In-D Exhit In-Depth Integrative Case 2.2 V Walmart's Global Strategies E Walmart International Operations, Exhibit 1 April 2010 Retail Units (04/2010) Date of Entry 1,479 317 438 44 284 November 1991 November 1994 374 371 Introduction In 1991, Walmart became an international company when it opened a Sam's Club near Mexico City. Just two years later, Market Walmart International was created. Since venturing into Mexico Mexico in 1991, Walmart International has grown somewhat Canada erratically. During the 1990s the retailer exported its big-box, Brazil low-price model, an approach the company expected to be Argentina as successful in foreign markets as it was in the United China States. Although Walmart has had success in several overseas United Kingdom markets, this success has been far from universal. For exam- Japan ple, in Mexico, China, and the U.K., the company's efforts Costa Rica to offer the lowest price to customers backfired because of El Salvador resistance from established retailers. And in Germany, Guatemala Walmart could not seem to fit its model to local tastes and Honduras preferences. In Japan, its joint venture had a series of set- Nicaragua backs, many related to buying habits for which the Walmart Chile model did not respond well. In Mexico, three of the largest India domestic retailers constructed a joint buying and operational alliance solely to compete with Walmart.' Its presence in 170 77 May 1995 August 1995 August 1996 July 1999 March 2002 September 2005 September 2005 September 2005 September 2005 September 2005 January 2009 164 53 55 254 1 May 2009 ciates in 26 countries outside the continental U.S. (See Exhibit 1.) According to international chief C. Douglas 2 and it shuttered operations in Indonesia in the mid-1990s after rioting incidents in Jakarta. Walmart also owned McMillon, Walmart is "progressing from being a domes- approximately 16 stores in South Korea and 85 in Germany; tic company with an international division to being a however, it sold off these operations in 2006 after merchan- global company.” In two decades Walmart International dise failed to match consumer tastes, distribution and re- bagging problems arose, and strong loyalties to other brands had become a $100 billion business. Had it been a stand- alone company, it would have ranked among the top five made attracting customers difficult and expensive. In addition, labor advocates and environmentalists have global retailers.° (See Exhibit 2.) Walmart International's created headaches for the U.S. behemoth, making continued business represents a solid chunk of Walmart's overall expansion both cumbersome and expensive. For instance, in $405 billion revenues for the fiscal year 2010. 2006, Walmart faced a strong public relations campaign from With a market capitalization of more than $200 billion in the All-China Federation of Trade Unions (ACFTU) over 2010, Walmart is worth as much as the gross domestic prod- Walmart's refusal to let its workers in China unionize. uct of Nigeria. Four of America's 10 richest individuals are Walmart was eventually forced to concede, perhaps because from Walmart's low-profile Walton family, which still owns the Chinese government also lent its weight to the ACFTU's a 40 percent controlling stake. The company's portfolio campaign in its effort to establish unions in all foreign- ranges from superstores in the U.S. to neighborhood markets funded enterprises throughout the country. As of October in Brazil, bodegas in Mexico, the ASDA supermarket chain 2006, almost 6,000 of Walmart China's 30,000 employees in Britain, and Japan's nationwide network of Seiyu shops. were union members.' Despite its public battle with the Walmart sources many of its products from low-cost Chinese ACHTU, Fortune China and Watson Wyatt still voted Walmart suppliers. The pressure group China Labour Watch estimates China as one of the "Top 10 Best Companies to Work for" in 2005.4 As Walmart continues to expand its global opera- tions, analysts are curious to see how the company is received ing more than $18bn annually on Chinese goods. and whether consumers' opinions in fragmented market set- tings are a match with Walmart's low price model. that if it were a country, Walmart would rank as China's seventh largest trading partner, just ahead of the U.K., spend- 9 Walmart Early Internationalization Notwithstanding these challenges, today, Walmart In venturing beyond its large domestic market, Walmart International is a fast-growing part of Walmart's overall had a number of regional options, including entering 264 In-Depth Part 2 The Role of Culture 266 43 with 55 p debit card like insu Wal-Me tions an $5 and at com remitta Mexic wa target 0 Walmart International Retail Unit Count (2006-2010) Exhibit 4 2009 2008 2010 2007 Country 21 28 Argentina 13 345 313 434 299 Brazil 318 305 317 289 Canada 0 197 Chile 243 202 73 China 164 149 137 Costa Rica El Salvador 63 145 132 160 Guatemala 50 47 41 Honduras 0 0 0 India 394 392 371 Japan 1,197 889 Mexico Nicaragua 40 46 51 Puerto Rico 54 54 56 UK 335 352 358 Total 2,757 3,121 3,615 77 70 252 279 170 77 164 53 1 371 1,469 55 56 371 4,112 55 P rank with nati 20 1,023 an in Source: Walmart Annual Reports for fiscal years 2007, 2008, 2009, 2010. h felt ready to take on the Asian challenge and it targeted China. This choice made sense in that the lower purchasing September 2005 a senior Walmart lawyer was contacted by The growth of Wal-Mex has not been problem-free. In a former executive at Walmart de Mexico. In the e-mail and follow-up conversations, the former executive (later identi- fied as the lawyer in charge of obtaining construction permits for Walmart de Mexico) indicated that Walmart de Mexico growth prospects. In response, Walmart dispatched investiga- 14 power of the Chinese consumer offered huge potential to a low-price retailer like Walmart. Still, China's cultural, lin- guistic, and geographical distance from the United States presented relatively high entry barriers, so Walmart decided to use two beachheads as learning vehicles for establishing had paid bribes for permits throughout the country to file an Asian presence. During 1992–93, Walmart agreed to sell low-priced tors to Mexico City. Those investigators found overwhelming products to two Japanese retailers, Ito-Yokado and Yaohan, evidence of bribery and hundreds of suspect payments total that would market these products in Japan, Singapore, Hong ing more than US$24 million. The investigation also found Kong, Malaysia, Thailand, Indonesia, and the Philippines. that Walmart de Mexico's top executives had taken steps to Then, in 1994, Walmart entered Hong Kong through a joint conceal the evidence from Walmart's headquarters.. Regula- venture with the C.P. Pokphand Company, a Thailand-based tory filings confirmed that Walmart is the subject of an inves- conglomerate, to open three Value Club membership dis- tigation by the both the SEC and the Justice Department. count stores in Hong Kong. Walmart warned shareholders that its reputation could be affected by the bribery scandal. In a statement Walmart said Success in Mexico and China that inquiries from media and law enforcement could affect Overall, Walmart has had a very successful experience in the perception among certain audiences of its role as a cor- Mexico. In 1991 Walmart entered into a joint venture with porate citizen. porate citizen."!? In response to the investigation and bribery retail conglomerate Cifra and opened a Sam's Club in charges, Walmart has created a new executive position to Mexico City. In 1997 it gained a majority position in the ensure that all Walmart employees are complying with the company and in 2001 changed the store name to Walmart U.S. Foreign Corrupt Practices Act. 18 de Mexico, or more commonly, “Wal-Mex.” In addition In late 2006 the company was also approved by to its 195 Walmart Supercenters and Sam's Club ware- Mexico's Finance Ministry to open its own bank. In a houses, Wal-Mex also operates Bodega food and general country where 75 percent of citizens have never had a merchandise discount stores, Superama supermarkets , bank account due to high fees, “Banco Walmart de Mexico Suburbia apparel stores, and Vips and El Portón restau- Adelante” added much-needed competition to the financial rants. The majority of its stores are located in and around services industry and it was hoped would begin to offer Mexico City; however, it does business in over 145 cities consumers lower fees than traditional banks.' In Novem- throughout Mexico. Wal-Mex has shown no signs of slow- ber 2007, Wal-Mex opened its first consumer bank, Banco ing down. In 2005 Walmart opened 93 new stores and saw . Walmart, in Toluca; by August 2010, the company open another 125 that year. 2007, it operated 889 stores in Mexico and had plans to targeting the low-income market in a country where just had opened nearly 250 branches. Banco Walmart is especially 15 24 percent of households have savings accounts, compared COLLEGE RULER 267 In-Depth Integrative Case 2.2 Walmart's Global Strategies with 55 percent in Chile. Wal-Mex plans to boost sales via shopping centers that offered a broad assortment of high like insurance, and make money on interest-rate spreads. debit cards, later ease users into more profitable services quality general merchandise and food. Germany was seen Wal-Mex's mission is to lure newcomers with easy instruc- tions and entry points, like minimum balances of less than $5 and no commissions, compared with $100 minimums at competing banks. Wal-Mex is also eyeing the $23 billion Mexican immigrants in the U.S.2 remittances market-the amount sent home every year by the company with an ideal entry into a new market.29 Wal-Mex's plans for future growth involve more heavily targeting the 16-24-year-old age group, which constitutes 55 percent of Mexico's population. In April 2010, Mexico ranked as Walmart's number one international destination with 1,479 retail outlets, far ahead of its second major inter- national destination Brazil, which had only 438 stores.21 In 2011, Walmart de Mexico was a top performer globally with as the largest single base for retailing in Europe. Wertkauf's annual sales were about $1.4 billion, and its stores operated similar to the popular Walmart Supercenter format in the U.S. Walmart's executives considered Wertkauf as an “excellent fit for Walmart and hoped that it would provide However, Walmart's operations in Germany quickly critical factors that the company underestimated when it entered the new market. First of all, the stores of the acquired German retail chain were geographically dis- persed and often in poor locations. Also, Walmart had faced some serious cultural differences, which it tried to resolve by making one error after another. For example, in total for all global operations during this same time.22 an operating margin of 7.9 percent, compared to 4.9 percent the company initially installed American managers, who Though not as easy as its experience in Mexico, Walmart made some well-intentioned cultural gaffes, like offering to bag groceries for customers (Germans prefer to bag has also found decent success in China. Walmart entered the their own groceries) or instructing clerks to smile at cus- Chinese market in 1996 when it opened a Supercenter and tomers (Germans, used to brusque service, were put off).30 Sam's Club in Shenzen. As of late 2006 the company had Other problems, however, were largely outside Walmart's expanded to 73 stores in 36 cities. In order to cater to its control. Two German discounters, Aldi and Lidl, dominated Chinese shoppers, Walmart has introduced "retail-tainment” the grocery business, with smaller shops that featured and attempted to create a more hands-on shopping experi- cut-rate, though still good-quality, food. Aldi also heavily 23 China's Tourism Bureau even named one under- promoted one-week sales, featuring deeply discounted ground Walmart store a tourist destination.24 merchandise, ranging from wine to garden hoses, which In addition to its own stores, Walmart has had a stake draw customers back. While Walmart's vast size gave it in the Taiwanese Bounteous Company Ltd., which owned enormous leverage in purchasing clothing and other goods, the popular chain of Trust-Mart stores. In late 2006, The it had to buy much of the food for its German stores locally. Wall Street Journal publicized a $1 billion deal between And there, it lacked the muscle of Aldi, which had 4,100 Walmart and Bounteous, in which Walmart would acquire shops and a presence in nearly every town in the country. “Germany is the home of the discounter," said Mark Trust-Mart's 100 stores over the course of three years. In light of Walmart's slowing U.S. sales and the termination Josefson, a retail analyst at Kepler Securities in Frankfurt. of its operations in Germany and South Korea, the com- “Walmart is not competing on price, and that is one of its main attributes in its home market.” Beyond these com- pany's expansion in China is quite timely. Like its opera- tions in Mexico, Walmart has also entered the Chinese petitive pressures there was another serious factor to con- sider, namely that the German consumer was one of the financial service industry, by introducing a credit card most parsimonious and price-conscious in Europe. Profit with Bank of Communications Ltd. in late 2006. Walmart's expansion has not gone unnoticed. Domes- margins in German retailing were the lowest in Europe. 32 Walmart had struggled in Germany for almost 8 years. tic Chinese rivals have also built up their businesses in Analysts said that Walmart Germany was losing about ence. 25 31 26 order to compete. In 2005 Shanghai Bailan Group pur- chased four rival supermarkets and department stores and €200 million (£137 million) a year on a turnover of about now operates over 5,000 stores. China Resources Enter- €2 billion, despite several attempts to turn around the prise has hired away managers from foreign chains and business. In 2006 it finally made the decision to withdraw cut staff in order to increase its profitability.27 While these from the German market, by selling its 85 German stores efforts signal greater competition for Walmart in particu- to the rival supermarket chain Metro and taking a pre-tax they are necessary for domestic companies to survive loss of about $1 billion (£536 million) on the failed ven- in China's $841 billion retail market,28 which has been ture.33 The decision to sell out to the Metro Group came increasingly competitive ever since the country joined the two months after Walmart sold its 16 stores in South WTO and dropped restrictions on foreign retailers. Korea and it appeared a rare retreat by the world's largest retailer from its breakneck global expansion. Mixed Results in Europe In contrast, Walmart's second retail destination in and Japan Europe, the United Kingdom, has brought the company In 1998 Walmart entered the European market through much needed success. Walmart entered the U.K. market Germany by acquiring 21 Wertkauf hypermarkets, one-stop in June 1999 by acquiring ASDA Group PLC, Britain's lar, 34 In-Dept Part 2 The Role of Culture 268 ($10.8 billion). The cash deal, which topped a rival bid from the British retail group Kingfisher PLC, was pre- dicted to double Walmart's international business at a 35 Latin America expertise throughout Europe. Walmart executives said they hoped to draw upon ASDA's management talent and experience. ASDA's 229 stores are a little less than half the size of Walmart's supercenters of more than 200,000 square feet (18,000 square meters) in the United States, but the lack of space in much of Europe for new out-of-town shopping devel- opments could make ASDA's formula more relevant as a platform for expansion. However, while the chain has been only a moderate The app million services here tha ings wi with th Inda chains from perce Mexi in th Pres: selli have finally accepted that they can buy quality merchandise third-largest food retailer. Walmart offered £6.7 billion for a lower price." After spending 100 billion yen (roughly stroke and put it in a position to expand its retailing looking for further expansion through acquisition.41 $1.2 billion), by 2010, Walmart's situation in Japan had seen bilized, with two years of profits and reports that it was After 2005: Refocusing on 2005 became another turning point in Walmart's strategy Somewhat frustrated by strategic failure in Germany, and very slow expansion in the developed countries like Canada and the U.K., the company has turned its focus toward Latin America. Walmart has decided to leverage its positive expe rience in Mexico toward other South American countries, success, delivering consistent results, Walmart has been purchase of a 33-ss 1/3 percent interest in Central American In 2005 Walmart successfully entered this market with the Retail Holding Company (CARHCO) from the Dutch retailer Royal Ahold NV. CARHCO is Central America's largest retailer, with 363 supermarkets and other stores in the following five countries: Guatemala (120), El Salvador sales. The head of global marketing for Walmart is based (57), Honduras (32), Nicaragua (30), and Costa Rica (124). CARHCO has approximately 23,000 associates. Its sales Prior to that, in March 2004, Walmart bought a 118-store supermarket chain, Bompreco, in northeastern Brazil for $300 million, also from Royal Ahold of the Netherlands This acquisition has significantly increased Walmart's com- 36 W In pla со pr er ca is f frustrated in its efforts to expand, though competing in Britain's feverishly competitive supermarket industry has taught Walmart a good deal. Nevertheless, ASDA is now something of a center for excellence for its global grocery at ASDA's head office in Leeds. And, in an example of Walmart's global distribution muscle, The Wall Street during 2004 were approximately $2.0 billion.42 Journal recently reported that the best-selling wine in the whole of Japan is an own-label ASDA Bordeaux. The third major strategic step in Walmart's early 2000s global expansion was entering the Japanese market. In 2002 Walmart set foot in Japan with the purchase of a 6 percent petitive position in the country. In 2006 the company made stake in the 371-store Seiyu chain. Despite continued losses, another successful deal with Portugal-based Sonae by pur- Walmart gradually raised its stake, making Seiyu a wholly chasing its 140 Brazilian stores for $757 million. The Sonae owned subsidiary in June 2008. Walmart has had to confront purchase was expected to boost Walmart’s presence in numerous issues in Japan, from longtime Seiyu managers Brazil's wealthier southern states. With the Sonae acquisi- resisting its initiatives to a tendency among Japanese shop- tion, Walmart store count increased to 295 units in 17 of pers to equate low prices with inferior products. Also, bulk Brazil's 26 states. However, this move made Walmart only deals did not play well in a country where many lived in the third-largest retailer in Brazil, following Carrefour of small urban apartments, and the country's grocery distribu- France and Companhia Brasileira de Distribuio Po de Acar.43 tion system was populated with wholesalers who brokered The last step in the sequence of its strategic moves in deals between suppliers and retailers, skimming profits. Latin America was Walmart's expansion into Chile. In Even rival Carrefour abandoned this market. 2009 Walmart acquired a majority stake of D&S (short Edward J. Kolodzieski was the man in charge of turn- for Distribución y Servicio) 224-store chain for $1.6 bil- ing Seiyu around. As CEO of Walmart Japan, Kolodzieski lion. In acquiring D&S, the nation's leading grocer and has slashed expenses, closed 20 stores, and cut 29 percent third-largest retailer, Walmart hopes to cement its domi- of corporate staff. In-store butchers were removed, with nance in Latin America, where it is by far the biggest most meat now processed in a central facility. With the retailer with $38 billion in sales, estimates research firm freed-up floor space, Seiyu bulked up meals-to-go offer- Planet Retail, double that of its closest rival, Carrefour. In ings. To bypass the middlemen, Seiyu has also boosted Chile, Walmart enters a market that has long been inhos- the number of products it imports directly from manufac- pitable to foreign retailers. Home Depot, Carrefour , and turers by 25 percent in 2009, and was also focusing on JC Penney are among the companies that have tried, and increasing sales of its own private-label brands. 39 failed, to make it in Chile, a nation of 17 million with the The biggest change, however , was a shift away from sixth-largest retail market in Latin America.44 weekly specials to "everyday low prices" in areas like baby Walmart has increased D&S's expansion budget from care and pet products, and, eventually, throughout the store. $150 million to $250 million, which would go toward open marketing dollars to compare prices against competitors. stores that cater to lower-income shoppers, according With the pressure of prolonged recession Japanese consumers to ing nearly 70 stores in fiscal year 2010, many of them small Vicente Trius, Walmart Latin America's president and CEO. COLLEGE RULED In-Depth Integrative Case 2.2 Walmart's Global Strategies SU 269 Projected FY11 The appeal of D&S goes well beyond its stores. About 1.7 million Chileans carry a Presto card issued by its financial here that large retailers generate sales with [stores] and earn- services unit, up from 1.2 million in 2004. "There is a saying with the Boston Consulting Group in Santiago. 45 ings with their credit cards," says Rodrigo Rivera, a partner Indeed, analysts estimate some South American retail chains generate upwards of 70 percent of their profits percent.) Walmart already offers financial services in from financial services. (At D&S that figure is just 17 Mexico and Brazil, though its attempts to launch a bank in the U.S. have failed. The retailer is keen to grow the selling life insurance for outside vendors. 46 Presto business by adding more low-risk services such as Walmart's Plans for 2010-2011 Exhibit 6 Walmart Actual and Projected Square Footage Growth by Segment (in millions) Actual Additional Square Footage for: FY09 FY10 Walmart U.S. Sam's Club U.S. Walmart International Total Company 14 23 2 19 44 11 1 23 1 25 37 38 Source: walmartstores.com. plans for store and club growth in the next year at its annual conference for the investment community and updated its projections for capital expenditures through the fiscal year 50 »51 square feet added in the prior year (excluding square foot- age added by acquisition). Walmart expects to increase global square footage by approximately 37 million square feet in fiscal year 2011.49 Square footage growth (exclud- In October 2009 Walmart Stores, Inc. , presented its globaling any acquisitions) is projected as shown in Exhibit 6. Walmart International plans aggressive investment, par- ending on January 31, 2011. According to this plan, total International portfolio includes a variety of formats, from capital spending for the fiscal year ending January 31, 2010, supercenters to small grocery stores. New stores are expected is projected to be in a range of $12.5 to $13.1 billion, up to add approximately 23 million square feet in fiscal year from approximately $11.5 billion in fiscal year 2009. Total 2010, and approximately 25 million more square feet in capital spending for the fiscal year ending January 31, 2011, fiscal year 2011. These projections are based on the existing is projected to be in a range of $13.0 to $15.0 billion. store base and do not include possible acquisitions. “We will continue our organic growth strategy, with strong shareholder value," said Tom Schoewe, executive vice “Our plan for growth is clearly intended to increase capital discipline and optimization of our portfolio of formats president and chief financial officer. "In the U.S., we're and brands worldwide,” said Doug McMillon, president and building new stores and accelerating the pace of our CEO of Walmart International in a company press release in October 2009. “We will allocate capital, by country and by remodels because they have been so successful at winning format, to improve returns from these investments. and retaining customers. We're stepping up growth in our Walmart, whose international business is its fastest International operations to take advantage of growing growing segment and already makes up roughly one-quarter economies and opportunities in emerging markets, such of its total business, is positioning itself for 20 years of as China and Brazil."-48 Capital expenditures for all pur- worldwide growth according to the CEO.Walmart is pro- poses are projected as shown in Exhibit 5 and exclude the jected to spend up to US$750 million to build, renovate, or impact of any future acquisitions. relocate roughly 73 stores in Canada in 2012." If Walmart If fiscal year 2009 were placed on a constant currency International (with over 9,000 stores under 60 different basis with fiscal year 2010, international capital expendi- names in 15 foreign countries) was viewed as a stand-alone tures in fiscal year 2009 would have been approximately company, it would be the third largest retailer in the world $3.8 billion. In the fiscal year ending January 31, 2010, as of 2010 with sales of US$109 billion and a growth rate the company expected to add approximately 38 million of 12.1 percent. Seventy-five percent of Walmart's stores square feet globally, compared to approximately 44 million outside of the U.S. operate under a different name as Walmart has shifted towards smaller formats and smaller acquisitive growth for global strategy. In comparison, Exhibit 5 Walmart Actual and Projected Capital Walmart's domestic unit did not experience any significant Expenditure 2009-2011 (US$ billions) Projected growth and virtually remained flat for 2010,54 Actual FY10 FY11 Segment China $70-8.0 In March 2010, the official website of China's Ministry of Walmart U.S. $0.7-1.0 Commerce reported that Walmart had set up a new wholly Sam's Club U.S. $0.8 $4.5-5.0 owned subsidiary in Hebei. This move is reportedly designed Walmart International $4.1 to help Walmart's smooth expansion and localization of $0.8 Corporate Walmart in China. An insider from Walmart revealed to the $11.5 Total local media that the company will continue to speed up its Source: walmartstores.com. FY09 $5.8 $6.6-6.8 $0.8-0.9 $4.2-4.4 $0.9-1.0 $0.8-1.0 $12.5-13.1 $13.0-15.0