As the most populous country in the world, China is a major potential market for retailers. Retail sales in China grew at an annual rate of 11 percent between 1990 and 1995, propelled by economic liberalization and a large pent-up demand for consumer goods. But the Chinese market also poses unique challenges because regulations and government policies are often unpredictable and China's infrastructure is not well developed. Also, middle-class disposable income is dramatically lower in China than in the United States, so that even discount-minded Wal-Mart must reinvent its business model to operate within the reach of key population groups. Finally, Wal-Mart had to accept that most Chinese tend to buy in small quantities, and that language differences required tailored marketing approaches for product labeling and brand names.
Wal-Mart responded by conducting a number of experiments. First, it experimented with different store formats to see which had the greatest customer appeal. One was the Shenzhen Supercenter, a hybrid store combining a supercenter and a warehouse club where memberships were sold but non-members could also shop at "everyday low prices" plus a 5 percent premium. The Shenzhen operation also experimented with stocking merchandise targeted at a predominantly male market. Wal-Mart also began testing smaller satellite stores that seemed to fit better with the buying habits, as well as the transportation and shopping trends, in China.
In addition to varied formats, Wal-Mart tested merchandise items to determine what would have the greatest consumer appeal and fit best with the Chinese culture. As a result, Wal-Mart began to carry a wider range of products, particularly perishable goods that appealed to the Chinese palate.
Product sourcing was another area requiring adaptation. Wal-Mart had three options: 1) products obtained from global suppliers; 2) products manufactured in China by global suppliers such as Procter & Gamble, and 3) products from local suppliers. Wal-Mart elected to purchase 85 percent of its merchandise for the Chinese market in China through a combination of options 2 and 3. This solution sought to balance the desire of local customers for high-status United States-made consumer goods and pressure from local governments to purchase domestic goods.
2. Battles with local competitors
Whenever a company enters a new country, it can expect retaliation from local competitors as well as from other multinationals already operating in that market. Successfully establishing local presence requires anticipating and responding to these competitive threats. Wal-Mart has used several approaches to neutralizing local competitors in different markets:
Acquiring a dominant player. Wal-Mart used this approach in its entry into Germany.5 In December 1997, it acquired the Wertkauf hypermarket chain of 21 stores, one of the most profitable hypermarket chains in the country, from the Mann family of Germany. Having determined that building new hypermarkets in Germany would be ill-advised due to the mature European market and that strict zoning laws precluded greenfield operations, Wal-Mart spent more than two years exploring potential acquisitions, including Britain's Tesco, Germany's Metro and the Netherlands' Makro. Wertkauf's stores, similar in format to Wal-Mart's, featured high-quality personnel and locations, and were larger than the average German hypermarket.
Acquiring a weak player. Acquiring a weak player in the local market is an effective approach, provided the global company has the ability to transform the weak player within a very short time. This is what Wal-Mart did in Canada in acquiring Woolco.
Launching a frontal attack on the incumbent. Attacking dominant and entrenched local competitors head-on is feasible only when the global company can bring significant competitive advantage to the host country. Wal-Mart's entry into Brazil illustrates the potential - and the limitations - of a frontal attack.6