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Why Walmart Fails

Why Walmart Fails

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Published by Shashank Chauhan

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Published by: Shashank Chauhan on Oct 04, 2009
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03/31/2013

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Wal-Mart Korea:Challenges of Entering a Foreign Market
Renee B KimHanyang UniversitySchool of BusinessSeoul KoreaTel 822.2220.2597Fax 822.2220.1169Email: Kimrby@gmail.com
 
Wal-Mart Korea:Challenges of Entering a Foreign Market
Renee B KimHanyang UniversityIntroduction
Wal-Mart is the world’s largest retailer, operating in 15 countries with 6500 stores, andgenerating $62.7 billion in 2006 (Wal-Mart, 2006). Its stock price has skyrocketed over 180,000 percent by 2007 since its IPO in 1972. Wal-Mart has been forced to initiateinternational expansion in the early 1990s due to changes in the US market condition.Market saturation was becoming a problem in the US market. Over 200 new Wal-Martstores being opened each year, the rapid growth in the number of stores in the US placednewer stores close to older ones and the newer stores start to cannibalize the older ones.Demographics of the US market was also evolving as the baby boomer segment wasincreasing and the family sizes were getting smaller, which led to slower growth of USmarket on demand side. Dynamics of the US retail industry has also changedsignificantly, posing a threat to Wal-Mart’s market leader position.Wal-Mart’s core competitiveness stems from having a low price/high volume orientationto dominate the discount retail sector. Wal-Mart implemented a superior informationtechnology (IT) system (Figure 1) and established a centralized automated distributionsystem that connected itself with its supplier through Electronic Data Interchange (EDI)system. The EDI system gave Wal-Mart an access to information on the entire valuechain and allowed maintaining constant cost-cutting. This enabled Wal-Mart to havesuperior productivity, significant reduction of operational costs and overall lean businessmodel. This enabled Wal-Mart to offer the lowest retail prices. Wal-Mart disrupted USretail market with its aggressive price offering and had the market dominance for pastfew decades. Wal-Mart’s strategy fitted well in North America where consumers werewilling to compromise service and quality for low price. Wal-Mart’s low price offeringwas matched with customersdefinition of value and this created “value-exchange” between Wal-Mart and its customers.However, other major competitors in the US retail sector have adopted strategies similar to Wal-Mart, and learned to have a retail-format with superior technology and lean business operations. The retail price difference between Wal-Mart and other retailershave narrowed consequently and weakened consumers’ incentives to visit Wal-Mart. Allthese factors have contributed to slowing of Wal-Mart’s earning growth in the US, andinternational expansions have become a strategic priority for further growth of Wal-Mart.
 International Expansion of Wal-Mart 
Wal-Mart’s international expansion showed mixed performance. Although the proportionof international sales has grown substantially from 9% of total sales in 1998 to 22% in2007, Wal-Mart’s market positioning in different markets resulted in different outcome.Page 2 of 12
 
While it had considerable success in Mexico, Canada, UK, Wal-Mart failed to positionitself in several oversea markets such as Germany and South Korea. Wal-Mart hasretreated from Korea, however, by selling its 16 stores to a major local discount chain,Shinsegae Co. at $882 millions in May 2006, and exited from Germany in July 2006.Wal-Mart's stores in Korea lost about $10 million in 2005 on sales of $720 million(Ramstad, 2006a). Wal-Mart’s exit from these markets showed that the American Way of marketing did not translate well in every market. This raises an important question froman international marketing perspective; how can Wal-Mart localize its products andservices to foreign market’s tastes and preferences when the core existence of Wal-Martis primarily associated with marketing and retailing the “American way”? In other words,how can Wal-Mart strike the balance between localization of its service and products,while maintaining its core competitive advantage that is ultimately American? How muchof Wal-Mart’s American cookie cutter model of everyday low prices and IT-basedcentralized distribution system should be applied to a local condition? How much wouldWal-Mart need to reinvent a localized strategy for consumers who are significantlydifferent from American consumers? A retailer’s decision to export a retail-format toanother cultural environment may require a drastic modification of initial competitiveadvantages (Dupuis and Prime, 1996). The ability to adapt to overseas market conditionslargely determines success of international operations of these firms. The key question inthis regard is how a MNC can convey its competitive advantages and experiences fromdomestic market to a new foreign market, which may have significantly differentexpectations and market conditions. This paper attempts to address this question with acomprehensive analysis of the Wal-Mart Korea case.
Wal-Mart’s Failure of Market Penetration and Market Positioning in Korea
Wal-Mart has missed a proper timing to enter the Korean market, and was unable tocapture logistically efficient locations which can allow building an efficient distributionsystem with advantage of economies of scale that it enjoyed in the US market. Major Korean retailers had already located their stores in key commercial areas and developedtheir distribution networks to optimize the merchandising and the retailing operations prior to Wal-Mart’s market entry. Wal-Mart was unable to consolidate its market positionin the Korean discount retail segment and posted a net loss of $10 million in 2005 onrevenue of 728.7 billion won (Choe, 2006; Troy, 2006).The Korean discount market was estimated to be approximately at $26 billion (28 trillionwon), with 300 stores nationwide in early 2000s (Park, 2003). In the late 1990s and early2000s, the Korean retail industry experienced globalization, industry consolidation,increased costs of procurement and merchandising, continued pressures on food safetyand supply chain management costs, and an increasingly competitive marketplace, withan imperative for providing customer service and promotional campaigns. Majointernational retailers such as Price Club, Carrefour, Wal-Mart and Tesco entered theKorean discount retail market in the late 1990s in response to the liberalization of theretail sector by the Korean government in 1997 (SERI, 2006).However, when the foreign retailers were allowed to enter the Korean retail market in1997, the Korean retail market was already saturated. Strategically critical commercialPage 3 of 12

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