How Wal-Mart Plans to Conquer China

The king of retailers, Wal-Mart Stores (NYSE: WMT  ) , is struggling with poor sales growth. With more than $400 billion in annual sales, the company has to engage in massive discounts and sales promotions in order to keep a one to two percent annual growth rate in sales. This trade-off hurts the giant's profitability enormously.

China's huge emerging middle class could help Wal-Mart solve its sales growth problem. China's retail sales were already huge in 2010 and amounted to nearly $2.1 trillion. At the current pace, by 2015 China is poised to jump to the position of third largest consumer market globally behind only the U.S. and Japan.

Aware of these facts, Wal-Mart has been opening stores in China since 1996. However, China still represents a small proportion of Wal-Mart's total revenue at only $10 billion in 2012. A fierce landscape and the struggles of other U.S. retailers in capturing market share have made huge retail chains such as Costco  (NASDAQ: COST  )  avoid China for the time being. Best Buy (NYSE: BBY  )  has done very poorly there. How does Wal-Mart plan to capture market share in China? 

WMT Revenue (Quarterly) Chart

Source: YCharts

Wal-Mart's strategy to conquer the fierce Chinese retail space
Wal-Mart is planning an aggressive expansion in China. Mike Duke, Wal-Mart's CEO and President, recently announced the company will be opening 110 new super-centers and Sam's Clubs over the next three years. At the same time, the company -- which has already closed 11 stores in the country -- plans to close 15 to 30 more stores over the next 18 months.

What's going on? The company is planning a massive geographical relocalization of its stores. Most of the new locations will be focused on smaller cities, between two to five hour drives from Beijing, Shanghai, and other main cities. Smaller cities are expected to experience faster growth within the next decade. 

At the same time, Wal-Mart plans to stock all stores with upgraded, fresh merchandise. New distribution centers will be opened to ensure faster distribution and more efficient supply chain management. It seems the retail giant has finally understood that low prices aren't enough to get market share in China. As Forbes contributor Walter Loeb mentions, Chinese consumers are increasingly discerning and willing to spend time checking product quality before buying to ensure freshness.

Understanding consumer preferences is a must
A better understanding of China's evolving consumer preferences remains crucial for winning or losing this race. For example, according to CNBC contributor Shaun Rein, Best Buy -- which in 2011 closed all nine of its branded stores in China -- failed simply because the company did not differentiate its product lines from local competitors. As a result, its products were perceived as being too expensive. The company also focused too much on building huge flagship stores in China's biggest cities rather than building smaller retail outlets located in medium-sized cities.

In order to avoid Best Buy's mistakes, chains such as Macy's and Costco plan to enter China by opening online storefronts before starting brick-and-mortar operations. This patient approach allows retailing giants to get exposure to the fastest-growing segment of China's entire retail industry, the e-commerce market, and at the same time get a better understanding of consumer preferences.

Final Foolish takeaway
After opening its first store in 1996, Wal-Mart has learned a lot about how to be competitive in the world's second largest economy. The new approach the company is taking sounds more realistic and will hopefully contribute toward improving the giant's top-line performance. However, although Wal-Mart's integrated strategy -- from adding more e-commerce exposure to improving its distribution network -- does sound promising, it's important to keep in mind that the company still has plenty of things to learn about China's rapid consumer market changes. 

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Read/Post Comments (8) | Recommend This Article (0)

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  • Report this Comment On November 10, 2013, at 11:31 AM, Patmygroin wrote:

    Wal-Mart has pledged $100 Billion over the next ten years for manufacturing jobs in the U.S. , good move and intelligent thinking due to the fact Mfg. is leaving China due to tremendous increases in wages and production cost . In a reversal by returning these jobs to U.S. soil re-opens the market to the Chinese to by AMERICAN which is a lure to the rapidly growing middle class and wealthy in China /

  • Report this Comment On November 10, 2013, at 12:20 PM, DanEyeL wrote:

    Adrian,

    Very cool article, but your graph doesn't support what you're asserting. You're comparing margin rate to revenue dollars. Ebbs and flows in margin rate are to be expected from one year to the next; what you might have intended was to compare margin dollar growth to revenue growth. If you make that comparison, you will find that margin dollars have actually grown quite steadily along with revenue dollars.

    In fact, in the full period you pulled for that chart, gross profit has grown by 10% vs. 7.5% for revenue. To view the correct chart, just change "gross_profit_margin" in the y-chart URL to "gross_profit."

    Also, generally speaking I have no idea how Y-Charts calculates quarterly % change. As an example, compare jan '13 to jan '12. The actual dollar growth for revenue is 3.85% if you calculate it, but it comes up closer to 18% on the growth chart. Weird.

  • Report this Comment On November 10, 2013, at 12:20 PM, thethreestooges wrote:

    What's wrong with this article??

    Walmart to conquer China? China never want any foreigner to be invaded let alone conquer.

    Why would Walmart who sell mostly Chinese goods in their stores in the US want to buy the same Chinese goods and sell it back to the Chinese in China? Where could Walmart outsource cheaper than China so they can sell it to the Chinese people?? Africa??

    An outsider cannot compete with the local selling the local products back to them.

    The head of Walmart in China is making these things up just to keep his job. Closing some stores and opening up more stores? Give me a break.

  • Report this Comment On November 10, 2013, at 2:25 PM, SaintJoseph wrote:

    Hi Folks,

    Unlike the Americas,

    China's growing middle class

    is more sophisticated now, and

    prefer better products that cost more

    than at WalMart.

    If I was WalMart's Chairman and CEO,

    I would be inclined to employ WalMart's

    wealth of resources to create a new store chain

    offering products China's new middle class wants.

    I's sure I can do that, and make a profit.

    QED.

  • Report this Comment On November 10, 2013, at 3:35 PM, FredBP wrote:

    Here is a great idea. Wal Mart should sell American products in China. They stock China products in their stores in America.

  • Report this Comment On November 10, 2013, at 10:22 PM, madmilker wrote:

    READ REALLY SLOWLY....!!!!!

    ["Walmart China firmly believes in local sourcing. We have established partnerships with nearly 20,000 suppliers in China. Over 95% of the merchandise in our stores in China is sourced locally. In addition, Walmart is committed to local talent development and diversity, especially the cultivation and full utilization of female staff and executives. 99.9% of Walmart China associates are Chinese nationals. All our stores in China are managed by local Chinese. Furthermore, over 60 percent of Walmart China associates are female and about 40% of those are at management level. In 2009, the company established the “Walmart China Women’s Leadership Development Commission” for driving women’s career development."] .......

    Less than 5% foreign in China....

    READ MORE SLOWLY....!!!!

    http://eartheasy.com/blog/2010/11/supersize-ships-being-buil...

    NOW...READ THIS REALLY DANG SLOWLY....!!!!

    http://www.gizmag.com/shipping-pollution/11526/

    1975 the last year America had a trade surplus.

    http://www.census.gov/foreign-trade/statistics/historical/ga...

    Retail makes NOTHING...it only moves a countries currency. Wal*Mart has its Global Procurement Office in China. America has a 6 to 1 trade deficit with China and if the person that wrote this article thinks they know Wal*Mart will conquer China.... that person is three sheets in the wind and a sandwich short of a picnic because Wal*Mart has already closed stores in China and have lost market share....

    The consumers of China are fed up being deprived from the opportunity to purchase foreign made products and are shopping less and less at Wal*Mart.

    In fact....the world is shopping less at Wal*Mart including the people of America.

  • Report this Comment On November 11, 2013, at 2:37 PM, onesong2go wrote:

    This is not a financial post, but an observation on Wal-Mart's stores in China.

    I have had the displeasure of visiting two Wal-Mart stores when in China.

    To say the least they were a disgrace. The condition of both were terrible. Store looked dirty, merchandise in disarray.. just not a showcase that you would think... now one floor down was a Chinese department store that was impeccable. Clean, organized , staff waiting to help you and huge inventory of items.

    I guess my point is , if Wal-Mart wants to dominate China.. they better make presentable stores .. or they will just piss there marketing money away... Chinese consumers are more savvy than Americans think... they also will shop Chinese stores before American if perception is their stores are equal or better. WAKE UP Wal-Mart... the average Chinese is not swallowing the cool aid yet.

  • Report this Comment On November 12, 2013, at 2:00 AM, cynnils wrote:

    As noted by the previous poster, this article just parrots the marketing messages from Walmart without any insight on the true situation.

    The reality of Walmart's situation in China under its existing (primarily expat) leadership:

    (1) customer traffic is falling (-7% in latest quarterly call)

    (2) market position has fallen from #1 to #3 (surpassed by Sun Art and CRE+Tesco)

    (3) service standards are eroding following multiple layoffs (presumably in a bid for profitability)

    (4) experienced Chinese talent has been leaving (multple SVP and VP departures in past year)

    "Geographical relocalization" is just spin for "stores in big cities are losing money and must be closed". I am not sure if Sun Art and CRE have needed to take the same action.

    In short, I would retitle the article "How Wal-Mart Is Being Conquered in China"

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