How Wal-Mart Plans to Conquer China

The king of retailers, Wal-Mart Stores , is struggling with poor sales growth. With more than $400 billion in annual sales, the company has to engage in massive discounts and sales promotions in order to keep a one to two percent annual growth rate in sales. This trade-off hurts the giant's profitability enormously.

China's huge emerging middle class could help Wal-Mart solve its sales growth problem. China's retail sales were already huge in 2010 and amounted to nearly $2.1 trillion. At the current pace, by 2015 China is poised to jump to the position of third largest consumer market globally behind only the U.S. and Japan.

Aware of these facts, Wal-Mart has been opening stores in China since 1996. However, China still represents a small proportion of Wal-Mart's total revenue at only $10 billion in 2012. A fierce landscape and the struggles of other U.S. retailers in capturing market share have made huge retail chains such as Costco  avoid China for the time being. Best Buy  has done very poorly there. How does Wal-Mart plan to capture market share in China? 

WMT Revenue (Quarterly) Chart

Source: YCharts

Wal-Mart's strategy to conquer the fierce Chinese retail space
Wal-Mart is planning an aggressive expansion in China. Mike Duke, Wal-Mart's CEO and President, recently announced the company will be opening 110 new super-centers and Sam's Clubs over the next three years. At the same time, the company -- which has already closed 11 stores in the country -- plans to close 15 to 30 more stores over the next 18 months.

What's going on? The company is planning a massive geographical relocalization of its stores. Most of the new locations will be focused on smaller cities, between two to five hour drives from Beijing, Shanghai, and other main cities. Smaller cities are expected to experience faster growth within the next decade. 

At the same time, Wal-Mart plans to stock all stores with upgraded, fresh merchandise. New distribution centers will be opened to ensure faster distribution and more efficient supply chain management. It seems the retail giant has finally understood that low prices aren't enough to get market share in China. As Forbes contributor Walter Loeb mentions, Chinese consumers are increasingly discerning and willing to spend time checking product quality before buying to ensure freshness.

Understanding consumer preferences is a must
A better understanding of China's evolving consumer preferences remains crucial for winning or losing this race. For example, according to CNBC contributor Shaun Rein, Best Buy -- which in 2011 closed all nine of its branded stores in China -- failed simply because the company did not differentiate its product lines from local competitors. As a result, its products were perceived as being too expensive. The company also focused too much on building huge flagship stores in China's biggest cities rather than building smaller retail outlets located in medium-sized cities.

In order to avoid Best Buy's mistakes, chains such as Macy's and Costco plan to enter China by opening online storefronts before starting brick-and-mortar operations. This patient approach allows retailing giants to get exposure to the fastest-growing segment of China's entire retail industry, the e-commerce market, and at the same time get a better understanding of consumer preferences.

Final Foolish takeaway
After opening its first store in 1996, Wal-Mart has learned a lot about how to be competitive in the world's second largest economy. The new approach the company is taking sounds more realistic and will hopefully contribute toward improving the giant's top-line performance. However, although Wal-Mart's integrated strategy -- from adding more e-commerce exposure to improving its distribution network -- does sound promising, it's important to keep in mind that the company still has plenty of things to learn about China's rapid consumer market changes. 

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Adrian Campos has no position in any stocks mentioned. The Motley Fool recommends Costco Wholesale. The Motley Fool owns shares of Costco Wholesale. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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