Wal-Marts Foreign Expansion

Aaron Blackburn Fall 2011

Wal-Marts Foreign Expansion

Wal-Mart has not been able to translate its merchandising strategy wholesale to another country successfully. What has worked well in the United States has been the result of adapting to changes in the U.S. market over decades. This strategy could not be used in another country when management in the U.S. only has knowledge of retailing in their home country. Being able to start a venture with a single store and grow it into a large corporation is very different than said corporation moving into a completely new market. Their forays into international markets have proven this to them. They need to be mindful of how the local culture shapes merchandise demand and buying behaviors. This strategy has given Wal-Mart success in Mexico and China. In Mexico, Wal-Mart used a jointventure with someone who had that from-the-ground-up experience in Cifra. While Wal-Mart did not have a partner in China, their low prices were something that complimented the bargain-hunting culture of Chinese consumers well. Ignoring cultural effects on merchandise demand and buying behaviors has led to failure in the United Kingdom, Germany, and South Korea. In these countries, long-established competitors knew their customer base better than Wal-Mart. These have influenced Wal-Mart to concentrate on developing countries where there is a lack competition and low prices are a primary consideration in purchases. Understanding a countrys culture is a necessity for conducting successful business there. Wal-Marts began international expansion by starting in Mexico. This took the form of a partnership with the countrys then largest retailer Cifra. Initially, Wal-Mart had some problems with its stores in Mexico. It quickly discovered that shopping habits were different. These differences included a preference for fresh produce, meat, and bread goods. Unlike the United States, many Mexicans did not own large refrigerators, so these foodstuffs did not last long. This difference between the two cultures accounted for the difference in buying habits. Therefore Mexicans on average shopped more frequently. They also buy lesser volume because of a lack of long-term storage, and also because they often walked to their grocery stores. Walking to grocery stores was a result of another material difference between the U.S. and Mexico: lack of privately owned vehicles. The retailer did not allow these differences to stop them. Wal-Mart adjusted its strategy to meet local conditions, hiring local managers who understood Mexican culture, letting those managers control merchandising strategy, building smaller stores that people could walk to, and offering more fresh produce. These changes proved to be very successful because the company learned how to take advantage of these differences. Now Wal-Mart is now the largest retail chain in Mexico. Wal-Mart has not been successful in countries such as the United Kingdom, Germany, and South Korea. In all three countries it found itself going head to head against well-established local rivals who had nicely matched their offerings to local shopping habits and consumer preferences. Again, WalMart was not prepared for the differences between U.S. and local customers. And unlike the Mexican example, Wal-Mart did not have a local company with whom they could form a strategic alliance. They also did not change their approach to meet local shoppers expectations. There was also a difference in

the type of goods in demand. Moreover, consumers in all three countries seemed to have a preference for higher quality merchandise and were not as attracted to Wal-Marts discount strategy as consumers in the United States and Mexico. Adapting to local buying behavior and using joint-ventures will not work if there is not enough demand for a companys products. Since cheap products is part of WalMarts core competency, then nothing short of completely different approach would succeed. However, Wal-Mart might not be able to make that drastic of a change when so much of their companys history went in an opposite direction. When Wal-Mart began to expand into China in 1996, it did so gradually. In its first ten years there, the company only opened 66 stores. Their everyday-low-price approach worked well for them. They found that Chinese were bargain hunters, and open to the low price strategy and wide selection offered at Wal-Mart stores. So this aspect of the company has served them well. But they have also had to alter other components of their business. One of the things that Wal-Mart has learned is that Chinese consumers insist that food must be freshly harvested, or even killed in front of them. This has lead Wal-Mart to offer still living animals like fish and turtles, and pre-slaughtered meat that is not packaged. Figuring out the preferences of the Chinese consumer has made Wal-Mart successful in China. The company also has had to learn to work in a different political structure than in the United States in regards to labor unions. In the U.S. unions and management often struggle against each other. However, in China they are an arm of the state, providing funding for the Communist Party and (in the governments view) securing social order. In this example, Wal-Mart figured out that structural characteristics can hinder or help a firm in a foreign nation. For its cooperation, the company has been able to buy a stake in a Chinese retail chain store. The result from these changes is a growth from 66 stores in 2006 to 243 in 2009. Companies can change some cultural aspects of foreign countries, but not all. Wal-Mart was able to affect Mexico. The customization, persistence, and low prices paid off. Mexicans started to change their shopping habits. This was only possible because Wal-Mart was able to adapt to local conditions. Businesses must be flexible when expanding overseas. However, as in the case with WalMart and the United Kingdom, Germany, and South Korea, if the local customers have preferences for different products than your company offers, no amount effort to fit local culture will work. Their experience in these markets also affected how the company expanded overseas. *I+t continued to look for retailing opportunities elsewhere, particularly in developing nations where it lacked strong local competitors, where it could gradually alter the shopping culture to its advantage, and where its low price strategy was appealing. This has shown that Wal-Mart was learned to adjust its approach to foreign expansion to be more selective. The stage that a countrys economic structure is in has been a determinable factor for the company. If the merchandise demand and buying behaviors are too welldeveloped, only retailers whose core competencies match them will succeed. Firms should carefully examine their products and how they are delivered to see if how much they need to change their approach and if it is profitable. Source: Hill, Charles W. L. International Business. McGraw-Hill, 2011. Instructor Customization of the 8th Edition.

Walmart de Mxico
Walmart de Mxico is the name of the joint-venture between Wal-Mart and Cifra mentioned in the Wal-Marts Foreign Expansion case. Since the case was written, it has proven to be a profitable project for Wal-Mart. In 2009, Walmart de Mxico acquired Walmart Centroamrica, expanding its presence to six countries, and increasing the potential for continuous profitable growth (Wal-Mart). No doubt this is because Wal-Mart has continued to offer the products the people of Mexico and Central America want in a way that has encouraged sales. The changes the firm made after their initial entrance into Mexico have validated their decision to deviate from their business plan in the United States. The company has had its own impact on the retail industry in Mexico. Practices introduced by the retailing giant include centralised distribution systems, the use of standardised pallets, rigorous delivery schedules, and computerised tracking, which allows suppliers to obtain real-time information on sales and inventories at the level of individual stores (Iacovone, Javorcik and Keller). Companies, no matter if they are local or international, have been successful when they differentiate themselves from the competition. These new practices have helped Walmart de Mxico reduce costs for themselves and their customers while offering those local products that Mexicans prefer to purchase frequently. The firm has changed how grocery suppliers conduct business too. The partnership allows Mexican suppliers to reach a larger market without having to make investments in distribution and logistics on their own (Iacovone, Javorcik and Keller). This has given suppliers a tremendous opportunity at little cost compared to other industries within Mexico. However, this has had an impact on the suppliers. Walmart de Mxico routinely demands price reductions from suppliers that do not come up with a product innovation in a given year (Iacovone, Javorcik and Keller). The retailer therefore extracts a price for using their sophisticated distribution network. They justify it by offering nation-wide access without the suppliers having to create the system themselves. The practice incentivizes suppliers to find ways of lowering their costs or provide new offerings. But not everything is going Walmart de Mxicos way. Theres a limit on how many stores the Mexican economy can absorbThe number of new stores is outpacing the increase in Mexican salaries and new jobs, resulting in sales being taken away from existing ones (Levin and Black). This might help Walmart de Mxico if the customers main motivation is finding the best deal. However, if there is a trend to locally-owned businesses, the company might be seen as an interloper from the United States. The everyday low-price comparative advantage is also in danger. Efforts to increase sales come as competitorshave learned to match Wal-Mart de Mexicos prices (Levin and Black). The business will either have to continue to use their leverage with suppliers, and/or find new efficiencies in their distribution system, to lower prices further. That would be a strategy Wal-Mart could use. In a different market such as Mexico, they might have to find a new solution that utilizes the local culture instead.

Works Cited for Walmart de Mxico

Iacovone, Leonardo, et al. "The Two Faces of Wal-Mart in Mexico." 2011. VOX. <http://www.voxeu.org/index.php?q=node/6887>. Levin, Jonathan J. and Thomas Black. Wal-Mart de Mexico Profit Drops 3.4% Amid Store Openings. 2011. <http://www.bloomberg.com/news/2011-07-19/wal-mart-de-mexico-posts-second-quarterprofit-4-5-billion.html>. Wal-Mart. Mexico Fact Sheet. 2011. <walmartstores.com/download/2006.pdf>.