Wal-Mart is coming under pressure in the US, where localities often attempt to derail its expansion. But in China, associates (Wal-Mart’s term for employees) are ready to sing more cheers as the Arkansas-based retail giant prepares to open a host of new stores.
Globally the company expects to add more than 5.5m square metres of retail space in 2006, which is an increase of more than 8% on the estimated current fiscal year-end square footage. China is a major component of that strategy. This year, Wal-Mart plans to add 12 new locations in China to the 24 Chinese cities it already serves. It already has a presence in Shenzhen, Kunming, Fuzhou, Dalian, Xiamen, Shantou, Dongguan, Harbin, Changchun, Shenyang, Changsha, Beijing, Nanchang, Ji’nan, Qingdao, Tianjin, Nanjing, Nanning, Wuhan, Guiyang and Taiyuan.
“In the US, the growth opportunities are limited,” explains Joe Hatfield, senior vice-president of Wal-Mart Stores and president and CEO of Wal-Mart Asia, while touring fDi through a Supercenter in Guangdong province. But in China, with its 1.3 billion people and 8% gross domestic product (GDP) growth, the business potential appears unlimited.
In 2005 alone, the mega retailer celebrated openings in Shanghai, Chongqing, Beijing and Taiyuan. It has been in China since 1996, when it opened its first Supercenter in Luohu district, Shenzhen. Now its operation includes 40 Supercenters, three Sam’s Clubs and two Neighborhood Markets.
“We employ about 26,000 associates in China today,” says Mr Hatfield. “We will grow to over 40,000 associates one year from now.”
Wal-Mart knows exactly what it is doing: it emphasises an “every day low prices” philosophy, and maintains a low-price structure through aggressive buying and smart distribution. It makes the concept work well in China, where it has already invested up to Rmb1.6bn ($198.3m) and paid more than Rmb1.4bn in taxes.
In 2004, Wal-Mart topped the China Business Competitiveness Index among commercial and trade companies and was the only retailer on the list. That same year, it ranked eighth among the most admired companies in China in Fortune magazine’s China edition.
But competition in China is tight. “Local players like Renrenle have done extremely well,” Mr Hatfield acknowledges. “We do a good business and they do a good business. They are a well-run company and so are we. But we feel competition does not drive anyone out of business; it only makes you better.”
Wal-Mart knows that to stay on top, the company must be compliant with all government imposed standards and requirements. This includes full co-operation with tax bureaux, inspection processes and fire prevention measures, which can vary widely between cities and provinces. Employee housing and medical benefits are also factored in.
“We work closely with officials,” says Mr Hatfield. “In setting up the stores, everything has to be approved by the Chinese government, beginning with the joint venture. When we go into a city, we meet local officials such the mayor and the party secretary to get their support at the provincial, city and district level – all the way down the chain. It is critically important to have good government relations. We employ corporate affairs people in every city we are in to deal with government every day.”
According to Mr Hatfield, corruption at the government level is much less prevalent than it once was.
When Wal-Mart decided to locate a Supercenter in China almost 11 years ago, it trod cautiously at first. “When we first formed our joint venture, we were based in Hong Kong for the first eight months,” says Mr Hatfield. “Then we decided we had to move across the border to understand the business and shopping habits in China because it is different from Hong Kong.”
Corporate officials looked at population, considered demographic information and performed surveys. “We studied average household income and the area’s GDP growth. Then we set out to look for great neighbourhoods in which to locate the store,” he says. “It is not hard to find good real estate the way we go about doing it.”
The Supercenter in Nanjing is one example. It opened in January 2004 and is Wal-Mart’s first Supercenter in east China. Today it does about 180,000 transactions per week and attracts more than half a million customers. “That’s 70,000 people a day,” says Mr Hatfield.
One of Wal-Mart’s most recent projects was the relocation of its Shenzhen Sam’s Club in December to a new facility five minutes down the road. The reason for the move was that the location ran out of sufficient parking space.
The new facility is attached to a high-end shopping mall much like those in the US, and includes a Warner Theatre with 18,580 square metres on two levels and parking space for 1500 cars. “It is very high end,” says Mr Hatfield.
The mall concept marks a new trend for Wal-Mart, which is increasingly placing facilities in shopping malls, including an outlet it opened in Chongqing last June. On opening day, local residents began lining up outside before dawn, then flooded into the store and the adjoining mall the minute the doors opened. Over the next year, the company will anchor about 20 shopping centre complexes, all of which are being built by Singapore-based CapitaLand. The idea is to create a one-stop shopping concept for the customer.
Wal-Mart is proud of its training of local workers. “There are only four expats from the US, including myself, here,” says Mr Hatfield. “And one of them happens to be Chinese but has a US green card. So he is really a ‘re-pat’ rather than an expat.”
He considers the Chinese to be dedicated workers. “Over 200 of the company’s associates who work at Wal-Mart’s flagship Shekou Superstore will celebrate their 10th anniversary with the company next year. Many associates are also well educated. Nearly 20% have college degrees,” Mr Hatfield says. “This is unusual. But they understand their opportunity for growth is unprecedented.”
For example, the associate who heads one of Wal-Mart’s Sam’s Club operations is a local employee who started out in the cash office 10 years ago. “Her replacement started out as a translator,” he adds.
To help train associates and promote them up the ranks, the company uses some of its establishments as “stores of learning”, says Mr Hatfield. Associates go to such stores for six or seven months of training before being assigned to a city.
The company also offers advanced leadership classes in China for department managers. The classes used to be offered in the US but tended to preclude top talent from China from attending due to inefficient English language skills. “The classes are sophisticated,” Mr Hatfield says. “Even I have to be very attentive.”
Given the huge volume of goods that Wal-Mart sells in China, its buyers are critical to the company’s success. Like its workers, these are sourced locally. Buyers are needed in each city in which it operates primarily because of distributor agreements.
“Plus, 90% of the market is made up of local brands,” Mr Hatfield explains. “For example, every city has their own local beer and tobacco. There are very few national brands. Very little crosses the provincial boundaries.”
This is especially the case for produce, although for different reasons. Wal-Mart does not invest in distribution centres for fresh goods. Produce is so cheap in China that handling and distributing produce is cost prohibitive.
“We will run a sale on tomatoes, for example, where an entire 25lb box will sell for $2.50,” says Mr Hatfield. “You cannot afford to box or handle this product at these prices.”
To date, Wal-Mart co-operates with about 20,000 suppliers in China and has been ranked number one for “good credibility and accurate and prompt payment” for several years by the China Chain Store & Franchise Association and IBM China.
“We always treat our suppliers as partners and grow with them,” says Mr Hatfield.
In addition, Wal-Mart procures a high volume of merchandise from China and exports to the rest of the world through its global procurement centre in Shenzhen. Its direct and indirect procurements have increased every year: $10bn in 2001, $12bn in 2002, $15bn in 2003 and $18bn in 2004.
Wal-Mart is undoubtedly yielding positive results from its corporate strategy. While competition in China is increasing, Wal-Mart Stores Inc continues to find huge opportunities in this mammoth market.
To paraphrase former Wal-Mart president and CEO David Glass, China is the one place in the world where Wal-Mart can be created all over again. The mega retailer is setting out to do just that.