Why Wal-Mart Never Picked Up In China?

The world’s largest retailer, Wal-Mart (NYSE:WMT), is struggling in its domestic and international markets alike. While sluggish consumer confidence and self-cannibalization have troubled the retailer in the U.S., international regions have had their specific problems. Although the company has done well in Mexico and Brazil in the past, it never gained any significant momentum in the world’s second largest economy, China.

Even after 18 years of operation, Wal-Mart’s Chinese business has grown to just 405 stores. The retailer has had problems in understanding discerning Chinese consumers as their buying decisions aren’t always price driven. They are more inclined towards tailor-made products and a shopping environment that reflects local preferences. While Wal-Mart’s strategies to adapt to local tastes haven’t been fruitful, local retail chain Sun-Art retail group has been extremely successful. Its imitation of Wal-Mart’s business model and better understanding of consumer behavior have helped it win Wal-Mart’s customers. Although China doesn’t contribute much to Wal-Mart’s revenues, the market is of vital importance to the company from long term perspective. The retailer is missing out on a substantial growth opportunity and it needs to come up with some formidable strategies to vitalize its Chinese business.

Our price estimate for Wal-Mart stands at $79.30, which is less than 5% ahead of the market price.

See our complete analysis for Wal-Mart

Shrewd Consumer Behavior Is Troubling Wal-Mart

China, the second largest economy in the world, is a lucrative market for western retailers due to its huge population, booming middle class and rising disposable incomes. Entering this market in 1996, Wal-Mart was one of the first retailers to take advantage of this growth opportunity. However, 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.

Wal-Mart China contributes only around 2% to the company’s overall revenues, which is surprising considering that China is one of the fastest growing retail markets in the world. The retailer’s efforts to grow in China have been undermined by the shrewd consumer behavior and dominance of Sun-Art retail group. More than prices, Chinese buyers are concerned about the authenticity and quality of products. While Wal-Mart’s EDLP (every day low prices) strategy has been very successful around the globe, it has been regarded as cheap and unsafe in China. ^[1]

Sun-Art Imitated Wal-Mart’s Business Model And Outwitted The Company

While Wal-Mart has struggled to serve to local taste, its native counterpart, Sun-Art, has performed significantly better with its more localized approach. Despite a smaller presence than Wal-Mart, Sun-Art retail group holds a higher market share. ^[2] 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. ^[3] 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 as Sun-Art. The retailer sources around 95% of merchandise locally and hires Chinese nationals to run its stores, 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.

Macro-Economic Environment Isn’t In Wal-Mart’s Favor Either

While Wal-Mart has made meaningful progress in China, it has been slow and uneven. The recent slowdown in Chinese economic growth has weighed heavily on the retailer’s sales (+0.7% comparable sales in 2013). Although the Chinese economy has grown rapidly over the last 10 years, its growth has slowed down significantly since 2012. In the last two years, the GDP growth rate has come down to 7.7% (average) from the historical average of 9.3% (1989-2011). ^[4] This year, World Bank expects China’s GDP growth rate to decelerate to 7.6% as China’s salary growth is slowing down and severely impacting the region’s consumer spending and retail sales. In its latest earnings call, Wal-Mart stated that in addition to economic problems, government austerity programs are also negatively impacting its sales. ^[5]

Wal-Mart Is Focusing More On Improving Store Productivity

Since Wal-Mart’s comparable sales in China aren’t improving, it is looking to boost its productivity. In 2012, the retailer decided to slow down its expansion in Brazil and China, to build a strong foundation for comparable store sales growth and reduce operating expenses. Wal-Mart is still persisting with this strategy as it plans its capital expenditure at around $11.8 billion – $12.8 billion for fiscal 2015, slightly down from fiscal 2014’s $12 billion – $13 billion. The company is looking to close 50 of its under-performing stores in Brazil and China, which contribute about 2% – 3% to their respective regions’ sales. Although their closure will put negative pressure on Wal-Mart’s revenue growth, new store openings in lucrative regions should offset this impact. Moreover, with fewer under-performing stores, Wal-Mart will be able to generate better revenue per square feet in China, which has been on the lower side. The retailer’s Chinese e-commerce business has made significant progress lately with the acquisition of Yihaodian, which is likely to positively impact its store productivity going forward. ^[6]

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1. Wal-Mart’s China syndrome a symptom of international woes, Reuters, Feb 21 2014 [↩]
2. See Bass With Barbie Dolls in China, Bloomberg, December 10, 2012 [↩]
3. The China’s Copycat Walmart Is Beating The Real Thing, Business Insider, Dec 10 2012 [↩]
4. China GDP Annual Growth Rate, Trading Economics [↩]
5. China’s economy to slowdown to 7.6% this year: World Bank, The Economic Times, Jun 6 2014 [↩]
6. Wal-Mart’s Q1 fiscal 2015 earnings transcript, May 15 2015 [↩]