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 / Fourth Quarter 1999 / Issue 17(originally published by Booz & Company)


Taking Wal-Mart Global: Lessons From Retailing's Giant

Choice of Markets
In going outside the United States, Wal-Mart had the option of entering Europe, Asia or other countries in the Western hemisphere. It could not afford to enter them all simultaneously for at least two reasons. First, in 1991 Wal-Mart lacked the necessary competencies and resources - financial, organizational and managerial.

Second, a logically sequenced approach to market entry allows a company to apply the learning gained from its initial market entries to its subsequent entries.

The choice of which market to enter first is not always easy. During the first five years of its globalization (1991 to 1995), Wal-Mart concentrated heavily on establishing a presence in the Americas: Mexico, Brazil, Argentina and Canada. It is important to examine whether it should have focused first on Europe or Asia instead.

The European market had certain characteristics that made it less attractive to Wal-Mart as a first point of entry. The European retail industry is mature, implying that a new entrant would have to take market share away from an existing player - a very difficult task. Additionally, there were well-entrenched competitors on the scene (e.g., Carrefour in France and Metro A.G. in Germany) that would be likely to retaliate vigorously against any new player. And European retailers have formats similar to Wal-Mart's, neutralizing the competitive advantage Wal-Mart might have expected had its business model been entirely new to the market. Further, as with most newcomers, Wal-Mart's relatively small size and lack of strong local customer relationships would be severe handicaps in the European arena.

Wal-Mart might have overcome these difficulties by entering Europe through an acquisition, but the higher growth rates of Latin American and Asian markets would have made a delayed entry into those markets extremely costly in terms of lost opportunities. In contrast, the opportunity costs of delaying acquisition-based entries into European markets appeared to be relatively small.

It is no doubt true that Asian markets had huge potential when Wal-Mart launched its globalization effort in 1991. But the Asian market is the most distant geographically and the most different culturally and logistically from the United States market. It would have taken considerable financial and managerial resources to establish a presence in Asia.

In the end, Wal-Mart chose as its first global points of entry Mexico (1991), Brazil (1994) and Argentina (1995) - the countries with the three largest populations in Latin America.

By 1996, Wal-Mart felt ready to take on the Asian challenge. It targeted China, with a population of more than 1.2 billion in 640 cities, as the growth vehicle. This choice made sense in that the lower purchasing power of the Chinese consumer offered huge potential to a low-price retailer like Wal-Mart. Still, China's cultural, linguistic and geographical distance from the United States presented relatively high entry barriers, so Wal-Mart decided to use two beachheads as learning vehicles for establishing an Asian presence.

During 1992-93, Wal-Mart agreed to sell low-priced products to two Japanese retailers, Ito-Yokado and Yaohan, that would market these products in Japan, Singapore, Hong Kong, Malaysia, Thailand, Indonesia and the Philippines. Then, in 1994, Wal-Mart entered Hong Kong through a joint venture with the C.P. Pokphand Company, a Thailand-based conglomerate, to open three Value Club membership discount stores in Hong Kong.

Mode of Entry
Once Wal-Mart had selected the country or countries to enter, it needed to determine the appropriate mode of entry. Every company making this move faces an array of choices: It can acquire an existing player, build an alliance with an existing player or start greenfield operations, either alone or in partnership with another player.

Wal-Mart entered Canada through an acquisition. This was a logical move for three reasons. First, Canada is a mature market - an unattractive situation for greenfield operations, since adding new stores (i.e., new capacity) will only intensify an already high degree of local competition. Second, because there are significant income and cultural similarities between the United States and Canadian markets, Wal-Mart faced relatively little need for new learning. Thus, entering through a strategic alliance was unnecessary. Third, a poorly performing player, Woolco, was available for purchase at an economical price. Furthermore, Wal-Mart's business model was precisely what Woolco needed to transform itself into a viable and healthy organization.

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