By Kevin Yee | August 4, 2009

Nearly all Americans are familiar with the name brand Wal-Mart and their mantra of “Everyday Low Prices”.  For those who do not know, Wal-Mart is a grocery store, discount center, and hypermarket, bringing value to the US suburban and rural market.  Strategically, they are masters of their supply chain and an expert in logistics and information systems.  Any idea where a large portion of their goods come from?  You guessed it.  China.

The Wal-Mart Effect Shielding China

For the last decade, exports have sustained China’s development by growing eight-fold.  Enter the financial crisis.  By the end of 2009, China’s exports are projected to fall by 20%.  Historically, regional countries such as Japan, South Korea, and Taiwan have experienced even larger declines.  This is grim news for any country, especially those heavily reliant on manufacturing.  However, China has not expressed much concern, partially due to its primary role as the supplier in the “Wal-Mart effect”.

In general, the Wal-Mart effect describes economic ripples attributed to the low-cost retail giant, such as driving down prices and forcing local competitors out of business in the US.  As the world’s largest retailer, Wal-Mart accounted for 11% of the growth of US trade deficit with China between 2001 and 2006, importing $27 billion in 2006 alone.

In the US, Wal-Mart’s superstores display an enormous selection of products and are a testament to China’s manufacturing prowess across a diverse composition of goods.  In addition to stereotypical goods such as apparel and electronics, China manufactures many basic necessities and low-cost goods characterized by relatively inelastic demands.  During the US recession, these inferior goods may actually experience an increase in demand by retailers such as Wal-Mart.  Aforementioned countries such as Japan, South Korea, and Taiwan that primarily produce sophisticated and expensive goods have witnessed a more significant drop in export levels in comparison to China.  The initial reaction of the US consumer to weather the storm is to be thriftier, but the demand for inelastic products will nevertheless remain.

Wal-Mart in China

We have just discussed the symbiotic relationship Wal-Mart and China possess.  China exports goods, US imports and consumes.  But what if the goods never left and China consumed them?  What about Wal-Mart in China?  How does the US superstore expand quickly in a highly competitive environment?

Getting in was difficult; it took two years before Wal-Mart opened.  They created a small team to recruit local talent that understood the market.  Wal-Mart was supposed to enter a joint venture with a Thai conglomerate that had massive investments in China, but because of control issues, the deal fell through.  Instead, Wal-Mart made arrangements with politically connected partners in Shenzhen.  In 1996, it was here that Wal-Mart finally opened its doors for business.

Since then, Wal-Mart has expanded rapidly.  Currently, they have 121 supercenters with over 70,000 employees.  The company has had its share of challenges, including: unionization, competition with wet and black markets, lack of a nationwide logistics network leading to high distribution costs, acquisition of retail locations, merchandising, retention of local talent, and obtaining official approvals of retail practices.  Wal-Mart overcame many of these challenges by abiding by the rules, developing strong rapport with the national government, and establishing a working relationship with local officials.

Wal-Mart’s strategy has been to adapt their marketing methods to meet the needs of locals.  Recognizing the strength of sales surrounding the Chinese holiday periods, Wal-Mart has promoted large discounts leading up to Lunar New Year and the beginning of universities.  They have implemented nationwide rollouts, in-store events, and sustainability programs.

Moreover, Wal-Mart has catered to the Chinese market in two noticeable ways.  First, Wal-Mart has listened to the consumer.  They offer more perishable products, such as live seafood, to compete with the wet markets.  Items are tailored for people with lower disposable income.  Labels are printed with the local language and products are adjusted for smaller quantities per visit.  In the US, customers typically drive to Wal-Mart and purchase in bulk for the week.  In China, customers typically walk or bike to Wal-Mart and purchase just enough for the day.  After all, Chinese apartments tend to be much smaller than American homes. 

Second, Wal-Mart has localized its supply chain.  They have worked with government officials and producers to purchase locally grown foods and increase delivery frequency.  Realizing they could not rely on the same hub-and-spoke (warehouse-to-stores) logistics model that was so successful in the US, Wal-Mart revamped its strategy to accommodate for China.  Backhaul services helped suppliers reach more consumers despite infrastructure and resource limitations.  Goods were transported using smaller trucks, rather than large 18-wheelers, to work around poor road conditions.  The point is, in comparison to the US, Wal-Mart runs a totally different business in China.

Road to Success

What can be learned from Wal-Mart’s foray into China?  And more generally speaking, how can a foreign company be successful in China?  There are three broad lessons to take away.  Lesson 1 is partnering the local governments and businesses.  Developing good business relationships with important people is the key to get things done in China.  Remember the old adage, it’s not so much what you know, but who you know.  This is especially true in China.

Lesson 2 is adaptation.  Businesses need to adapt to the local culture, the local infrastructure, and the local talent.  Sometimes, this means positioning your overseas brand beyond the traditional domestic boundaries.  For example, in the US, Pizza Hut is largely viewed as a fast-food, take-out restaurant.  In China, Pizza Hut is an upscale, sit-down dining experience.  Global strategies must align with local appetites and nuances. 

Lesson 3 is education of the market and promotion of brand awareness.  In depth local consumer research is required to understand the target demographic.  What do people consume?  How do they consume?  And why?  Answers to these questions drive a product’s development.  Eventually, the product’s benefits will address customer values and tastes. 

The Future of Wal-Mart in China

Many corporations are starting to understand that success in large emerging economies demands more than just realizing a greater sensitivity to cultural differences.  It involves living and breathing the same air, truly embracing the local market.  Wal-Mart is no different.  To continue its penetration in China, Wal-Mart has a few opportunities.  They can push deeper into the countryside and expand into third tier cities.  Wal-Mart can increase their product offerings that cater to local taste.  Increased partnerships with local suppliers can increase efficiencies and help drive down costs.  To build a brand name, Wal-Mart can increase sustainability programs to influence other firms and the government.  Doing so strengthens Wal-Mart’s business in China and cements its position as a global brand.