By  on July 26, 2005

NEW YORK — Wal-Mart is making China its newest frontier.

The world's largest retailer, which is opening a store in Shanghai on Thursday, plans to almost double its store count in China to 90 from 48 by the end of next year. The 42-unit increase will help Wal-Mart maintain its overall double-digit growth, a necessity as its U.S. business matures.

"We are in 22 Chinese cities now, and we want to be in every city in the next five to 10 years," said Lawrence Lee, Wal-Mart's operations director for eastern China, according to media reports in Asia.

The world's largest retailer already had plans to open 15 to 17 units in China this year, with the goal of bringing Supercenters to Beijing as well as the foray into Shanghai. Those plans represented the most ambitious expansion since Wal-Mart opened its first units in Shenzhen in 1996.

Wal-Mart officials in the U.S. did not respond to requests for comment.

The $285 billion retailer, based in Bentonville, Ark., is pushing further into a country that, based on better-than-expected same-store sales this year, is considered the star performer of the discounter's global operations. That was disclosed by Wal-Mart International chief executive officer John Menzer at a June 13 Credit Suisse First Boston conference.

While Menzer said the average 200,000-square-foot stores in China still have low transaction amounts, he noted that China is a "real bet in an emerging economy and an emerging middle class."

The average transaction is $5 compared with the U.S. average of $27, but analysts note that existing stores tally 450,000 transactions a day, ringing up $1 billion in sales annually.

By boosting its expansion in China, considered the world's fastest-growing economy, Wal-Mart gains a stronger foothold in market share. That's an opportunity Wal-Mart can't afford to miss considering its major competitors in the marketplace: France's Carrefour; Germany's Metro AG; the U.K.'s Tesco, and Holland's Makro Cash & Carry.

Wal-Mart is China's 19th-largest retailer. According to Accenture research, Carrefour is the fifth-largest retailer in China, with its 62 stores generating $2 billion in annual revenues.

"Wal-Mart wants to dominate China and has established a strong name for themselves in the country, not only through the present store base, but also through the buying that's done locally," said Walter Loeb, a former Wall Street analyst and now retail consultant of the firm that bears his name.He noted that Chinese consumers are likely to view Wal-Mart favorably since many work in the factories that produce goods for the discounter. Many are also employed at Wal-Mart stores.

"More importantly, the low-priced merchandise appeals to the Chinese population since wages are still very low," Loeb said.

The consultant said even with rivals such as Carrefour and Metro AG, they can coexist because they appeal to a different segment of the consumer base.

"The aggressive expansion for Wal-Mart is about gaining market share quickly," Loeb said.

Many of the retail options in China are still state-run department stores, alongside small mom-and-pop retailers. Ira Kalish, Deloitte Research's global director of consumer business, described the older retail landscape that still permeates many Chinese cities as "highly inefficient, really backward."

But, like Wal-Mart making a bold move in its expansion, modern retailing also is gaining steam in China. The landscape that is developing is partly due to a government policy change made Dec. 11, allowing foreign retailers to own their own businesses outright, Kalish said. Before the change, foreign firms needed to have a Chinese partner before they could enter the marketplace.

Wal-Mart, for example, works with local partners where the stores are located. The Shanghai store is owned by a venture between Wal-Mart East China Stores Co. and China CITIC Group. The joint venture also operates a store in Nanjing.

"Many [retailers entering the Chinese market], like Wal-Mart, may still prefer to have a domestic partner since that can help ease the relationship with the local governments and suppliers," Kalish said.

He noted that each big city is essentially a "self-sufficient economy." The retailers work with local suppliers, and it is more the norm than not to find that certain brands for a particular product in Shanghai won't be available at the retail counterpart in Beijing.

Kalish, who recently returned from a tour of China to track the evolving retail landscape, said many large cities have very few hypermarkets, particularly those in the second tier where the per capita income level is still far below those of the coastal cities. Hypermarkets sell everything from general merchandise to apparel and food.The city of Chunking, for example, has a huge population, but the income level is still "very poor relative to Shanghai," which is in the first tier because its per capita is high, Kalish said.

The theory is that as economic growth continues, the masses start spilling into the middle class, giving consumers more discretionary power, reaching eventually even to cities now considered second tier.

"As the real estate market explodes, the middle class will move to the outskirts, and the hypermarkets will move out there ... There is enough middle-income opportunities for the hypermarkets and the big chains," Kalish said.

load comments
blog comments powered by Disqus