A Great Wall worth hurdling - Wal-Mart operations in China

Discount Store News, Oct, 1999

The world's largest nation is quickly getting acquainted with the world's largest retailer. Wal-Mart began operations in China in 1996, opening a Wal-Mart Supercenter and Sam's Club in Shenzhen, a mainland Chinese city of 3.8 million residents located on the opposite shore from Hong Kong.

From the first two stores, Wal-Mart has since expanded to a total of five locations.

China's massive population of more than 1.2 billion people offers a market that could easily support hundreds of Wal-Marts within a relatively short period of time.

Compared to the U.S. population of approximately 270 million people, Wal-Mart could be as prevalent in China as it is in the United States by early in the next century.

Wal-Mart announced last year that another three units in China are scheduled to open by the end of 1999.

Wal-Mart's Chinese operations are expected to be profitable in another year or two when a critical mass of stores is built.

Wal-Mart's development of the Chinese market, despite its huge promise, is likely to continue at a slow and deliberate pace.

Recent economic and political events in Asia, as well as other external events such as the recent bombing of the Chinese Embassy in Serbia, are likely to influence the retailer's expansion plans for China.

About a half dozen other affluent areas of China, Beijing, Shanghai and other coastal special economic zones, are where the retailer could presumably operate successfully.

Shenzhen is one of eight special economic zones set up by the Chinese government to draw foreign investment and trade.

The other seven areas, which Wal-Mart has said it has considered as new expansion markets, are: Shanghai, China's largest city with 13.4 million people and the site of Asia's largest department store, owned by Yaohan; Beijing, Tianjin; Guangzhou; Dalian; Xiamen; and Shatou.

These regions together have a combined population of at least 50 million people, more than enough market density to keep Wal-Mart occupied for years to come.

As part of its expansion in China, Wal-Mart is likely to move into less obvious markets, with marked variations to its store format.

Plans call for the development of more multi-level stores or smaller prototypes based on what works in a particular location.

The Shenzhen supercenter itself was a milestone. It was Wal-Mart's first multi-level supercenter in the world, situated within a four-tower, 30-story residential complex.

The original Shenzhen store measured 140,000 sq. ft. of selling space and carried approximately 25,000 skus, about half of what the average Wal-Mart Supercenter in the U.S. stocks.

The Shenzhen Sam's Club is located across town from the supercenter in a newly constructed 123,000-sq.-ft. facility.

The Wal-Mart concept adapted to China seems to work, with hundreds of walk-in shoppers surging through the supercenter's aisles day and night, snapping up everything from cosmetics, consumer electronics and small appliances to roast chicken and frozen dim sum.

Examples of tailoring the Wal-Mart concept to fit local tastes are sales of live snakes and barbecued pigeons.

Wal-Mart has even adapted its shopping bags to fit the needs of the Chinese markets where many consumers shop for food daily and arrive at the store riding on a motorcycle or bicycle.

Wal-Mart is far from the only international retailer seeking its share of the rapidly expanding Chinese retail marketplace. Wal-Mart faces competition from a number of other international retailers, as well as the Chinese government.

Global retailer Carrefour operated eight hypermarkts in China as of 1998 and more stores are reportedly in the works.

Chinese retail competitors include Shanghai No. 1 Department Store Ltd., Shanghai, Yuyuan Commercial City Ltd. and the Beijing Department Store Ltd.

Just how lucrative is the retail market in China?

Chinese retail sales, which have been rising rapidly, were approximately $355.7 billion in 1998, according to the securities firm Lehman Brothers.

By 2008, retail sales in China are expected to expand to $579.5 billion, according to Lehman Brothers.

Lehman Brothers estimates that Wal-Mart's sales in China could range from a low of $4.7 billion, representing less than 1% of the market in 2008, to as high as $35.7 billion, or about 5% of the market in 2008.

China is likely to serve as a test case for Wal-Mart's expansion in Asia. Wal-Mart is already expanding in the region with the 1998 acquisition of Makro Korea in South Korea. And retail analysts look for Wal-Mart to eventually move into other Pacific Rim markets such as Japan, Australia and the Philippines.

CHINA

YEAR WAL-MART ENTERED: 1996

STORE COUNT:

DISTANCE FROM SHENZHEN, CHINA TO BENTONVILLE:

4 supercenters

7,449 MILES/12,074 KM.