Walmart needs to grow overseas, and China's the big prize
SHENZHEN, China - Zhong Guoyan sifted through piles of fish at a Walmart in Shenzhen, one of China's largest cities. She studied the fins, to make sure they were bright red and firm. She peered at the eyeballs - were they bulging?
"I like when the products are fresh, and the quality is good," she said. "When I come here, I have a look. If it's good, then I will buy it. If it's only cheap, I won't buy it."
In American Walmarts, customers are not offered the opportunity to fondle their fish. But America is not China, as the world's biggest retailer has learned. If the Arkansas-based company wanted to win over foreign consumers like Zhong, it would have to shed some of its American ways, and cater to very different customs and conventions that are fast changing.
In the U.S., Walmart conquered the marketplace by offering "everyday low prices" to penny-pinching, bulk-buying customers, but Chinese shoppers have good reason to look for quality first, bargains second after scandals involving tainted and mislabeled food. And Chinese shoppers seek fresh food daily because their tiny refrigerators don't give them room to stock up.
Zhong eventually tossed a couple of fish into a plastic bag - a small victory in this massive retailer's struggle to build an international empire.
The stakes are high: Walmart can't count on much sales growth from its U.S. business - it's facing challenges at home with intense competition from online leader Amazon.com and dollar stores, which offer low prices and convenience - so the retailer is depending more on its operations overseas.
China, the world's most-populous country, is the ultimate prize. Right now, it represents just 3 percent of Walmart's global sales of $478.6 billion, according to estimates from IBISWorld, a research firm. And the company has just over 400 stores in China, compared with more than 5,000 in the U.S. But the Chinese grocery market, already the world's largest at $1.1 trillion a year, is expected to grow to nearly $1.5 trillion in just the next four years, says IGD, a global consumer products research firm.
"China remains a strategic market for our future," Doug McMillon, CEO of Walmart Stores Inc. recently told investors.
Getting the food business right is critical for Walmart. Shoppers buy groceries more often than anything else. If Walmart can get them in the door to buy food regularly, perhaps they will visit more frequently for items like pajamas and coffee makers - and eventually become loyal online customers, too.
Still, markets in China and elsewhere in the world will not surrender to Walmart, just because it's Walmart. In particular, global players like Walmart have found that food retailing doesn't cross borders easily because it's a largely local business. After struggling on its own in China, Britain's Tesco PLC decided two years ago to team up with China Resources Enterprise, a state-owned company. Walmart has also taken some lumps.
Overall international sales growth has been uneven, dropping 9.4 percent last year largely because of the strong dollar. And while Walmart's overseas business had a strong start to this year, it faces long-term challenges. Walmart gave up in Germany and South Korea, abandoning those markets back in 2006 in the face of tough competition. It's closing 10 percent of its stores in Brazil. And it's locked in a price war in the United Kingdom, slugging it out with no-frills German discounters Aldi and Lidl.
Overseas, Walmart lacks the scale to squeeze local suppliers on price as it does in the U.S. It also faces nimble competitors who are entrenched in foreign markets. It has not always found it easy to duplicate its bedrock strategy of constant bargains outside the United States.
But Walmart has learned over the years from its missteps, discovering that it can't just impose its culture on the world, that it needs to adapt to local ways, that patience does pay off.
In countries like Mexico, Canada and Japan, Walmart has won shoppers over time. After the setbacks in Germany and South Korea, the company established a team to ensure it does a better job integrating international acquisitions, while avoiding the impulse to force employees overseas to adopt all its ways. In Chile, it launched a corporate culture campaign and worked closely with suppliers to coax them into its way of doing business. It's using its global clout to find and import products from around the world, catering to increasingly sophisticated and demanding middle class consumers.
Walmart also has come to realize that it can thrive without being the biggest player in every market, says Bryan Roberts, global insights director at TCC Global, a London-based marketing consultancy for grocery retailers. But the company also knows that it needs to succeed in China, now the company's fourth largest international market by sales. And he believes it will do just that.
"Walmart," Roberts says, "is a very determined organization."
WINNING OVER PICKY CONSUMERS
Except for the signs, most Americans wouldn't recognize a Walmart in China. At a store in Shenzhen, shoppers sniff bins of rice or use tongs or their hands to examine the piles of local sausage, whole chickens and pigs' feet. Nearby, tanks brim with live fish, frogs and crabs.
Americans may like to touch products, but in China, many want to buy live fish, or smell the meat.
"It has to smell like fresh blood," said Lina Wang as she examined loose pork.
Meanwhile, Huang Xiulian stood at a nearby Snickers display, studying the expiration date and where the candy was produced.
In the massive, unruly Chinese market, some competitors have cut corners, mislabeling products or even selling tainted foods. The risks have made Chinese consumers unusually wary: If a carton of milk or a piece of fish seems too cheap, Chinese shoppers wonder if it's safe. If items stay on sale day after day, they worry if there's something wrong with them.
Sean Clarke, CEO of Walmart China, based in Shenzhen, previously worked in Britain, Japan, Germany, and Canada. China, he says, "is easily the most challenging market to operate."
"There is a huge level of distrust in this market," Clarke says. "Is it fresh? Is the price right?"
Although China still has plenty of bargain-conscious shoppers, overplaying the price message can also "alienate the increasingly affluent middle-class shoppers, less sensitive on price but (who) value more the quality and assortment of merchandise," says Jason Yu, general manager of Kantar Worldpanel China, which specializes in research on Chinese shopping habits.
In particular, Walmart had a difficult time promoting "everyday low prices" - promising the lowest prices on a basket of goods every time consumers shop. Early on, Walmart undermined its own claims for consistently low prices by running lots of short-term promotional gimmicks.
Then some rivals poached the "everyday low price" message, confusing customers. Walmart scrambled to find the right slogan. In 2010, it switched to "Low Prices." Two years later, it trotted out "Worry Free" - a message that employs the Chinese characters for "save, heart, price," implying quality and reassuring shoppers who worry that deals will expire before they get to the store.
"Worry Free" is Walmart's key weapon to lure shoppers: 85 percent of the discounts in the Walmart stores in China now last anywhere from four weeks to six months, said Clarke. Unlike in the U.S., Walmart had to build trust by spelling out in signs how long the low prices last.
The company's message: Efficiency and good management, not cutting corners, make everyday low prices possible.
When Walmart came to China, it was slow to tailor its offerings to local tastes. Southern Chinese like rice. Northern Chinese like noodles. Folks from Hunan like their chili peppers. The Cantonese crave chicken feet.
Realizing its mistake, Walmart gave local managers more leeway to run their businesses. For example, it let them decide when hot deli food was past its sell-by date and gave them free rein in ordering from different local suppliers.
But that approach backfired, leading to a series of food-safety violations. In one particularly embarrassing episode, Walmart had to recall donkey meat - a delicacy in China - after DNA testing showed it contained traces of fox meat. The misstep came at a time when Chinese consumers were especially wary, because tainted baby formula had sickened hundreds of thousands of infants.
In response, Walmart slashed nearly two-thirds of its 20,000 suppliers, including food. Now, Walmart knows exactly where each product comes from. Walmart also took back some of the responsibilities from local managers, though they are allowed to decide on such issues as whether meat should be loose or packaged in their stores.
Walmart increased its investment in food safety. It broke new ground in China by adding mobile testing labs that go around from store to store in both the Southern and Eastern regions of China, checking for pesticides on vegetables and fruits. It's using handheld devices in South China to check temperatures of meat products.
"It's quality first," Clarke said, "and then we will have the lowest price."
GAINING CONTROL OVER SUPPLIERS, COSTS
In America, Walmart consistently delivers low prices to shoppers largely because it has the clout - 25 percent of the U.S. grocery business- to force suppliers to do things the Walmart way. That means cutting costs to the bone. In return, the suppliers enjoy steady demand from Walmart, so they don't have to spend so much on advertising or worry about staffing their factories.
Walmart's pull is so strong that more than 1,500 suppliers have opened offices near its headquarters in Bentonville, Arkansas.
But replicating that model has proven tough overseas, partly because it takes time to work with new suppliers to cut costs. In Brazil, for instance, it's still a work in progress after two decades.
In China, things are tougher still. Walmart accounts for just 2.3 percent of the overall grocery market. In fact, the top 10 grocery retailers in China account for just 18.5 percent of the market, says Euromonitor International, a global market research firm. Suppliers are scattered, too. Ninety-five percent of all products Walmart sells in China are supplied by local companies. It's tough for retailers to have influence over their network of Chinese suppliers.
The Chinese supply chain is also notoriously inefficient. For years, Walmart and other foreign companies haven't dealt directly with their suppliers, working mostly instead through a labyrinth of middlemen who handle distribution. One supplier could potentially have 100 distributors, handling delivery to just three or four stores. Walmart would have to work with each distributor.
Walmart had been making some efforts in centralizing its food distribution. But it didn't get serious about breaking up the system until three years ago. It decided to cut out, or at least reduce, the middlemen and route as many goods as possible through 20 of its own distribution centers. It built 11 centers for fresh food, and increased its packaged-food distribution centers from five to nine. Now, 85 percent of packaged goods is being sent through distribution centers. For fresh food, that figure is about 50 percent.
Walmart says it was a challenge to convince many suppliers to unravel their way of doing business. But by eliminating the go-betweens, Walmart could negotiate directly with suppliers and knock down costs - often by 10 percent to 12 percent, says Lesley Smith, senior vice president of the supply chain at Walmart China and the woman behind the move.
The change also gives Walmart more control over the quality of the food being sent to its stores and the efficiency with which it gets to them. Before the switch, only about 75 percent of orders would actually reach Walmart stores; now 95 percent do. Before, it took three days for products to arrive; now it takes a day and a half, Smith says.
Nestle S.A., for instance, used to go through 81 Chinese distributors to reach 400 Walmarts. Now it's using Walmart's national distribution network, which it says is resulting in fresher quality of goods at the store, higher sales and lower costs.
Another supplier, Beijing-based noodle and flour maker Cofco, is also coming to appreciate the Walmart way. In 2003, it started supplying 11 Walmarts. Now it's selling to 398. Walmart demands that state-owned Cofco keep prices low and stable.
"At first, we had concerns, especially when the raw material costs had some ups and downs," says Cofco general manager Liu Hongwei says.
But Cofco has learned to be more efficient. And Walmart stocks Cofco products in the busiest parts of the stores and markets them under the "worry free" slogan. Cofco sales to Walmart rose 40 percent last year, compared to 10 percent to 20 percent increases for other customers.
Hongwei says negotiates prices with his other customers every two weeks. With Walmart? Twice a year.
FIGHTING COMPETITORS
Often, Walmart enters new markets by acquiring competitors, but that doesn't guarantee success. Buying the top player, as it did in Chile and Mexico, seems to work best.
In Chile, Walmart's intense marketing paid off. Chileans are so sold on Walmart's supercenter, Lider, that they believe the gap between its prices and rivals is twice what it actually is.
But in the United Kingdom, Walmart's Asda and traditional British supermarkets like Tesco and Sainsbury's are all being undercut by the rapidly expanding Aldi and Lidl chains. In response, Asda is stepping up sustained price cuts and joined the European Marketing Distribution, which pools the buying power of 250 supermarket chains.
In vast China, Walmart competes with a swarm of regional rivals.
At first Walmart and France's Carrefour had China's big-box retail business pretty much to themselves. But Chinese rivals, learning fast and exploiting close ties to local suppliers, erased their lead.
Walmart landed in China in 1996, a year behind Carrefour, opening two stores in Shenzhen- a Walmart supercenter and a Sam's Club. They were the first foreign retailers to offer the big-box shopping experience, which offers everything from clothing to food. That's a big change from traditional wet markets and mom-and-pop stores filled with counterfeit goods. After investing in a Taiwanese-owned retail chain in 2007, Walmart became China's biggest super-sized store chain and expanded its lead for over the next two years.
But Walmart and Carrefour were hobbled. The government restricted foreigners to opening three stores per city. But even after China dropped the store limit in 2001, Walmart and other foreign retailers have faced unfavorable treatment. Government officials have investigated the foreign retailers' pricing and highlighted their food scandals.
Meanwhile, local and regional competitors quickly closed the gap. The local players can sometimes undercut Walmart prices because they have closer ties to local suppliers and can negotiate better deals, says Kantar's Yu in Shanghai.
Walmart insists its share of the big-store sector has increased three years in a row. But Euromonitor says Walmart's market share has fallen steadily since peaking at 11.6 percent in 2009. By last year, Walmart held 9.6 percent of the market, good for No. 3.
Walmart closed about 30 lackluster stores, but it has spent millions to renovate 50 it thinks are promising. Last year, it announced that it plans to add 115 stores by 2017, bringing the total store count to 530. It's concentrating in markets where it's already established, including the west, central China and its stronghold in the south.
From the start, Walmart has had some advantages, including its global clout. It's able to stock its shelves with foreign imports and sell them at a bigger discount than its rivals can. And it's been pressing that advantage in the wake of a changing consumer mindset. Three years ago, Walmart imported 212 containers of products into China. Last year, it imported 2,800, including milk sold under its Asda brand - popular with the exploding ranks of middle-class Chinese who can afford to buy better goods.
But, Walmart faces another challenge in China, and it is not from other big box stores.
Across the globe, shoppers who are increasingly shifting away from buying at big stores and toward buying online or at small stores. But in China, that trend is more dramatic. It has overtaken the U.S. as the world's biggest online marketplace.
That's meant declines in traffic at Walmart and other big-store rivals, both local and foreign. So Walmart is expanding offerings at its website, which is run by Yihaodian, a Chinese startup Walmart fully took over last year. And it's blending its online services with its own stores and adding hubs in key cities to deliver goods to shoppers' homes.
Sissy Xiao, a journalist, represents the future. Xiao had her hands and nose in the bins of rice at a Walmart store in Beijing. She compared the scents. Her elderly mother was elsewhere in the store, buying food.
Xiao, however, was not planning to take any home. She'll do her shopping later, online.
"I am spending less time at big stores," Xiao says. "I usually buy things online. It's more convenient."
___
AP Business Writer Paul Wiseman reported from Washington, D.C.