Wal-Mart Strategy

Introduction

Wal-Mart is an American multinational company engaged in the retail business. It is considered the biggest global retailer. Wal-Mart offers three types of services. The first service is the selling of clothing, hardware and sporting goods among other similar products. The second service is offered in Sam’s clubs that sell wholesale products. The third service is provided in supercenters that represent a mixture of a discount store and supermarket. The company has expanded internationally. It managed to succeed in some countries and failed in others. The paper discusses whether the company can translate its products strategy wholly to another nation. It also explores the reasons why Wal-Mart was successful in Mexico and why it failed in South Korea and Germany investigating the differences between these countries. The paper also analyzes the steps Wal-Mart must take to succeed in China. Finally, the paper examines the extent to which companies can change the culture of the nation they work with.

Wal-Mart’s Merchandising Strategy

It is impossible for Wal-Mart to translate its products strategy wholly into another country and achieve success. One of the reasons is that Wal-Mart’s product strategies were meant for adaptation to the United States market. The strategies are in line with American culture. However, the same strategies may not work in every country. There are several factors that can affect the success of a foreign company in this or that country. One such factor is the law of the country. Another country might have some laws that do not exist in the United States and can affect Wal-Mart’s merchandising strategies. For example, in Germany, there is the Store Closing Law (Lyons). The regulation limits the number of hours and days during which a store is supposed to operate. On Sundays, supermarkets are not meant to operate unless they sell pharmaceuticals. Wal-Mart is used to working for long hours in the American market might find it hard to implement its merchandising strategies entirely. It will be forced to either adapt to the German market or close down its business in the country. Another example of a state with different regulations that might affect Wal-Mart’s merchandising strategy is China. The nation has regulations concerning the percentage of product sourcing from foreign markets. The regulations require that at least 15 percent of all products should be from local Chinese producers (Fong). Wal-Mart is used to source products from American firms such as Procter and Gamble. The company would have to change its strategy to fit the applicable regulations in China.

Another factor that might affect Wal-Mart’s intended global domination over foreign markets with its merchandising strategy is the culture of the foreign country. Culture is important as it affects the way consumers shop. In China and most Asian countries, consumers have the culture of buying fresh products such as crabs and fish from aquariums. Wal-Mart, on its part, usually stores refrigerated products (Fong). The company would have to change its merchandising strategy to fit that of the national culture of other countries if it wants to succeed in the market. Wal-Mart also needs to critically assess the buying and consumption habits of consumers in the intended markets. In the United States, buyers prefer discounted and low-priced products. Wal-Mart has consequently adopted a low pricing strategy as part of its merchandising model. However, the approach will not work in such countries as Germany, Britain and South Korea where buyers prefer high quality and priced goods (Lyons). Wal-Mart would have to tailor its strategy to fit the context of the intended market.

Another factor that will impede the success of Wal-Mart in implementing its merchandising strategy is the level of income of consumers in the intended market. In some countries, consumers might receive a lower income compared to American consumers. Wal-Mart’s low pricing strategy would, therefore, be effective in such cases. An example of such a country is Mexico. However, in countries like South Korea where the income levels of consumers are slightly higher than those of the American customers, Wal-Mart’s strategy would not work as such customers would prefer high priced goods (Lyons).

Reasons for the Success of Wal-Mart in Mexico

Wal-Mart entered the Mexican market in 1991 through a joint venture with Cifra, Mexico’s largest retailer. By 1997, it had gained the majority stakeholding in Cifra. Wal-Mart has over 500 stores in Mexico (Lyons). It is also the biggest foreign branch of the company contributing to a third of the parent company’s profits worldwide. The success of Wal-Mart in Mexico can be explained by several reasons. The first reason is the enforcement of the North American Free Trade Agreement (Lyons). The agreement revolutionized trading in the U.S., Canada, and Mexico by uniting the three nations into a single trading zone. Consequently, tariffs tumbled and there was an increase of Mexican demand for tariff-free U.S. based products. Wal-Mart was, therefore, able to surpass its competitors in terms of the competitive advantage.

Another reason for Wal-Mart’s success in Mexico was its strategy of entering the Mexican market. As there are significant income differences between the American and Mexican citizens, Wal-Mart had to devise a strategy that would make it operational in Mexico. It successfully formed a joint venture with Cifra (Lyons). The venture eased Wal-Mart’s entry into the Mexican market as Cifra provided the operational expertise that was needed for Wal-Mart’s startup. Later on, Wal-Mart consolidated its position in the Latin country by obtaining a majority stake in Cifra. Wal-Mart also succeeded in owing its low-price and discount strategies that were well accepted by Mexicans. Mexicans are known to have a significantly lower income than their American counterparts. Therefore, these strategies were highly welcomed by Mexican customers who were in favor of low-priced products.

Wal-Mart’s success is also attributed to the creation of in-store bank branches that proved its innovativeness in the Mexican market. Wal-Mart had received permission from the Mexican government to install in-store bank branches and the company finished the installations in 2007 (Lyons). The Mexican government saw Wal-Mart as being capable of stopping the oligopolistic tendencies of international banks operating in Mexico. Consequently, this would make financial products more affordable to the Mexican people, most of whom could not afford opening bank accounts before. The banking operations proved successful as it eased the traffic in the stores and boosted sales for the giant retailer. Wal-Mart was also successful in Mexico because of its comprehension of the Mexican culture of consumption. For example, upon Wal-Mart’s foray into Mexico, it stocked a lot of products that Mexicans did not use. Some of these products included ice skates and riding lawn mowers (Lyons). Mexicans did not buy these products because compared to their American counterparts, they had lower wages. However, Wal-Mart quickly learned about the culture and shopping habits of Mexicans and replaced the items that were not moving on the shelves with best-sellers like bakery products and maiden uniforms.

Mexico also provided Wal-Mart with sufficient cheap labor. The company changed from the U.S. system of using robots in its distribution networks to using Mexican laborers. These workers earned around U.S. $5 a day and were satisfied with such wages (Lyons). The efficiency at which those workers functioned in the distribution systems ensured that the products were always available in the Wal-Mart stores. Consequently, this positively affected the low-pricing strategy of Wal-Mart and it opened more stores to cater to the increasing demand for the products. Another factor for the success of Wal-Mart in Mexico is the economies of scale it enjoys in the given country. It has ensured that the company is always a step ahead of its competitors. The large economies of scale make it possible for the giant retailer to offer discounts and implement its low pricing strategy. Consequently, it has led to an increase in demand for Wal-Mart’s products as Mexicans are attracted by the low prices. The move has resulted in competition with other companies that do not enjoy economies of scale to close down their businesses.

Another reason for Wal-Mart’s success in Mexico is its strategy of price-wars. Wal-Mart triggers price-wars in the countries of its operation. Although the strategy has not been effective in such countries as Germany that has strict regulation of price wars, it has worked for Mexico (Lyons). The aggressive practice where Wal-Mart had reduced the prices of its commodities resulted in the giant retailer driving its competitors out of business in Mexico.

Reasons for the Failure of Wal-Mart in South Korea and Germany

Wal-Mart established its presence in the South Korean market in 1998. It is because in 1998 after the Asian financial crisis, the South Korean economy started reviving at a fast rate (Lyons). The growing economy, therefore, offered attractive venture opportunities for the giant retail company. Also because of the financial crisis, the Korean currency was traded at an artificially low level making it lucrative for the U.S. domestic economy if the company was to venture into the South Korean market. Wal-Mart managed to establish only sixteen stores in the country (Lyons). There are particular reasons why Wal-Mart failed to achieve success in South Korea. The first reason is the Korean culture. Wal-Mart has a domestic and global strategy of low pricing. The business model did not go well with South Korean consumers. The South Korean consumer culture implies that the customers just like their German counterparts prefer high-quality goods (Lyons). The low pricing products offered by Wal-Mart appeared to be of insufficient quality. South Koreans are known to be workaholics and work efficiently to facilitate their high maintenance lifestyle. They, therefore, do not appreciate low-priced goods.

Another reason for the failure of Wal-Mart in South Korea was the type of products the company sold. Just like in China and other Asian countries, South Koreans prefer fresh foods that they can see being prepared. South Korean stores such as Emart were able to provide the consumers with this experience. Wal-Mart in its turn sold refrigerated products that were rarely fresh (Lyons). Consequently, the company lost many customers to competitors like Emart. Wal-Mart also failed because it had a small number of stores that operated in South Korea. The company had a total of 16 stores. Wal-Mart’s business model requires the company to have several stores for the low-price strategy to amount to profits. However, in Seoul, a city with over 10 million people, Wal-Mart established a single store (Lyons). The small number of stores also meant that Wal-Mart could not enjoy economies of scale. It had no other choice but to leave the South Korean market. Emart’s parent company eventually bought the Wal-Mart stores.

In 1996, Wal-Mart expanded its operations to Germany as it was the biggest market in Europe (Lyons). Besides, Germany had a healthy per capita income that positively influenced consumer spending. The country also had an excellent transport infrastructure essential for the distribution services of Wal-Mart. The company had a plan of increasing the number of its German stores to over 500 branches. However, this never happened. In 2007, Wal-Mart left the German market. (Lyons).Wal-Mart failed to succeed in Germany for several reasons. The first reason for failure was its business model. The company focuses on the low-pricing policy. It means that economically Wal-Mart needed to counter all losses that could occur from this strategy by establishing several shops. However, Wal-Mart did not establish new stores (Lyons). Instead, it took over existing supermarket stores established with the use of different business models. These stores were mostly small and had a limited range of products. They were also located far apart from each other and could not counter the losses of the strategy.

Secondly, Germans appreciate high-priced and high-quality products. They, therefore, categorized Wal-Mart’s low pricing policy to imply that its goods were of insufficient quality. However, even with their appreciation of quality products, Germans were also used to several discount supermarkets like Aldi stores (Lyons). These presented stiff competition for Wal-Mart that followed the same low pricing and discount strategies. The lack of competitive advantage resulted in Wal-Mart closing down its business in Germany. Another reason for Wal-Mart’s failure was the employment of British managers to work in German Wal-Mart stores. When the giant retailer opened its stores in Germany, it carried out its operations from Britain. It fired the existing German CEOs from its supermarkets and replaced them with British managers (Lyons). The CEO resided in England. There was a cultural barrier as the CEO failed to understand the German culture regarding shopping. The sacked German managers knew essential information that could have helped the company. All these reasons resulted in the company undergoing losses. The German laws and regulations also contributed to the failure of Wal-Mart in Germany. Germans just like the Chinese stand for the unionization of businesses. Wal-Mart in its turn believes in being union-free and has refused to join the German unions (Lyons). It has negatively affected Wal-Mart’s image. Germany also has stringent Store Closing Laws that regulate the hours of business. The stores are not allowed to be open on Sundays. It interfered with the operations of Wal-Mart that was used to the long hours of operation like in the United States (Lyons).

Another legal issue that Wal-Mart faced in Germany was its introduction of price wars. Wal-Mart introduced a label called ‘smart brand’ and used it to sell most of its products for a lower price compared to its production costs. The competitors reacted by reducing their prices for their products. Consequently, the German industry experienced a profit setback. The nation’s federal cartel office had to intervene to stop the price wars (Lyons).

The difference between South Korea and Germany lies in their differentiation in levels of income of their citizens. German and South Korean citizens earn a higher income compared to their Mexican counterparts. Moreover, citizens of the two nations prefer high-quality goods, unlike Mexicans who prefer discounted and low-priced goods because of their lower income levels.

Wal-Mart in China

China attracted Wal-Mart because of being the second-largest economy in the world, and the country presented a broad range of business opportunities for the giant retailer. China also has a vast population, a booming middle class and rising disposable income that represented an attractive market for Wal-Mart to venture (Fong). However, in as much as the company had been successful in China, it encountered some challenges that prevented Wal-Mart from achieving significant success in the Asian country. For example, Chinese people have a culture of buying freshly produced goods instead of refrigerated products from supermarkets (Fong). It, therefore, implies that Wal-Mart’s refrigerated products were not in demand in China. Another challenge Wal-Mart faced in China was the Chinese government’s regulations that required any supermarket to source at least 15 percent of its products from local Chinese manufacturers (Fong). Wal-Mart sources its products from American companies like Procter and Gamble. It, therefore, presented a challenge to Wal-Mart. However, the company successfully adapted to these regulations. In as much as the company had seen significant progress in China, the progress was slow and uneven. The company needs to understand the culture of the Chinese people so as to achieve success in the Asian market. In as much as the Chinese have adapted to Wal-Mart’s low pricing strategy, the citizens still prefer high-quality goods. Wal-Mart should, therefore, put more effort into supplying the Chinese market with these products. Wal-Mart also needs to change its business model by distributing more freshly produced goods to cater to the Chinese market. The company is on the right track as it is currently establishing more distribution facilities in the country that will be used for storing and transferring freshly produced goods to the Wal-Mart stores (Naughton 50).

To cater to the increasing number of consumers who prefer to shop online, Wal-Mart should implement strategies that would serve this class of customers. Wal-Mart is on the right track in this respect as it is awaiting approval on the necessary regulations to acquire a majority stakeholding in Yihaodian, a Chinese e-commerce firm (Naughton 51). The move will enable Wal-Mart to be flexible online and cater to the growing number of Chinese online shoppers. To make the system more efficient, Wal-Mart plans to establish brick-and-mortar shops. They will make it easier for Chinese clients to pick their online orders at physical locations (Naughton 51).

Changing the Culture of a Business in a Foreign Country

Companies are rarely able to change the culture of the country in which they are operating. However, there are extents to which these companies can change the culture of a country. One such extent is when an enterprise, like Wal-Mart, educates people on the benefits of the new culture (Lyons). People will then be able to adapt to a new and more beneficial culture. For example, Wal-Mart helped change the Mexican culture of shopping and educated them on the American merchandising culture whereby shoppers started shopping at big stores that offered low-priced products. A company will also be able to change the culture of the country it is operating in if the intended culture to be implemented worked successfully in another country preferably a model nation. For example, Wal-Mart was able to convince Chinese consumers to adopt the American low-pricing strategy even though they preferred high priced products (Rigby). The strategy has created a new shopping culture in China where buyers prefer low-priced products.

Conclusion

Wal-Mart, the biggest retailer in the world, has encountered many challenges in regard to its global expansion strategy. It has led to the closing of the global retailer’s branches in such countries as Germany and South Korea. However, the giant retailer is not losing faith in its branches in China. The company has embarked on crucial strategies to ensure that it achieves success in China. These include establishing an online shopping system to cater for the increasing number of Chinese consumers who prefer buying products online. The success in China will add to the success of Wal-Mart internationally and join the rank of Wal-Mart’s success in countries like Mexico. Hopefully, by understanding the Chinese culture and that of other countries where it intends to establish branches, Wal-Mart will achieve ultimate success.

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