Module 4 Case

Walmart—Which Way should they Go?

After becoming the #1 retailer in the U.S. in 1990, Walmart decided it was time to go on its own
international shopping spree. In 1991, it entered the Mexican market as its first international
venture, and since then Walmart has become the largest retailer in Mexico. Stores in Puerto Rico
followed shortly thereafter. After these initial successes, Walmart formed its international
division in 1993, and the shopping began in earnest. In 1994, it acquired Woolco stores in
Canada, followed by investments in Argentina and Brazil.

Walmart had been buying products for its stores from China, but in 1996, the company decided it
was now time to go the other direction. Since investment in the retail sector was prohibited for
foreign companies in China, it took a lot of negotiation, but Walmart was granted permission to
open 7 stores, starting in Shenzhen, in Southern China. Work began on this investment in 1996,
but it took 3 years for the deal to be completed and for the first stores to open.

In the meantime, in 1998 Walmart decided to move into Germany. Instead of beginning from
scratch as had been done in China, Lee Scott, Chairman of Walmart, determined that his strategy
in Europe would be to build upon an existing brand. Walmart decided to purchase a chain of 21
stores called Wertkauf for $880 million. Wertkauf was well positioned in the German market.
Although smaller than some higher end chain stores, such as Hertie and Kaufhof, Wertkauf was
well represented in major German cities. Whereas the former two chain department stores are
somewhat upscale from Wertkauf, for most shoppers, it is an acceptable alternative for their daily
needs.

At the time of the purchase, Wertkauf was running successful, albeit declining, operations. The
stores were profitable, although the image of the chain had become a bit tarnished. The
condition of some of the older properties had been deteriorating, and the stores appeared
cluttered. Wertkauf stores were located primarily in the centers of larger German cities. Most of
these stores were located in Fuβgängerzonen—pedestrian zones, where no automobiles are
allowed—although public transportation is excellent. Germans have high disposable incomes,
and they regularly shop at department stores of this kind. However, at the time of purchase, the
product assortment at Wertkauf was more like that of J.C. Penney's in the U.S., rather than
Walmart. Clothing, home textiles and housewares were the primary products being sold. The
Wertkauf stores were substantially smaller than an American Walmart, but this was true of most
German stores.

Only recently in Germany has there even been any competition in the "big box" sector. A chain
called Toom-Mart opened large retail stores in suburban areas, with lots of parking. However
these stores, in many ways, were actually positioned below Walmart in the market, with many
products more like one would find at a U.S. "dollar store." Service at these stores was virtually
non-existent, as was real marketing. In this business environment, Walmart executives saw a
great opportunity to immediately capture market share in Germany. They planned to do this with
a quick renovation of the Wertkauf stores, retraining of the staff, and the planned opening of
several U.S. style big box stores in the suburbs of major cities. One year after purchasing
Wertkauf, Walmart expanded its German operations by buying the Spar chain of grocery stores,
bringing their total investment in Germany to well over $1 billion.

As indicated, Walmart implemented a very different strategy in China. Until 1995, retailing in
China has been almost primitive. Most commerce was conducted in small shops and by street
vendors. Even though China was responsible for massive exports of consumer goods to the U.S.,
in many cases the Chinese Government banned the sale of products to Chinese consumers that
were designated for export. That meant that most consumer goods made in China were
unavailable to local consumers. In addition, with Chinese per capita Gross Domestic Product
(GDP) at about $600 a year, and disposable income substantially lower than that, the market
potential for large retailers seemed questionable.

In 1995, the French chain Carrefour was the first foreign owned company to be given permission
to open a store in Beijing. Carrefour built a large hypermarche-style store in Beijing, similar to
the style of a Walmart, and like the stores they had in France. Unlike the early Walmart stores,
Carrefour included groceries, making it a true hypermarche.

This was the first real big box store in China. It was a far cry from some of the modest attempts
of local firms to open department stores in the past. The first Western-style Chinese department
store was the "Friendship Store" (友谊商场), opened in Beijing in 1964. The Friendship Store
was only open to foreigners in China, and goods could only be purchased in foreign currency
scrip. Foreign goods were available, but at relatively high prices—nothing that the majority of
the local citizens would have been able to afford. Other stores followed, but most targeted
foreign residents and visitors. In recent years, very high end shopping malls have been built in
association with hotels that cater to foreigners. These stores have high end brands at high end
prices, and are found in the large cities, such as Shanghai or Beijing.

Walmart was given permission to open only 7 stores in Southern China, on a trial basis. They
received permission to open their stores because of a joint venture (JV) with a local Chinese
partner, and because Walmart officials repeatedly reminded the Chinese regulators that
Walmart's purchases in China for export to the U.S. account for nearly 2% of China's gross
domestic product! In addition to the problem of getting the initial permission to open stores,
Walmart had further difficulties. The JV partner had some ideas as well. Each time Walmart
executives wanted to do something, the partner balked. For example, Walmart wanted to build
American Style big box stores. The partner was opposed, saying that this would not work in
China. Instead, the partner wanted to buy existing downtown locations and convert them to
Walmart's. In one case, the proposed facility was underground!

During the negotiation, it became clear to Walmart executives that owning 50% of a JV in China
could be like owning nothing. They felt they had been opposed on virtually everything they
wanted to do, and that nothing was going according to their plan. Walmart executives
complained, but very quietly, and, somehow, the first store opened in Shenzhen—a city near
Hong Kong, but on the People's Republic of China side of the border.

The day the store opened, there was a near riot. Police had to be called to restore order. The
store was mobbed, and ultimately the police had to limit the number who could enter the store at
In a brief period of time, Walmart went from a large U.S. Domestic operation to a company with
stores on several continents and in very unique situations. These two examples are indicative of
difficulties Walmart faced in its other new markets of Mexico, Puerto Rico, Brazil, Argentina,
Canada, Korea and Great Britain. In each market, Walmart had unusual circumstances, and
executives quickly learned that the rest of the world has little in common with Benton, Arkansas.
Let us take the two Walmart investments in China and in Germany as an example of Walmart's
international management challenge. The questions for discussion are: Which investment was
more productive and profitable for Walmart: The purchase of 21 Wertkauf stores in Germany, or
the JV with 7 stores in China? What could Walmart have done improve both investments?
one time, because of fire safety concerns. After the first week of near riot levels of store visitors,
Walmart did the math. Even though there had been tens of thousands of people pass through the
store, sales were virtually zero. In a panic, the store manager began a survey of "potential"
customers that were crowding the store to find out what was happening. With virtually all of the
visitors, the story was the same: Because this was the first big box store they had ever seen,
Walmart had become a tourist attraction. When asked why they didn't buy products, the standard
answer was, "oh, we can't afford these expensive goods." Without realizing it, Walmart has
positioned itself as the Niemen Marcus or Sachs Fifth Avenue of China—fun to visit, but too
expensive to buy there.