Case study: Wal-Mart Foreign Expansion

Wal-Mart, the world's largest retailer, has built its success on a strategy of everyday low prices, and highly efficient operations, logistics, and information systems that keep inventory to a minimum and ensures against both overstocking and understocking. The company employs some 2.1 million people, operates 4,200 stores in the United States and 3,600 in the rest of the world, and generates sales of almost $400 billion (as of fiscal 2008). Approximately $91 billion of these sales were generated in 15 nations outside the United States.

Facing a slowdown in growth in the United States, Wal-Mart began its international expansion in the early 1990s when it entered Mexico, teaming up in a joint venture with Cifra, Mexico's largest retailer, to open a series of supercentres that sell both groceries and general merchandise.

Initially the retailer hit some headwinds in Mexico. It quickly discovered that Mexicans shopping habits were different. More people preferred to buy fresh produce at local stores, particularly items like meat, tortillas and pan dulce which didn't keep well overnight (many Mexicans lacked large refrigerators). Many consumers also lacked cars, and did not buy in large volumes as consumers in the United States did.

Wal-Mart adjusted its strategy to meet the local conditions, hiring local managers who understood the Mexican culture, letting those managers control merchandising strategy, building smaller stores that people could walk to, and offering more fresh produce. At the same time, the company believed that it could gradually change the shopping culture in Mexico, educating consumers by showing them the benefits of its American merchandise culture. After all, Wal-Mart's, managers reasoned, people once shopped at small stores in the United States, but starting in the 1950s they increasingly gravitated towards large stores like Wal-Mart.

As it built up its distribution systems in Mexico, Wal-Mart was able to lower its own costs, and it passed these on to Mexican consumers in form of lower prices. The customisation, persistence and low-prices paid off. Mexicans started to change their shopping habits. Today Wal-Mart is Mexico's largest retailer and the country is widely considered to be the company's most successful foreign venture.

Next Wal-Mart expanded into a number of developed nations, including Britain, Germany and South Korea. There its expenses have been less successful. In all three countries it found itself going head to head against well-established local rivals who had nicely matched their offerings to local shopping habits and consumer preferences. Moreover, consumers in all three countries seemed to have preference for higher quality merchandise and were not as attracted to Wal-Mart's discount strategy as consumers in the US and Mexico.

After years of losses, Wal-Mart pulled out of Germany and South Korea in 2006. At the same time it continued to look for retailing opportunities elsewhere, particularly in developing nations where it lacked strong local competitors, where it could gradually alter the shopping culture to its advantage, and where its low price strategy was appealing.

Recently, the centrepiece of its international expansion efforts has been China. Wal-Mart opened its first store in China in 1996, but initially expanded very slowly, and by 2006 had only 66 stores. What Wal-Mart discovered, however, was the Chinese were bargain hunters, and open to the low price strategy and wide selection offered at Wal-Mart stores. Indeed in terms of their shopping habits, the emerging Chinese middle class seemed more like Americans than Europeans. But to succeed in China, Wal-Mart also found it had to adapt its merchandising and operations strategy to mesh with Chinese culture.

One of the things that Wal-Mart learned is that Chinese consumers insist that food must be freshly harvested, or even killed in front of them. Wal-Mart initially offended Chinese consumers by trying to sell them dead fish, as well as meat packed in Styrofoam and cellophane. Shoppers turned their noses up at what they saw as old merchandise. So Wal-Mart began to display the meat uncovered, installed fish tanks into which shoppers could plunge fishing nets to pull out their evening meal, and began selling live turtles for turtle soup. Sales soared.

Wal-Mart has also learned that in China, success requires it to embrace unions. Whereas in the United States Wal-Mart has vigorously resisted unionisation, it came to the realisation that in China unions do not bargain for labour contracts. Instead, they are an arm of the state, providing funding for the Communist Party and (in the government's view) securing social order. In mid-2006 Wal-Mart broke with its longstanding antagonism to unions and agreed to allow unions in its Chinese stores.

Many believe this set the stage for Wal-Mart's most recent move, the purchase in December 2006 of a 35 percent stake in the Trust-Mart chain, which has 101 hypermarkets in 34 cities across China. Now Wal-Mart has proclaimed that China lies at the centre of its growth strategy. By early 2009 Wal-Mart had some 243 stores in the country, and despite the global economic slowdown, the company insists that it will continue to open new stores in China at a "double digit rate". (Hill, 2011)

Answer all three questions:

1. Through the use of suitable tools, conduct a foreign market analysis and evaluate critically the strategic and environmental reasons of why Wal-Mart engaged in internationalisation strategies.

2. Analyse why Wal-Mart failed in South Korea and Germany and the differences between these countries and Mexico?

3. Using appropriate theories, critically analyse the importance of a cross-cultural understanding for international businesses success. Support your answer by quoting relevant examples from the case study.