As the largest retailer in the world, Wal-Mart(NYSE:WMT) may seem to be a natural fit in the most populous country in the world, China. However, that has not been the case thus far.
Eighteen years after entering the Chinese market, Wal-Mart has about 400 stores in the region, less than 4% of its worldwide total. The company has struggled to develop a meaningful foothold in this key growth market. Missteps over the years have forced the company to close stores and scale back ambitions of a network of superstores much like it has in the U.S.
Now, Wal-Mart is refreshing its goals there with plans to open up 115 new stores by 2017. CEO Doug McMillon said the company does not want to become the biggest retailer in the country but the most trusted. The decision to expand comes at a time when China sales are flagging, down 0.7% overall for the most recent quarter and down 2.3% at stores open more than a year.
With the core store format, U.S. superstores, approaching saturation, China is taking on increasing importance as a growth market.
Not all American brands have prospered in China
While the Chinese are known for their fondness for Western brands, some have found more success than others. Restaurant chains like Yum! Brands' KFC and Starbucks have achieved major success, both benefiting from a premium brand image there. Fashion labels like Nike have also found success, and recent performance from Apple has been strong.
However, American retailers have not necessarily enjoyed the same reception that American brands have. In many ways, brands have an easier sale to make than retailers as Chinese people are generally more trusting of Western products. In recent years, there have been local food safety issues with tainted milk and unscrupulous beef and chicken suppliers. Similarly, western brands like General Motors are preferred over Chinese carmakers.
Retailers, however, sell products rather than make them, which has not yielded the same advantage, and Wal-Mart is not the only American retailer to have struggled in the region. In 2012, Home Depot announced it would shutter its Chinese operations, closing all seven of its stores and pulling out of the country. The company found that its do-it-yourself home improvement culture did not fit well in China, where doing such work is not a point of pride the way it is in the U.S.
Last year, Best Buy also made the same decision, selling its China division to a local real estate company and closing the book on the unsuccessful venture in order to focus on domestic operations.
Considering that Home Depot and Best Buy are two of the largest retail chains in the U.S. after Wal-Mart, recent history does not bode well for its growth.
Like those two chains, Wal-Mart may have approached the Chinese market with too much of an American mindset. The company has lost market share to Chinese rivals such as Sun-Art, which seems to have borrowed the Wal-Mart business model and adapted it to China. For example, Sun-Art allows shoppers to purchase groceries in a style resembling traditional outdoor markets. The everyday low prices strategy has also not been much of a winner, and with just 400 stores, the company lacks the economies of scale it typically enjoys.
For investors, the best hope for success may be riding on the shoulders of new CEO Doug McMillon. McMillion has shown he is unafraid to break away from traditional company tactics by raising employee wages and taking a stand against an anti-gay rights law in Arkansas, the company's home state.
E-commerce will play an important role in the turnaround strategy, and the company has shown it understands that with the acquisition of Yihaodian.com, a local online retail website. If Wal-Mart can find the right mix of e-commerce, adaptation to Chinese tastes, and price leadership, it should be able to find some growth in the region. However, with only 115 new stores planned, this is unlikely to be a major source of growth anytime soon. As other retailers have found, China is not necessarily the cure-all that American companies had hoped it would be,