Uniting nations

This week Joe Hatfield, CEO of Wal-Mart Asia, told Reuters that "China and India really represent the future of Wal-Mart". According to the retailer, within 20 years its China business will be as big as that in the US.

These are daring claims to make, even for the world’s largest retailer – but believable, according to recent announcements.

 

Beth Keck, director of international corporate affairs for Wal-Mart International, told OPI+: "In China we plan to open between 18 to 20 stores this year (2006) and continue on this type of growth path in the coming years. China is a highly competitive market, but we believe we have developed a strong offering that will help us grow our business in that market."

 

Last week, Wal-Mart said that it plans to hire 150,000 people in China over the next five years to fuel the expansion, which will be largely focused on second-tier cities. If Hatfield had his way, he would also introduce a university degree programme to train future employees.

 

The retail giant currently operates 56 stores in the country, employing about 30,000 people. Carrefour, the largest foreign retailer, has 78 stores.

 

Keck would not comment on Wal-Mart’s hopes and expectations of its non-food offerings in China and Asia in general. According to analyst data, the ratio is approximately 50:50 in China, with non-food such as electronic and office products set to become more important.

 

Dan Binder, SVP of Buckingham Research, upgraded Wal-Mart last week from ‘Neutral’ to ‘Strong Buy’ as a result of the "numerous constructive changes being made across the organisation as management attempts to turn this business around". While he believes it will still take several years for China to be a meaningful contributor to sales and earnings growth for Wal-Mart, he is confident that the retailer can fulfil its projections.

 

In a research note last year, Binder said: "By 2010, we believe the company could get to an expansion pace of 100 stores per year with an opportunity to build at least as many stores as it has in the US and probably more. The biggest challenge will be developing the people to keep pace with store growth."

 

Interestingly, Binder noted that Wal-Mart’s competitive advantage in China is not logistics or price, as in the US. "The main competitive advantage is the modern approach to retailing, consistency and replenishment systems," said the note, which adds that direct sourcing also "represents a large opportunity".

 

Acquisitions, however, are not on the agenda for Wal-Mart in China, added Binder. With strong joint ventures and ample real estate opportunity, there are said to be no sizeable competitive operations that Wal-Mart can buy. In any case, management seems averse to buying a state-owned enterprise for many reasons including culture and approach to market.

 

There has also been more talk this week of Wal-Mart’s hopes in India. In addition, the South Korean market has popped up among the Wal-Mart headlines in the past month, with rumours that Wal-Mart and Tesco may bid for South Korean outlets of French rival Carrefour. And according to reports in the local press over the last week, Wal-Mart is looking to create around 5,000 new jobs in Brazil this year as the retailer opens up 15 new stores.

 

Although Keck would not comment on market speculation in her interview with OPI+, she spoke of the tremendous opportunities being explored by Wal-Mart’s international operations, which currently account for about 20 per cent of total sales, reaching $312 billion last year. But when asked if Wal-Mart would take lessons learnt in China to India, she said it would not.

 

"We believe that international markets provide strong long-term growth opportunities for Wal-Mart. We don’t compare India and China markets because they are each unique, as is every country where we operate.

 

"China has allowed foreign direct investment (FDI) in the retail sector for about a decade and so we have been operating [there] since 1996. India is now considering opening up its economy to FDI in the retail sector. With India, we are in the feasibility study phase and [are] hopeful the Indian government will continue liberalising entry into this sector and allow foreign investors like Wal-Mart and other retailers," she added. 

 

Hatfield meanwhile has made no effort to hide his best piece of advice: "Steal shamelessly", he has been quoted as saying, citing Wal-Mart founder Sam Walton, who routinely visited competitors’ stores to get new ideas.

 

Indeed, one of the reasons Wal-Mart has been trailing Carrefour in China is that the French retail chain did a better job at adapting stores according to local tastes. Wal-Mart will be keen not to make the same mistake in India, however, which is why it has already implemented its feasibility study phase.

 

Hatfield has said that his India strategy would be to go in hard at the beginning, opening 12 to 18 stores in the first 18 months to prove Wal-Mart’s commitment to the country.

 

However, it will be interesting to see how Wal-Mart fares against the popular corner shops, which account for 97 per cent of India’s retail market, not to mention pricey real estate and the meagre available parcels of land in the big cities such as New Delhi and Mumbai.

 

At the very least, anticipation of bulging profits in Asia is keeping Wall Street at bay at a time when growth in the US is sluggish. But the chain is keen to bolster margins there too. Wal-Mart recently announced plans to open 1,500 new stores in the US over the next few years and said it was on schedule to meet its target of between 335 and 370 new US stores this year.

 

There are also big promises made for Europe, and the UK in particular, through Asda, Wal-Mart’s largest international operation. Keck told OPI+: "The Asda Essentials format will bring Asda to new audiences. There’s nothing else like it in the UK – a store predominately stocked with own label items and less than 100 brands. The store is a vote of confidence in the strength of the Asda brand and the quality of our private label items. The first store will open in Northampton on March 31 and we will open a handful of additional stores in 2006. It’s important to note that this is a pilot.
 
"Regarding Asda’s business results, [we are] very focused on the customer and improving the basics – everything from customer facilities (toilets, baby changing rooms, ventilation, car parks) through to improving availability, enhancing service and lowering prices. With these and other efforts, we are confident that our Asda team will continue to see improved business results."