Global Economics

Wal-Mart Shops for China's Trust


There have been plenty of lost-in-translation moments for Wal-Mart (WMT) overseas this year. The $300 billion-plus retailing colossus sold off loss-making operations in South Korea and Germany in 2006, and has bled more than $1 billion from its Japanese operation since taking a stake in Japanese retailer Seiyu back in 2002 (see BusinessWeek.com, 9/13/06, "Japan: Wal-Mart's Looking for a Partner??gain").

These setbacks aside, Wal-Mart shows no signs of letting up in its efforts to take its unique brand of retailing abroad. On Oct. 16, The Wall Street Journal Online reported that Wal-Mart has agreed to acquire Taiwanese retailer Trust-Mart in a bid to expand its retailing footprint on mainland China. If so, the deal would set the stage for a bruising battle in a critical market with France's Carrefour (CRERF), which also reportedly bid for Trust-Mart and has more than 70 hypermarket retail outlets in nearly 30 Chinese cities.

Carrefour's China sales last year were about $2.2 billion, nearly twice Wal-Mart's. Analysts say Carrefour has been more nimble than Wal-Mart at adapting its stores to Chinese tastes??or example, by styling its fish and produce departments after traditional Chinese street markets, with salespeople beckoning customers to step up for a closer look. "Local adaptation has always been Carrefour's strong point overseas," Carrefour CEO Jos?? Luis Duran told BusinessWeek in a recent interview.

Yet Wal-Mart, the fabled and controversial U.S. retailer, founded in 1962 by Sam Walton, is already a big international player. It operates some 2,745 stores outside the U.S. and is particularly well entrenched in Mexico, Canada, Brazil, Central America, and Britain. About 20% of its revenues are from overseas.

LEARNING THE ROPES. Wal-Mart entered the Chinese market about a decade ago, and now operates more than 66 of its stores in 34 or so cities. It invested about $215 million in China during that period, and has established 20,000 supply partnerships to supply those stores and its retail outlets back in the U.S. and elsewhere. Wal-Mart says it exports (directly and via third-party suppliers) about $18 billion worth of goods from China every year.

Yet while Wal-Mart has excelled in developing low-cost sourcing relationships in China, it still has some work to do to truly click with Chinese consumers. "Knowing how to source and negotiate for low prices requires a very different skill set than selling to the Chinese consumer," says Shaun Rein, founder of Shanghai-based China Market Research Group.

Rein and others think a takeover of Trust-Mart would give Wal-Mart better insights into the mindsets of Chinese consumers as well as better access to choice retail locations. Wal-Mart is expected initially to take control of 30 stores and overtake Carrefour in the hypermarket arena in terms of outlets.

CROSS-SELLING PROBLEMS. If Wal-Mart can integrate Trust-Mart more seamlessly than it has executed other foreign acquisitions, this could be money well spent. McKinsey principals and retail specialists Wai-Chan Chan and Richard Cheung estimate that retail sales in China could hit $760 billion by 2008, and have been growing about $80 billion a year thanks to the mainland's white-hot economy and growing consumer wealth.

The trick will be making the economics of big-store retailing work in China's less developed urban markets. The retailing concept works well in major cities such as Shanghai, says McKinsey's Chan, where people tend to buy more high-margin general merchandise rather than thin-margin food products. "The challenge in a second-tier city is that people will go in for food and not so much general merchandise," he says.

On top of that, Chinese consumers are likely to stay loyal to mainland specialty retailers that excel at service and product expertise, according to Shanghai-based Interbrand China managing director Frank Chen. "They will go to hypermarkets for everyday purchases," and specialty retailers for certain purchases that require more expertise and after-sales service, he figures.

MISSION CRITICAL. In the giant outlet space, in which retailers offer everything from consumer electronics to groceries, Wal-Mart and Carrefour could do well. However, big domestic specialty retailers such as the home appliance chain Gome will also continue to thrive.

This much is clear: Wal-Mart must succeed in a fast-track market such as China to offset slower sales growth back in the U.S. Wal-Mart CEO H. Lee Scott would like to see overseas revenues reach about one-third of total sales from some 20% now. Getting the Chinese market right after the recent setbacks abroad is critical for the U.S. retailer.

Bremner is Asia Regional Editor for BusinessWeek in Hong Kong.

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