Management of Global Enterprise

Management of Global Enterprise Tsinghua SEM MBA | 2020.3.31

Group 11 Angel Mo An Qi

Li Ao Jin Peng Ze

Zhao Yi Ming Ma Chao

I. Company Overview Walmart — the American retail giant, founded by Sam Walton in 1962, is now operating a

chain of supermarkets and hypermarkets in 27 countries with about 11,500 stores. Walmart has a variety of store formats (Walmart Supercenter, Walmart Discount Store, Walmart Neighborhood Market, Sam’s Club) and 150+ distribution centers around the world. Despite being the world’s largest bricks-and-mortar retailer, Walmart also possesses a great e-commerce portfolio with multiple sites it acquired since 2016.

Sam Walton developed the company based on four core values — (1) service to the customer, (2) respect for the individual, (3)strive for excellence and (4) act with integrity. In 2019, this multinational retail corporation was listed by the Fortune Global 500 as “the world’s largest company by revenue” with the figure of $514.405 billion in revenue. With 65% of its annual sales from operations in the United States, it was also ranked as the largest grocery retailer there in the year of 2019.

Behind the glorious success, Walmart went through three main phases of development, which were local expansion, rapid expansion and globalization.

Phase 1 – Local Expansion (1969-1980)

In the 1970s, a time of stagflation in America, there were low employment rate and low financial growth. Walmart focused on opening stores in rural areas of Arkansas and its nearby states, a strategy that kept rents low and avoided competition with local big stores in the cities. Due to low costs, Walmart was able to provide the lowest price anywhere, anytime, which therefore won over many customers’ hearts. The “rural areas encircling the cities” strategy later allowed Walmart to expand rapidly during the financial crisis around the mid 70s.

Phase 2 - Rapid Expansion: The golden 10 years (1981-1991)

With very clear expansion plans, Walmart kept acquiring local stores in the US while introducing new store forms — Sam’s Club and Supercenter. The Sam’s Club was founded in 1980 and it aimed at serving small businesses and individuals, while the Supercenter was founded in 1988 to serve the general public with a one-stop shopping experience and it offered a full-scale of products. It utilized the “local fill-up strategy” to conquer one state at a time and stores were built within 500 kilometers of a logistic center. By 1990, Walmart was America’s national No.1 retailer.

Phase 3 - Globalization (1991 to Present)

Walmart reached out to countries outside of America mainly by acquisition and joint ventures with local big retailers. The first International Walmart store was a Sam’s Club opened in Mexico City in 1991. Later in 1996, Walmart landed in Shenzhen, China with a Sam’s Club and a Supercenter. In the year of 2000, Walmart’s official shopping website was up and running. As of January 31, 2020, there were a total of 11,503 Walmart stores in 27 countries and Walmart was ranked the 1st place in global powers of retailing by Deloitte.

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Background – China’s Retail Industry

China’s retail industry has experienced dramatic changes and rapid growth since the 1970s, accompanied by the country’s legendary economic growth. From 1979 to 1992, Chinese government implemented a series of reform policies to transfer the traditional retailing from mainly state-owned enterprises with monopoly powers to a competitive market with lots of new private and self-employed businesses, which fired up the engine of China’s retailing. From 1992 to 2004, consumption power in China was booming as a result of the rapid economic growth, the State Council therefore decided to implement the “Open Door to the Outside World” regime and designated 11 cities as the pilot zones for sino-foreign joint ventures. During this period, more than 300 foreign retailers entered China, including the retail giants — Walmart, Carrefour and Metro. Ever since then, annual total retail sales of consumer goods in China has been growing at a steady 10% to 15% rate.

Later in 2004, China officially cancelled the stock rights restrictions on foreign retailers which marked the fully open state of Chinese retail.

From 2008 to present, many Chinese local retailers, including traditional gurus and new brands, have been thriving as they explored with new retail and e-commerce business models.

Today, Chinese consumers can easily shop for almost anything from anywhere online and receive the item in a very short time due to the mature omni channel built by world-leading infrastructure and logistics.

Walmart’s Development In China

Walmart entered China in 1995, the year when China’s retail market was opened to foreign players, and it formed a joint venture with Shenzhen International Fiduciary. One year later, the first Sam’s Club and Walmart Supercenter were opened in Shenzhen. The first two stores instantly attracted new customers and they would drive from the cities to the rural stores to buy all kinds of imported goods which were uncommon in local retail stores.

In 2007, Walmart started to expand in China by acquiring the chain Trust-Mart, who was doing well locally. It then was able to open many new stores in China and by August, 2010, Walmart had 189 store units in 101 Chinese cities. However, Walmart ran into a huge political scandal in Chongqing, China, it had to shut down 13 local stores as well as fire the president, CFO and COO at the moment.

2011 was the year when e-commerce was booming in China, so

Management of Global Enterprise

figure 1. China Retail Market Key Stages if Development

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Walmart invested in YiHaoDian, an online platform for grocery shopping with next-day delivery service. By early 2012, Walmart doubled its presence in China, with 370 store units in 140 Chinese cities.

Although Walmart has its own shopping website as well as mobile app in China, but both platforms have not been doing well. Thus, on June 20, 2016, Walmart announced an remarkable strategic alliance with the China’s largest e-commerce company by revenue at that time — JD.com. This powerful combination of e-commerce and bricks-and-mortar greatly helped Walmart to expand its opportunities in China’s e-commerce market. JD’s significant base of online customers also brought more traffic to Walmart’s bricks-and-mortar stores. In addition, JD’s vast same-day delivery network allowed Walmart to latch onto a fully developed logistic system, instead of inventing its own. Understanding the importance of same-day delivery in China’s grocery retailing market, Walmart later invested in Dada-JD Doajia — a delivery company that provides delivery-to-home service within 2 kilometers of the Walmart stores. Walmart also had experimented with the latest technology, such as opening unmanned convenient stores and featuring “scan and go” self-checkout services in stores.

II. The Big Question Why Did Walmart Struggle In China?

From Part I of this report, we mentioned that Walmart is the world’s largest company by revenue as well as the no1 retail brand in the US; however, its market share in China is far from the top place. Figure 2 shows us that by the year of 2017, Walmart’s market share in China’s supermarket sector was only about 5.3%.

From figure 3, Walmart China’s net profit has demonstrated a declining trend in the 2010s. The first half (2010-2014) was a mild plateau, when Walmart stopped growing, while the later half (2015-2018) was a dramatic drop.

Combing the above research results, one cannot help but want to ask the question: “why did Walmart struggle in China?”. It is a valuable question to ponder over because the strategic mistakes that a powerful company made can act as valuable guidance for other companies. It is also a reasonable question to think about as it reflects a classic case of a foreign company’s unaccustomed operation in China.

figure 2. Top five supermarkets in China (2017)

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figure 3. Walmart’s Net Profit Trend

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III. Problem Analysis What does the CAGE model tell us?

In order to better understand the key issues of Walmart’s development in China, we decided to utilize Ghemawat’s CAGE Distance Framework to analyze this topic from four perspectives and three levels. We have summarized the key points in the chart below (see figure 4).

C - Cultural

As we can see from the table, Walmart’s core values and the shopping experience it creates are ill-fitting to the Chinese retail world. First, the “Every Day Low Price” strategy that worked for American consumers are not working in China, because the target shoppers for Chinese Walmart stores are not the most price-sensitive group, instead, they are the middle class group of buyers who value quality over quantity.

Another unique factor about consumers in the Chinese retail industry is their distinctively shopping habits that go against the bulk buying behavior in America. While it is common for the American shoppers to buy a week’s groceries in one visit, it is extremely unlikely for the Chinese buyers, who prioritize freshness of their groceries, to buy in bulk in one day; instead, they would purchase small amounts at a time and pay multiple visits to the local stores throughout the week.

Despite having probably the richest mix of products for its Chinese customers, Walmart’s procurement plan may not properly reflect what the local consumers really want to buy. Many shoppers would have a list of things that they want before visiting a store, if they couldn’t find what they wanted and even got lost in the maze of shelves, they would probably not visit the store again.

It may take years for a large company like Walmart to fully understand the local culture as well as consumer preferences in a country like China. To no surprise, Walmart also failed to understand the South Korean market and struggled there as well.

To overcome the cultural resistances, Walmart should re-construct its pricing strategy as well as its procurement plan in China to better fit with the Chinese consumption habits. Walmart should also carefully portrait its major consumer group so that they can cater to their specific demands.

C - Cultural A - Administrative G - Geographic E - Economic

Firm LevelWalmart

- Every Day Low Price- Bulk Purchase- One-Stop Shopping Experience

- Acquisition- Little R&D Input- Government Relationship

- Rural Locations- Supply Chain Management

- Employment Policy- Low Welfare

Industry LevelRetail in China

- Consumer Habits- Smaller Package- High Frequency- Freshness

- Store Format- Shopping Site & App

- Logistics- Delivery Power

- Distribution Centers- E-Commerce’s Boom- Local Competitors

Country LevelChinese

Consumers

- Chinese Values- Choice of Products- Procurement

- Foreign firm policy- Brand awareness

- Population Density- Location Advantages

- Growing Middle Class

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figure 4. CAGE Analysis of Walmart in China

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A - Administrative

From the administrative perspective, Walmart’s brand image in Chinese consumers’ minds is a foreign big brand, as a result, consumers will expect to see a variety of imported products that are not available in other local stores. However, Walmart’s expansion strategy in China was to acquire local brands that have been doing well already, with the aim of a faster localization. As it turned out, not only did Walmart not fully localized itself after the acquisition, the acquired brands also gave up precious brand awareness that they previously accumulated (such as Trust-Mart).

Another administrative drawback that Walmart still possess up to this day is that Walmart has a poorly designed online shopping site and a malfunctioning Chinese shopping application. Walmart was destroying its brand image by neglecting the management of its official online shopping portals that were linked to its name, and such lack of responsibility may result in the loss of customers. With very little R&D investment, Walmart was surely missing a vital piece of the puzzle because China’s new retail era is all about advanced technologies that help boost operational efficiency, better shopping experience and gain customer loyalty.

Walmart China has also experimented with different formats of stores, other than the traditional Supercenter and Sam’s Club, it also opened convenience stores, community stores, discounted stores, as well as unmanned stores. However, none of them made a major breakthrough in the local retail market. The exploration was not entirely meaningless, but it did lack a certain degree of brand positioning, that is, the unique brand image that distinguishes Walmart from other local retail brands.

In order for Walmart to overcome the administrative drawbacks mentioned above, the company should prioritize innovation and re-think how its existing Walmart stores can be reformed and upgraded so that they can create game-changing experiences to the Chinese consumers. The company should also stop wasting resources on trying for new things or new formats, and make efforts to optimize its official websites as well as applications. In addition, Walmart should find out about its unique positioning in the extremely competitive Chinese retail market so that it can stand out from the crowd.

G - Geographic

One of the most important success factors of any retail store is the location but Walmart’s choices of location in China were ill-advised. In America, Walmart experienced a huge success with the “using the rural areas to encircle the cities” location strategy, because the car ownership per capita in the US was about 0.79 in 2019, meaning that most Americans are able to drive to the suburb areas for shopping, and that the Walmart stores don’t necessarily need to be located in the densely populated zones. However, China’s car ownership per capita in 2019 was only 0.14, much lower than that in the US. Having stores located in rural areas in a country like China, with the

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biggest population on earth and a relatively low car ownership level, means that a large portion of potential customers are isolated and restricted because they don’t have easy access to the stores.

To overcome this location bias, Walmart should consider moving store locations from rural areas to inner cities. For its current stores that have the lowest flow volumes, Walmart should also consider rebuilding them into more functional spaces. Besides, it should develop a stronger logistic network and increase local delivery power to reach out to consumers who don’t have access to the stores.

E - Economic

During the 2010s, we have witnessed the declining trend of Walmart’s net profit in China, it was mainly affected by the ever-growing local Chinese retailers’ market power as well as the economic shock as a result of the booming e-Commerce.

In a fully opened competitive market, Walmart was unable to keep moving forward with other new retail brands, mainly because Walmart failed to adapt to the rapid economical changes in China. A common mistake made by countless foreign companies in China is that their senior executives were mostly non-Chinese who were sent to China from western head-quarters, the same group of people are making important decisions in a region that they don’t really understand. That was when the local candidates, who employed Chinese executives, can react better and make wiser and more reasonable decisions.

Falling behind the local competitors with e-Commerce integration, although Walmart acquired YiHaoDian in 2011, it failed to create its own effective logistic system in China. Eventually, Walmart latched onto JD.com for its mature supply chain management and logistic distribution centers. A truly late comer to the e-Commerce world of China.

To prevent itself from repeating the same mistakes again, Walmart should foresee the next big trend in China and make prompt decisions to chase after it. A large company like Walmart often goes through information delay in tedious process with a complex hierarchy, thus, a flat management structure is needed for better and quicker decision-making.

Another unique rule about doing business in China is to always follow the latest government regulations. By familiarizing yourself with the latest regulations and making changes to adopt to them can prevent unwanted loss and may even generate new streams of opportunities.

figure 5. Walmart’s Main Competitors in China

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IV. Analysis Results

Preliminary Conclusion

We dissected Walmart’s resistances in China from cultural, administrative, geographic and economic perspectives with considerations about firm, industry and country levels. As it turned out, Ghemawat’s CAGE Distance Framework had brought out fruitful insights with regards to Walmart’s strategic drawbacks in China.

First, some of the strategies that worked in the USA have been proven to not work in China. Walmart needs to understand the Chinese market and Chinese consumers better and it should re-define its brand positioning and create a unique brand image.

Second, Walmart’s bricks-and-mortar stores need re-planning, especially about the choices of location and the product procurement plans.

Third, facing severe competition from local players, Walmart should distribute more resources to R&D and creative innovations for a new breakthrough.

Fourth, Walmart had missed many key development points in China, especially during the 2010s, it should prepare itself for the next wave of trends in China’s retail market.

After forming a strategic alliance with JD group, Walmart now possesses the new engines and great potential in China’s e-Commerce sector, it should now fully utilize JD’s resources, including intelligent warehouse, distribution center, logistic system and delivery network to better develop itself and win over more market share.

Suggested Solutions

Solution 1 - Differentiate Walmart From Others

Given the fact that most consumers recognize Walmart as the American retail brand, the company should really amplify the brand effect by featuring a variety of imported goods in its stores, especially those products that are only available in Walmart. This would help creating a unique shopping experience for consumers.

Solution 2 - Cater to the Middle Class

China’s new middle class is perceived to surpass any other groups in the next few years and by 2027, China will have the world’s largest middle class population. This exact same group will serve as the biggest group for private consumption. As fewer and fewer Chinese people remain poor, more and more new middleclass and new affluent Chinese people will find ways to spend their “new money”. For this reason, Walmart needs to learn the detailed portraits of these consumers and make changes to adapt to their preferences. The new largest group of Chinese retail Consumers are the millennials (people born in the 80s and 90s) and the post-millennials, also known as generation Z (people

figure 6. China’s Urban Household and Urban Private Consumption

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born in the 95s). Meeting these people’s needs will guarantee Walmart a bigger market share in China’s future retail sector.

Solution 3 - Redefine the Shopping Experience

If the one-stop shopping experience was not attractive to the Chinese consumers, then Walmart should try to make smart modifications to its bricks-and-mortar space and turn them from large department stores into community centers and cool lifestyle hotspots. One of the biggest challenges for the traditional Walmart stores in China was to attract more traffic, by providing lifestyle services and acting as a community bond for local residents, Walmart stores can therefore generate more traffic and self-reproducing revisits. In the new space, Walmart should also feature a lot more middle-end and high-end products and brands to meet with the new middle class’ demand.

Solution 4 - Step Up the E-Commerce Game

Walmart should make bold moves to have greater e-commerce presence in China. Different from before, Walmart is now ready to expand its business online, with JD group as its partner, and Dada as its local delivery network. Walmart should optimize its multiple online shopping portals to create a more convenient shopping experience for its online users. To attract more new users, Walmart should also initiate marketing campaigns that feature well-known Chinese celebrities that are popular among the new middle class to raise public awareness of the brand and the services it provides.

figure7. Portrait of China’s Millennials and Generation Z Consumers

figure 8. Chinese Customers’ Purchase Channel Preference (2018)

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V. References

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2. ��, �%e (2019-09-01). 6`]�“}r�h� — Y�}rI8JZwo¡�¢”, Retrieved March 31st, 2020. [figure 2. Top five supermarkets in China (2017)]

3. jf�, ��b (2019-07-15). G7“9W5Gki¤�d+G2L�s�£�&A\*£�gz1V”, Retrieved March 31st, 2020, from https://xw.qq.com/cmsid/20190714A0LA8L00?f=dc. [figure 3. Walmart’s Net Profit Trend]

4. t0�, u~D (2020-03-31). Tsinghua SEM 2019 GMBA. [figure 4. CAGE Analysis of Walmart in China]

5. ��, ���,u~D (2020-03-31). Tsinghua SEM 2019 GMBA.[figure 5. Walmart’s Main Competitors in China]

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