Wal-Mart Struggles With Local Strategy In China

China, the second largest economy in the world, is a lucrative market for western retailers due to its huge population and booming middle class with rising disposable incomes. ^[1] Entering this market in 1996, Wal-Mart (NYSE:WMT) was one of the first retailers to take advantage of this growth opportunity, but the inability to resonate with the local market has made it difficult for foreign retailers to gain significant presence in China, and Wal-Mart is no exception. ^[2]

Presently Wal-Mart China contributes only 2% to Wal-Mart’s overall revenues, but the region provides huge potential for future expansion as China is the fastest growing retail market in the world (with 18% annual growth). ^[3]

Lately, Wal-Mart has been facing fierce competition from a local big box retailer, Sun-Art Retail Group, that has managed to gain a higher market share through its traditional Chinese style stores. Moreover, the economic growth in China has been slowing for the last seven consecutive quarters, the latest 7.4%, being the lowest in the last three years. ^[4] Let’s evaluate how these factors are going to weigh on Wal-Mart’s growth in China.

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What Is Sun-Art Doing Better?

Despite having a wider presence and a few years lead, Wal-Mart has lower market share of 11.2% compared to Sun-Art with 12.8%, according to a Bloomberg report citing Euromonitor. ^[5] This is despite Wal-Mart operating around 378 stores in the region, which is more than Sun-Art’s 240 stores. ^{[6] [7]}

So how is Sun-Art performing better despite its limited physical presence?

We believe that Sun-Art’s better understanding of Chinese customers is proving to be a competitive advantage. Chinese shoppers are accustomed to buying their groceries at local outdoor markets. Sun-Art provides this experience by giving its stores a local “Chinese street look” with fresh seafood like crabs displayed on table tops and in-store noodle stands. ^[8] The combination of a street market and super market has been very attractive to Chinese shoppers.

Comparatively, Wal-Mart’s typical big box format has a lower appeal and its efforts to be “local” have not been as successful at Sun-Art. The retailer sources around 95% of merchandise locally and hires Chinese nationals to run its stores, ^[6] which helps, but the retailer will have to adopt localized strategies similar to Sun-Art in order to attract more customers. Wal-Mart needs to get past its big box look and customize its stores for the local Chinese market while maintaining its everyday low price strategy.

Slow Economic Growth May Hinder Aggressive Expansion

On an average, Wal-Mart has opened around 50-60 stores in China annually. ^[9] However, recently the retailer has revealed plans to open 100 stores in the next three years, an average of little over 30 stores per year. ^[10] Given the size of the country, this decision is unlikely to have been driven by worries of cannibalization and likely due to the combination of slower economic growth and wanting to ensure that it’s China strategy is on a sound and profitable footing before investing more heavily.

Although the Chinese economy has grown rapidly over the last 10 years, its growth slowed down significantly in 2012. In the third quarter, the GDP growth rate stood at 7.4%, well below the historical average of 9.3% (1989-2012). ^[11] We expect this slower pace of slowing growth to taper off going forward.

While Wal-Mart has made meaningful gains in China, they have been slow and uneven. Meanwhile Sun-Art and other retailers with Asian ties are imitating some of Wal-Mart’s strategy and then adoption better to the local environment. Wal-Mart should take heed to the successful strategies such as taking a more localized approach to retailing and incorporate its big box and discount strategies to beat these imitators at their own game.

Our price estimate for Wal-Mart stands at $80, implying a premium of about 10% to the market price.

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1. China’s middle-class boom, CNN Money, June 26 2012 [↩]
2. Wal-Mart in China: challenges facing a foreign retailer’s supply chain, China Business Review, Sept 2003 [↩]
3. How Wal-Mart is changing China, The Atlantic, Dec 2011 [↩]
4. China’s GDP grows at slowest rate for three years, The Telegraph, Oct 18 2012 [↩]
5. See Bass With Barbie Dolls in China, Bloomberg, December 10, 2012 [↩]
6. Wal-Mart China [↩] [↩]
7. Sun-Art Retail [↩]
8. The China’s Copycat Walmart Is Beating The Real Thing, Business Insider, Dec 10 2012 [↩]
9. Wal-Mart To Open 100 Stores In China, Wall Street Journal, Oct 25 2012 [↩]
10. Wal-Mart China Announces 5 Key Points Of Long Term Strategy, Wal-Mart China, Oct 30 2012 [↩]
11. China GDP Annual Growth Rate, Trading Economics [↩]