While Wal-Mart‘s (NYSE:WMT) domestic business has struggled over the last one year, its international business hasn’t done well either. Driven by weakness in Mexico, Brazil and China, Wal-Mart’s international revenues grew by a mere 1% in 2013 and its revenue per square feet declined by 4.2%. Bleak results from Mexico are a big concern for the retailer, since the country is its largest international market with close to 2,300 stores. Although China doesn’t contribute much to Wal-Mart’s revenues, the market is of vital importance to the company from long term perspective. Therefore, we believe that addressing the challenges being faced in these two markets should be among Wal-Mart’s top priorities.
In Mexico, the recent slowdown in the economy has been the main reason responsible for Wal-Mart’s dismal sales. In China, however, the company’s problems are much deeper. Even after 18 years of operation, Wal-Mart’s Chinese business has grown to just 405 stores. The retailer has had problems in understanding discerning Chinese consumers as their buying decisions aren’t always price driven. They are more inclined towards tailor-made products and a shopping environment that reflects the local touch. While Wal-Mart’s strategies to adapt to local tastes haven’t been fruitful, local retail chain Sun-Art retail group has been extremely successful. Its imitation of Wal-Mart’s business model and better understanding of consumer behavior have helped it win Wal-Mart’s customers.
Our price estimate for Wal-Mart stands at $78, which is slightly ahead of the market price.
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Economic Slowdown In Mexico
Although Mexico’s retail sales have grown steadily for the past few years, they remained weak in 2013 due to low consumer confidence and an overall slowdown in the economy. Mexico’s economy expanded by just 1.1% in 2013, on account of lower government spending, weak demand for exports and sluggish consumption.  This marked the region’s slowest economic growth rate in the last four years. Also, consumer confidence index declined to 89.7 in December 2013, reaching its lowest level in the last two-and-a-half years.  The index fell further to 84.5 in January due to increased taxes that prevented consumers from spending freely. 
Owing to Mexico’s weak economic environment and Wal-Mart’s continued expansion, the retailer’s comparable store sales in the region have declined by 2.2% on average for seven consecutive quarters. In almost all of these quarterly results, Wal-Mart cited low store traffic as the primary reason for its comparable sales decline. Weak consumer spending in Mexico has also forced Comercial Mexicana (fourth-largest supermarket chain in Mexico) to consider selling its business. While the region holds substantial growth potential in the long run, its sluggish economic growth will continue to weigh on Wal-Mart in the near future. 
China’s Sun-Art Retail, Peculiar Consumer Behavior And Slowing Economic Growth
China, the second largest economy in the world, is a lucrative market for western retailers, due to its huge population, booming middle class and rising disposable incomes. Entering this market in 1996, Wal-Mart was one of the first retailers to take advantage of this growth opportunity. However, the inability to resonate with the local market has made it difficult for foreign retailers to gain significant presence in China, and Wal-Mart is no exception.
Wal-Mart China contributes only around 2% to the company’s overall revenues, which is surprising considering that China is one of the fastest growing retail markets in the world. The retailer’s efforts to grow in China have been undermined by the shrewd consumer behavior and dominance of Sun-Art retail group. More than prices, Chinese buyers are concerned about the authenticity and quality of products. While Wal-Mart’s EDLP (every day low prices) strategy has been very successful around the globe, it has been regarded as cheap and unsafe in China.  On the flip side, Wal-Mart’s local counterpart Sun-Art has performed significantly better with its more localized approach.
Despite a smaller presence than Wal-Mart, Sun-Art retail group holds a higher market share.  We believe that Sun-Art’s better understanding of Chinese customers is proving to be a competitive advantage. Chinese shoppers are accustomed to buying their groceries at local outdoor markets. Sun-Art provides this experience by giving its stores a local “Chinese street look” with fresh seafood like crabs displayed on table tops and in-store noodle stands.  The combination of a street market and super market has been very attractive to Chinese shoppers. Comparatively, Wal-Mart’s typical big box format has a lower appeal and its efforts to be “local” have not been as successful as Sun-Art. The retailer sources around 95% of merchandise locally and hires Chinese nationals to run its stores, which helps, but the retailer will have to adopt localized strategies similar to Sun-Art in order to attract more customers. Wal-Mart needs to get past its big box look and customize its stores for the local Chinese market while maintaining its everyday low price strategy.
While Wal-Mart has made meaningful progress in China, it has been slow and uneven. The recent slowdown in Chinese economic growth has weighed heavily on the retailer’s sales (+0.7% comparable sales in 2013). Although the Chinese economy has grown rapidly over the last 10 years, its growth has slowed down significantly since 2012. In the last two years, the GDP growth rate has come down to 7.7% (average) from the historical average of 9.3% (1989-2011). Notes:
- Mexico’s same-store sales seen slightly up in 2014-trade body, Reuters, Jan 21 2014 [↩] [↩] [↩]
- Mexico Consumer Confidence Falls to Lowest Since 2010 on Taxes, Bloomberg, Feb 5 2014 [↩]
- Wal-Mart’s China syndrome a symptom of international woes, Reuters, Feb 21 2014 [↩]
- See Bass With Barbie Dolls in China, Bloomberg, December 10, 2012 [↩]
- The China’s Copycat Walmart Is Beating The Real Thing, Business Insider, Dec 10 2012 [↩]
- China GDP Annual Growth Rate, Trading Economics [↩]