The Hindu Business Line : Breaking down the `Wal'

WAL-MART IN VIRIGINIA, US. The store has seen huge success across the world — in Canada, Mexico, Costa Rica, China, Japan, Brazil, Argentina and the UK.

Wal-Mart. Who are they?

Wal-Mart Stores Inc operates Wal-Mart discount stores, Supercenters, Neighborhood Markets and Sam's Club locations in the US. It has more than 6,600 stores worldwide and sales for 2006 are estimated to be $1 billion per day. The company operates in Argentina, Brazil, Canada, China, Costa Rica, El Salvador, Guatemala, Honduras, Japan, Mexico, Nicaragua, Puerto Rico and the UK. The company's securities are listed on the New York Stock Exchange and NYSE Arca, formerly the Pacific Stock Exchange, under the symbol WMT.

What is the motivation to expand to global markets?

The three modes by which the company can expand are:

Organic growth: Organic growth represents the true growth of the company. It is a good indicator of how well the management has used its internal resources to expand profits. Organic growth also identifies whether managers have used their skills to improve the business. Wal-Mart has been growing organically by the introduction of new products and services on a regular basis. It is also constantly improving its service management to reduce the cost of logistics and thereby generate more profits. Same store sales is a key metric used to measure organic growth.

Acquisitions: Acquisitions can be either friendly or unfriendly. Friendly acquisitions occur when the target firm agrees to be acquired; unfriendly acquisitions don't have the same agreement from the target firm. Over the years, Wal-Mart has acquired many companies in the US as well in other countries to expand their business.

Market expansion: Expanding the target market to cater to the needs of more customers is called market expansion. The retail industry was growing at a rapid pace when Wal-Mart realised the scope for expansion in the global market. Same store sales for Wal-Mart have not increased at a decent pace in recent years and therefore the need for market expansion has evolved. It has been a huge success across the world like North America (Canada), Central America (Mexico and Costa Rica), Asia (China and Japan), South America (Brazil and Argentina) and Europe (UK).

Wal-Mart International acquired Asda (UK's retailer) on July 26, 1999. Since then Asda claims it has gained one million more customers. They have 259 stores and 19 depots across the UK. Asda is now the second biggest supermarket chain in the UK with 17 per cent market share. Asda was primarily known as a food retailer; but after its acquisition by Wal-Mart, it has developed a good portfolio of different retailing sectors.

In March 2006, ASDA launched a new format store called Asda Essentials in Northampton. With a primary focus on own-brand products on a much smaller scale than Asda's mainstream stores, the Essentials only stock products that belong to the typical weekly shopping basket. This strategy is similar to that of discount supermarkets like Aldi or Netto. This could be perceived as Asda's response to the increasing strength of Tesco and Sainsbury in the convenience store sector. While the battle for market share exists between Tesco and Wal-Mart, the differing marketing strategies of these two chains lead them to possibly different clientele.

Wal-Mart's ability to transport the company's unique culture and effective retailing concepts to each new country has been the bottom line for Wal-Mart's successful international operations. The management and staff reconcile themselves to local cultures to ensure best service. They also participate in local community events. Wal-Mart International has realised a huge growth with potential for much greater development worldwide because of its understanding of local needs and satisfying them.

Although efforts to expand in some parts of Europe (Germany) and North-Eastern Asia (Korea) have failed, Wal-Mart learns and adapts to newer environments much faster than any other retailer in this world.

Why did it fail in Germany and Korea?

Wal-Mart failed in Germany because of several reasons. Wal-Mart's biggest strength is competing on price, but because local German stores Aldi and Lidl were able to deliver good quality grocery at very affordable prices, Wal-Mart could never compete. Aldi and Lidl promoted weekly sales and heavily discounted merchandise, which drew the customers back to it. Wal-Mart opened all the stores in the suburbs and customers were very reluctant to drive that far for grocery. With the local shops providing better rates, customers had no need to drive to the suburbs. People were not even comfortable with the idea of the hypermarket.

Even in South Korea, local retailers provided huge discounts and therefore Wal-Mart could not compete on pricing. Many Koreans have never heard of Wal-Mart. There is only a single store in Seoul that has a population of 10 million.

What is Wal-Mart's typical business model?

It has a highly efficient service channel management, which make it possible to buy directly from producers. Also, the company's innovative information technology (like use of satellite communication to link corporate headquarters with stores nationwide) has given Wal-Mart an edge over its competitors. It tries to compete on price with local merchants and is always located in a neighbourhood that is convenient to the customers.

Why does it want to enter India?

India is witnessing an unprecedented consumption boom. The economy is growing at the rapid rate of 7-8 per cent and has resulted in greater income dynamics, driven by factors such as favourable demographics and growth in aspirational consumption.

Retailing in India is currently estimated to be $200 billion, of which organised retailing (i.e. modern trade) makes up 3 per cent or $6.4 billion. Organised retail is expected to grow at 25-30 per cent every year, and is projected to attain $23 billion by 2010.

The factors driving Indian retail growth are:

Sixty per cent of the total population below 30 years of age is expected to have high purchasing power. For instance, this demographic group accounted for 50 per cent of cellular phones bought in the last year. Increasing double income families in cities have resulted in a higher disposable income for consumers.

Salary hike is another reason for extra spending power, which may result in more consumption.

Indian consumers' self-esteem needs are satisfied by purchasing things from big multinationals like Wal-Mart. The new concept of shopping under one roof (super centre) is also what the Indian consumers have always wanted to experiment with.

Why a joint venture with Bharti Enterprises?

Bharti Group and Wal-Mart have joined hands to tap the retailing opportunities in India. Bharti, with its deep knowledge of India's fast growing consumer market, and Wal-Mart, with its extensive global retail experience, share the same commitment to building relationships with producers to provide great quality at reasonable prices to consumers everyday.

Wal-Mart's alliance with Bharti Enterprises appears to be prompted by a need to get around restrictions on foreign companies, which are currently barred from operating multi-product retail chains in India. Under the deal, Wal-Mart and Bharti Enterprises will set up a joint venture to manage procurement, inventories and logistics, while stores will be set up under a franchise agreement.

Bharti will manage the front-end of the business, while Wal-Mart will take care of the supply chain, logistics and other back-end operations. The joint venture helps Wal-Mart easily understand the Indian market. This is possible because Bharti has a strong grip over the needs and wants of customers while Wal-Mart provides cost-effective logistics, helping Bharti sustain the price competition. Bharti Enterprises already has a retail network and is a household name in telecom, and this deal will prove its capabilities as a company with strong execution capability.

Who is the competitor of this alliance?

Reliance Industries has entered the retailing industry and will operate hypermarkets, convenience and specialty stores as well as business-to-business operations, sell food, clothing, electrical consumer durables, luxury goods and financial and travel services. It is setting up distribution infrastructure to enjoy the benefits of competitive pricing.

Infiniti Retail Ltd (a Tata Group company) has also entered the market to make most of the growing retail sector in India. The Tata Group has partnered with Woolworths Ltd, Australia's biggest retailer, for sourcing and technical support. It opened the first store in Mumbai in October 2006.

Pantaloon Retail India, which has stores like Big Bazaar spread all over India, is also ready to expand the business and is planning to open 100 stores by December 2007.

Will Wal-Mart succeed?

Wal-Mart has been a global company for many years. Apart from a couple of failures, it has been a huge success because of its understanding of the local markets. In India, it will be able to succeed because it has the best know-how to provide the right set of products to the right set of customers.

Customers are also hungry for new ways of shopping. The joint venture with Bharti Enterprises will prove a smart move as Bharti is one of the biggest consumer players in the market and has adequate knowledge about the Indian market. This will make the cultural transition easy for Wal-Mart.

The rest, time will tell.

The writer is ING Chair Professor of Marketing and Executive Director, ING Center for Financial Services, University of Connecticut.