Retail is one of the most rapidly growing sectors among companies making investments overseas. According to greenfield investment monitor fDi Markets, one in every 10 crossborder projects between 2003 and 2012 was in the wholesale business.

 

Walmart: an FDI lesson learned

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Years of foreign expansion have taught Walmart not only that acquired companies can offer the US retail giant much more than the rapid presence on the new market, but also that the push for rebranding can be counterproductive. “The brand is not the reason why customers choose Walmart stores. It is because they are close, convenient and their prices are competitive,” says Charles Fishman, a journalist and author of The Walmart Effect. “Outside of the US, Walmart succeeded at being a global company behind local brands,” says Mr Fishman, who currently resides in Mexico and by his own count, lives 103 steps from the nearest shop owned by Walmart.

Walmart's expansion into Mexico and southwards into central and Latin America is a case in point, showing how Walmart uses the market penetration of acquired companies in combination with certain retail solutions from its US stores. Of its 3832 stores in the region, only 8% are branded as Walmart superstores. The rest go by one of the 20 other brands that Walmart owns in Latin America, and they vary in size and the type of goods that they stock.

For all its success, Walmart's expansion has not been without its difficulties, however, such as the current investigation by the US Securities and Exchange Commission into whether the company broke US bribery laws in Mexico, India and China. But this has not stopped the company in its bid for global domination, and in 2013 it seems that Walmart’s shopping spree overseas will continue. “In 2012, Walmart's international sales grew 10 times faster than the sales of the whole retail sector in the US. This company has no choice but to increase its presence abroad,” says Mr Fishman.

Europe-based Carrefour, Tesco and Metro have been among the most active investors in the past decade, but it is their US counterpart Walmart – with annual revenues of nearly $450bn and a global workforce of 2.2 million – that has made the most investments. The Arkansas-headquartered retail corporation's direction and strategy therefore offers a good indicator of where the biggest growth opportunities exist in the retail market.

According to company spokesperson Kevin Gardner, there is one country in particular where the company is focusing its expansion efforts. “In late 2012, Walmart China announced a new strategic optimisation plan, intended to better meet the product and service needs of Chinese consumers," he says. "The company has room to improve its performance as its assortment and value offering strengthens."

Cracking China

After 17 years in China, Walmart has a 6% market share in the country and annual revenues of $7.5bn. In the past few years, it has been opening new stores at a rate of 50 to 60 a year and it has plans to add 100 more in the next three years. Given the size of China, however, this growth does not have the typical aggression that characterises the company’s usual expansion strategy. “The Chinese market is a lot more difficult than Walmart thought,” says Bryan Roberts, retail insights director at consultancy firm Kantar Retail and a co-author of the book Walmart: Key Insights and Practical Lessons from the World’s Largest Retailer. “Then again, Carrefour and Tesco – Walmart’s main competitors – also find it [a difficult market].”

One Asian market that is starting to pay off for Walmart, however, is Japan. After more than a decade in the country ­– operating through its subsidiary Seiyu – Walmart began to see some positive results in 2012, with Seiyu’s extremely strong sales accounting for more than 2.5% of Walmart’s total revenue that year. 

Walmart is not the only global retailer active in Asia. More than half of UK-based retailer Tesco's expansion has taken place in China and south-east Asia, namely Malaysia and Thailand. The company has been focusing the rest of its expansion efforts on central and eastern Europe (CEE), with nearly half of the UK retailer’s new stores opened between 2010 and 2012 located in the region.

CEE was also an important market for German retailer Metro until it sold its Real retail chain in Poland, Russia, Romania and Ukraine for $1.4bn to French retailer Auchan at the end of 2012. The move signalled a change of geographic focus for Metro. Since 2010, one-quarter of its new ventures have been in Vietnam, Indonesia and Turkey.

In the past two years, Carrefour has invested heavily in China, Romania, and across the Middle East and Latin America, but one-quarter of all its new projects have been concentrated in Spain. Aware of Spain’s economic difficulties, the French retailer plans to expand its range of cheaper, own-brand products in the country.

Going it alone

In 2012, Walmart entered a new market when it acquired South Africa-based retailer Massmart for $2.4bn in March. This gave it a foothold not only in South Africa, but in nine other African countries. Kevin Regan, a senior managing director at FTI Consulting, views Walmart’s acquisition of Massmart as a springboard in to other African markets. “Walmart is using Massmart as a base for other markets, such as Nigeria, where the growth of middle class is significant,” he says.

It is not just a physical presence in Africa that Walmart has gained through its acquisition of Massmart, but also the know-how of business conditions and customer preferences in this new market. “Walmart buys companies that know the markets in which they operate and know local conditions. Walmart shares, of course, certain elements of its corporate structure, but it does not impose all of them [on new acquisitions],” says Mr Roberts.

According to Mr Roberts, this strategy was adopted in response to Walmart’s failures in the German, South Korean and Indonesian retail markets, when the company attempted to completely transplant its US model into the three new markets. “Its power of humility is quite stunning," says Mr Roberts. "Walmart is certainly a company that learns.”

Walmart adopted a new approach when entering the UK in 1999. “Walmart succeeded in the UK in buying an already established retailer [Asda] and learning about the UK market from the inside,” says Michael Hewson, senior market analyst at trading house CMC Markets UK.

Local know-how

Carrefour’s 2010 exit from Thailand and 2012 exits from Singapore and Malaysia show how difficult it can be to enter a new retail market without local know-how and knowledge of consumer habits. Tesco, which successfully operates stores in Malaysia and Thailand, entered both countries by teaming up with local companies. Its attempt to conquer the US market was less successful, however. It introduced a new brand, Fresh & Easy, but at the end of 2012 the company signalled that its US venture may soon come to an end.

There is no doubt that it is difficult for a retailer to enter a new geography, but the opportunities in emerging markets are too big to resist and, despite the setbacks they have suffered, multinational retailers are likely to accelerate the pace of their foreign expansion in the future. According to data from the International Monetary Fund, between 2010 and 2012, the GDP of emerging economies was growing three times faster than that of developed economies. For retail sector executives the equation is simple: the bigger the middle class, the bigger the opportunities.