Wal-Mart’s Operations and Success Strategies in International Markets: A Case Study Dr. Arun Mittal* Abstract Wal-Mart is primarily a discount retailer because they sell their products at the lowest possible prices. By selling at the "lowest price" Walton outlines that the essence of successful discount retailing to cut the price on an item as much as possible, lowering the markup, and earn profit on the increased volume of sales. Wal-Mart is the largest private employer and the largest grocery retailer in the United States. It also owns and operates the Sam's Club retail warehouses in North America. Wal-Mart's future will depend on how well the company manages its expansion plans. For the coming years, the company will need to justify its expansion plans with consistent growth in sales, in order to offset the increases in debt interest and operating expenses. Wal-Mart focuses more on helping customers save money rather than only to increased sales, profit and return on investment. Present paper discusses the international operations and success strategies of Wal-Mart and its entry in India with Bharti. The study is based upon secondary data accessed from Wal-Marts annual report and other sources. The information has shown significant increase in Wal-Marts performance in International segment. Keywords: International Segment, Strategies, Retailing, Joint Venture, International Operations.
Introduction: Wal-Mart is an US based public corporation that runs a chain of large, discount department stores. Wal-Mart serves customers and members more than 200 million times per week at more than 8,159 retail units under 55 different banners in 15 countries. With fiscal year 2009 sales of $401 billion, Wal-Mart employs more than more than 2.1 million associates worldwide. It is the world's largest public corporation by revenue, according to the 2008 Fortune Global 500. The company was founded by Sam Walton in 1962, incorporated in 1969, and listed on the New *
Birla Institute of Technology, (Deemed University, Mesra, Ranchi), A-7, Sector-1, Noida, UP201301, E-Mail:
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York Stock Exchange in 1972. Wal-Mart is primarily a discount retailer because they sell their products at the lowest possible prices. By selling at the "lowest price" Walton outlines that the essence of successful discount retailing to cut the price on an item as much as possible, lowering the markup, and earn profit on the increased volume of sales. Wal-Mart is the largest private employer and the largest grocery retailer in the United States. It also owns and operates the Sam's Club retail warehouses in North America. A leader in sustainability, corporate philanthropy and employment opportunity, Wal-Mart ranked first among retailers in Fortune Magazine’s 2009 Most Admired Companies survey. Wal-Mart's operations are organized into three divisions as Wal-Mart Stores U.S., Sam's Club, and Wal-Mart International. The company does business in nine different retail formats: supercenters, food and drugs, general merchandise stores, bodegas (small markets), cash and carry stores, membership warehouse clubs, apparel stores, soft discount stores and restaurants.
Wal-Mart’s International Operations: Wal-Mart operates in Mexico as Walmex, in the United Kingdom as Asda, in Japan as Seiyu, and in India as Best Price. It has wholly-owned operations in Argentina, Brazil, Canada, and Puerto Rico. Wal-Mart's investments outside North America have had mixed results: its operations in the United Kingdom, South America and China are highly successful, while it was forced to pull out of Germany and South Korea when ventures there were unsuccessful. WalMart has a Net Sales of $98.6 billion Operating Income $ 4.9 billion, Number of Units 3,615 (As on 31st January, 2009) Wal-Mart has distinctive retail strategies. In its international operations Wal-Mart continues to strengthen local agricultural sourcing programs by buying more from farmers located close to our stores. By 2011, our China stores expect to buy from more than one million farmers in that country. Wal-Mart created approximately 63,000 jobs around the world in 2008, including more than 33,000 in the United States. We plan to create tens of thousands more jobs this year. Wal-Mart and its Foundations gave $423 million in cash and in-kind gifts in the communities we served last year, an increase of approximately $86 million from the prior year.
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Various Types of Wal-Mart International Stores/Retail Formats as on 31st Jan. 2009 International Unit counts and operating formats as of January 31, 2009 Country Super Markets Discount Stores Supercentres Hypermarkets Other Total Argentina 0 0 22 0 6 28 Brazil 155 0 34 71 85 345 Canada 0 256 56 0 6 318 Chile 46 76 0 75 0 197 China 0 0 132 103 8 243 Costa Rice 25 122 0 6 11 164 El Salvador 30 45 0 2 0 77 Guatemala 29 109 0 6 16 160 Honduras 7 36 0 1 6 50 Japan 264 0 0 106 1 371 Mexico 163 67 154 0 813 1197 Nicaragua 7 44 0 0 0 51 Puerto Rico 31 7 8 0 10 56 United Kingdom 307 0 30 0 21 358 Grand Total 1064 762 436 370 983 3615
Source: Wal-Mart Annual Report Segment Wise Sales of Wal-Mart’s Sales
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Figure: Wal-Mart Net Sales in Fiscal 2009 (Showing a Share of 24.6% of International Segment) Source: Wal-Mart’s Annual Report At January 31, 2009, Wal-Mart’s International segment is carrying out retail operations in 14 countries and Puerto Rico. This segment generated 24.6% of fiscal 2009 net sales. The International segment includes numerous different formats of retail stores and restaurants, including discount stores, supercenters and Sam’s Clubs that operate outside the United State Wal-Mart Stores Internationally (Up to October, 2009) Sr. No. 1 2 3 4 5 6 7 8 9 10 11 12 13 14
Market Mexico Puerto Rico Canada Brazil Argentina China* United Kingdom Japan Costa Rica El Salvador Guatemala Honduras Nicaragua Chile
Retail Units 1,352 56 313 385 35 267 371 371 170 77 164 53 55 243 4
Date of Entry Nov-91 Aug-92 Nov-94 May-95 Aug-95 Aug-96 Jul-99 Mar-02 Sep-05 Sep-05 Sep-05 Sep-05 Sep-05 Jan-09
15 Total
India
1 3,913
May-09
Source: www.Wal-Martstores.com *Includes a 35% interest in Trust-Mart, which operates 104 stores in China.
Wal-Mart’s Financial in International Operations: Total Sales: Wal-Mart’s total net sales increased by 7.2% and 8.6% in fiscal 2009 and fiscal 2008 when compared to the previous fiscal year. As per the opinion of Wal-Mart officials those increases resulted from its global expansion programs, comparable store sales increases and acquisitions.
Amounts in Millions Net Sales $255,745 98,645 46,854 $401,244
Walmart U.S. International Sams Club Total Net Sales
2009 Percent of Total 63.70% 24.60% 11.70% 100%
Percent Increase 6.80% 9.10% 5.60% 7.20%
Net Sales $239,529 90,421 44,357 $374,307
2008 Percent of Total 64.00% 24.10% 11.90% 100%
Percent Increase 5.80% 17.60% 6.70% 8.60%
2007 Percent Net Sales of Total $226,294 65.60% 76,833 22.30% 41,582 12.10% $344,759 100.00%
Figure: Wal-Mart’s Comparative Sales figures showing growth of all segments from 2007 to 2009. Wal-Mart’s International segment has shown as better increase in sales as compare to the other segments with 9.1% and 17.6% in fiscal 2009 and 2008 when compared to the previous fiscal year.
Operating Income:
Amounts in Millions
Walmart U.S. International
2009 Operating Percent of Income Total $18,763 82.30% 4,940 21.70%
Percent Increase 7.10% 4.60%
2008 Operating Percent of Income Total $17,516 79.80% 4,725 21.50% 5
2007 Percent Operating Percent of Increase Income Total 5.40% $16,620 81.10% 10.80% 4,265 20.80%
Sams Club Others Total Operating Income
1,610 -2,515
7.10% -11.10%
0.50% 31.90%
1,618 -1,907
7.40% -8.70%
9.30% 2.10%
1,480 -1,868
7.20% -9.10%
$22,798
100%
3.90%
$21,952
100%
7.10%
$20,497
100.00%
Wal-Mart’s growing operating income is a meaningful measure because it indicates how effectively it is managing its costs and leverage expenses. For fiscal 2009, its operating income increased by 3.9% when compared to fiscal 2008, while net sales increased by 7.2% over the same period. In its international segment operating income has increased 4.6% and 10.8% in the fiscal year 2009 and 2008 when compared to the previous fiscal year.
Comparative International segments financials at a Glance:
International Segment
Fiscal Year 2009 2008 2007
Segment Net Sales Increase from Prior Fiscal Year 9.1% 17.6% 29.8%
Segment Operating Income (in Millions) $4,940 4,725 4,265
Segment Operating Income Increase from Prior fiscal Year 4.6% 10.8% 24.8%
Operating Income as a Percentage of Segment Net Sales 5.0% 5.2% 5.5%
Wal-Mart’s International segment was comprised of our wholly-owned subsidiaries operating in Argentina, Brazil, Canada Japan, Puerto Rico and the United Kingdom, its majority-owned subsidiaries operating in five countries in Central America, and in Chile and Mexico, its joint ventures in India and China and other controlled subsidiaries in China. The fiscal 2009 increase in the International segment’s net sales primarily resulted from net sales growth from existing units and international expansion program, off set by the unfavorable impact of changes in foreign currency exchange rates of $2.3 billion. Wal-Mart’s international expansion program added 517 units and 29.2 million or 13.1% of additional unit square footage, net of relocations and closings. The acquisition of Distribución y Servicio contributed 197 stores and 9.6 million square feet in fiscal 2009. The fiscal 2008 increase in the International segment’s net sale 6
primarily resulted from net sales growth from existing units, international expansion program and the favorable impact of changes in foreign currency exchange rates of $4.5 billion. WalMart’s international expansion program added 364 units and 34.1 million or 17.9% of additional unit square footage, net of relocations and closings. The consolidation of Bounteous Company Limited (“BCL”) contributed 101 stores under the Trust-Mart banner and 17.7 million square feet in fiscal 2008.
Distinctive Retail Strategies:
As Wal-Mart International, Wal-Mart operates in 15 markets, with a universal focus of price leadership. Wal-Mart has built strategic framework that has driven consistent growth. WalMart’s victory depends upon applying its unique strategy on each format “every day low cost – every day low price (EDLC-EDLP) strategy. Wal-Mart manages store formats and price points to meet customers’ needs. This has enabled it in many of countries to grow sales faster than the overall growth of their respective markets. Wal-Mart focuses more on helping customers save money rather than only to increased sales, profit and return on investment. Wal-Mart’s one more important strategy is building solid working relationships with both suppliers and employees, being aware and taking notice of the most intricate details in store layouts and merchandising techniques, capitalizing on every cost saving opportunity, and creating a high performance spirit. This strategic formula is used to provide customers access to quality goods, to make these goods available when and where customers want them, to develop a cost structure that enables competitive pricing, and to build and maintain a reputation for absolute trustworthiness. WalMart has emerged as the industry leader because it has been better at containing its costs, which has allowed it to pass on the savings to its customers. Wal-Mart has become a capability competitor. It continues to improve upon its key business processes, managing them centrally and investing in them heavily for the long-term payback. Wal-Mart has been regarded as an industry leader in "testing, adapting, and applying a wide range of cutting-edge merchandising approaches. Wal-Mart has an ability to quickly learn from his competitors' successes and failures. Wal-Mart has invested heavily in its unique cross-docking inventory system. Cross docking has enabled Wal-Mart to achieve economies of scale, which reduces its costs of sales. With this system, goods are continuously delivered to stores within 48 hours and often without 7
having to inventory them. Lower prices also eliminate the expense of frequent sales promotions and sales are more predictable. Cross docking gives the individual managers more control at the store level.
Wal-Mart’s Social and Charitable Activities:
Wal-Mart and the Wal-Mart Foundation are proud to support the charitable causes that are important to customers and associates in their own neighborhoods. Through its philanthropic programs and partnerships, the Wal-Mart Foundation funds initiatives focused on creating opportunities in education, workforce development, economic opportunity, environmental sustainability, and health and wellness. From February 2008 to January 31, 2009, Wal-Mart – and its domestic and international foundations – gave more than $423 million in cash and in-kind gifts globally.
Wal-Mart in India Wal-Mart opened its first store in India’s northwest Punjab region; Wal-Mart plans to build 10 to 15 more stores during the next three years. The discount retailer operates 3,913stores in 15 countries. Local vendors called Wallahs control 97% of India’s retail trade. To protect their business, a major element of Indian culture, Wal-Mart has agreed not to compete directly. Instead, it will supply the Wallahs and other business owners, plus their families. By respecting the local customs and finding a way to work with rather than work against, Wal-Mart may be able to avoid the mistakes other companies have made after expanding into the world’s largest democracy. Wal-Mart seems eager to embrace the local culture. Local brands comprise 90% of the items stocked. Indian pop music is blared through the store’s speakers. Another subset of this strategy is the competitiveness of every unit. Each store is encouraged to ferociously compete against all other stores in its customer base until the Wal-Mart store gains dominance over its local competitors. Wal-Mart is currently ranked as the world's number one retailer and the number one company in the world in terms of sales (over $200 billion) on the Fortune 500 list. The key strategy is to dominate a market. Using its size and volume buying power, the company effectively implements its strategy.
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Wal-Mart's future will depend on how well the company manages its expansion plans. For the coming years, the company will need to justify its expansion plans with consistent growth in sales, in order to offset the increases in debt interest and operating expenses. The Indian retail market, which is the fifth largest retail destination globally, has been ranked as the most attractive emerging market for investment in the retail sector by AT Kearney's eighth annual Global Retail Development Index (GRDI), in 2009. The share of retail trade in the country's gross domestic product (GDP) was between 8–10 per cent in 2007. It is currently around 12 per cent, and is likely to reach 22 per cent by 2010.
Reason for Entry 1. The reason for Wal-Mart’s interest in India is obvious. The country offers a middle class estimated to be as large as the entire population of the United States and several times the size of China’s middle class. 2. Wal-Mart has not made any official comment on the deal as yet, but analysts find it easy to understand why they want to gain access in India. They believe India’s booming retail sector is the prime reason for their interest. Right now only 3% of Indian shopping is in big stores or chains, but India’s retail market is expected to be worth $600 billion in another 10 years. 3. The idea is to give Indians lowest price everyday. Why was Joint Venture chosen as the mode of entry? 1. The primary objective was because of the policy restrictions on foreign direct investment (FDI) in the Indian retail sector. 2. However, it's a great fit for Wal-Mart as Bharti knows the rules of the game and will save Wal-Mart a lot of time and energy to overcome the system. 3. Provides Bharti and Wal-Mart with the opportunity to gain new capacity and expertise. 4. Provided Wal-Mart with the assistance in entering related businesses or new geographic markets or gain new technological knowledge. 5. Wal-Mart gained access to greater resources, including specialized staff and technology 6. Wal-Mart lowered their risk quotient by sharing risks with its venture partner – Bharti. 9
7. Provides Wal-Mart and Bharti with flexibility to limit the life span of the venture, thus limiting the commitment and business’ exposure.
The Joint Venture Agreement The written Joint Venture agreement between Wal-Mart and Bharti contains among others the following information1. The parties involved 2. The objectives of the joint venture 3. Financial contributions each company will make whether any of transfer assets or employees takes place to the joint venture 4. Intellectual property developed by the participants in the joint venture 5. Day to day management of finances, responsibilities and processes to be followed. 6. Dispute resolution, how any disagreements between the parties will be resolved 7. How if necessary the joint venture can be terminated. 8. The use of confidentiality or non-disclosure agreements is also recommended to protect the parties when disclosing sensitive commercial secrets or confidential information.
Role of Bharti Ltd and Wal-Mart as per Agreement
Under the plan with Wal-Mart, Bharti would have 100 per cent ownership of the front-end stores and will form a 50/50 joint venture with Wal-Mart to provide wholesaling and logistics. In other words, Wal-Mart would take care of the supply chain and other back – end operations. The retail shops will be owned by Bharti under the Wal- Mart franchise. Wal-Mart had reportedly brought in two veteran executives, Andy Guttery and Lance Rettig, to implement its operations in India under the joint venture. It had also roped in Raj Jain, Emerging markets president & CEO, WalMart, to head the cash-and-carry business in India.
References: 10
1. Stalk, G., Evans, P., Shulman, L. (1992, March-April). Competing on capabilities: the new rules of corporate strategy. Harvard Business Review, pp. 55-70. 2. Thompson, A. A., Jr. & Strickland, A.J. III. (1995). Strategic management concepts and cases (8th ed.). Chicago: Irwin. 3. http://en.wikipedia.org/wiki/Wal-Mart retrieved on 19/11/2009 4. http://www.echeat.com/essay.php?t=25044 retrieved on 19/11/2009 5. http://www.icmrindia.org/courseware/International%20Business%20&%20International %20Marketing/IBIM-DS6.htm 6. http://www.marketingteacher.com/Lessons/lesson_international_modes_of_entry.htm 7. http://www.essays.se/essay/5b92ef4bb0/ 8. http://www.icmrindia.org/business%20Updates/micro%20casestudies/Business%20Strate gy/MCBS0008.htm 9. http://www.rpemery.com/articles/advantages_and_disadvantages_jv.htm# 10. http://www.indianexpress.com/news/walmart-makes-its-india-entry/468561/ 11. http://indiafdiwatch.org/fileadmin/India_site/Implications-backdoor-entry_of_WalMart.pdf 12. http://walmart.3cdn.net/dd4fd53b314948b9c1_98m6beokd.pdf 13. Wal-Mart Annual Report, 2009
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