For the biggest U.S. companies, China is the next great frontier. Major corporations like Wal-Mart (NYSE: WMT) are busily trying to adapt their business models to be more palatable to the Chinese consumer.
The reason is simple.
China is the world’s most populous country, with a population exceeding 1 billion. In addition, its economy is growing at rates higher than most developed countries, including the United States. For example, the International Monetary Fund projects China’s gross domestic product will grow 6% this year and in 2017.
This level of economic growth will raise millions of people into the middle class in China. And when people move up in economic class, they have more disposable income to spend on consumer goods. That’s why Wal-Mart has made China a key strategic priority moving forward – and its strategy is right on the money.
Wal-Mart Sees a Huge Opportunity Ahead
Wal-Mart badly needs a boost for its international business. Sales in international markets fell 9% last year.
That’s why China represents such a massive opportunity. Wal-Mart is virtually saturated in the United States. It generates annual sales close to $500 billion, but only about 3% of its total sales come from China.
Wal-Mart has more than 5,000 locations in the United States, but operates just 400 stores in China. This is despite the fact that China’s grocery market is the largest in the world.
Wal-Mart is seeing particularly good results in China for its wholesale operation, Sam’s Club. Of the 800 Sam’s Club stores Wal-Mart currently operates across the globe, four of the top 10 performing locations are in China.
In all, Wal-Mart has 13 Sam’s Club stores in China, and it will undoubtedly add to this total going forward. It expects to open around seven new Sam’s Club locations by next year.
To be sure, Wal-Mart has faced some significant challenges in bringing its brand to China. First and foremost is the difference in culture. Whereas American consumers – particularly at the low end of the income demographic – are highly motivated by price, that is not necessarily the case in China.
Chinese consumers demand the ability to closely inspect food. They aren’t content to purchase prepackaged food. As a result, Wal-Mart had to cater its offerings to be easily touched and smelled.
In addition, Wal-Mart does not yet have the ironclad grip on suppliers that it does here in the U.S. The grocery industry in China is highly fragmented and is comprised mostly of local suppliers. It will take time for Wal-Mart to build those relationships and to develop the size and scale necessary to maximize its pricing power over its suppliers.
But Wal-Mart also has some advantages working in its favor when it comes to expanding in China. The first is that it faces virtually no competition in the club business. Close rival Costco (NASDAQ: COST) has barely any presence in China at all.
It’s no secret that Wal-Mart is struggling. Management expects earnings per share to decline 9% for the current fiscal year. That’s why expanding into China makes perfect sense. Growing in China could be Wal-Mart’s biggest opportunity, which could not come at a better time for the company.
To be sure, the road to domination in China will not be a smooth one. But if there is any American retailer with the financial strength to claim the top spot in China, it’s Wal-Mart.
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