Walmart in China: Lessons to Learn
Walmart in China: Lessons to Learn
Walmart, for better or worse, is an American icon. Through its’ mastery of economies of scale, the supermarket giant has made its’ supercenters the super-center of countless small American towns throughout the country. While Walmart in China does share certain similarities with its’ American parent, the chain has adapted to the Chinese market and distinguished itself through pricing strategy, marketing, product mix, and vendor relations.
A brief history of Walmart in China
This history of Walmart in China is tied with the history of modern China. It begins shortly after the planned economies were abandoned and the free trade zones established. Early adaptors came to China looking for a new place to source their manufacturing, and Walmart was watching.
Prices were rising in Taiwan and Korea, while other countries South and South East Asia did not have reliable enough infrastructure or a stable enough socioeconomic situation. China’s Greater Bay Area was booming, millions of workers were flocking from the country side to the manufacturing megacities, and factories were popping up by the thousands.
Walmart was interested in sourcing from China as well, however they had backed themselves into a corner with an anti-globalization rhetoric. Beginning in the early 80s, Walmart began a campaign called “Buy American” in response to an economic recession and rising imports from developing nations. Walmart made a show of retrofitting one American Factory to make plaid work shirts and in asking governors about other factories they could potentially retrofit.
At the same time, Sam Walton set up a buying organization with his tennis partner, George Billingsley. In a scheme to distance themselves from the negative press at the time around China, they created “Pacific Resources Export Limited” or PREL. They used this intermediary company to source from China until 2001, when China entered the WTO and the American people were distracted with conflicts in the Middle East. Eventually, PREL was bought outright by Walmart in 2002. They have been sourcing 70% of their manufactured products from China, either partly or wholly, since.
In summation, Walmart had been in China for a long time as a buyer before they went to China as a retailer. If Walmart were a country, they would be one of China’s largest trading partners. They saw the potential in China early and wasted no time in switching their sourcing from domestic factories to Chinese ones.
The first Walmart in China
The first Walmart in China opened its’ doors on August 12th, 1996 in Shenzhen. It was successful enough, as they opened 11 more in Shenzhen alone. To date there are 443 Walmart supercenters throughout China, with more allegedly on the way.
Walmart entered the Chinese market through a joint venture with “Shenzhen International Trust & Investment Co., Ltd,”. However, before opening its’ first location in China, the company had already set up a research agency in Hong Kong in 1992, four years before their entry date. They used this research agency to study the Mainland Chinese retail market and enter the market informed and ready.
Their China strategy
Through their extensive research and China experience, they soon learned that they cannot, and do not want to, compete on pricing with local Chinese competitors. While their slogan was “Always Low Prices” in the United States, their Chinese slogan is “Worry Free” emphasizing that they are trustworthy, not cheap. They choose to focus on quality and assortment of merchandise instead of low pricing. When they do offer discounts, the duration of their discounts are clearly labeled in order to build trust with their consumers.
Walmart Supercenters in the United States truly live up to their “Supercenter” name. They are the size of football stadiums, and allow consumers to buy in massive bulk, saving them money in the margins. However, this strategy will not work in China for 2 reasons.
The first being that a Walmart in China will be located in an urban area, where the cost of land is too expensive to build a warehouse. The second is that Chinese consumers, even wealthy and middle-class ones, do not live in houses as large as American ones. Their refrigerators are smaller as are their homes, so they do not have the space to purchase many items in bulk. They still will buy rice, water, and some other basic staple items in bulk though.
So, to compensate for this, Walmart’s product mix reflects a more Chinese style of grocery shopping. Fresh ingredients, live fish, frogs, and turtles for consumption. Walmart in China sells to the apartment, where Walmart in America sells to the suburban home.
Problems they faced
Despite their lengthy research before entering the Chinese retail market, Walmart in China still faced difficulties tailoring their product mix to reflect local tastes. For example, different regions in China have different staples foods. The people in the northeast prefer noodles, the south rice, and those from Hunan chili peppers. In order to accurately accommodate to the local tastes, Walmart gave their local managers more agency to run their stores.
This ultimately backfired in a series of food-safety violations that ended up shutting down one of their Chongqing locations and harming their reputation. They since have scaled back the autonomy of local managers, and slashed two-thirds of their suppliers. They also added mobile testing labs to their stores to check for pesticides and meat temperature.
Walmart now still caters to local tastes but centralize distribution networks and quality control. Through their lengthy experience in China they seem to have found a stable balance.
Partnership with Jingdong
Chinese consumers have wholly embraced online shopping, buying groceries not being an exception. Walmart in China created its own online marketplace called “Yihaodian”, but this only had middling success. They sold this platform to Jingdong, the Chinese online shopping giant. Then, they bought 5% stake in JD.com, and have recently upped their stake to 12.1%, further cementing their relationship. This has been a successful move, as JD is the most popular app for buying groceries and they have given Walmart a large presence. Also, with 12.1% ownership, the success of JD is the success of Walmart, and successful JD has been.
Future of Walmart in China
The future of Walmart in China is looking pretty solid. Their embracement of online shopping and focus on quality and reputation have set them up for success. More competitors from the West are moving in, such as Costco, but Walmart has earned the trust of a large consumer base. Costco has a good reputation, but only with a very select amount of Chinese consumers who even know of its existence. Walmart in China is well positioned for the future and their lengthy experience has given them the knowledge needed to succeed.
Lessons learned from Walmart in China
- Extensive research before entering China pays off, Walmart did four years before entering and they are still thriving to this day
- Compete with local Chinese business on trust, quality and product mix, not on pricing
- Update your business to reflect the differences of life in China compared to the home country
- Allow local management autonomy while still maintaining control of critical aspects
Find a partner whose goals and strengths compliment your own
Jack O’Dwyer, manager of 1421’s Pear River Delta office, is a Chicago born American with extensive experience in China. He first started studying Chinese when he was a teenager, and majored in East Asian Studies with a concentration on China in University. His passion for Chinese language and the business environment, as well as the natural environment, spans over a decade long. After graduating, Jack moved to Chongqing China, and joined the 1421 team a few years after that. Since arriving in Shenzhen, Jack has been developing 1421’s PRD network, managing the South China projects, and establishing 1421 as the leader of Chinese consulting in the PRD area.
What happened in the year 1421?
From 1421 to 1423, during the Ming Dynasty of China under Emperor Zhu Di (朱棣) the fleets of Admiral Zheng He (鄭和), commanded by the Chinese captains, discovered Australia, New Zealand, the Americas, Antarctica, the Northeast Passage; and circumnavigated Greenland.
Due to this endeavour we can conclude that “1421 is the year that the Chinese discover the world”.