergers Fail”, McKinsey Quarterly,

http://www.mckinseyquarterly.com/Organization/Postmerger/Why_mergers_fail_1113 (accessed 24 May 2012).


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Even facing these real, post-merger dilemmas, Smith was not shy about sharing Wal-Mart’s desire to grow. “There are whole provinces in China that we haven’t even begun to think about, so we would think about those kinds of things (expansion) there,” she said.13

Expansion through New Store Formats

SmartChoice

When examining its expansion strategy throughout China, Wal-Mart could not ignore its competition with other large retailers, both foreign and domestic, or its competition for land. Wal-Mart China was sorely constrained to find locations that were large enough on which to open its giant warehouse outlets. At many of the Wal-Marts and Sam’s Clubs throughout the first-tier cities, such as Shenzhen and Beijing, customers travelled up and down “travelators”, sometimes in a queue to “board” with their carts to multiple floors to find their merchandise.14

Given these obvious land constraints, it made sense for Wal-Mart to think small. Leveragingthe success of its Latin American colleagues, Wal-Mart International designed and launched new brick-and-mortar store types in China. Following in the footsteps of the profoundly successful convenience store format in Mexico and Argentina (Bodega Aurrera Express, Todo Dia and Changomas Express), Wal-Mart China opened two new types of discount convenience stores in urban areas of China.

The first type of these smaller-format stores, branded SmartChoice or Hui Xuan in Chinese, opened in December 2008 in Shenzhen, Guangdong Province. China’s SmartChoice was relatively small at only 280 square meters, yet convenient, selling only 2,000 products. Food accounted for approximately 75% of its merchandise.15 A total of three SmartChoice stores were opened, all in the southern province. According to the company spokesperson, Vivi Mou, Wal-Mart set up the SmartChoice stores to observe “market acceptance and customer preferences” for the convenient stores before deciding on future development plans.16

An unnamed company source was quoted by Chinese media saying Wal-Mart planned to open 100 of the convenience stores across China this year and 1,000 in five years.

Trust Mart

In October 2010, Wal-Mart officially opened its second small-format store. This larger version of SmartChoice, called Trust Mart (a name retained from the Taiwanese-owned supermarket stores Wal-Mart acquired in 2007), was first opened in Zhangshu Province. At 3,000–5,000 square meters, Trust Mart was considerably larger than SmartChoice, but still only a fraction of the size of a traditional Wal-Mart supercentre. The Trust Mart format, Wal-Mart International’s CEO McMillon claimed, would soon arrive in China’s other second- and third-tier cities. 17 There was no doubt that, although hypermarkets and supercentres still generated most of Wal-Mart’s overseas income, the compact hypermarket format would continue to grow internationally. The format, according to McMillon, would keep costs down, while it reached those Chinese customers not geographically close to a supercentre. Indeed,

13 Jopson, B. (8 March 2012) “Walmart Ready for More M&A in China”, Financial Times, http://blogs.ft.com/beyond-

brics/2012/03/08/walmart-ready-for-more-ma-in-china/#axzz1wW6ulfbU (accessed 28 May 2012). 14 Case author visit to store sites in April 2012. 15 Berg, N. (2 December 2010) “To China, Love Mexico”, Natalie Berg on Grocery,

http://blog.emap.com/Natalie_Berg/2010/12/02/to-china-love-mexico (accessed 18 April 2012). 16 Wei, M. and Kwok, D. (6 May 2009) “Wal-Mart Enters China’s Convenience Store Market”, Reuters,

http://www.reuters.com/article/2009/05/06/us-walmart-china-idUSTRE5450YY20090506 (accessed 19 March 2012). 17 Mast, C. (6 December 2010) “Walmart Goes Small in China”, New Hope 360, http://newhope360.com/walmart-goes-small-

china (accessed 18 April 2012).


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when asked, McMillon claimed the compact format had a “very attractive return” that would be even more important in Wal-Mart’s future.18

Interestingly, only two years later, in March 2012, Wal-Mart China closed all three of its SmartChoice stores in Shenzhen, the first type of its compact stores. When announcing the compact stores’ closures, Wal-Mart China claimed that they were only test sites, denying that the McMillon-lauded convenience store format was a failure.19 In fact, at the time of the closure, Wal-Mart claimed it was still committed to the small-store concept, setting its sights on growing with the larger compact hypermarket format (similar in size to the Trust Marts) with stores sized at approximately half of a typical Wal-Mart supercentre. According to an unconfirmed company source speaking to Chinese media in 2010, Wal-Mart originally had planned to have 1,000 SmartChoice stores opened in China by 2014.20

What happened to the SmartChoice concept in China? Were the obvious cultural differences between Mexico and China to blame for the failure? Perhaps a better explanation for why SmartChoice closed could be found by examining the highly competitive convenience store market in China at the time. The majority (80%) of convenience stores were owned by the Chinese with only 20% held by a foreign owner.

Major competitors, the wholly owned 7-11 stores and the Chinese-owned Kedics, were a force to be reckoned with. Kedics, a Chinese brand, was the largest convenience chain in the country with 2,356 stores at the end of 2011.21 Did Wal-Mart stand a chance against that kind of presence? Did the company that honed its skills operating megabox stores have the skills to “downsize” its offerings and still compete?

Conclusion: Brick-and-Mortar Expansion

In the early 2010s, expansion throughout China and the rest of the world was a key strategy for Wal-Mart. Although stinging from its failure to launch its SmartChoice convenience store-style, Wal-Mart still planned to expand by adding more hypermarkets and more members-only Sam’s Club outlets. The company reported in October 2010 that new stores internationally were expected to add 21 million square feet of space that fiscal year and between 23 and 24 million square feet in 2011.

“Our capital investment for next year will drive new store growth with particular emphasis in the emerging markets of China, Brazil and Mexico,” said McMillon. “Through a combination of comparable store sales, new store square footage and continued earnings performance, we will continue to shape our international portfolio to drive both growth and improving returns. We will also continue to evaluate acquisitions to enter priority markets and to build scale in existing markets.”22

18 Berg, N. (2 December 2010) “To China, Love Mexico”, Natalie Berg on Grocery,

http://blog.emap.com/Natalie_Berg/2010/12/02/to-china-love-mexico (accessed 18 April 2012). 19 Research in China (1 March 2012) “Wal-mart China Shuts Small-Box Smart Choice Stores”,

http://www.researchinchina.com/Htmls/News/201203/31193.html (accessed 18 April 2012). 20 Ibid.21 Want China Times (21 March 2011) “Convenience Stores Vie for Chinese Market”, http://www.wantchinatimes.com/news-

subclass-cnt.aspx?id=20120321000003&cid=1502&MainCatID=15 (accessed May 2012). 22 Mast, C. (6 December 2010) “Walmart Goes Small in China”, New Hope 360, http://newhope360.com/walmart-goes-small-

china (accessed 18 April 2012).


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Expansion through Online Growth

Realising rather quickly that competition between both foreign and domestic operators inside its many markets was intensifying between the physical stores, Wal-Mart focused more energy on its e-commerce business. In 2010, it announced that it would consolidate its e-commerce activities around the world into a Global e-Commerce division. At the time, the division had three goals: (1) develop and execute a global e-commerce strategy, (2) accelerate global online channel growth, and (3) create technology platforms and applications for every Wal-Mart market.

Through the 2000s and into the 2010s, Wal-Mart created dedicated online platforms in seven countries, with the most significant being Wal-Mart.com in the United States. Its UK grocery home shopping network, ASDA, became a substantial presence for Wal-Mart International, with its reach extending to 97% of all its UK customers.

E-commerce in China

According to the China Internet Network Information Center, the government-authorised body that maintains the country’s Internet infrastructure, China had 161 million online shoppers in 2010, with sales that year at US$48.8 billion. Forecasts of online sales suggested the country would reach US$159.4 billion by 2015. Such an explosive growth in internet sales was not lost on Wal-Mart China. When it saw how its competitors were gaining shoppers online, often delivering their items quickly and cheaply by local bicycle couriers, Wal-Mart moved quickly. There was a huge upside potential to having an e-commerce business, especially among Wal-Mart’s younger customers.

The company tested the waters of online shopping through a small, yet important e-commerce investment.

In 2010, Wal-Mart and five other companies invested US$500 million in 360buy.com, a privately held company based in Beijing. A fast-growing online retailer, 360buy.com primarily dealt in consumer electronics and, at the time, closely resembled Amazon, the world’s largest online retailer that year.

In June 2011, Wal-Mart made another great e-commerce leap by establishing the Wal-Mart China e-commerce headquarters in Shanghai. The Shanghai operation was built to oversee Wal-Mart’s online retail operations in the country.


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EXHIBIT 5: CHINESE CONSUMER PURCHASES IN 2004 AND 2010

Source: iResearch Inc. (2005)

Electronics(Camera, MP3)

53%

Cell phones and accessories

7%

Home appliances7%

General7%

Rechargeablecards for games and cell phones

5%

Books6%

CDs and DVDs3%

Gifts and decorations

1%Others

11%

PRODUCT CATEGORIES SOLD OVER INTERNET 2004


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Source: China Internet Network Information Center (2011)

Stake in Yihaodian Only a month before Wal-Mart’s Shanghai operation was launched, Wal-Mart staked an initial claim on a leading Chinese online grocery company, Yihaodian. Wal-Mart acquired a minority holding of 20%, valued at US$65 million, from Ping An Insurance (Group) Company of China, one of Yihaodian’s major stakeholders at the time.

Yihaodian, launched in 2008, was well-established in the e-commerce space in China. Its sales revenues reached US$429 million in 2011, increasing from only US$650,000 three years earlier. At the time of Wal-Mart’s purchase, it employed 2,000 employees and had a supply chain network based in Shanghai, Beijing and Guangzhou. Its growing Chinese customer base enjoyed next-day delivery at competitive prices.

The company was further distinguished by offering foreign manufacturers help registering their brands and dealing with import formalities, transportation, logistics and advertising. The online retailer, a commercial superstar, saw the number of products available in its store jump to 180,000 in the fourth quarter of 2011 from just 50,000 a year earlier.

It was no wonder that, only nine months later, in February 2012, Wal-Mart announced that it had purchased a majority share in Yihaodian. At the time, the company was waiting for government regulatory approval to increase its interest to 51%. According to Mr Yu Gang,

Apparel,accessories and

footwear24%

Electronics and accessories (cell phone, laptop,

MP3)26%

Rechargeablecards for games and cell phones

9%

Home appliance9%

Home general9%

Books, CDs and DVDs

5%

Cosmetics4%

Foods2%

Sports and stationaries

2%

Maternity and baby products

2%Jewellery, watches

and accessories 2%

Others6%

PRODUCT CATEGORIES SOLD OVER INTERNET 2010


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Yihaodian’s chairman and founder, Yihaodian would remain a “separate unit and independent in China”.23

Yihaodian would allow Wal-Mart to reach its younger customers, who, at the time, were moving more and more toward shopping online.

Peng Jianzhen, deputy secretary-general of the China Chain Store and Franchise Association, at the time claimed that Wal-Mart, as a foreign company, knew that “online stores will affect the profitability of traditional stores. Partnering with Yihaodian will help Wal-Mart maintain profitability in its traditional bricks-and-mortar stores while developing in the e-commerce sector.”24

Mr Neil Ashe, president and CEO of Wal-Mart Global eCommerce, said, “This investment further enables Wal-Mart to deliver a superb customer experience to Chinese consumers who are already connected to the world through smart phones and social media. We are on track to create the next generation of e-commerce, offering the latest in online innovations to give our customers a unique shopping experience.”25

Other Means to Attract the Young Chinese Shopper

At the same time as the Yihaodian acquisition, Price, then CEO of Wal-Mart International, addressed Wal-Mart’s plans to continue to woo the younger Wal-Mart shopper. Early on, Price acknowledged that delivery on an online order might not be easy for a single, younger worker without anyone home to receive it. Plans for Chinese shoppers to pick up their Web orders at physical locations, closer to their homes, were in development in mid-2012.

Wal-Mart Asia, including Wal-Mart China, was also attracting younger consumers through their cell phones. Plans to send customers store information over their cell phones and to encourage the use of Wal-Mart-derived micro-blogs were developed in 2011.

In sum, expansion through multi-sales channels became Wal-Mart International’s strategic focus in China and throughout many of its emerging markets. Price used the word “synergy” when he described the company’s plan for expansion. The synergy of Wal-Mart’s brick-and-mortar sales with its online purchases would drive Wal-Mart Asia, especially Wal-Mart China, into the next decade.

Powered by Wal-Mart—Global Leverage

In addition to its expansion strategy, Wal-Mart International implemented its Powered by Wal-Mart EDLP strategy in the Chinese marketplace. This strategy in its experience would successfully leverage Wal-Mart’s global strength by reducing its expenses. Duke announced that Wal-Mart International was committed to bringing even more discipline and focus to being productive and efficient across all its international businesses.

Beyond the “Powered by Wal-Mart” strategy, the CEO emphasised the idea of leveraging globally its vast network of information systems, sourcing, business processes and shared

23 Li, W. (31 May 2012) “Carrefour to Hire Chinese MBAs”, China Beverage News,

http://chinabevnews.wordpress.com/category/china-hypermarket-stores (accessed 19 March 2012). 24 Ibid. 25 Ibid.


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services. “Powered by Wal-Mart” was a phrase that would become more common as the company looked to leverage its global presence.26

According to the company’s website, Powered by Wal-Mart meant:27

• Reducing costs • Getting back to its core EDLP policy • Providing differentiated, value-led products on its shelves by sourcing globally.

EDLP—Global Leverage EDLP was a pricing strategy promising consumers a low price without the need to wait for a sales event or to shop for a better price at other stores. The concept of EDLP was designed to save Wal-Mart both the effort and expense needed to market a sale and the labour involved with marking down prices in the store before the sales event. The belief was that such a strategy also generated shopper loyalty. Wal-Mart found it cost-advantageous to only advertise monthly, while its competitors advertised weekly.

How Did Wal-Mart Achieve EDLP?

Wal-Mart worked toward operating the most cost-efficient business it could to ensure low costs. The company’s expense structure, measured as a percentage of sales, was among the lowest in the industry in the early 2000s.28 These cost savings were then used to successfully manage and promote its EDLP strategy, which led to both higher sales and resultant earnings, thus fuelling the company’s growth. The reinvestment of earnings to further optimise the operating system (resulting in yet further cost reductions) was known as the “Productivity Loop”. In the United States, experts agreed that this “Productivity Loop” drove Wal-Mart’s rapid and steadfast growth and success in the US hypermarket space. Thanks to the EDLP strategy, powered through the ever-increasing drive toward cost reductions and system efficiencies, Wal-Mart remained price-competitive in the United States. Price-conscious shoppers, who were more interested in finding cheaper prices than they were good customer service and products of quality, made up the vast majority of the Wal-Mart market.

Given the success of EDLP with the American consumer, Wal-Mart exported the model to its other international markets, including South Korea, the United Kingdom and Japan.

Korean Consumers’ Response to EDLP Strategy

When Wal-Mart exited South Korea in 2006, critics pinpointed its EDLP strategy as one of the factors leading to its demise. After Wal-Mart’s exit from South Korea, retail analysts reflected that the Korean consumers were more quality-conscious and more brand-loyal than their American counterparts and much less likely to switch to a less expensive product for the sake of a few won. How could EDLP be a viable strategy when Korean consumers would not settle for lower price over inferior product quality or lower price with poor customer service? At the time, most retailers in South Korea paid their salespeople to stand in the aisles, at their product display areas, actively promoting their assigned products or services, even clapping in some cases. Some South Korean discount stores even provided employees in the car park to assist shoppers, even going out of their way to give them directions to an open spot. Korean consumers perceived Wal-Mart stores as a “cheap marketplace” with a warehouse-style 26 Berg, N. (3 June 2011) “Day Three—Powered by Walmart”, Natalie Berg on Grocery,

http://blog.emap.com/Natalie_Berg/2011/06/03/day-three-powered-by-walmart (accessed 18 April 2012). 27 For details, see Wal-Mart China’s website: http://www.wal-martchina.com/english/index.htm.28 Shah, A., Evan, O. and Tyra, P. (2005) “Wal-Mart Stores, Inc.—2004”, in F. R. David (ed.) Strategic Management: Concepts

and Cases, 10th Edition, Pearson-Prentice Hall: Upper Saddle River, NJ.


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layout and poor-quality products.29 The Wal-Mart warehouse-like store layout also failed to enamour the Korean shopper who saw it as a “cheap marketplace” without the helpfulness and outreach of a typical Korean retailer. When Wal-Mart arrived with its EDLP strategy, the store and its lack of helpful employees (short of getting a smile at the entry) were quickly dismissed, not providing the value the Korean consumer wanted.

Japan and the United Kingdom and EDLP Strategy

In Japan, Wal-Mart wholly converted all of its stores to EDLP by 2011. It cited its EDLP strategy and the Japanese divisions’ operational efficiencies for contributing to that country’s increased profits for the three-year period of 2009–2011.

In the United Kingdom, its Asda Stores (a Wal-Mart subsidiary since 1999) brought the price guarantee/EDLP concept further, allowing its customers to check the price of an item against competitors’ prices with a few simple clicks on an in-store computer.

EDLP Strategy in China

It was the success of the EDLP strategy in Japan and the United Kingdom that prompted Wal-Mart to move the strategy to China. For the outside analysts who watched this unfold, Wal-Mart’s decision to export a strategy out of the British Isles and not out of Bentonville made a big statement about the growing power and influence of Wal-Mart’s international business.30

Perhaps learning from its past successes and failures, Wal-Mart decided to bring its EDLP model to China in the second quarter of 2012. Foran declared that his division in the Middle Kingdom would focus on offering more products at consistently lower prices instead of having sales or temporary discounts and seasonal sales.

But would the EDLP work? At the time of the rollout, the mom-and-pop establishments that proliferated across the China landscape haggled over price and undercut even the largest chains. Could Wal-Mart keep its prices low enough when just outside its doors were countless merchants willing to go one yuan lower?31

Wal-Mart International was willing to take that chance, not only in China, but also in some of its other international markets, such as Argentina, South Africa, India and Chile.

Local Relevance

Still trying to recover from its failures in Germany, South Korea and Russia [see Appendix], Wal-Mart was intent on getting it right in China. But how would Wal-Mart source globally to leverage its network while also remaining locally relevant? Could it balance these two apparently contrasting strategies?

In adapting its strategy to be locally relevant in China, Wal-Mart took measures that centred not only on attracting the 100–150 million Chinese middle-class buyers, but also on keeping its employees productive and its supply chain sustainable.

29 Kim and Sim, 2006. 30 Berg, N. (3 June 2011) “Day Three—Powered by Walmart”, Natalie Berg on Grocery,

http://blog.emap.com/Natalie_Berg/2011/06/03/day-three-powered-by-walmart (accessed 22 April 2012). 31 Burkitt, L. (22 October 2011) “Wal-mart China Woes Add Up”, China Beverage News,

http://chinabevnews.wordpress.com/category/china-hypermarket-stores (accessed 19 March 2012).


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Relating to the Chinese Buyer Perhaps stung by its negative experience in South Korea [see Appendix], Wal-Mart realised that it needed to adjust to be locally relevant to the Chinese customer, not the Western customer. Whereas in the United States the retailer traditionally focused on electronics and other non-perishables as its key source of revenue, in China Wal-Mart learned how critically important food, cosmetics, package size, variety and store location were to keeping the Chinese consumer buying.

Live vs. Dead When Wal-Mart China first opened, its Shenzhen stores stocked and tried to sell dead fish and packaged meat. When customers stayed away, Wal-Mart China adapted. Quickly learning that Chinese shoppers preferred to select their own fresh vegetables, fruits, meat, live fish and seafood, the stores were set up with tanks to hold live fish and racks to display uncovered meat. While many of Wal-Mart’s traditional Western shoppers might cringe at such displays, it worked. As Wal-Mart expanded across China, all of its supercentre stores featured the tanks of live fish where the Chinese shoppers could pull out their own fish with nets before handing it off to be killed by the Wal-Mart clerk.

Maybelline vs. Motorola For Wal-Mart, becoming locally relevant also meant learning how its personal-care product offerings, specifically its cosmetics, could attract customers into the store. When it created demonstration stations where its clerks could show customers how to apply cosmetics, its sales positively reflected the change. Such stations, normally seen in more upscale department stores in Europe and the United States, proved a success.

Two Bottles of Soy Sauce Are Enough, Thank You The Chinese shopped closer to home and more frequently than their American counterparts. They might have shopped daily to see what was new on the shelves, but could come away empty-handed or with only small quantities of goods. At the Wal-Mart Sam’s Clubs, in particular, this left those characteristically large bundles of products still on the shelf. To accommodate this, Wal-Mart made two changes. First, it insisted that some of its vendors downsize the packaging of some items. In one case, its vendor reduced its traditional US-style bundling of five bottles of soy sauce to two bottles to better appeal to the Chinese buyer. Second, it provided more change and variety in its product offerings, compelling the Chinese shopper to stop in often to check out what was new.

Unions in China

Perhaps one of the greatest ways Wal-Mart localised its business was, after eight years of resistance, to finally accept organised labour in China. In the United States, Wal-Mart’s reputation of being anti-union was well-known. At the time, retail analysts in China suspected that Wal-Mart did not fully understand the role unions played. Unlike those in the United States, Chinese unions did not negotiate employer-employee contracts. Rather, Chinese unions were an extension of the government, providing a direct means of getting funding for the Communist Party while allowing the Chinese government to tighten its control over the ever-expanding foreign private-sector workforce. The Chinese government also saw the union as the principal way it could keep social order within Wal-Mart, something Wal-Mart traditionally managed itself through its own ever-powerful company culture. When it finally agreed to accept unions in 2004, Wal-Mart insisted workers ask for representation. Although no workers asked, believing the unions were merely a tool of management, the Chinese government persisted, sending union organisers directly to Wal-Mart workers. The move


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wore down Wal-Mart’s resistance. Finally seeing organised labour as both a cultural and political mandate in China, the company accepted the first union into its stores in August 2006. By June 2011, Wal-Mart China claimed nearly 70% of its employees were members of the All-China Federation of Trade Unions.

Organic, Locally Produced Food By 2012, Wal-Mart China had established relationships with over 20,000 Chinese suppliers, sourcing 95% of the products in its stores locally. It touted the hiring and development of female staff and executives, claiming that 43% of its senior managers and above were women. In 2009, the company established the Wal-Mart China Women’s Leadership Development Commission, clearly seeing a need to better develop its future Chinese leaders. With nearly all (99.9%) of its associates Chinese nationals in 2011, Wal-Mart China wanted more than anything to be locally relevant.32

Locally Relevant and Socially Responsible What started in 2008 with a speech delivered by then-CEO Lee Scott at the China Sustainability Summit in Beijing soon took root and spread. Working with its North American advisers from the Environmental Defense Fund, the National Resources Defense Council and Business for Social Responsibility, Wal-Mart challenged its Chinese suppliers to rethink their supply chains to improve on energy and cut costs. When Duke took over as CEO in 2009, he not only reaffirmed Scott’s vision, but pushed it further, claiming Wal-Mart would rely completely on sustainable energy, produce zero waste and sell only sustainable products. When Duke referred to these as the company’s “new normal”, its Chinese division paid attention.33

Jumping on the bandwagon, Wal-Mart China created its own Bentonville-inspired corporate social responsibility (“CSR”) policy. Declaring on the company’s website34 its desire to be a good corporate citizen, the division detailed five goals of its policy: environmental protection, community involvement, child welfare, educational support and disaster relief.

Since 2008, the company had achieved many milestones and awards toward these goals. Between 1996 and the end of 2011, the company donated funds and support worth more than $9.42 million to various charities, while its Chinese associates volunteered more than 180,000 hours to their local communities. Although critics deemed the entire CSR industry as more show than substance between suppliers and buyers, others supported Wal-Mart’s efforts.35 Themost memorable of its achievements came in the spring of 2010 when Wal-Mart China launched its “Earth Month” green campaign, turning off one-third of the lighting in its stores during off-peak hours. That campaign alone, the company claimed, helped its stores and their communities save 1 million kilowatt-hours of electricity and cut 860 tons of carbon dioxide emissions. Wal-Mart China proudly reported that 38 million customers across 90 cities joined the campaign along with 100,000 of Wal-Mart China associates and their families.36

32 For details, see Wal-Mart China’s website: http://www.wal-martchina.com/english/walmart/index.htm#china.33 Schell, O. (December 2011) “How Walmart Is Changing China”, Atlantic Magazine,

http://www.theatlantic.com/magazine/archive/2011/12/how-walmart-is-changing-china/8709/3 (accessed 7 May 2012). 34 For details, see Wal-Mart China’s website: http://www.wal-martchina.com/english/walmart/index.htm#china.35 Schell, O. (December 2011) “How Walmart Is Changing China”, Atlantic Magazine,

http://www.theatlantic.com/magazine/archive/2011/12/how-walmart-is-changing-china/8709/3 (accessed 7 May 2012). 36 For details, see Wal-Mart China’s website: http://www.wal-martchina.com/english/walmart/index.htm#china.


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Bribery Issues Wal-Mart Faced in China

Bribery was not a new phenomenon for Wal-Mart. The company’s internal reports showed that it had identified 90 cases of bribery in Asia between 2004 and 2005.

One prominent case occurred in late 2005 when the Chinese government official responsible for Wal-Mart’s building applications in Yunnan Province was convicted of bribery and abuse of public funds. Mr Peng Muyu, the former secretary of the Communist Party and a lead trade official in the province, was convicted, with authorities claiming that his wife had accepted over US$15,000 in gifts from Ms Zhou Jiali. Zhou, at the time, was a member of the board at Wal-Mart Management Service Co, Ltd.37

At the time of Peng Muyu’s conviction, Wal-Mart denied knowledge of the bribes. It did, however, admit to setting up the management service company with Zhou, who held a 30% share of Wal-Mart Management Service. After Zhou was also arrested, information emerged that Zhou had been embroiled in another bribery scandal, that time involving the Yunnan governor.

In mid-2012, as part of a global review of Wal-Mart’s policies on bribery, Wal-Mart’s attorneys cited China as one of five38 countries that represented the highest corruption risk for the organisation.

For cases of bribery in other countries, see the Appendix.

The Phone Call That Started It All: Chongqing Scandal In October 2011, Wal-Mart found itself involved in its largest scandal yet in the Middle Kingdom. Chongqing, home to 28 million people on a land-mass the size of Austria, was one of China’s largest and most densely populated cities located in southwestern China, not to mention a growing market for Wal-Mart China. The problems for Wal-Mart started with a simple phone call to a consumer hotline. A 30-year-old homemaker complained that the organic pork she bought at her local Wal-Mart was the same as ordinary pork. The Chinese Administration for Industry and Commerce (“AIC”) found that, since 2009, the particular Wal-Mart store in Chongqing had been selling regular pork mislabelled and priced as organic pork.39

According to the AIC, the pork mislabelling was the latest in a total of 21 violations in Chongqing dating back to 2006. Wal-Mart’s first citation in the city came in July of that year, when it was selling soup paste that fell short of food standards. Later, other Chongqing Wal-Mart stores were found to be selling orange juice, pressed duck, dairy products and other items past their expiry dates. The problems did not stop with its groceries. Wal-Mart was also cited for failure to meet production standards with products as varied as lemon candy, televisions and washing machines as well as other examples of false advertising in its stores.

The pork mislabelling broke the proverbial camel’s back when the AIC, clearly unhappy with Wal-Mart’s responses to all of these earlier violations, ordered all 13 of the Chongqing stores shut for two weeks while also fining them US$572,000.

37 Wynn, G. (23 April 2012) “Corrupt Wal-Mart’s NYC Plan: 159 Stores, Growth for Decades”, NYaltnews,

http://nyaltnews.com/2012/04/wal-marts-plan-nyc-159-stores-growth-decades/14650 (accessed 23 April 2012). 38 Other countries cited include Brazil, India, Mexico and South Africa. 39 Jones, T. Y. (28 October 2011) “Wal-Mart’s China Woes Began with Phone Call, Then Snowballed”, Reuters,

http://www.reuters.com/article/2011/10/28/us-china-wal-mart-idUSTRE79R0ZA20111028 (accessed 22 March 2012).


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In addition, local police cited 37 people for the mislabelling, going as far as arresting two Wal-Mart employees, detaining another 25, putting seven under house arrest and releasing three on bail. Many of those detained were not released until seven months later in April 2012. The two arrested employees were not released until May 2012, with the municipal government of Chongqing choosing to not press charges.

“Wal-Mart opened its first store in Chongqing in September 2005 and the violations started in 2006,” Mr Zhao Jia, a spokesman for the AIC’s Chongqing Bureau was quoted as saying. “Many times we sent our opinions and sent them notices. They never explained anything to us clearly. . . . One employee told us they were instructed to keep the special display shelf for organic pork stocked with meat.”40

During the scandal, when challenged by Western reporters claiming that the Chinese government was perhaps targeting Western companies, Zhao jumped to his agency’s defence, claiming that the number of complaints about Wal-Mart stores in Chongqing was greater than the number of complaints about its competitors, both Western and local, such as France’s Carrefour SA, Germany’s Metro, Yonghui, Shinshiji and Chongqing Baihuo.

Many retail analysts at the time saw the closure and fine as a harsh punishment meant to serve as an example to other retailers.

When it reopened its Chongqing stores after the two weeks, employees were greeted by surging crowds. One hundred shoppers waited outside a Wal-Mart in the Nan’an district of Chongqing, rushing inside when the doors opened. On the reopening day, shoppers were loud and boisterous as they jammed aisles and loaded up on cooking oil, soy sauce, peanuts and fruit, some even taking their turn at gutting rabbits.

Mr Wang Dingbao, 66, was at the Jiulongpo store with his wife and a camera, taking photos of the activity. When asked why he shopped at Wal-Mart, he claimed to like the selection and prices. Although he shopped at other local stores, he could walk to this Wal-Mart and trusted the American retailers. “They said they would fix things,” Wang said, “and they did.”41

Recovering from the Shutdown Wal-Mart spent the two-week shutdown strengthening its monitoring processes and training its local workers and managers. The problems were not seen as issuing from Wal-Mart Corporation headquarters, but rather from local personnel in Chongqing, which prompted the local retraining effort. As a result of the scandal, Wal-Mart China created a “fast food inspection lab” in all its stores. On a larger scale, Wal-Mart Corporation established, with the help of external experts, a compliance division in charge of issues related to food safety and protection of customers’ rights, perhaps as a way to not have another government hotline learn of a problem before the company learned of it. At the closed Chongqing stores, local authorities conducted twice-daily inspections, while the company brought in supervisory teams to train local management and redo product labels.

Following the scandal, Wal-Mart received praise from Chinese leaders. Wal-Mart took “well-measured approaches” to fix the problems, said Mr Huang Qifan, the mayor of Chongqing. “We should also respect Wal-Mart for its gesture to correct the problem as soon as the issue was found,” he said.42

40 Jones, T. Y. (25 October 2011) “Penalized in China, Wal-Mart Reopens Chongqing Stores”, Reuters,

http://www.reuters.com/article/2011/10/25/us-walmart-china-idUSTRE79O0TY20111025 (accessed 22 March 2012). 41 Ibid. 42 Areddy, J. T. and Burkitt, L. (25 November 2011) “Chongqing Mayor Lauds Wal-Mart Effort on Pork Issue”, Wall Street

Journal,


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Bo Xilai’s Fall from Grace At the time of the store closures, Chongqing was swimming in political upheaval, which the media deemed as one of the worst China had seen in 20 years. Mr Bo Xilai, the provincial chief of the Communist Party in Chongqing and a much-favoured frontrunner for higher office, found himself in great political trouble. Known for years for his aggressive anti-crime initiatives and fervent housing development in the province, he suddenly found himself embroiled in a scandal. In February 2012, Bo’s appointed Chongqing police chief, Mr Wang Liun, critical in helping Bo lead the anti-gang initiative, entered the US consulate in Chengdu, a six-hour drive from Chongqing, rumoured to be trying to defect. By May 2012, Wang Liun was charged with treason. Further issues for Bo surfaced when his wife, attorney Gu Kailai and her assistant Zhang Xiaojun, “an orderly at Bo’s home”, were accused of murdering Mr Neil Heywood, a British businessman, in Beijing in November 2011. For his direct link to these events, most notably the attempted defection of Wang Liun, Bo was removed from office and put under house arrest for “serious discipline violations” in April 2012.

Did Bo’s fall from grace relate in any way to the Wal-Mart store closure and worker arrests in Chongqing? Critics of Bo claimed that his policies in Chongqing were used to target uncooperative business leaders. The Chongqing problems revealed for Wal-Mart and other Western companies doing business there just how fragile both the political and business environments were.

Personnel Changes

The scandal in Chongqing that forced the closure of 13 of its stores rocked Wal-Mart in more ways than one. In October 2011, shortly after the stores were closed, Chan, the head of Wal-Mart China, along with Senior Vice President of Human Resources Clara Wong, resigned, citing personal reasons. Although Wal-Mart International claimed that neither resignation correlated with the investigations in Chongqing, it was difficult to believe there had not been a connection. Wal-Mart appointed Foran, a former Woolworths Ltd executive, into Chan’s role as president and CEO of its Chinese Unit early in 2012.

What made it more problematic for Wal-Mart was that the October resignations were the third in a series of high-power executive exits that year, with the first taking place six months earlier in May 2011. Then, Wal-Mart’s chief financial officer, Mr Roland Lawrence, and its chief operative officer, Mr Rob Cissell, left the company. Round two took place just one month later in June 2011 when Mr Shawn Gray, vice president of Wal-Mart’s hypermarket operations, resigned.

The appointment of the new president and CEO in March 2012 did not stop the resignations. Newly appointed Senior Vice President and Chief Merchandising Officer of Hypermarkets Joe Zhou left after only six months in the job. Wal-Mart’s spokesperson said, “Wal-Mart China’s strong management team and over 100,000 associates will spare no effort to continue serving our customers so as to fulfil our core mission: ‘Saving people money, so they can live better’.”

Commenting on China at a presentation shortly after Joe Zhou’s departure, Wal-Mart International CEO McMillon said, “If we can change one thing right now in China, it would

http://online.wsj.com/article/SB10001424052970204630904577059810218963588.html?grcc=b2cefa49e8508b12ad5e60281a4c5051Z3&mod=WSJ_hps_sections_business (accessed 19 March 2012).


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be that we should be better merchants. China is a great market and there is nothing externally that concerns me—it’s really all internal at this point.”43

Closing: Wal-Mart’s Issues Abroad

Although Wal-Mart suffered from a host of internal concerns, it also suffered from its own external image. In late April 2012, Wal-Mart China brought in the external public relations consulting firm MSL Group to handle its corporate image in China.

The image consultant was hired not only to lessen the impact of the multiple personnel changes occurring in just a 12-month period, but also to address the other scandals that wracked Wal-Mart China.44

Conclusion

By 2015, the non-profit UK grocery watcher IGD predicted that China would be the biggest grocery market in the world, with total sales possibly reaching US$1.4 trillion, up from US$953 billion in 2011. This forecast would be triple the actual grocery sales from only five years earlier in 2010 of US$500 billion.45 But can Wal-Mart, facing food safety concerns, loss of key personnel and governmental food safety pressures all in just a few critical years, succeed in China? Can Wal-Mart capture the minds, hearts and wallets of the mainlanders who, with a disposable income and rate of consumption growing at a high annual rate of 10%, can afford to be picky? Will debuting its EDLP strategy, remaining locally relevant and leveraging its global network be enough to make it in the Middle Kingdom?

43 Marley, S. (13 April 2012) “Wal-Mart Senior Vice President Joe Zhou Leaves China Unit”, Bloomberg,

http://www.bloomberg.com/apps/news?pid=webport_news&tkr=MCD:US,PFE:US,WMT:US&tkr2=WMT:US&sid=ayjaxlT3C_2k (accessed 18 April 2012).

44 Sudhaman, A. (24 April 2012) “Walmart Brings in PR Counsel in China”, Holmes Report,http://www.holmesreport.com/news-info/11755/WalMart-Brings-In-PR-Counsel-In-China.aspx (accessed 25 April 2012).

45 Warc (16 April 2012) “Wal-Mart Seeks Chinese Improvement”, http://www.warc.com/LatestNews/News/WalMart_seeks_Chinese_improvement.news?ID=29717 (accessed 18 April 2012).


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APPENDIX

Bribery in Mexico

In late April 2012, Wal-Mart found itself in the middle of a media frenzy as the company investigated its Mexican subsidiary, Wal-Mart de Mexico, also known as Walmex, for allegedly paying over US$24 million in bribes to local Mexican officials. The bribes were given for permits needed to build stores in the country. In 2005, Walmex failed to fully investigate similar bribe claims, including US$16 million in “donations” to Mexican officials, in an attempt to not interrupt its expansion plans in that country.

At the time of the investigation, Walmex was Wal-Mart’s largest international operation with 431 stores and plans to expand. The US Foreign Corrupt Practices Act (“FCPA”), a law passed in the 1970s, banned a company or its agents from bribing foreign government officials to obtain or retain business. According to Ms Amy Conway-Hatcher, an attorney and a former federal prosecutor, “The investigation alone could cost Wal-Mart in the tens of millions of dollars or more, and that’s if it’s limited to Mexico.” Experts priced the cost of a global federal investigation for a company the size of Wal-Mart in the hundreds of millions of dollars, excluding penalties and fines if guilt was established.

In response to the 2012 controversy, Wal-Mart created the position of a global compliance officer to monitor FCPA compliance.

Failure Abroad

Wal-Mart International: Failure in Germany

Only one year after it entered the Chinese market, Wal-Mart International opened its first German operation in 1997. For a speedy entry into the discount frenzy that was present in Germany at the time, Wal-Mart quickly took over 24 stores from failing retailer Wertkauf and 74 stores from underperforming Interspar and began its trademark price war. However, it took only nine years and US$1 billion in losses for Wal-Mart Germany to claim defeat. In 2006, it sold its supercentre stores, by that time down to 85 outlets from the original 98, to its competitor and Germany’s largest retailer, Metro, and left the country. The German papers had a field day claiming that Wal-Mart limped out of Germany’s US$370 billion retail market with its tail between its legs in defeat.

But why did Wal-Mart fail in Germany? Some German retail analysts cited three primary reasons why Wal-Mart failed.

Wal-Mart Failed to Understand Germany’s Culture

“The problem was the company’s business philosophy, which had always worked so well, was people-centred. That doesn’t actually work when the people aren’t American,” Frankfurt’s financial daily newspaper, Börsen Zeitung, reported at the time.46

Under the leadership of an American expat who spoke no German, Wal-Mart exported its American model, described by the German newspaper Handelsblatt as “bizarre”. Didn’t Wal-Mart understand the differences between the two cultures?

46 Schultz, H. (September 2006) “This Is Not America: Why Wal-Mart Left Germany”, Atlantic Times, http://www.atlantic-

times.com/archive_detail.php?recordID=615 (accessed 13 July 2012).


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In America, the service-with-a-smile from the bag-packers and the store greeters was a Wal-Mart staple. In Germany, such behaviours were seen as off-putting in a people who still liked to bag their own groceries and saw a smile from a stranger as a sexual come-on.

Although the traditional Wal-Mart pre-shift staff chants were popular in its American stores to raise employees’ spirit and maintain morale, in Germany they were viewed simply as silly and ridiculous. Furthermore, the Works’ Council in Germany, a group of employees formed within a company (similar to an American union) considered it its responsibility, not Wal-Mart management’s, to cater to its employees’ social well-being. With the Council’s pressure and media taunts, Wal-Mart eventually scrapped the warm-up.

When the Wal-Mart ethics code, which banned sexual relations between employees, made its way into Germany, the German courts took immediate issue. In 2005, the courts overturned the Wal-Mart ban, citing its own support of the German tradition of flirting in the workplace.

Wal-Mart Failed to Understand the German Consumers’ Habits Other consumer advocates and the German authorities also kept a close eye on Wal-Mart. German anti-trust lawyers banned Wal-Mart’s practice of luring consumers with price-dumping. Wal-Mart also found it difficult to compete when Germany’s strict laws governed its opening hours. It had to close on 6:30 p.m. on weeknights and 8:00 p.m. on Saturdays and stay shuttered on Sundays. In addition, as the Wal-Mart Germany managers soon learned, under German labour laws, hiring and firing of employees was not as simple as it was in the United States.

Wal-Mart Failed to Reach a Critical Mass in the Country

Finally, on a more practical note, critics cited Wal-Mart’s failure to achieve the required economies of scale in Germany to continue operating as a low-cost retailer. To adequately support its three warehouses and logistic centres in the country, Wal-Mart needed at least 400 stores. Although originally planning to build 50 additional superstores in addition to its original 98, Wal-Mart faced land restrictions and planning laws in a country the size of the US state of Oregon. Wal-Mart was also slow to buy up some of the larger chain stores that were for sale in the late 1990s and early 2000s, thus limiting further its ability to expand quickly.

According to Mr Harald Schultz, a senior editor at the Handelsblatt newspaper at the time, Wal-Mart’s failure in Germany could be summed up by a German proverb. Translated, it means: “A nightmarish end is better than a nightmare that doesn’t end.”47

Wal-Mart International: Failure in South Korea

Wal-Mart International’s history of giving up and leaving repeated itself again that same year when, in May 2006, it sold all 16 of its South Korean stores to Shinsegae, a local company, for US$882 million. Again, local business analysts from Seoul claimed that Wal-Mart failed to localise its operations in South Korea. Yet again, Wal-Mart failed to do business in a way that appealed to its non-American consumers.

Similar to the German story unfolding 5,300 miles away, Wal-Mart South Korea could not compete when it failed to understand the South Korean culture and its consumers’ behaviour. Rather than focusing on food and beverages, like its competitors in South Korea, Wal-Mart stocked dry goods, including electronics and clothing. While E Mart and Lotte, Wal-Mart’s 47 Ibid.


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Korean competitors, built fancy, colourful in-store displays, Wal-Mart kept its décor simple, even drab in comparison. Wal-Mart may have had its smiling clerks at its entry doors, but its competitors put on a show with employees wielding megaphones, calling out and clapping to draw attention to their product displays. Like their German counterparts 5,300 miles away, the South Koreans did not want their groceries bagged either. They preferred the excitement and drama of the traditional Asian open market, but in the dry, cool space of a hypermarket.48

Bad Things Come in Threes: Wal-Mart International Leaves Russia In December 2010, Wal-Mart closed its representative office in Moscow, failing to cash in on yet another booming market. What started in early 2008 as a strong desire to strike a deal ended in disappointment when no viable acquisition materialised. Rather, Russia’s X5, part of the Alfa Group, announced only a week before Wal-Mart pulled out that it acquired the Russian discount chain store Kopeika for US$1.65 billion. Wal-Mart saw acquisition of Kopeika or of Lenta, another failed takeover attempt, as central to its entry strategy for Russia.

When the situation was reviewed, local analysts thought Wal-Mart clearly could not manage its entry, moving too slowly to acquire a presence.

“I think Wal-Mart overslept. With their decision-making processes and management from the United States (an eight hour time difference), they didn’t have a chance,” a source close to Wal-Mart’s entry attempts told Russia Profile, an English-language website devoted to Russian business news.

Wal-Mart was rumoured to have looked at entering Russia in 2002, but did not open its office until six years later in 2008. Others cite Wal-Mart’s indecision on whether or not to open a medium-sized hypermarket, a large-format hypermarket or a smaller, convenience type format. Such indecision hurt Wal-Mart. Perhaps its failure to grab hold and profit in Germany and South Korea made Wal-Mart Russia overly cautious. Regardless, Wal-Mart was not the only major international retailer to pull out of Russia. Almost one year later, in October 2009, French retail giant Carrefour announced it was pulling out after opening just one shop in Moscow and another in the southern city of Krasnodar.

Even as he announced that Wal-Mart was leaving Russia, McMillon did not rule out a return to serve the 145 million people who live in the Russian Federation.49 “The Russian market is a compelling retail opportunity and we believe that Russian consumers could benefit from Wal-Mart’s value proposition. We will continue to pursue market entry opportunities,” McMillon said.50

48 Choe, S. H. (23 May 2006) “Wal-Mart Selling Stores and Leaving South Korea”, New York Times,

http://www.nytimes.com/2006/05/23/business/worldbusiness/23shop.html (accessed 20 April 2012).49 Griffin, R. and Profile, R. (2 March 2011) “Walmart Cashes Out of Russian Retail”, RIA Novosti,

http://en.rian.ru/business/20110302/162829249.html (accessed 19 March 2012). 50 Ibid.


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WAL-MART’S SALES, EXPENSES AND INCOME IN 2005 AND THEN SAME DATA PRESENT DAY


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WAL-MART’S STOCK PRICE (JUNE 27, 2012) COMPARED TO S&P AVERAGE FOR ENTIRE HYPERMARKET/DISCOUNT RETAIL INDUSTRY DURING SAME TIME

Rank Retailer NameSales in 2006 (Billion Rmb) Number of Outlets 1 Gome Electric Appliance, China 86.93 820 2 Bailian Group, China 77.09 6280 3 Suning Appliance Chain Store, China 60.95 520 4 China Resources Vanguard, China 37.85 2250 5 Dashang Group, China 36.14 182 6 Carrefour, France 24.80 95 14 Wal-Mart, USA 15.03 71 17 Lotus, Thailand 13.50 75 23 Metro, Germany 9.37 33 24 Tesco, UK 9.30 47

Table 1: The Rank of Retailers in China

Source: Each company’s website (2007).

68.59

68.22

68

68.1

68.2

68.3

68.4

68.5

68.6

68.7

Stock Price Jun 27 2012

Wal-Mart store Inc.

S&P consumer staples industry average

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Walmart in China