Tuesday, April 19, 2005

Should Wal-Mart Say Sayonara To Japan?

Wal-Mart hopes focusing on international expansion will not only help its bottom line, but also provide an opportunity to shift the world’s attention away from the negative press currently besieging the mammoth retailer in the United States. As referenced herein on April 18, with increasing labor relations problems in the United States and Canada, as well as an increasingly saturated domestic retail market, Wal-Mart needs to find more good news overseas.

Of Wal-Mart’s 5,700 stores, 35% (2,000 stores) are located in countries outside the United States, including stores in ten countries employing over 400,000 employees. In a recent discussion with reporters, Wal-Mart reported plans to add 40,000 new international jobs in 2005, via the opening of more than 150 new stores in non-U.S. countries. Wal-Mart already operates stores in Canada, Puerto Rico, Mexico, Brazil, the United Kingdom, Germany, China, Japan, Korea, and Argentina.

Wal-Mart’s owes its U.S. success to internal capabilities which support a low-cost structure: high-tech inventory tracking systems, cost-conscious employee culture, superior supply chain management, and the “every day low-price” (EDLP) model. Increasingly, analysts have stated that Wal-Mart’s future lies in its ability to effectively enter new international markets by entering with the same low-cost advantage. According to Retail Forward, a research and consulting firm that works with Wal-Mart, “Wal-Mart will increasingly need to look overseas to maintain its brisk growth as its domestic markets mature.” On its own website Wal-Mart contends that, “despite obvious cultural and business challenges, Wal-Mart international has experienced success because of its ability to transport the company’s unique culture and effective retailing concepts to each new country.”

Wal-Mart’s model has translated non-U.S. countries. For example, in early 2005, 18 of Wal-Mart’s top 20 highest performing stores were located in the UK, not in the U.S. Wal-Mart bought the UK chain, Asda, in 1999, and the success of this brand has been tied largely to highly competitive food pricing and the extremely successful George clothing brand. Despite a strong competitive response from Tesco, the largest UK retailer, Asda has always worked to be low cost, and has effectively forced Tesco to keep up with Asda’s major price cuts.

Conventional wisdom would suggest that consumers in every part of the world would welcome lower-price shopping choices. However, Wal-Mart has learned the hard way that an American-style EDLP supercenter business model is not necessarily a winner with all foreign customers. For consumers used to shopping at local stores with personal service and a localized selection of merchandise, the Wal-Mart methodology of placing huge supercenters in inconvenient locations and providing standardized range of merchandise is quite simply foreign.

Three years ago, Wal-Mart bought an initial 6% stake in the struggling Japanese retail chain Seiyu. Wal-Mart subsequently increased its ownership to approximately 38%. Despite Wal-Mart’s efforts to convert Seiyu to the Wal-Mart model, Seiyu has reported losses for three consecutive years. While an initial curiosity brought customers to the mega-store model, it has largely failed to keep them coming back. Carrefour, the French retailer holding the number two spot behind Wal-Mart worldwide, recently pulled out of Japan after four years of bleeding money in that market.

Several factors appear to be influencing Seiyu’s difficulties. Relaxed government restrictions on foreign retailers and changing consumer attitudes suggested that the era of the mega-store had come to Japan. However, when the new stores came, it turned out that the Japanese still preferred frequent shopping trips to smaller local shops, as opposed to a weekly trip to a larger store. One of biggest issues is that the Japanese perceived low-price items to be inherently lower quality. Japanese customers emphasize the importance of fresh, high-quality produce and “cool” fashion-conscious clothing selection. In Japan, Wal-Mart is perceived as offering less fresh food, and clothes that are decidedly not cool.

In particular, the EDLP model has failed to attract Japanese consumers and has run contrary to the Japanese distribution methods. Japanese stores traditionally attracted customers with daily or weekly specials advertised in newspaper circulars; Wal-Mart initially eliminated these specials in favor of EDLP, but consumers cried foul, and so the specials were brought back. In addition, when consumers felt that jeans priced at $10 must be low quality, Wal-Mart responded with higher-priced $35 jeans to appeal to the customers’ expensive tastes. Also, Japanese consumers buy more fresh produce than their American counterparts. Wal-Mart’s usual price lowering tactics of buying in bulk do not support the freshest foods, for example fish. In Japan, most fisheries and farms are small and locally owned, offering discounts for smaller orders rather than larger orders. Likewise, consumers often have more localized preferences, requiring more market-specific customization and increased costs due to supply chain issues.

Seiyu’s failure to adopt the Wal-Mart model raises the possibility that the internal capabilities so effective in the U.S. may not be relevant in Japan. Due to the Japanese preference for smaller stores, the economies of scale necessary to support large fixed investments in high-tech systems may not exist. Japanese resistance to the EDLP model suggests that Seiyu must continue with deep-discount sales to bring consumers in, creating variances in demand that translate into higher distribution costs..

However, there are reasons why Wal-Mart should remain in the Japanese market, not the least of which is the shear potential market size. Competitors are starting to throw in the towel and leave, giving Wal-Mart the time and opportunity to further decipher the Japanese market. As Asda has successful done, Wal-Mart could partner with several well-known designers in Japan to create a trendy line of clothing and enhances the perceived quality of the Seiyu brand. The years of economic recession have forced the Japanese to accept lower quality to a degree, potentially expanding the customer base for Seiyu. Wal-Mart’s EDLP model can be effective but it needs to convince customers the Seiyu brand stands for quality items at a very good price.

Tana Barton, Jee Ku, Christina Sung


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