Wal-Mart expansion turns Northeast and Far East; Bentonville behemoth on road to Hong Kong, China - Bentonville, Arkansas

Discount Store News, Sept 5, 1994 by Richard Halverson

BENTONVILLE, Ark. -- Wal-Mart is exporting its retail savvy east to Asia with stores opening in Hong Kong and China.

The move marks Wal-Mart's first retailing venture outside the Western Hemisphere and amounts to a giant leap toward its becoming a global retailer.

By fall, Wal-Mart and its partner, C. P. Pokphand Co. Ltd., a Thailand-based industrial, agricultural and trading company, expect to be operating three or four mini-warehouse clubs in Hong Kong called Value Clubs.

The Hong Kong clubs would range in size from 10,000 sq. ft. to 20,000 sq. ft. Land scarcity in Hong Kong prohibits an American-size club of up to 135,000 sq. ft. on several acres of land.

Warehouse clubs and discount stores in China would follow the Hong Kong openings on an as yet undisclosed timetable.

In China, the membership clubs and discount stores would be similar in concept to those in North America, said C. P. Pokphand Co. Ltd.

What name the partners will use in China has not yet been determined, a spokeswoman for Pokphand said. Other questions, such as the merchandising approach the downsized Hong Kong clubs will follow and the cost of club membership, also are premature, she said.

Wal-Mart chairman Rob Walton will serve as chairman of the joint venture. Pokphand already is a major investor in China, operating 55 joint ventures, including a motorcycle production company. The firm is part of the Chroen Pokphand Group, which is the largest agro-industrial concern in Asia. Besides manufacturing, its interests include: animal feed, meat and prawn processing and trading in a wide range of agricultural commodities and equipment.

Its experience in moving goods should prove to be invaluable in the new venture, especially in China, which lacks a modern retail distribution system.

U.S. clubs bypass the need for distribution systems by requiring vendors to drop ship their goods, but the lack of storage space in the tiny Hong Kong units makes it questionable as to whether or not international drop shipment would be feasible.

The Pokphand subsidiary that is becoming Wal-Mart's partner is called Ek Chor Distribution System.

In previous global expansion steps, Wal-Mart has been operating supercenters and clubs in Mexico for the past three years and announced that it will open clubs and supercenters in Brazil and Argentina by late 1995 or early 1996.

Wal-Mart expanded into Canada this spring, buying 122 Woolco units from Woolworth Corp., and is convert-

[WRONG CONTINUATION ON THE ORIGINAL TEXT]

But the Hong Kong and China ventures represent Wal-Mart's first step outside the western world as a retailer, one that surprised analysts by coming so soon. Last spring, Wal-Mart announced agreements to supply its private label goods to two major Asian retailers: Ito-Yokado, Japan's largest retailer, and Yaohan International Group, a Japanese company that moved its headquarters to Hong Kong. In a newspaper article earlier this year, chairman Walton said the time line for entering China "is going to be pretty darned long."

But Wal-Mart president and ceo David Glass tipped his hand about China at a recent speech at the University of Colorado. He advised students "to learn two languages: Mandarin Chinese and Spanish."

On another occasion, Glass told Wal-Mart associates, "If you don't think internationally, you are working for the wrong company."

In announcing the Asian venture, Bob L. Martin, president of Wal-Mart's international division, said, "With cooperation from our new partner, we will fine tune our retail concepts to meet the expectations of Hong Kong and Chinese consumers.

"However, the foundation of what Wal-Mart is all about will not change," Martin added. "We will offer our customers great values on a wide assortment of merchandise."

Chinese government regulations are going to stretch Wal-Mart's culture of adaptability. In addition to having to operate with a joint venture partner, foreign retailers must procure half of their goods from China. Retailers are forbidden to sell at wholesale and limited to operating in 11 cities, including Shanghai and Shenzhen; and can open only two stores per city.

In effect, foreign retailers can tap the purchases of only the 60 million inhabitants of those 11 cities and not the rest of China's 1 billion population.

How the restriction on wholesale sales will affect the operation of membership clubs, with a large proportion of sales in U.S. clubs going to small businesses, remains undetermined.

Lack of infrastructure in China is another problem foreign retailers face, commented Jeffrey Feiner, retail analyst for Salomon Bros., in an August report on Wal-Mart's international prospects. "A retail distribution system is really not in existence," Feiner wrote.

Another new element: Wal-Mart will be in competition with some 280,000 government owned enterprises that control 40% of retail sales, Feiner said.

U.S. fast food operations, McDonald's, Pizza Hut and Kentucky Fried Chicken, already have opened outlets in China, but Wal-Mart would be the first U.S. discount store in the country, he said.