Wumart Stores Chinas Response To Wal-Mart Case Study
China is the fastest-growing big retail market, and may one day be the biggest. Foreign chains such as Carrefour, Walmart and Tesco are piling in. Yet neither they nor any of their local rivals comes close to dominating China the way Walmart dominates the supermarket business in America. The biggest chain, Shanghai Bailian, has only 11% of the market and barely registers outside its home region.
A comparison of Walmart's Chinese operations with those of Wumart, a Beijing-based chain, is illuminating. Wumart is cheaper—hence that heap of raw chickens. Walmart is considered more fancy, a fact that may surprise American shoppers. Its stores are well-lit and spotlessly clean. Its wares are safe, reliable and tastefully displayed, though they differ somewhat from those on offer in Arkansas. Basins brim with live fish and sea turtles that clients can kill at home or have slaughtered on the spot. Other delicacies include birds' nests, pigs' feet and sea cucumbers (which resemble foot-long aquatic slugs).
Walmart, the American giant, entered China in 1996, five years before the country joined the World Trade Organisation and liberalised its retail industry. Yet despite starting early, it has advanced slowly. In 2006 it took over Taiwan's Trust-mart, which added more than a hundred shops to its Chinese operations. Today Walmart has 338 shops in 124 Chinese cities, with 90,000 employees and annual sales of some $7 billion. Not bad, but that is less than 3% of its sales in America.
Wumart, the Beijing-based chain, was founded in the early 1990s by Zhang Wenzhong, who had developed an IT system for retailers while at Stanford University, but found that he couldn't interest any retailers in it. He returned to China and opened his own chain of stores. By 2005, Wumart had more than 450 hypermarkets, supermarkets and convenience stores.
He aimed to have 1,000 by 2010, but that did not happen. Wumart today has 469 shops with annual sales of 14 billion yuan ($2 billion). Mr Zhang, alas, is serving an 18-year prison sentence for bribery. His store is big in Beijing, tiddly elsewhere but still ambitious. “We dream about being the Walmart of China,” says Fu Yu, a Wumart spokesman.
Wu Jianzhong, Wumart's chairman, thinks Chinese stores need to spruce up. “Foreign retailers wear suits when they welcome visitors, while the Chinese wear shorts because they feel they are familiar with their clients,” he sighs. Chinese executives should at least wear long trousers, he reckons. Otherwise foreigners might win the fierce contest for footfall (retail jargon for the number of shoppers).
Retail sales in China are $1 trillion a year and growing by around 18% annually. China's 1.3 billion people are rapidly urbanising and ravenous for all the goods they couldn't have a generation ago. China's government is eager to promote domestic consumption. But the Chinese middle class is not nearly as rich as the middle class in rich countries. Only 1.4% of urban households make more than $15,000 a year. Only 11% make $5,000-15,000. And all these people save furiously, because unless they work for the state they are unlikely to receive much of a pension.
Small wonder that they love low prices. Small wonder, too, that the government, which fears anything that might provoke unrest, fears inflation. Consumer inflation is officially 5.3% but probably higher. The central government has cranked up interest rates, banned the hoarding of staple foods, raised subsidies to low-income families and increased the minimum wage. It also takes a hard line against any private company suspected of stoking inflation. Unilever was fined $310,000 earlier this month for mentioning to reporters that it might raise prices—the news sparked panic buying of shampoo in March.
Supermarkets could cut prices if their supply chains were better-oiled. Moving food from farm to fork is a nightmare. China has few big farms. More than four-fifths of the rural population of 665m work on tiny plots. “Logistics, warehousing and shipping are still very inefficient,” says Chiang Jeongwen of the China-Europe International Business School in Shanghai.
Go west, young grocer
The next big thing for retailers in China will be the less-developed cities of the country's interior. It's a “land-grab situation”, says a Chinese executive. Everyone is vying for first-mover advantage. Yet although no one wants to arrive too late, no one wants to be too early, either. Those who open stores when locals are still too poor to shop there can lose a packet.
The whole market has a Wild West feel. Huge areas of China are up for grabs, and it helps if you are chums with the local lawman. Retailers depend on local government for a licence and a place to operate. “The prime space always goes to local players,” says Sunny Wong, CEO of Lifung Trinity, a retailer. Tellingly, the Bailian group, China's biggest retailer, is state-owned.
“There could be political tensions if a foreign retailer gets too big or too dominant,” says Matthew Crabbe of Access Asia, a consultancy. There seems little danger of that. Neither Carrefour nor Walmart has much more than 6% of the market. Provincial governments favour provincial retailers. The national government gives a helping hand to all Chinese chains. Foreigners are on their own. Call it the Great Wall against Walmart.
Read on: Why Walmart and Tesco would be good for India
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Module 3 Retail Market Entry Strategy in China
Module 3 Outline:
3.1. Introduction to International Retail Strategy
- Sustainable competitive advantage for retailers
- Strategic growth opportunities for retailers
3.2. Globalization of Retailing
- The motivation of retail internationalization
- Major retailers in the world
3.3. Evaluating International Opportunities – BRIC Countries
- Major emerging markets: Brazil, Russia, India and China
- Specific opportunities and challenges for international retailers in China
3.4. Foreign Retail Entry into China
- Patterns and approaches to retail internationalization
- Major entry strategies made by foreign retailers in China
- Concept of divestment and different retail divestment strategies
- Examples and case studies on market entry strategies
- Wal-Mart and Carrefour in China
- Entering Shanghai: 7-Eleven’s Choice of Master Franchisee
- Best Buy – China
- The Home Depot Considers Entering China
- Hadiya Faheem. Alibaba Competing in China and Beyond. IBS Center for Management Research. BSTR/288.
- Hadiya Faheem. Ebay’s problem in China. IBS Center for Management Research. BSTR/278.
- Ali Farhoomand. Wal-Mart and Carrefour in China. Asia Case Research Centre. HKU590.
- Ali Farhoomand, Zhigang Tao.Wumart Stores: China’s Response to Wal-Mart. Asia Case Research Centre. HKU635.
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To download the relevant cases, please click here.