Minicase: The Globalization of Walmart ee Founded in Rogers, Arkansas, by Sam Waltonin 1962, Walmart has developed into the largest retaler in the world, with 2010, sales of more than $406 billion, Embodying high levels of ser- vice, strong inventory management, and purchasing econo- Walmart overpowered competitors and became the dominant firm in the US. retal industry. After rapid expansion during the 1980s and 1890s, Walmart faced limits to growth ints home market and was forced to look internationally for ‘opportunities. ‘When Walmart opened its first international location in 1991, many skeptics claimed that Walmart’s business prac- tices and culture could not be transferred internationally. Yet, the company’s globalization efforts progressed at a rapid pace. Its more than 4,283international retell units employ more than 660,000 associates in 15 international markets. Walmart’s international sales exceeded $100 bilion in 2010-247 per- ent of the company’s total, and a level that is expected to inorease substantially over the next decade. Globalizing Walmart: Where and How to Begin? When Welmart began ta expand intemationally, it had to decide which counties to target. Although the Europeen {otall market was large, to succeed there Walmart would have had to take market share from established competitors. Instead, Walmart deliberately selected emerging markets es its starting point for intarnatianal expansion. In Latin America, ittargeted nations with large, growing populations—Mexico, ‘Argentina, and Brazil—and in Asiait aimed at China, Because ‘the company lacked the organizational, managerial, and financial resources to simultaneousiy pursue all ofthese mar- kets, Walmart pursued a very deliberate entry strategy for ‘the emerging markets, focusing first on the Americas rather than the more culturally and geographically distant Asian smarketplec For its first international store, opened in 1991 in Mex- {co City, the company used a 50-60 joint venture, This entry ‘mode helped Walmart manage the substantial differences in culture and income between the United States and Mexico, lis Mexican partner, the retail conglomerate, Cifra, provided expertise in operating in the Mexican market and a base for learning about retailing in that country. Leveraging ts learn= ing from the Mexican experience when it entered Brazil in 1888, Walmart took a majority position in a 60-40 venture with 8 local retailer, Lojas Americana. When subsequently enter ing Argentina, Walmart did so on a wholly owned basis, After {2ining experience with partners, in 1987 Walmart expanded further in Mexico by acquiring 2 controling interest in Cif, which it renamed in 2000 to Walmart da México §.A. de. V. 8y 2011, Walmart operated more than 1,768 units in Mexico, accounting for more than half of all supermarket sales in Mexico, Stil, learning the dos and don'ts was @ difficult pro- cess, “it wasn’t such a good idea to stick so closely to the omestic Walmart blueprint in Argentina, or in same of the International Competitive Strategy other international markets we've entered, for that matter ‘said the president of Welmart International, “In Mexico City we sold tennis balls that wouldn't bounce right in the high altitude. We built large parking lots at enme of our Mexican stores, only to realize that many of our ‘the bus tothe store, thon trudged acta lots with bags full of merchandise, Wi ing bus shuttles to drop customers ( were all mistakes that were easy to ¢ ‘working smarter internationally to ava Problems on the front end,"* Walmart’s initial entry unv ure. sed greenfield store sites and emphasized aggressive pris. ing to build market share, but the French retailer Carrefour and other Brazilian competitors retaliated, launching a costly price war. Walmart’s strength in international sourcing was initially of inted assistance in Bra, since the leading sales category—food—was primarily sourced locally, where Cz refour and others already had strong relationships with local ‘suppliers. Over time, Walmart changed its competitive empha- sis to customer service and e broader merchandise mix than smaller local companies could match, The company ais pur- sued ecquisitions to supplement internal growth, buying 118 Bomprego stores in 2004 and 140 Sonee stores in 2008, By 2011, Walmart was the third-largest retailer in Brazil, operat- ing 434 stores. The Challenge of China The lure of China, the world’s most populous nation, proved too greetto ignore, Walmart was one of the firs international retailers in China when it set up operations in 1996, Before Welmart’s arrival, state-owned reteilers typically offered ® limited range of products, often of law quality, and most, stores were poorly lit, dirty, and disorganized, Concerned about their potertial impact on local firms, ing restricted the operations of foreign retailers, These restrictions included requirements for government-backed ppartners and limitations on the number and location of stores. Inititly, Walmert’s pariner was Charoen Pokphand, a Thai conglomerate with massive investments in China and a strong track record with joint ventures. This venture was terminated efter 18 months, due to differences regarding control. A new venture was subsequently formed with two politically con- nected partners, Shenzhen Economic Development Zone and Shenzhen International Trust and Investment Corporation, ‘and Walmart was able to negotiate a contralling stake in the venture. The first Chinese Walmart store wes in Shonzhen, a rapidly growing city bordering Hong Kong. The company concentrated its initial activities in Shenzhen while it learned about Chinese retailing Walmart had many well-publicized miscues while learn= ing howto do businass in China. For example, some household items found at American Walmarts are not found in the Chi- nese stores, “Their shopping list isn't as extensive as ours. you ask the mejorty of people here what a paper towelis, they ‘ther don’t know ar they think its some Kind of luxury item,” Chapter 9 Bii i | | i seid the president of Welmert China.” The company elimi nated matching kitchen towels and window curtains, because the wide veriety of Chinese window sizes caused people to make their own curtains. Consumers purchased four times the number of small appliances projected, but Walmart no {onger tries to sell extension ladders or @ year's supply of soy sauce or shampoo to Chinase customers, wo typically lve in cramped apartments with finite storage space. Yet, although “people say the Chinese don't lke sweets, we sure sell alot ‘of M&Ms,” said Joe Hatfield, president of Welmart’s Asian Fetaling operations.® Operationally, the scarcity of highly maderized supplions in China frustrated Welmarts inital attompts to achieve high levels of efciency, Bar coding was not standardized in China, and retailers had to either recode goods themselves or distrib- lute labels to suppiers, procedures that increased costs and indered efficiency. Pressured to appease the government's, desire for local sourcing of products, while maintaining the ‘ura of being an American shopping experience, Welmart’s solution was to source about 85 percent ofthe Chinese stores’ purchases from local manufacturers but heavily weight pur- ‘chasing toward locally produced American brands (such as ‘oducts from Procter & Gamble's factories in China). Walmart ‘also mass-merkets Chinese products that were previously available only in isolated parts ofthe country, such as coconut juice from Guangdong province, hems and mushrooms from rural Yunnan, and oats from Fujian province Walmart elso leerned the importance of building rela- with agencies from the central and local govern- ments and with local communities. Bureaucratic red tape, raft, and lengthy delays in the approval process proved to be aggravating. The company learned to curry favor through ng Chinese officials to visit Welmart’s American headquarters, assisting local charities, and even building @ schoo! forthe local community. Walmart expected small-town folksiness tobe a song asset in China “Price hhas been an issue, but there's always somebody who can ‘undersell you. A young person who's smiling and saying, ‘Can | hetp you?" isa big part of the equation. Most places in tis, country you dont get that” said the president of Walmart Intornational# “Over the ist two years, Walmart has learned a tremendous amount about serving our Chinase customers, and our excitement about expanding nthe market and in Asia has never been stronger."* In 2006, Walmart outbid competitors Carrefour, the United Kingdom's Tesco, and Lianhua of Chine to acquiro ‘Trust-Mart, a chain of more than 100 supercenters located in 20 cies across China. This acquisition immediately gave Walmart the largest network of food and department stores in China, By 2011, Walmart operated 278 retail units in China, Walmart estimated that its operations in China could be ‘nearly as large as in the United States within 20 yoars, and the lessons Walmart has learned have positioned the com- pany to exploit future market-opening initiatives n China, A Different Approach for Entering Canada and Europe Ater focusing inital intornational expansion efforts on large developing nations, Walmart began to pursue the Canadian and European markets. Strong, entrenched competitors in ‘these mature, developed country marketshindored Walmart’s prospects for abtening critical mass solely through internal ‘row, Rather than first developing its retail operations from scratch, asin Latin America and Asia, Walmart entered vie acquisitions. ‘The company ontered Canada in 1994 by acquiring 122 Woolco stores. Walmart auickly restructured the money. losing Cenacian operations, applying many of the prectices ‘that had been successful in the United States. Transition ‘teams were brought in from the United States to help withthe ‘transformation, and within two yeers the Canadian operations ‘were profitable. Its 317 stores account for mare than 35 per- cont of the Canadian discount- and depertment:store retail market. In Europe, Walmart ontered Germany by acquiring the 2 -unit Wertkaut hypermarket chain in 1998 and 74 Interspar stores in 1998, The company entered the United Kingdom in 1998 by acquiring the 228-store ASDA Group. Welmart was the second-largest supermarket chain in the United King- dom by 207%, with 371 stores, but it hes been losing ground to industry leader Tesco Pic. Thase acquisitions allowed Walmart to bulld market share quickly within the highly advanced and competitive Europeen retail market Walmert’s rapid European market share growth was accompanied by difficulties. The acquisition of two German ‘companias based in different cites within a year proved too ‘much for the company’s timited Europeen infrastructure. Top management positions were filed with U.S. expatriates, many ‘of whom lacked German language sil. forts to centraize purchasing and leverage Walmart’s femous competencies in information systems and inventory management were sty mmied by problems with suppliers that were not familiar with such practices. The introduction of Walmart’s “always low brices" approach met resistance from competitors and regu- lators. Indeed, the company was ordered by Germany’s Car- tel Ofice to reise prices, charging that Walmart had helped to spark a price war by illegally selling some items below cost. Walmart also challenged existing retail practices regerding hours of operation. Laws required shops to close by 8 pum. ‘on weekdays and 4 p.m. on Saturdays and to remain closed on Sundays, In response, Walmart stores began to open by 7 am, two hours earlier than most competitors. Theso changes sparked vehement opposition from smaller compet- tors and employees’ unions. Walmart Germany struggled to build a strong compet tive base, sustaining estimated losses of more than S1bilion. Lacking the scale of operations to create competitive advan tage, and facing strong competition in a mature marketplace, in 2006 Walmart sold its German operations to a compettor, Metro, "We iad a dificuittime in Germany from the get-go,” said Walmar’s Amy Wyatt. “Looking athe international bus ness around the world and winere we would have the greatest impact on growth and investor retumn, it becamo increas- ingly clear that given the German business environment, we could never obtain the scale end results we desired. "! That ‘same year, Walmart announced that itwas selling its Korean operations after failing to achieve successful scale and due to difficulties adjusting to the peculiarities of the Korean marketplace 7 252 Section The Organizational EnvironmentIndia: Anticipating the Ope: of a Billion-Person Market Although itis the world’s eighth-targost retail market at more than $360 bilfon and has 400 milion people with disposable ‘income, the inefficiency of the Incian retail sector is well ‘own, More than 88 percent of retail sales are made through nearly 16 milion tea stands, newspaper stalls, and mom-end. op stores. Strict government berriers have prevented foreign. owmed retail usinesses, ehough that situation i changing, “Many smert peaple—much smarter than |—beliave that Indi could be the next Chins,” said ohn Menzer, the former heed of Walmart’ international operatians and current vice chai of the company’s US. stores. “So, certainly, 2s a rotailer i's a place whare we'd tke to be."? However, exploiting the potential of India could be a Imalor challenge, particulary given the country’s notoriously frustrating bureaucracy and poor infrastructure, Walmart will have to learn to manage highly protectionist and anti-captal- ‘st politcal parties, a bad road system, frequent power out. ages, dificulties acquiring appropriate plots of land, and lack Of adequate distribution and cold-storage systems, among other concerns. One industry participant said, "Where will they run their Volvo trucks here? They will probably have {© have bullock carts and handearts in their supply chain”? The diversity of the country could also prove protlematic, with 18 official languages, 6,000 castes and subcastes, and ‘widely varying ragionel consumer cultures. Savy new Indian chains, such as Provogue and Shoppers’ Stop, are starting to ‘emerge, and nationalistic sentiments may produce much con. sternation for expansion efforts of foreign companies such as Walmart. in preperation for an eventual opening of the market, Walmart begen bulging a foundation by establishing rela. tionships with Indion suppliers, distributors, and consumers, “What we found in China as we get stores on the ground and get more mass, we get to know a lot more of the suppliers, And when we know the supplies, it gives us the opporty, rity to learn the product of the suppliers and eetually export them,” said Mr. Menzer! In 2007, Walmart established Bhat Walmer, a 50-60 joint venture with Bharti Enterprises, 2 leader in mobile telecommunications. The venture's frst ‘store opened in 2008. Due to the constraints on retallng, this ‘Venture is technically focused on the wholesale market, sel. ing only to large institutional or wholesale buyers while the Company builds up its infrastructure and skils for an even. {val liberalization ofthe retail market. However, due to limited restrictions, more than 30,000 members joined this first store {fo shop from the broad selection of products. By mid-2011, the ‘venture had opened six Best Price Modern Wholesale stores, ‘nd it planned to open another 20 stores in the subsequent g Up 'nternational Competitive Strategy ‘wo years, As stated by Raj Jain, Bharti Walmart’ chiet executive, “In the next one or two years we do anticipate we \will bein a market leadership position.”! Clearly, Walmart will ‘aed to understand the political and market dynamics and exploit the lessons ithas learned from entering other emerg- ing markets in order to achieve success when the Indisn ‘market finally opens up, Questions: 1. Why has Welmart viewed international expansion as ¢ critical part of its strategy? 2. What did Walmart do to enable the company to achieve ‘success in Canada and Latin America? Why did Walmart fail to achieve simiar success in Europe? 3. 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