China and India really represent the future of Wal-Mart." These were the recent words of Wal-Mart Asia’s CEO, Joe Hatfield, who stated that within 20 years, the retail giant’s 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 with a track record like Wal-Mart’s, almost anything is believable.
"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," Beth Keck of international corporate affairs for Wal-Mart International told OPI. "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."
In March, Wal-Mart had 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. And Hatfield is already talking about introducing 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. But 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, recently upgraded Wal-Mart 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, adding 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 of Wal-Mart’s hopes in India. In addition, rumours had been circulating that Wal-Mart was bidding for the South Korean outlets of French rival Carrefour (before the French retailer announced that Wal-Mart was not a final bidder). And according to recent reports in the local press, 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, which reached $315.65 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 has said that Wal-Mart’s 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.
The retailer has also been forced to counteract listless sales in the UK, where Tesco has leapt ahead of the competition. Asda, Wal-Mart’s largest international operation, opened its first store in convenient format, Asda Essentials, in March with six more convenience stores planned for this year. "The Asda Essentials format will bring Asda to new audiences," said Keck. "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 opened 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."