Walmart

Wal-Mart : What's in Store?

Growing anti-Wal-Martism and a string of failures in overseas ventures do not augur well for the retailing juggernaut.

On April 22, 2007, much to the chagrin of Wal-Mart and its local Indian partner, Bharti Group, Wade Rathke, the Chief Organizer of Association of Community Organizations for Reform Now (ACORN), one of the largest community organizations of low and moderate income families in the US, gave an emotional speech exhorting locals and warning policy- makers against corporate participation (read: Wal-Mart) in retail. Rathke, who has been in the limelight due to his relentless opposition to organized retailing biggies, came flying down to mobilize public opinion against the Bentonville, US-based retailer, which has tied up with the Bharti Group to launch its India foray. While Wal-Mart may deny any concerns over such protests, the fact is that Rathke has emerged as its bete noire, thanks to the growing popularity of his hot pursuit against the world's top retailer and the upheaval it has caused so far. For instance, last year Wal-Mart was compelled to quit its businesses in South Korea and Germany mainly due to stiff opposition it faced from ACORN. The forum has been particularly vocal about Wal-Mart's unlawful labor practices in the US, Canada and some European countries, and initiated a series of litigations and labor movements against the retail behemoth. The anti-Wal-Mart movement is slowly but steadily gaining momentum, and now speculation is rife that Wal-Mart might have to stop its Japanese business also, where it is struggling to find a strong foothold. But for the retailing juggernaut, which has just dethroned the oil-major ExxonMobil to regain its top position in the 2007 Fortune 500 list, expansion does not stop so easily. And unsurprisingly, it is now concentrating more on China, India and Europe to compensate for the drubbing it received in Germany and South Korea. But it is not only the growing anti-Wal-Mart sentiments that are troubling the retailing giant; its failure in some of the major overseas markets too has put a big question mark over its ability to repeat its success in the domestic market.

Overseas ordeal

However, despite putting up a brave face amidst such challenges, the fact is that Wal-Mart, which experienced meteoric growth during the period 1995-2005, has suddenly started facing the heat in some major overseas markets. For example, in 2006, it abandoned its German venture and sold off all of its 85 retail stores to Germany's Metro. Wal-Mart's German operation was encountering intense competition from local discount food retailers such as Aldi and Metro for the past decade. Besides, it could not develop private labels that have `value perception' from the consumers' viewpoint, whereas Essen-based discount supermarket chain Aldi is still reaping the benefits of a value-based model where 95% of the products bear local labels. This label-based chain has such strong goodwill in Germany among its consumers that even the world's number one retailer could not break its hold. And this is often cited as one of the major causes of Wal-Mart's failure in Germany. Added to it is the typically low propensity to consumption by the German consumers. In Germany, even the Metro's own real food stores were losing money due to this peculiarity. Moreover, Wal-Mart, which boasts of at least 5,700 stores across the globe, and has been internationally infamous for violation of labor laws, was embroiled in many controversies with regard to pay and working conditions even in Germany. It was engaged in a bitter dispute with German labor union over working hours, which did not do any good to Wal-Mart's already tarnished reputation and rather paved the way for its exit from the country.

Wal-Mart also had to stop its operations in South Korea in May 2006, after years of futile efforts to cement its position among the country's top retailers. The retailing major which was, in fact, not even among the top five players in South Korea even attempted to acquire the store network of its France-based rival Carrefour, but in vain. Experts say that this may also have hastened its premature withdrawal from South Korea. Interestingly, Eland Corp, a local clothing manufacturer, which outclassed other competitors, pipped Wal-Mart to acquire Carrefour Korea. Moreover, the Koreans are very passionate and culturally-inclined, and Wal-Mart's approach of `always low price' and the big box format proved to be a blunder. Also, Wal-Mart's heavy-handed union busting approach was a big mistake. The US multinational ventured the country through the acquisition of a local Cash and Carry chain. Soon after its arrival, Wal-Mart started imposing its stringent personnel policies and revoked all types of union activities aimed at organizing the workers. The high-handedness of the retail giant automatically led to a series of protests and agitations in Seoul. The Korean Private Services Workers Union (KPSU) staged a vociferous demonstration outside a Wal-Mart store in posh Central Seoul, along with other Korean UNI affiliates, UNI Commerce and United Food and Commercial Workers International Union (UFCW). The Korean press also started severely badmouthing the $351 bn retail behemoth. Ultimately, Wal-Mart surrendered disappointedly to the mounting pressure and exited the country in an unceremonious way, selling all its 16 stores to its rival and market leader, Shinsegae E-Mart, for $882 mn.

Speculations are rife again that Wal-Mart might have to stop its business even in Japan's lucrative $1.1 tn retail market, which is the world's second largest market after the US. The concern may not be unfounded though as earlier as in 2005, Carrefour, the world's second largest retail player, had to exit Japan. Though Wal-Mart has been operating in Japan for the last five years, it has not been able to solidify its position in the country. Seiyu, the 53% local subsidiary of Wal-Mart, has been struggling as it posted five straight years of losses and lost nearly 75% of its stock market value since Wal-Mart first invested in the Japanese supermarket chain. Analysts opine that Wal-Mart should either stop its Japanese business, where it has already invested money worth $1 bn or acquire 100% stake in the local venture for a complete overhaul.

Some silver lining

However, there are some bright spots as well. For example, despite the fact that Wal-Mart has stopped operations in some of its important overseas markets, it is still expanding as well as tapping overseas markets like China and India, where it aims to begin its operations in early 2008. In fact, overseas businesses now account for more than 20% of the company's overall business, and despite all odds, its international sales increased 30%, whereas revenues at its US division grew at a meager 8% for the year ended January 2007. In the US, Wal-Mart's growth has indeed declined. The mere 2.1% gain in the US stores last year is its smallest in the past 22 years, where it has been severely criticized by the labor unions and religious and community groups for its anti-worker wages and benefits norms. Even in January 2006, Wal-Mart paid about $135,540 to settle federal allegations that it infringed child labor laws in Arkansas, Connecticut and New Hampshire. Again, in the US, it is facing stiff competition from upstart compatriot Target Corporation. Flashy marketing and slick image advertising adopted by Minneapolis-based Target is working brilliantly in its home market. Target's mix of high-margin products with discount pricing has enticed the upper income shoppers and has thrown a challenge to Wal-Mart's old and tired model of offering everything under one roof and at the lowest price.

This spate of events in the domestic market as well as in some overseas markets has come as a wake-up call to Wal-Mart's think-tank, which is now seriously mulling to expand its business in developing countries like China and India. In China, retail sales increased by 13.7% in 2006 and touched $770, which is around 25% of the entire US retail industry. Moreover, the Chinese economy is growing at an exceptionally high rate (in 2006, it grew by 10.7%), which is likely to drive up the incomes by 12.1% among the urban people and 10.2% in rural areas in 2007. This certainly augurs well for retail giants like Wal-Mart. Till date, Wal-Mart has been growing at a very slow pace in China in comparison to its arch-rival Carrefour. So it is now banking more on inorganic route of short-cut expansion to catch up with the French rival. In fact, Wal-Mart has already inked an agreement to acquire 35% of Trust-Mart, a hypermarket operator in China, to expand in the fastest growing economy of the world. This acquisition is likely to more than double Wal-Mart's stores in China. Wal-Mart has till now 73 outlets in 36 Chinese cities, and its acquisition of Trust-Mart would enable it to divert some customers from Carrefour in the world's most populous country.

In India also, Wal-Mart has already entered into a joint venture with telecom major Bharti to engage in cash and carry, logistics, supply chain and sourcing. Wal-Mart with its huge global retail experience and Bharti with its profound knowledge of India's fastest growing consumer market are likely to form a formidable entity which could provide great quality products to consumers at a reasonable rate.

Conclusion

Wal-Mart which rules the roost in retailing globally, however, now faces stiff competition from retailers, such as Tesco, Carrefour and Metro in the overseas markets. But still, its overseas expansion holds the key to its success in future as bulk discounts in this business often leads to razor-thin profit margin which can only be compensated by exceptional growth in revenue. And for revenue to grow significantly, overseas expansion is a sine qua non for Wal-Mart. However, it has not only competitors to worry about but also anti-Wal-Mart movements that are just growing and gaining momentum globally.

- Amit Singh Sisodiya and Sanjoy De