Walmart ME Final_For Presentation

IN CHINA

Does Wal-Mart’s Successful US Business Model Work in China?

--Economic Analysis --By HKUMBA2011

Amer Bukhari, Phyllis Chiu, Rachel Yu, Prince Wong, Michelle Dagenais, Tony Tung, Albert LiuAmer Bukhari, Phyllis Chiu, Rachel Yu, Prince Wong, Michelle Dagenais, Tony Tung, Albert Liu

Sam Walton – Leader, Entrepreneur, Visionary

Introduction/BackgroundIntroduction/Background

Wal-Mart's success in the US

Small town USA, flying under the radarCost Control leads to Uniform Low PricingThe One-stop shop. Single trips, Large carts, Fat.. InventoryRule #1, the Customer’s always right. Rule #2, see Rule #1Distribution, Logistics, Supply-Chain, Infrastructure / IT, JIT

Every Day Low Price - Wal-Mart’s Business Model

International accounts for 20% of total Sales

Projections: 439 Million US Consumers by 2050. China – 1.4 BILLION. Annual compound growth to $2.4 Trillion by 2020

How much shampoo can you sell, if everybody washed their hair everyday?

1996 China market growth. Chain stores, following a phased approach proposed by State Government

2001, WTO. China opens it doors. Hypermarkets, small cities, retail akin to the US/European model.. the unruliness ensues

Wal-Mart International

Introduction/BackgroundIntroduction/Background

Does Wal-Mart’s successful US business model work in China?

Competitive Markets Industry saturated with international and domestic players International renowned retailers have management expertise

and deep pockets Domestic retailers have knowledge of consumer preferences

and consumptions patterns Supermarket segment primarily dominated by domestic players Local demand, supply and distribution provides an edge for

domestic retailers

Market Challenges Market Challenges

By Phyllis

High store density in larger cities – productivity per store declines

Income Disparity Market demand is an average estimate of the demand for an individual

Average income does not accurately reflect market


By Phyllis

Low Income Groups – limit purchases to daily necessitiesMiddle Income Groups – purchase consumer durables and commercial

housingHigh Income Groups – purchase sophisticated products and advanced information services

Income Disparity China market is less homogeneous compared to the US market Broad gap between rich and poor, urban and rural populations Local income low in rural areas

Difficulty to develop uniformed market or pricing strategy

Unable to implement US-bred strategy of locating stores in smaller communities


By Phyllis

Economies of Scales Cost advantages that a business obtains due to expansion Reduction in unit cost as the scale increases

US Small-Town Locations Relentless Cost Control Partnerships with Suppliers Unrivalled Distribution and Logistics Management

What about in China? Hypermarket business model – cost efficiency

Economies of Scale to Achieve EDLPEconomies of Scale to Achieve EDLP

By Rachel

High Operating

Cost

Challenges to Achieve Economies of Scale in China

Challenges to Achieve Economies of Scale in China

By Rachel

LocationDoubts to operate large supercentres in rural areas with

low incomeStrong regional dominance of domestic players in prime

areas with extensive networks e.g. Bailian

Increase operating cost

Challenges to Achieve Economies of Scale in China - Location

Challenges to Achieve Economies of Scale in China - Location

By Rachel

Shopping Pattern - Many Trips, Little Purchase

Consumer Flow ≠ Consumer Purchase Impulsive purchase rather than planned Shop around for best bargain Frequent shopping than purchase in bulk

Increase average cost of serving a customer

Challenges to Achieve Economies of Scale in China - Consumer Behavior

Challenges to Achieve Economies of Scale in China - Consumer Behavior

By Rachel

Food Quality - Fresh Means Alive Demand for absolute freshness – animals alive like fish, eels, frogs and snakes

Shoplifting Presence of a considerable mass of transient population or immigrants from the p

oorer provinces; Employees Lost of 5% of sales compared to international standard of 0.3%

Procured locally instead of through Wal-Mart’s centralized procurement system

Diminished economies of scale and interrupted supply chain meant higher costs in satisfying Chinese consumers

Challenges to Achieve Economies of Scale Consumer Behavior

Challenges to Achieve Economies of Scale Consumer Behavior

By Rachel

Distribution and Logistics ManagementDependent on under-developed highway networkGoods often had to be warehoused while in transit, leading to high

er costs and more wasteBackward transportation network added to the cost of inter-region

al distribution

Challenges to Achieve Economies of Scale Distribution

Challenges to Achieve Economies of Scale Distribution

By Rachel

My StoryMy Story

My Story : Strategy Thinking My Story : Strategy Thinking

The Art of WarBy Sun Zi

About ten years ago, in the dinner between my last day in the academy and the first day I step into the society, I talked to my father that:

I want to start my own business, not to be an employee.

Father give me six words.

They are 天時 , 地理 , 人和 (Timing, Geography and Relationship )

Then, I start with these 6 words and 20K from student loan…

At last, I found out these 6 words come from The Art War, a great book about strategy thinking by Sun Zi.

Why the Wal-Mart’s business model does not work in China?Why the Wal-Mart’s business model does not work in China?

BECAUSE:

Infrastructural DeficiencyBECAUSE:

Infrastructural Deficiency

Total Length of Expressways:

Wal-Mart distribution system depends on different forms of the transportation:

Leading To High Cost and More WasteLeading To High Cost and More Waste

Warehouse

Highway RailwayPort Distribution

Centre

Retail ShopsWarehouse Warehouse Warehouse

CN

VS

US

>1997 >2004 >2004

no expressways 34,288 km (28%)

120,000 km

(100%)

CN

VS

US

157 km (21%) 720 km (100%)

The Density of Land Transport System: km per 1000 square km

Under-developed Highway Network In China:

By PrinceWhy the Wal-Mart’s business model does not work in China?Why the Wal-Mart’s business model does not work in China?

BECAUSE: Distribution Center Not Fully Functioned BECAUSE: Distribution Center Not Fully Functioned


Slow the speed of transportation Do not able to reduce the cost

Distribution centers were underusedTwo Distribution Centers:

Located in Shenzhen and Tianjin

By Prince

Wal-Mart USMap of Store 2004

Wal-Mart CNMap of Store 2005

“The biggest obstacle Wal-Mart faced in mainland China was

the lack of an information-technology network with suppliers,

making purchasing and distribution difficult.” --John Menzer, Chief of international operation of Wal-Mart

BECAUSE:

Lack of IT Network BECAUSE:

Lack of IT Network


Network was critical to Wal-Mart’s success in the US:The Web-based system allowed to:

Tracking of sales, inventory, pricing Real Time Communication: Headquarter >> Store >> Suppliers In total 15,000 local suppliers: More than 70%, received orders through fax, not by IT network

The lack of IT network impaired the retailer efficiency

By Prince

Local Government Protected Source of taxes, political power, private benefits

Wal-Mart centralized its operations in Shenzhen and settled all accounts in this area, most specifically tax

Slowed municipal approval

Welcomed by most Chinese city governments, Carrefour set up accounts and financial controls in each store

Carrefour had the first mover advantage by entering the China market in 1995. Establishing itself before government regulations were implemented

By Michelle

Wal-Mart’s Disadvantaged Government RelationshipsWal-Mart’s Disadvantaged Government Relationships

1962 – 1996 Strict Policy -no unions- 5,000 failed attempts Shut down store in Quebec Texas store switched from butchers to repacked meat

By Michelle

China’s Influence on Wal-Mart’s No Union Policy

China’s Influence on Wal-Mart’s No Union Policy

Horizontal integration, Wal-Mart purchased Trust-Mart providing 100 already established stores in China Bypass Chinese city governments red tape for opening new

stores Avoid complexities in purchasing land

Allowing ACFTU to set up branches in all its 66 Chinese outlets Strategic move – better relationship with government results

in fewer regulations.

By Michelle

Wal-Mart’s Strategic Moves in 1996Wal-Mart’s Strategic Moves in 1996

Wal-Mart can maintain growth strategyChina can maintain control of foreign enterpriseRepercussions of not allowing

Accused of breaking law that states companies are not allowed to ban or impede the creation of unions

BlacklistedEndless auditsTax examinationsLogistical restrictionsInaccurate news coverage in the mediaUnwanted visits from union reps every couple of weeks

By Michelle

Wal-Mart’s UnionsWhy Now?

Wal-Mart’s UnionsWhy Now?

By Michelle

All China Federation of Trade UnionsAll China Federation of Trade Unions

Wal-Mart vs CarrefourWal-Mart vs Carrefour

Entry StrategiesWal-Mart:

Entered China in 1996 Later entry More flexible choices of

location for its entry

Followed government regulations strictly - open stores much slower

Account, financial control & taxes settled in Shenzhen headquarter

Relationship with local government - not as good as Carrefour

Carrefour: Entered China in 1995 First-mover advantages Establishing strong brand reput

ation and stable customer groups

Exploited the loophole of regulation - open stores quickly [bypassed central government approval process]

Account, financial control & taxes settled in each store

Better relationship with local government

By Tony

Wal-Mart ranked 14th in 2006 Carrefour ranked 6th in 2006

Expansion StrategiesWal-Mart:

At the end of 2006, WalMart the 14th by opening 71 new stores

Locate stores in second tier cities

Start in smaller cities and then move to larger ones.

Carrefour: At the end of 2006, Carrefour

ranked the 6th by opening 95 new stores

Emphasizes its stores to be located in big cities and city centers


By Tony

Positioning StrategiesWal-Mart:

Emphasizes “Low Prices Everyday”

Carrefour: “Happy Shopping in Carrefour”,

aims to emphasizing its good shopping environment.

Local Adaptation StrategiesWal-Mart:

At the early stage, same form of selling food in America or Europe

Carrefour: Adopted the Chinese traditional

wet market selling models


By Tony

Wal-Mart vs CarrefourWal-Mart vs Carrefour Sourcing Strategies

Wal-Mart: Centralized purchasing High development cost Low utilization High uniformity in service Good quality and delivery

control

Carrefour: Decentralized purchasing Low development cost Flexible Challenges of uniformity in

service, quality and delivery control

However, it is more suitable to Chinese inter-provincial conditions and save a lot of costs and time in purchasing and delivery

By Tony

Go with the FlowDon’t impose foreign ideas into centuries of state authority Cooperate with regional government Technology advances counter traditional provincial autonomy and self-efficiency Increase flexible supplier chain and logistic management

Appropriate Technology LevelChina’s abundant labor supply Manual labor / Automatic process Tradeoffs: accuracy and quality Shift to “Mid-Tech”

SuggestionsSuggestions

By Albert

27

Nontariff Trade BarriersFind other means to protect its domestic consumer market as China complies with WTOKeep Chinese products on-shelves and imported products off -shelves International brands manufacturedin China slowly count as “local” in the government’s eyes

New Frontier Focusing from main cities to hinterlands


By Albert

28

Financial MattersRegional fragmentation of finance regulation, tax laws and payment systems counters efficiency similar to logistics in the supply chain Computer approval vs. stamped-happy culture Appoint a provincial lead to handle financial matters

Education Training and workshops for suppliers

Flexibility Hire “local” people and Adopt “local” view Adjust Utilization Rate to meet local demands


By Albert

29

Prisoner’s Dilemma Price Competition – Capture Market Share

Wal-Mart supply chain prowess offers “Everyday Low Prices”

Product Market Share vs. Disposable Household Expenditure

Why? Focus Product Differentiation


By Albert

30

(Carrefour, Wal-Mart)Wal-Mart - $69.8 RMBCarrefour - $72.7 RMB

Wal-Mart's “Wal-Co” Create partnership program with local suppliers

ex. Similar to “Ebay Motors Certification” or “Alibaba TrustPass” Incentivize local suppliers

ex. Trial shelf space at national level Save the Environment Local Business Benefits

Private Label Hybrid System – Local and Focal (from distribution center)


By Albert

31

Louis Vuitton sues Carrefour in China -

Question & Answer Question & Answer

1. Farhoodmand, Ali (2006) “Wal-Mart stores: Every Day Low Prices In China”, Asia Case Research Centre The University of Hong Kong

2. Naughton, Keith. (Oct. 30, 2006) “The Great Wal-Mart of China”, Newsweek3. Huffman, Ted P. (Sept.-Oct. 2003) “Wal-Mart in China: Challenges Facing a Foreign Retailer’s Supply Chain”,

The China Business Review4. ChinaRetailNews.com Editor (Oct. 19, 2006), “Wal-Mart Acquires Trust-Mart For US$1 Billion”, China Retail

News5. Foreman, William (Oct. 12, 2008), “Wal-Mart’s New Market: Small Town China”, Huffington Post6. Management Team, Oct. 24, 2007, “Wal-Mart Q1 2009 Earnings Call Transcript” Seeking Alpha7. FastCompany.com Editor (2003), “Game On”, FastCompany.com8. Fishman, Charles (Dec. 19, 2007), “The Wal-Mart You Don’t Know”, FastCompany.com

Sources

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