Wal-Mart And China: A Story Of Missing Customer Trust
Retail giant Wal-Mart (NYSE:WMT), which has been a leader in the U.S. retail industry for decades, has never managed to attain a similar position in China. Even after almost two decades in the country, Wal-Mart’s Chinese business has grown to just over 400 stores. The retailer has had problems in understanding discerning Chinese consumers as their buying decisions are not always price driven. They are more inclined towards tailor-made products and a shopping environment that reflects local preferences. Since Wal-Mart is a foreign retailer, it has not been able to gain significant customer trust, despite its efforts to be local.
While Wal-Mart’s strategies to adapt to local tastes have not 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 potential customers. Although China does not contribute much to Wal-Mart’s revenues, the market is of vital importance to the company from long term perspective. The retailer is missing out on a substantial growth opportunity and it needs to come up with some formidable strategies to vitalize its Chinese business. Though the company is trying out some strategies to win customers’ confidence, it still does not have the results to show for it.
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Gaining Customers’ Confidence Has Been An Arduous Task
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 the difficulty of adapting to 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 shrewd consumer behavior and the 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. In fact, it has been stated by Wal-Mart China’s CEO in the past that local consumers’ biggest concern is trust and authenticity. [1]
Sun Art Has Done It Better
While Wal-Mart has struggled to serve Chinese buyers, its native 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. Its better understanding of Chinese customers is proving to be an advantage when it comes to gaining buyers’ trust. 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 its international image keeps it a few steps behind Sun-Art. Wal-Mart needs make more formidable efforts to align itself with the local taste and compensate for the fact that it is not a Chinese Company.
How Wal-Mart Plans To Become A Trustworthy Retailer
Chinese buyers want quality and that is what Wal-Mart is trying to give them. The retailer is focusing on private label brands and imports, while closing some of the typical big-box stores that have never resonated well with buyers. Wal-Mart’s private label brands are usually 10%-40% cheaper than national brands and have better margins. Moreover, the company has control over the quality of these products, and hence it can ensure that the best reaches its customers. We believe that such products can be a true opportunity for Wal-Mart in the market, if buyers realize that they are getting better quality products from the American retailer at cheaper prices.
In a recent earnings call, the management stated that Wal-Mart has made great progress on strengthening its Chinese business. The company is in the process of centralizing its supply chain with the addition fresh grocery distribution centers, which will reduce supply costs and enhance the quality of fresh products. The retailer recently launched a “Worry Free Fresh” program in the country, piloting in 49 stores, providing customers with a money back guarantee on fresh produce and meats. [2]
The key to Wal-Mart’s success in the country is gaining customer trust throughout the market. It has made some progress in the past, as it is currently the third largest retail chain in the country, behind Sun-Art and China Resources Enterprise Ltd. However, the retailer’s journey from third to second or first position will be extremely strenuous, given Sun-Art’s better customer understanding and the fact that China Resources Enterprise is state-backed. To ensure its future growth, Wal-Mart needs to provide substantial incentive to buyers to gain customer trust that has been missing historically.
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- Wal-Mart’s China syndrome is a symptom of international woes, Reuters, Feb 21 2014 [↩]
- Wal-Mart’s Q3 fiscal 2015 earnings transcript, Nov 13 2014 [↩]