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Wal-Mart: Managing Globalization
Introduction
In 2005, Wal-Mart, the largest retail chain in the world was also the world’s
largest company with a turnover of $285.2 billion. Wal-Mart’s globalization had
started in 1991, when it opened a SAM'S Club near Mexico City. In 1993,
Wal-Mart International was set up to oversee the growing opportunities for the
company worldwide. Since then, the overseas operations had enjoyed rapid
growth and consumer acceptance. Wal-Mart International employed more than
400,000 associates in Argentina, Brazil, Canada, China, Germany, Korea, Mexico,
Puerto Rico and the United Kingdom. Wal-Mart also owned a 42% interest in
Seiyu, Ltd., a leading Japanese retailer. Overseas sales amounted to $56,277
million in 2005.
Wal-Mart’s approach to competing in overseas markets had evolved over time.
When it entered a foreign country, Wal-Mart adjusted to the local regulatory
framework and customer tastes. The retailer made necessary modifications such
as merchandise offerings. However, Wal-Mart did not change three main
ingredients: Brand names (Wal-Mart and Sam’s Club), everyday low price
strategy (EDLP), and high ethical standards. Brand names had been an important
asset while entering foreign countries and establishing an initial market. Wal-Mart
extended ELDP to overseas markets both to make supply chain management
more effective and to gain the trust of customers. Despite the difficulties
involved, Wal-Mart had also held steadfast to its high ethical standards.
Wal-Mart believed customers were alike across the world, regardless of how
different their countries looked.
2
As a senior executive put it1,
"Over the years many said that we would not be able to serve customers west
of the Mississippi, outside of the South, in metropolitan areas or outside of
the United States. Frankly, we find the customers want the same things.
Regardless of where we are, customers want to be treated well, want to have
a good assortment of products to choose from; and they want the
merchandise at a great price. The most amazing fact is that our associates
around the world embrace and protect this culture that they have built over
the last thirty-five years."
Global Expansion
For Wal-Mart’s founder, Sam Walton, going global had not been a top priority.
When Walton traveled overseas, he sometimes articulated the need to serve
international customers. He realized that by providing goods at low prices,
Wal-Mart could raise the standard of living of people around the world just as it
had done in the US. But, senior managers could not recall Walton going into
details and identifying specific countries where Wal-Marts could be set up.
It was after Walton’s death, that Wal-Mart’s globalization program accelerated.
Walton’s successors realized that waiting too long to get into foreign countries
would give competitors a lead that would be difficult to close. On the other hand,
moving fast would give Wal-Mart the necessary time to learn the complexities of
international business and to correct its mistakes before others joined the fray.
But Wal-Mart realized that going overseas was no easy task. The globalization
efforts of many retailers had failed. In the US, retailers could leverage their
purchasing power, reputation, and economies of scale, but these capabilities
were hard to replicate in overseas markets.
1 Slater, Robert. “The Wal-Mart Decade: How a New Generation of Leaders Turned Sam Walton’s Legacy into the
World’s #1 Company,” Penguin Group, 2003, pp.133-134.
3
In 1993, David Glass and Rob Walton asked Bob Martin, the Chief Information
Officer to take over as president and CEO of Wal-Mart’s newly created
international division. At the time, the international operation had only one
Sam's Club in Mexico. Martin was asked to build the international operations and
make them contribute one-third of the company's growth within five years.
Martin decided to move fast into neighboring countries. Sam's Clubs were set up
in Mexico and later in Argentina and Brazil. A plan was devised to enter China and
Indonesia and later Japan, a truly unique retail market, in terms of consumer
tastes, relationships between suppliers and retailers, and logistics systems.
Martin also firmed up plans to enter Europe.
By 1997, Wal-Mart’s international sales had crossed $5 billion. The international
division was profitable that year, with Canada and Puerto Rico showing excellent
results.
Exhibit 1
Impressive Sales Growth between 1995 and 1999
1995
$1.5 billion
1996
$3.7 billion
1997
$5 billion
1998
$7.5 billion
4
In June 1999, when Martin stepped down, the international division had become
a $17 billion operation. Martin was replaced by John Menzer, who had joined
Wal-Mart four years earlier as CFO, Menzer recalled2:
“The international division was very much a start-up in Wal-Mart, We were
viewed as something that had potential, but international was still such a
small part of the overall business. We were bouncing around a little bit and
trying a number of different things, from acquisitions to joint ventures to
"greenfield" development (building a business from the ground up, from a
base of zero, as Wal-Mart essentially did in South America).”
Menzer believed in a disciplined approach to global expansion. He realized new
overseas markets, took at least three years to become profitable, and five years
to get an acceptable return. Accordingly, Menzer adopted a more cautious
approach, taking his time to do proper market research. At any given time, he
examined several entry strategies including potential companies for acquisition
before taking the plunge. Gradually, Wal-Mart entered several countries across
the world.
Wal-Mart had been initially skeptical about replicating the domestic operation
easily when going abroad. But as its international program grew, the retailer
sensed a great opportunity. Wal-Mart executives quickly adjusted their
management and negotiation style in foreign countries. Senior officials realized
they could not simply seek a meeting with the prime minister of a country and
ask for permission to set up stores. When he met the president of China in
October 2002, CEO Lee Scott did not ask for approval for building more stores.
But he gave the president a detailed report on Wal-Mart's operations and
programs for future development. He hoped this would enable his colleagues in
China to tell local officials that the president was aware of and appreciated what
Wal-Mart was doing in the country.
As it globalized, Wal-Mart’s US operations had picked up new ideas from
2 Slater, Robert. “The Wal-Mart Decade: How a New Generation of Leaders Turned Sam Walton’s Legacy into the
World’s #1 Company,” Penguin Group, 2003, pp.133-134.
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countries across the world.
The gravity wall: a Brazilian concept, in which fixtures were fed from
behind an interior wall, enabling employees to stock fast moving
merchandise-such as sodas, diapers, paper goods, without getting in the
way of customers.
Selling shoes: A Canadian shoe program which presented shoes in a new
way by leaving them in the boxes and displaying them by style rather than
size.
Selling bike racks: The drawer-style bike rack in Canada that enabled
customers to look at and handle bikes more easily.
Displaying wine: Wine racking in Mexico, a new version of fixtures for
displaying and selling wine.
Food layout: The unique food assortment and layout of food area in
Mexico.
Selling apparel: George, a line of fashion apparel that had been developed
in the UK.
Mexico
In 1998, Wal-Mart acquired a controlling interest in Mexico's largest retailer,
Cifra, which operated stores throughout the country, ranging from the largest
chain of sit -down restaurants to a soft lines (apparel, home furnishings, fabric)
department store. In 2000, Wal-Mart changed Cifra’s name to Wal-Mart de
Mexico.
Wal-Mart de Mexico operated under different labels - Wal-Mart Supercenter,
Bodega, Sam’s Club, Superama Supermarkets, Suburbia clothing stores and Vips
restaurants. These stores served different segments of the population. In 2004,
Wal-Mart operated 640 retail, restaurant and supermarket outlets in the country,
with plans for more in the future. Wal-Mart was Mexico’s largest private
employer, accounting for 2 percent of Mexico’s GDP. Some economists even
6
went so far as to claim that Wal-Mart’s cost cutting measures had driven down
the rate of inflation in the country.
Wal-Mart modified its products to suit the tastes of local consumers. Its stores
sold meat, cheese, and produce appropriate to the local diet. The company also
had a Mexican bakery in all its stores. Promotions were geared to the Mexican
consumer. On weekends, the stores converted into a semi-festival with loud
music, children’s games, and pretty girls distributing free product samples.
The entry into Mexico had not been completely smooth. There had been start-up
problems. In Mexico City, Wal-Mart initially sold tennis balls, which because of
the high altitude did not bounce properly. The retailer provided huge parking lots
in a country where many shoppers traveled by buses. Wal-Mart solved the tennis
ball problem and introduced shuttle buses to drop customers off at the front
door. Initially, American managers stocked shelves with oversize lawn mowers
and swimming pool accessories—items that Mexican shoppers looked at with
curiosity but did not buy. Wal-Mart quickly realized its mistakes and employed
Mexicans to take care of product decisions to respond quickly to market needs.
On one occasion, Cifra decided to deviate from Wal-Mart's key EDLP strategy, by
putting certain items on sale. When Wal-Mart learned of this deviation, it moved
swiftly, closing the store for a day and rolling back 6,000 items to the EDLP
framework. For a while, customers assumed that discount sales would resume.
When that did not happen, the customers embraced EDLP once again.
Since Wal-Mart had more purchasing power than the next seventeen largest
Latin American retailers combined, it was able to negotiate price discounts from
its suppliers and generate economies of scale. It aggressively advertised that a
basket of goods from Wal-Mart was cheaper than from any other store.
Executives declared that when Wal-Mart came to town, the cost of living in that
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town declined—in fact, they figured they saved the Mexican consumer $51
million3 in 2002 because of their lower prices.
In 2005, Wal-Mart operated 529 discount stores, 89 Super centers and 61 SAMS
CLUBS in 31 states with annual sales of US$10.6 billion in Mexico. The company
employed more than 112,000 associates across the country.
Argentina
Wal-Mart Argentina had started its operations in August 1995, with the opening
of a SAM'S CLUB in Avellaneda, in the greater Buenos Aires area.
Like in Mexico, there were start up problems. Wal-Mart experienced heavy
crowds in Buenos Aires. But the aisles were too narrow for the unexpectedly
large customer traffic. Certain cuts of meat that appealed to Argentines were
missing. The jewellery department did not have the simple gold and silver items
that the locals liked. The aisles were widened, specialized cuts of meat added and
the jewellery line revised to emphasize simple gold and silver.
3 Tegel 2003.
8
Exhibit 2
Top Five Retailer in Argentina by Market Share
S
.No Company
Corporate
HQ 2003 Sales 2002 sales
1 Carrefour France $1,696 $1,615
2 Coto Argentina $817 $770
3 Ahold Neitherlands $722 $694
4 Cencuced Chile $493 $474
5 La Anonina Argentina $348 $347
Source: Desjardins, Doug. “Waiting Out The Argentine Economy,” DSN Retailing
Today, 13th December 2004, p-78.
In recent times, Argentina had been struggling due to political and economic
instability. The economy began to slump in 1999 and crashed in 2002. That was
the year the peso was devalued by 270% in a matter of months with double-digit
inflation following close behind. Consumer spending fell as shoppers spent the
little money they had on bare necessities. It took a while before Wal-Mart and
other chains felt confident enough to begin any serious growth. In 2004, 57 % of
the population still lived below the poverty level, and the unemployment rate
was around 19.1%.
In 2005, Wal-Mart operated 11 Supercenters and one distribution center in the
provinces of Buenos Aires, Cordoba, Entre Rios, Santa Fe, Mendoza and
Neuquen. The company employed over 4,000 associates in Argentina.
Brazil
Wal-Mart began operations in Brazil in May 1995, when a SAM'S CLUB was
opened in São Caetano do Sul, metropolitan area of São Paulo.
9
The global retailer, Carrefour, which had opened hypermarkets in Brazil in 1975,
proved to be a stiff competitor. Carrefour built a hypermarket right next to
Wal-Mart's first São Paulo Supercenter. The store sold twice than what Wal-Mart
did. The 500-unit Companhia Brasileira de Distribuicao was another major rival.
In March 2004, Wal-Mart Brazil announced the acquisition of Bompreco, a retail
chain with 118 units from Dutch retailer Royal Ahold for $300 million. Bompreco
was the leading supermarket and hypermarket chain in Brazil's northeast,
present in nine states across the region. Bompreco operated a number of
different formats including Bompreco hypermarkets ranging in size between
4,000 and 12,500 sq mt and offering 45,000 lines and Bompreco supermarkets,
with a sales area of up to 3,200 sq mt and offering around 10,000 lines. Bompreco
also operated mini-markets and Balaio discount stores, as well as a small number
of 'Hiper Magazine' stores. Wal-Mart merged the Bompreco stores with the 25
units Wal-Mart already had in Brazil, elevating the chain to the number three
position. But the existing management was retained.
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Wal-Mart Brazil President Vincent Trius, a Spaniard remarked4:
"We've learned through the years to adapt to the local market. New stores in
Brazil and Argentina devote twice as much selling space to food as the U.S.
stores and now have one entrance, instead of two, to reduce confusion--and
theft. Country heads are fluent speakers of either Spanish or Portuguese.”
In 2005, Wal-Mart Brazil operated 17 Wal-Mart Supercenters, 12 SAM'S CLUB
and 2 Todo Dias and 118 Balaio discount stores. Employing about 28,000
associates, Wal-Mart was the sixth-largest retailer in the country.
Canada
In 1994, Wal-Mart purchased all 122 Canadian Woolco discount stores. This
operation too did not get off to the right start. Indeed, for the first three years
(1995-97) Wal-Mart Canada showed major losses. But things started improving
subsequently. In 1996, Canada generated an operating profit in the second year
of operation. Only three years after Wal-Mart acquired the Woolco Stores, it
became Canada's highest-volume discount retailer. It broke even for the first
time.
Wal-Mart Canada quickly overtook rivals like Eaton's, Zellers and the Bay.
Wal-Mart's low pricing and its ability to strip costs from the supply chain
impressed analysts. Suppliers had to deliver at Wal-Mart distribution centers
within 15 to 30 minutes of the given schedule. Otherwise, they were fined.
Wal-Mart used its bargaining power to extract price concessions from suppliers.
In 2002, with total sales estimated at $5.76 billion, a store base of 207 outlets and
additional expansion plans on the horizon, Wal-Mart was Canada’s largest
retailer. The Canadian subsidiary was its parent chain's No. 3 international unit
4 Dolan, Kerry A. “Latin America: Bumps in Brazil,” Forbes, 12th April 2004, pp.78 – 80.
11
behind the United Kingdom and Mexico. Wal-Mart Canada had reported eight
years of continuous growth of sales and profits.
In 2005, Wal-Mart operated 256 discount department stores and 6 SAM'S CLUBS
and employed more than 60,000 associates across Canada. Each discount store
housed more than 70,000 products and a wide range of specialty services.
Indonesia
Wal-Mart had entered Indonesia, attracted by the potential of the world's fourth
most populous country. The retailer faced numerous challenges in a country
where foreign retailers operated under tight restrictions. Wal-Mart teamed up
with Lippo Group, the most powerful Indonesian conglomerate outside the
Suharto family. Through a license with Lippo's Multipolar unit, Wal-Mart got its
first supercenter up and running in August 1996, followed by a second unit in
January 1997. Wal-Mart was paid by Multipolar on a fee for services basis.
In Indonesia, bulk of the shopping was done in tiny stores. But the middle class,
fond of status symbols, broad selection and good values, flocked on the
weekends to the attractive malls that were increasing in Jakarta.
At Wal-Mart Supercenters, shoppers responded positively to categories like dell
foods--with 1,000 roasted chickens selling each weekend day--and bakery goods,
framed art, home storage, small appliances, prerecorded music, H&BC, toys,
intimates and bodywear. Although they came at a premium, they were popular.
Less popular categories included cosmetics, children's apparel, greeting cards,
automotive accessories and white goods.
Import tariffs were very high. There were the usual “sweetheart” deals between
manufacturers and established retailers. Wall-Mart found it difficult to cut
distribution costs.
12
While Indonesians worked hard, they did not like to challenge the status-quo.
Wal-Mart encouraged all associates to embrace the idea of empowerment to
make suggestions, to take ownership of the store. The amiable conversion of
Indonesian associates to the Wal-Mart culture gave the chain a pronounced edge
in customer service.
Despite all these initiatives, things suddenly changed for the worse for Wal-Mart.
Multipolar, which was also the Indonesian franchisee of JCPenney, surprised
everyone when it announced in December 1996 that it would acquire a
controlling stake in Matahari, the leading retailer in Indonesia. Wal-Mart was
taken aback by Multipolar’s action.
Growing distrust with its local partner and the specter of political unrest
progressively forced Wal-Mart to withdraw from Indonesia in 1998.
Multipolar sued Wal-Mart in February 1999, for $200m, alleging that the
American retailer had mismanaged its two stores in Indonesia and
misrepresented Multipolar's financing obligations. Multipolar contended that it
had to invest $28.9million instead of $20 million. The lawsuit also stated5:
"Wal-Mart's level of expertise, especially that of the foreigners who managed
the super centre, is low. It is also ignorant of the different tastes of consumers
in Indonesia".
China
Wal-Mart entered China in August 1996, with the opening of its first Supercenter
and SAM'S Club in Shenzhen. Wal-Mart focused on providing quality
merchandise at low prices. The retailer introduced advanced retail techniques
and concepts to improve operational efficiency and customer service. Wal-Mart
also procured large volumes of merchandise from China through its Global
5 “Foreigners exit,” Country Monitor, 10th March 1999, p-10.
13
Procurement Center located in Shenzhen for export to other countries. In 2005,
Wal-Mart bought more than $12 billion in merchandise, nearly 10% of all Chinese
exports to the US.
Despite all these initiatives, Wal-Mart’s Chinese operations did not take off as
fast as expected. Wal-Mart encountered problems such as supply chain
fragmentation and inadequate infrastructure. Wal-Mart and other foreign
retailers had to offer a 35% stake in each store to a Chinese joint venture partner
and were restricted to a territory of approximately 40 cities each. Fortunately for
Wal-Mart after December 2004, as part of China's admission to the WTO, the
government decided to allow foreign retailers to own their own stores outright in
any city they chose, provided they could obtain government building permits.
Meanwhile, competition was intensifying. Metro, the German retail chain with
$60 billion in world revenue, had announced its plans to invest $700 million to
add 40 Chinese stores to the 18 it already had. Carrefour had moved its global
purchasing center to China and was rapidly adding to its 43 stores there. A bigger
threat to Wal-Mart was Du Sha, one of China's richest entrepreneurs, who
operated a privately run hypermarket chain, the Home World Group, in northern
China. He planned to increase the number of stores from 26 to 150 in the next
four years, investing $750 million.
Nontariff trade barriers often in the guise of geographical limitations, quality or
safety standards, or, a cap on the number of stores a company could open were
among the most frequently discussed topics within China's retail sector. As China
complied with WTO terms and lowered its import tariffs, it looked for ways to
protect its huge domestic market. For instance, difficult testing and labeling laws
had been introduced in the country.
China's banking, finance, insurance, and taxation structures were bureaucratic
and cumbersome. Regional fragmentation of finance regulation, tax laws, and
other institutional arrangements created problems. For instance, a company with
joint ventures in several locations supplied by one supplier had to make a
separate payment from each venture to the supplier. Wal-Mart worked with the
14
Chinese government to set up a holding company to consolidate joint venture
distribution and finance.
The requirement for "chops6" on official documents further complicated matters.
As there was no widely accepted way for such chops to be electronically
authenticated or transmitted, hard copy documents were needed. This meant
more manpower and greater possibilities of human error.
In western countries, less-than-truck-load (LTL) service providers or express
parcel delivery were available. In the US, such services handled anything from a
single carton to a full shipment in a 53-cubic-foot trailer. Shipments could also be
tracked effectively. Such services were relatively undeveloped in China. Urgent or
exception delivery, just-in-time inventory management, catalogue or mail order
sales, and Internet sales were made possible around the world by such transport
services. Although some service providers in China such as China Post or China
Rail could arrange for such shipments, the choice of service providers was
limited, and tracking, pickup, and delivery were unreliable. But in a promising
sign for retailers, several joint ventures between Chinese state-owned transport
firms and foreign freight or parcel companies were being established.
Wal-Mart continued to educate its suppliers to help them streamline their
operations and reduce costs so that both parties benefited. Sometimes these
issues required the company’s participation in the debate on liberalization and
standardization. Wal-Mart became actively involved in government relations and
started talking directly with Chinese government officials at both local and
national levels and through trade groups in both the US and China.
In 2005, Wal-Mart had 43 Supercenters, 3 Sam's Clubs and 2 Neighborhood
Markets in China, together employing more than 20,000 associates.
6 In China, seals in the form of ivory chops used with ink were developed. Chops made from various materials are used
to this day by Asian companies to authenticate agreements and other documents.
15
South Korea
In 1997, regulations governing foreign retailers in South Korea were liberalized.
Wal-Mart entered Korea in July 1998, by acquiring a majority stake in Makro.
Wal-Mart purchased four former Korea Makro stores and also opened six new
Wal-Mart stores: three in the capital, Seoul and one in Taejon.
The South Korean operations initially experienced difficulties with regard to the
merchandise mix. Stores were also too far from city centers. A joint US/Korean
academic study of Wal-Mart's operations found that shoppers were not
"impressed" by what they experienced. The general perception was that
Wal-Mart had chosen bad locations, set prices too high and had a poor selection
of merchandise. South Korean housewives did not go a long distance to shop or
purchase food lacking freshness.
Exhibit 3
Top Five retailers in South Korea by Market Share
S
No.
Company Corporate
HQ
2003
Sales
2002
Sales
1 LG Corp South
Korea
$7,499 $6,129
2 Shinsegao South
Korea
$5,804 $5,172
3 Lotte Shopping Co
Ltd.
South
Korea
$3,330 $3,187
4 Samsung Tesco South
Korea
$2,817 $2,147
5 Samsung Cheil
Industries
South
Korea
$2,086 $2,088
By the spring of 1999, the stores were remodeled from the Makro warehouse
club format to Wal-Mart's supercenter format. The retailer designed the
16
Supercenter concept to save customers time and money and also offered a
unique shopping experience based on the EDLP philosophy. Supercenters
featured the traditional 36 general merchandise departments. The grocery areas
offered a bakery, delicatessen, frozen food section, meat and dairy as well as
fresh produce departments. In July 1999, the names on the stores were changed
and a fifth unit in the Kangnam area of the capital city Seoul was opened. Sales at
the remodeled stores improved dramatically. In 2000, the trend continued with a
same-store sales increase in excess of 20%. Wal-Mart added its sixth store in
2000, and in 2001, doubled the store count as it took advantage of store sites
acquired in the deal with Makro.
With a relatively high standard of living and high rates of automobile ownership,
customer counts and average transaction size were high in Korea. People were
used to shopping in cars and did not like pedaling home on a bicycle as many
customers in China did. This well-developed nation of 48 million potential
customers, had a population density of 1,263.97 occupants per square mile, with
an average per capita GDP of nearly $10,000 (U.S.). Wal-Mart continued to be
optimistic about South Korea.
Lee Scott, remarked7:
"I think the discount store market will continue to grow in the Korean market,
as more customers experience the value".
7 Scardino, Emily. “Mass Merchant Breaks New Ground in Profitable South Korea Market,” DSN Retailing Today,
13th December 2004, pp.69-71.
17
Exhibit 4
Wal-Mart South Korea
In 2005, Wal-Mart Korea operated 16 stores, averaging 180,000 sq ft each, in
Incheon, Ilsan, Gusung, Daejon, Kangnam, Daegu(Siji, Bisan, Sungseo), Hwajung,
and Ulsan(Joongang), Busan(Seomyun), Bucheon(Jungdong), Incheon(Geyang),
Anyang(Pyeongchon), Masan, and Pohang and employed over 3,700 associates.
Japan
In Japan, Wal-Mart decided the best entry strategy was to join hands with a local
partner. Accordingly, in 2002, Wal-Mart paid $46.5 million for a 6.1 percent
interest in Seiyu, Japan's fourth -largest supermarket. Wal-Mart retained an
option to buy the other two-thirds by 2007. In December 2002, Wal-Mart
announced it was exercising in full the first in a series of options it had received
earlier that year, to raise its stake in Seiyu to 34 percent.
In April 2004, Seiyu opened a new store in a fishing village 62 miles west of Tokyo
that featured one instead of multiple floors, wide aisles and a long row of cash
registers. The store was seen as a test of Wal-Mart-style layout, designs, brands
and supply systems in Japan.
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Streamlining operations and the supply chain remained a major challenge in
Japan. Wal-Mart also faced challenges in implementing its Retail Link system.
Most suppliers had yet to institute the technology needed to communicate
efficiently with Wal-Mart's order and replenishment system. Retailer-supplier
relations had traditionally been based on personal ties that often went back
several generations. Switching to impersonal electronic relations needed a major
cultural adjustment.
But Jeff McAllister, COO of Wal-Mart Japan, said in a statement in 2004 that 36
of Seiyu's 403 stores had started using Wal-Mart systems including one that
allowed suppliers to monitor product sales.
In 2005, Wal-Mart held a 42% stake in Seiyu, which operated over 405
supermarkets in Japan and employed 35,000 associates.
Germany
Wal-Mart's experience in Germany (the third-biggest retail market after America
and Japan), a country with 80 million people and the largest economy in Europe
had not been entirely happy. In December 1997, Wal-Mart purchased the German
Wertkauf group of twenty-one stores. A year later, Wal-Mart added 74 Interspar
hypermarkets, which were similar to Wal-Mart's Supercenters. The Wertkauf
stores did business worth $1.2 billion in 1998. For buying Wertkauf and Interspar,
Wal-Mart spent $1.6 billion.
Wal-Mart spent months remodeling the stores by widening the aisles, improving
the lighting and adding checkout counters. Wal-Mart hired additional staff and
exposed them to the company’s corporate culture. Only on 31st August 1999, did
it open its flagship Supercenter in Dortmund.
Wal-Mart found the competition in Germany much tougher than anything it
normally confronted abroad. The country had a large number of discounters, like
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Aldi, a countrywide chain of no-frills, no-service stores. Margins were low and
costs high. Labor laws and tough unions made wage cutting difficult.
Unlike in the US, German stores closed on Saturday afternoons and reopened
only on Monday morning. German customers were used to bagging their own
groceries. This affected Wal-Mart's productivity and slowed down the checkout
lines. German consumers also did not show much enthusiasm towards the
company's EDLP approach. Wal-Mart's expatriate managers initially suffered
from a massive clash of cultures, which was not helped by their refusal to learn to
speak German. Many people saw Wal-Mart as a very unattractive company to
work for because of relatively low pay and an ultra-frugal policy on managers'
business expenses.
Wal-Mart opened its stores two hours earlier than the nine o'clock standard. But
tough zoning laws made it next to impossible to build new stores. Only in 2001
did Wal-Mart finally open two stores built from scratch.
Meanwhile, Wal-Mart made various attempts to adapt to German ways. It of-
fered baked soft pretzels and open-faced sandwiches with sausage and butter.
The pictures on the Wal-Mart brand of pet food were changed. A terrier replaced
the founder's English setter. Customers were given the option of packing their
purchases. The Germans had at first been alarmed to find greeters talking to
them when they entered the stores. Later, Wal-Mart’s greeters spoke more
quietly, and respectfully. Instead of approaching customers, greeters simply
waited on the side.
Menzer admitted that Germany represented Wal-Mart's biggest challenge8,
8 Slater, Robert. “The Wal-Mart Decade: How a New Generation of Leaders Turned Sam Walton’s Legacy into the
World’s #1 Company,” Penguin Group, 2003, p-138.
20
"We are trying to put in our distribution, technology and operating expertise
in a market that is slow to change-slow to adapt to technology and
distribution."
Lee Scott also acknowledged9 that things had not gone smoothly for Wal-Mart in
Europe’s largest economy, but blamed it on the company, not the German
economy or the German people.
"We got confused on what's important, and so we went out and we
remodeled stores-and spent a lot of money doing things that wasn't what the
customers wanted from us." But he was confident about the long term
prospects: We'll be successful because we reprioritized what our efforts are
and understanding that market, understanding the German consumer and
understanding Wal-Mart stores."10
In 2005, Wal-Mart operated 91 Supercenters in Germany, employing more than
11,000 associates across the country.
The United Kingdom
In the United Kingdom (UK), Wal-Mart had acquired ASDA, a profitable chain in
1999. ASDA had been formed in 1965 by a group of farmers from Yorkshire.
Wal-Mart had kept an eye on ASDA for some time before seeking to purchase it.
Chairman Rob Walton recalled11:
"They had a great management team, a similar culture, and their philosophy
on retailing was almost identical to ours."
ASDA’s culture resembled that of Wal-Mart in many ways. Employees were
called "colleagues;' like Wal-Mart’s "associates." They wore a badge and called
9 Appearing on CNBC in March 2002. 10 Slater, Robert. “The Wal-Mart Decade: How a New Generation of Leaders Turned Sam Walton’s Legacy into the
World’s #1 Company,” Penguin Group, 2003, p-141.
21
each other by first name. ASDA was used to price rollbacks and people greeters,
"permanently low prices forever" and "Smiley" faces.
Wal-Mart had not shown any urgency about entering the UK. It was only when
another company offered to purchase ASDA early in the spring of 2000 that
Wal-Mart moved quickly to finalize its $10.8 billion deal to acquire the 232-store
supermarket chain. This was Wal-Mart's largest acquisition ever. ASDA, which
already had a strong business competing on price overtook the struggling J.
Sainsbury to become the second-biggest supermarket chain after Tesco.
Exhibit 5
Top Five Retailers in UK by Market Share
S
No.
Company Corporate
HQ
2003
Sales
2002
Sales
1 Tesco Britain $44,951 $35,199
2 J Sainsbury Britain $29,259 $26,424
3 Asda US $21,700 $18,100
4 Marks & Spencer Britain $11,852 $10,567
5 William Morrison Britain $8,184 $6,451
Source: Duff, Mike. “ASDA Advance Stirs United Kingdom Retail,” DSN
Retailing Today, 13th December2004, pp. 51-52.
Wal-Mart realized it had a lot to learn from ASDA about selling food. ASDA, on
the other hand, believed that it would be able to gain insights from Wal-Mart
about merchandising. The average Wal-Mart Supercenter was 180,000 sq ft and
did about 30 percent of its sales in groceries. In sharp contrast, the average ASDA
store had only 65,000 sq ft and did 60 percent of its sales in groceries. But though
Supercenters were three times larger, some ASDA stores did as much in sales as
the average Supercenter. ASDA's sales per sq foot were the highest in Wal-Mart.
That was not only because ASDA had a much larger food business but also
because the UK had far fewer grocery stores per capita. 11 ibid, p-140.
22
In 2000, Wal-Mart officials announced plans to spend more than $100 million
over the next five years to open 50 stores in the new 25,000-sq-foot ASDA "fresh"
format, which stressed fresh foods and prepared meals. Two new ASDA
Supercenters modeled after the Wal-Mart ones-were also in the planning stages.
ASDA's operations were improved by adding general merchandise and ramping
up its food and apparel offerings and, by bringing in Wal-Mart's state of the art
inventory and logistics systems. Sales per square foot in these UK units reached
$2,000 in 2004, four times higher than at a Sam's Club.
In 2005, Wal-Mart had 257 ASDA superstores, 20 ASDA/Wal-Mart Supercentres,
9 GEORGE stores and 3 ASDA Living stores and 3 ASDA Small Town stores in the
UK, employing around 150,000 people.
The Road Ahead
Scott had publicly stated that over the next few years sales from the overseas
division would grow to a third of earnings and sales growth. While Wal-Mart had
kept its specific plans tightly under wraps, rumors floated about an acquisition in
India, the Esselunga chain in Italy, France's Auchan, Carrefour, Cora or Casino
chains, Poland's Casino Géant stores, Spain's Mercadona and Japan's Daiei or
Aeon chains.
In the Philippines, regulations had been recently eased to allow foreign
investment. It was reported that Wal-Mart had been scouting for locations
around the capital city of Manila. But political instability was a cause for concern.
Moreover, rival, Makro had been established there for several years.
A meeting in Russia of 40 Wal-Mart managers to discuss logistical matters and
consumer shopping patterns was reported in April 2004. An acquisition or
partnering in Russia would enable Wal-Mart to make a quick entry into a market
that seemed to have reached the take off stage.
23
Meanwhile, Wal-Mart continued to face various challenges as it globalized.
Technical constraints-logistics and transportation were not the only problems.
Wal-Mart also had to integrate its corporate culture into its international
operations. Wal-Mart had to export the greeters, the cheers, the Sam Walton
quotations and photographs, the focus on customers and EDLP and all the other
elements that went into the culture.
The company's 2004 numbers showed international sales up 18% to $56 billion.
In Brazil, where Wal-Mart had previously fumbled by failing to make large
acquisitions, it had moved forward with a vengeance, adding 118 stores to the 25
it already had. In China, Wal-Mart already had 43 stores and planned to open 12
to 15 new ones.
As 2005 drew to a close, Wal-Mart realized the results of globalization had been
mixed. Though the retailer had performed well in Canada, Mexico and the U.K, it
was struggling in the six other overseas markets where it did business. Germany,
in particular, had been an unhappy experience.
Would Wal-Mart conquer the globe as McDonald’s had done? Could it improve
the profitability of its struggling subsidiaries? Would Wal-Mart be able to
leverage effectively its core strengths in overseas markets?
24
Exhibit 6
Pricing Philosophy
Walton always knew he wanted to be in the retailing business. He started
his career by running a Ben Franklin franchise store and learned about
buying, pricing and passing good deals on to customers. He gave credit to
a manufacturer's agent from New York, Harry Weiner, with his first real
lesson about pricing:
"Harry was selling ladies' panties for $2 a dozen. We'd been buying similar
panties from Ben Franklin for $2.50 a dozen and selling them at three pair
for $1. Well, at Harry's price of $2, we could put them out at four for $1
and make a great promotion for our store. Here's the simple lesson we
learned ... say I bought an item for 80 cents. I found that by pricing it at
$1.00, I could sell three times more of it than by pricing it at $1.20. I might
make only half the profit per item, but because I was selling three times as
many, the overall profit was much greater. Simple enough. But this is
really the essence of discounting: by cutting your price, you can boost
your sales to a point where you earn far more at the cheaper retail than
you would have by selling the item at the higher price. In retailer
language, you can lower your markup but earn more because of the
increased volume."
Sam's adherence to this pricing philosophy was unshakable, as one of
Wal-Mart's first store managers recalls: "Sam wouldn't let us hedge on a
price at all. Say the list price was $1.98, but we had paid only 50 cents.
Initially, I would say, 'Well, it's originally $1.98, so why don't we sell it for
$1.25?' And, he'd say, 'No. We paid 50 cents for it. Mark it up 30%, and
that's it. No matter what you pay for it, if we get a great deal, pass it on to
the customer.' And of course that's what we did."
The three of the pricing philosophies followed at Wal-Mart were:
Every Day Low Price (EDLP) Because you work hard for every
dollar, you deserve the lowest price we can offer every time you
make a purchase. You deserve our Every Day Low Price. It's not a
sale; it's a great price you can count on every day to make your
25
dollar go further at Wal-Mart.
Rollback This is our ongoing commitment to pass even more
savings on to you by lowering our Every Day Low Prices whenever
we can. When our costs get rolled back, it allows us to lower our
prices for you. Just look for the Rollback smiley face throughout the
store. You'll smile too.
Special Buy When you see items with the Special Buy logo, you'll
know you're getting an exceptional value. It may be an item we
carry every day that includes an additional amount of the same
product or another product for a limited time. Or, it could be an
item we carry while supplies last, at a very special price.
Source: www.walmart.com
26
Exhibit 7
The Wal-Mart Cheer
Give me a W!
Give me an A!
Give me an L!
Give me a Squiggly!
Give me an M!
Give me an A!
Give me an R!
Give me a T!
What's that spell?
Wal-Mart!
Whose Wal-Mart is it?
My Wal-Mart!
Who's number one?
The Customer! Always!
Walton was visiting a tennis ball factory in Korea, where the workers did a
company cheer and calisthenics together every morning. He liked the idea and
could not wait to get back home to try it with his associates. He said, "My feeling
is that just because we work so hard, we don't have to go around with long faces
all the time - while we're doing all of this work, we like to have a good time. It's
sort of a 'whistle while you work' philosophy, and we not only have a heck of a
good time with it, we work better because of it. We do have fun, we do work
hard, and we always remember whom we're doing it for - the customer.” That
was how the Wal-Mart cheer originated.
Source: www.walmart.com
27
Exhibit 8
International Operations
Source: www.walmart.com
Exhibit 9
Stores Breakup
Source: Annual Report 2005.
Exhibit 10
Wal-Mart’s Store Count
28
Source: Annual Report 2005.
Exhibit 11
Wal-Mart’s Operations
(dollars in millions)
29
Source: Annual Report 2005.
30
Exhibit 12
Financial Highlights
Source: Annual Report 2005.
31
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