Walmart, founded by Sam Walton in 1962, is the largest retail company in the world. The low cost strategy and hence the “Every Day Low Prices” (EDLP) strategy allowed Walmart to outperform competitors in the US. Besides having stores in the US, Walmart has also expanded its market worldwide. Walmart’s entry into China was not surprising, given its population and growth potential. Nevertheless, Walmart China had been struggling with its sales volume. It was only ranked twentieth in sales out of all the Chinese chain stores in 2005. Walmart’s strategic move in the US does not seem to be applicable in the Chinese market. Different factors in the Chinese market blunted the cost advantage of Walmart. This paper will analyze and discuss the strategic issues of Walmart in China with SWOT analysis and Porters’ five forces.
* Offers a large variety of products, with recognized labels * Low cost strategy allows Walmart to achieve “Every Day Low Prices” * International linkages around the world
* Labor issues arose due to union pressure
* Chinese consumers are more concern about the value that a product can bring about, they demand for higher quality and service * Expansion of the middle sector implies increasing consumer spending * Entry into the World Trade Organization (WTO) in 2001 lifted restrictions and opened up the market Threats
* Competition from both foreign retailers like Carrefour and local retailers * Income disparity (Gini coefficient over 0.4 – the alarm level) and difference in rural and urban areas result in difficulty in pursuing a uniformed strategic move across nation * Red tape and local protection policies add to cost, which restrict the Walmart’s further expansion in China * Under-developed infrastructure like poor transportation network, difference in consuming habit between Chinese and Americans, and prevailing shoplifting trends raise the operating cost * Chinese consumers prefers shopping around and look for the best deals, they seldom buy products in bulk, so it does not match the idea behind normal US strategy
Logistics and supply chain management is by far the most pressing issue for Walmart China. Walmart in the US is known for its cost leadership strategy, achieved by investing heavily in IT and inventory management. However, given the under-developed infrastructure and the absence of extensive IT networks, the efficiency of supply chain and the speed of transportation was greatly reduced. Having only two distribution centers in China does not help to reduce cost significantly (Farhoomand, 2006). Therefore, it is hard for Walmart China to achieve economies of scale and hence raises the barriers to entry to deter potential entrants (Porters, 2008).
Moreover, the demand of freshness of food from the Chinese consumers further increases the complexity of inventory management. For instance, they have to keep the product like fish alive, but that does not quite match with what other Walmarts elsewhere have been doing – selling meat and seafood in plastic containers. This further interrupted the supply chain management in China. Furthermore, it is difficult for the Chinese suppliers to adapt to the modern supply chain management used in other Walmarts worldwide (Gereffi & Ong, 2007).
Walmart China is sourcing from 15,000 suppliers and more than 95% are local suppliers (Gereffi & Ong, 2007). The bargaining power of suppliers should be greatly reduced because Walmart China has so many choices. In fact, many suppliers are willing to reduce prices since they wish to stay in business with Walmart – the shoppers’ paradise. As a result, they have to cut costs in order to offer a low price to Walmart. However, the implication is that the suppliers are going to be less concern about labor working conditions, as that adds to costs. Therefore, while having low...