Walmart’s ambitious designs on global expansion squarely depend upon its penetration of China’s customer-rich markets. However, the mega-retailer has floundered so far, straining to understand a shopper whose habits are much different from those of his American counterpart.
International expansion is the crux of Walmart’s strategy for future growth. The capital spending for Walmart in 2015 will be aggressive, with plans to drop $11.8 billion to $12.8 billion. The primary focus of the company will be improved technology, e-commerce and omnichannel capabilities and small-store renovations. But the number generating all the buzz is the robust prediction of half a trillion dollars by 2016, largely fueled by innovations in e-commerce strategies. Walmart expects to close out 2014 having captured $10 billion in Internet sales.
The company also plans to grow by a healthy 3 percent to 5 percent, adding as much as $24 billion in net sales. Walmart also plans to add as many as 265 new stores, which amounts to about 21 million square feet. For the sake of context, consider that New York City’s Central Park is 36.5 million square feet.
The Chinese market is the centerpiece of Walmart’s expansionist intentions. David Cheesewright, president of and CEO of Walmart, said, “We have initiated actions in Mexico, Brazil and China to improve our operating performance and this is a priority for fiscal 2015.”
Despite its strenuous efforts, though, Walmart has languished in China for twenty years now, failing to properly position its brand. The retailer’s share of the Chinese market slid to 10.4% in 2013 from 11.3% on 2008. In 2009, it was overtaken as the number two retailer by Sun Art Retail, which shares top billing in the country with China Resources Enterprise Ltd., according to data culled by Euromonitor. And, in general, Walmart International has performed sluggishly, with net sales in the fourth-quarter dropping 0.4% to $37.67 billion and sales from November to January plunging 45.8%. In fact, though Walmart plans to open 110 stores globally by 2016, it closed twenty-nine stores in China over the last year.
Raymond Bracy, head of corporate affairs at Walmart China, blamed the company’s missteps on overzealous attempts at growth. He said, “We’re closing some stores because we got enamored with growth. We’re not going to do that again. We’re focusing on quality first.” Greg Foran, the CEO of Walmart China since 2012, concurred with Bracy’s judgment. “For the first year a lot of my attention, and my team’s attention, has been focused on just getting the foundation fixed, sorting out what stores we need to exit, being much more clever about where we’re going to open stores,” Foran said.
The principal challenge for Walmart in China has been its inability to adequately accommodate the needs of the Chinese shopper, a different consumer organism than the Western shopper the retailer has thoroughly mastered. The standard Walmart sales model–focusing on price and convenience–simply hasn’t resonated with Chinese shoppers. James Roy, an associate principal at China Market Research, observed that they are primarily attracted to recognizable brands that consistently deliver high-quality. And, according to Roy, therein lies the problem. “Yet they’re seeing mixed messages from Wal-Mart because they have tried to sell the ‘every day low prices’ concept and Chinese consumers equate ‘every day low prices’ with being cheap and not very safe.”
Foran acknowledged that Walmart’s overtures to the Chinese consumer, which have emphasized steep discounts, translate as an advertisement of low quality. He said, “If you went out and asked members or customers, ‘What’s your single biggest worry?’ they’ll tell you trust and authenticity. Once you’ve got their trust, the next question they ask themselves is, ‘How much is it?”
Also, Walmart has sold itself as one-stop shopping hub, where bulk purchases can be made in order to keep store visits infrequent. However, the average Chinese shopper prefers to patronize much smaller, local shops and to buy only a few items at a time. Brazilian shoppers exhibit similar predilections and so it’s no surprise that Walmart has struggled there as well. Bracy said, “Just to make things tougher, though, Chinese “will walk a block to save 1 renminbi on a kilo of rice.” And since the big-box retail model presupposes large-scale physical infrastructure, Walmart’s misfires in China have proven costly in terms of real estate losses.
Finally, Walmart has stumbled as a seller of food, stung by a succession of food saftey scandals involving tainted meat, contaminated milk and suspect cooking oil. And, for the typical Chinese consumer, purchasing produce is a springboard to buying other, unrelated products. Bracy said, “That’s the most fundamental thing about getting food right. If you … say, ‘I’m not satisfied with the quality,’ then you may go to another store. So we lose not just the food purchase, but also the jean purchase.”
Historically, Walmart has been wedded to the strategies that have made it a colossal success in the U.S., making it less than nimble in adapting to new business environments. For example, in the past it was forced to exit Germany and South Korea for similar reasons. And some believe the road to success in China, for Walmart, is an uphill one. Himanshu Pal, director of retail insights at Kantar Retail, said, “They are not able to invest as much as they should because shareholders are not as patient as they used to be, especially with U.S. and European markets not doing very well.”