CASE STUDY ON WAL-MART'S STRATEGIES IN CHINA

On March 04, 2004, Wal-Mart Stores Inc. (Wal-Mart) held its Board of Directors' annual
meeting in China.
It was an indication of the importance the company accorded to its Chinese operation.
Although Wal-Mart entered China way back in 1996, it had adopted a slow expansion
approach in the country.
However, in the early 2000s the company began to realize that China had the potential to
replicate its US model of massive growth due to a huge population of over 1 billion and an
increasing per capita disposable income. The members of the Wal-Mart board wanted the
company to "get a lot more aggressive"4 in its expansion in China. Wal-Mart planned to
increase the number of its stores in China from 48 in 2005 to 90 in 2006.
Industry observers pointed out that China was a unique market for Wal-Mart. The company
sold goods worth $940 million and purchased to the tune of $18 billion5 from Chinese
manufacturers in 2004, thus having a substantial presence both as a purchaser and a seller of
goods in China.
In December 2004, the Chinese government eased restrictions on foreign retailers to fulfill its
commitments as a World Trade Organization (WTO) member. Experts commented that this
would help Wal-Mart's expansion efforts in the country.
Most analysts said that Wal-Mart's expansion in China would create more jobs and improve
supply chain efficiencies in the retail sector of the country. However, a few analysts were
critical of Wal-Mart's operations in China. They pointed out that Wal-Mart had reduced
wages to below sustenance levels not just at its own stores but at supplier's end as well.
Since the time it entered the Chinese market, Wal-Mart had offered the Chinese 'Tian Tian
Ping Jia'; its global practice of Every Day Low Prices (EDLP). At the same time, it had also
successfully localized its offerings to Chinese consumers with significant innovations.
However, analysts pointed out that it had not been all smooth sailing for Wal-Mart in China;
it had got over a lot of hurdles. They predicted that Wal-Mart would not be able to rest easy
as there would be plenty of challenges in the future as well.

In 1962, Sam Walton (Walton) and his brother James Lawrence "Bud" Walton opened the
first Wal-Mart store in Rogers (Arkansas), USA. In the first year of its operations, the store
registered sales of over $1 million. Initially, the Waltons concentrated on opening stores in
small towns and introduced innovative concepts such as self-service. By 1967, Wal-Mart had
24 stores with sales of $12.6 million.
Encouraged by the early success of Wal-Mart, Sam Walton expanded Wal-Mart's operations
to Oklahoma and Missouri in 1968. In the following year, Wal-Mart was incorporated as a
company under the name Wal-Mart Stores Inc. In 1970, Wal-Mart established its first
distribution center in Bentonville, Arkansas. The same year, it was also traded for the first
time as a public limited company in over-the-counter6 stock trading. In 1972, Wal-Mart was
listed on the New York Stock Exchange. Wal-Mart continued to grow in the 1970s, benefiting
from its highly automated distribution system, which reduced shipping costs and time, and its
computerized inventory system, which speeded up the checkout and reordering of stocks.
By 1975, there were 125 Wal-Mart stores in operation with sales of $340.3 million and 7,500
employees. The famous 'Wal-Mart Cheer' was introduced by Walton in the same year to
foster cooperation and team spirit among employees (Refer Exhibit II for the Wal-Mart
Cheer). In 1978, Wal-Mart purchased the Hutcheson Shoe Company, and later set up
pharmacy, auto service center, and jewelry divisions.
By 1980, Wal-Mart had 276 stores with annual sales of $1.4 billion and by 1984 the number
of stores increased to 640 with annual sales of $4.5 billion and profits of over $200 million.
In the 1980s, strong customer demand in small towns led to the rapid growth of Wal-Mart.
The main reason for Wal-Mart's success in smaller towns was that it offered low prices and
catered to the specific needs of small towns. It offered the kinds of products that customers
most needed, and maintained business hours according to the customers' convenience. This
allowed Wal-Mart to become more popular than many local stores which offered limited
selection and had high mark-ups.

Business Segments
Wal-Mart had two types of divisions - Retail divisions and Specialty divisions. Retail
divisions were further classified into -Wal-Mart Stores, Sam's Clubs, Neighbourhood
Markets, Wal-Mart International and Wal-Mart.com. The specialty division was divided into Tire & Lube Express, Wal-Mart Optical, Wal-Mart Pharmacy, Wal-Mart Vacations and WalMart's Used Fixture Auctions.

Wal-Mart's International Operations

In the early 1990s, Wal-Mart announced that it planned to go global. It wanted to look

for international markets for the following reasons:

Wal-Mart was facing stiff competition from K-mart and Target. These two firms had
adopted aggressive expansion strategies and had started eating into Wal-Mart's market

share.
Although Wal-Mart had the scope to expand in the US, it was becoming difficult for
the company to sustain its double digit growth rate. Wal-Mart was suffering from soft

sales and rising inventories, especially in its Sam's & Club divisions.
Wal-Mart also realized that the US population represented only 4% of the world's
population and confining itself to the US market would mean missing the opportunity

to tap vast markets elsewhere.

In the early 1990s, globalization and liberalization opened up new markets and
created opportunities for discount stores such as Wal-Mart across the world.

Wal-Mart's Strategies in China

ENTRY AND EXPANSION STRATEGIES:
Wal-Mart began the groundwork for its Chinese operations in 1994 when it sent a team of
executives to China.
It started its actual operations in China in August 1996 at Shenzen with the opening of its first
Super Centre and Sam's Club in partnership with Shenzhen International Credit Investment
Company.
LOCALIZATION STRATEGIES:

Procurement and Distribution

To maintain its practice of EDLP, Wal-Mart adopted a three pronged approach in China. First,
it focused on increasing local procurement thus reducing procurement costs. Second, it
maintained satisfactory supplier relationship during its initial years by paying suppliers
within 3-7 days. Third, it established modern commodity distribution centers and
computerized its management to improve efficiency and reduce cost.

Governance Practices
Unlike Chinese companies, at Wal-Mart, associates found a high degree of transparency in
relation to career growth. All new employees went through three months training at
Shenzhen. Wal-Mart valued an individual's competence rather than personal connections
when promoting an employee.
According to a report by People's Daily Online, Du Limin who started her career as an
ordinary checkout person at Wal-Mart, became general manager of a Sam's Club in Shenzhen
in just two years. In 2003, Wal-Mart figured among the 15 most popular foreign employers in
China in a survey of university students conducted by ChinaHR.com one of the leading
online recruitment websites in China. Wal-Mart suppliers also underwent "standards
training." As per Wal-Mart standards, suppliers were not allowed to have a work-week of
more than 40 hours. Wal-Mart also restricted overtime to three hours per day and emphasized
that safety requirements were met and satisfactory accommodation was provided to the
workers.

The Problem Areas

Wal-Mart's Chinese operations have had their share of problems. The company's supply chain
operations were not as efficient as in its home market. In addition, there was stiff competition
from both local Chinese retailers and from foreign retailers who had established their base in
China. Thus, even after nine years of presence in China, Wal-Mart was still very small with
just 48 stores. Its 2004 sales from the Chinese operations were $940 million which was
around 2% of its international sales and a miniscule portion of its total sales of $256.3
billion...

Future Prospects
Wal-Mart had long been criticized for its slow international expansion. Analysts pointed out
that its nearest rival, Carrefour, had gained a lot of ground due to rapid expansion in
international markets. The same applied to China as well. Experts pointed out that Carrefour
had been successful in China because it had been able to study Chinese consumers through its
venture in Taiwan, while Wal-Mart did not have any such experiential advantage. Also, WalMart did not make use of its first mover advantage and expanded slowly in China.