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The three-level Wal-Mart SuperCenter at 12 Fenghuang Road sits on a bustling plaza in the heart of Shenzhen, China, where grandmothers tend children and vendors hawk sugarcane juice, hair accessories and even pet puppies from blankets spread on the ground.

In this neighborhood of high-rise apartments, most customers arrive on foot or by bicycle. About 12,000 shoppers visit this SuperCenter each day, purchasing L’Oreal makeup, live turtles or countless other products in a hybrid of Chinese and U.S. retailing. Recently, there were even large displays of sex-instruction videos, an extraordinary item given the traditions of Chinese society and Wal-Mart’s socially conservative posture in the U.S.

Wal-Mart is shifting its expansion in China, the world’s fastest-growing economy, into high gear after a decade of cautious growth. Registers in Wal-Mart China’s 46 stores tally 450,000 transactions a day, about $1 billion in sales annually, Wall Street analysts and the company said.

Executives hope it is mere prelude. China is an opportunity Wal-Mart cannot afford to miss. And the competition with rivals such as France’s Carrefour, the world’s second-largest retailer after Wal-Mart, is sure to be intense.

At a June 13 Credit Suisse First Boston conference, Wal-Mart International chief executive officer John Menzer told analysts that China was the “star performer” of Wal-Mart’s global operations, based on better-than-expected same-store sales this year.

“China is a big bet,” he said. “We have 200,000-square-foot stores with still very low transaction amounts. It’s a real bet in an emerging economy and an emerging middle class, and it’s starting to happen.”

The nation of 1.3 billion people is on a short list of global markets with the heft to influence Wal-Mart’s stock price because China, which recorded $654 billion in taxable retail sales last year, according to the Ministry of Commerce, offers Wal-Mart the prospect of significant overall sales growth.

This fiscal year, for example, Wal-Mart must add at least $28 billion in sales to maintain its double-digit growth, and as its U.S. business matures, new markets such as China will be needed to drive those increases.

“People get excited about China because they look at the size of the economy, at the consistent growth over 20 years, and at the increase in individual and family income and spending power,” Beth Keck, Wal-Mart director of international corporate affairs, said in an interview. “In the last 10 years, you’ve seen the development of [formal] retail. So it’s a great opportunity.”

This story first appeared in the June 22, 2005 issue of WWD. Subscribe Today.

The $285 billion retailer based in Bentonville, Ark., plans to grow 30 to 50 percent in retail square footage annually in China for the foreseeable future, executives told Wall Street analysts during a tour of Wal-Mart China’s operations in March. This year, Wal-Mart China intends to open 15 to 17 stores, bring SuperCenters to Beijing and enter Shanghai for the first time this summer. It is the most ambitious expansion since Wal-Mart opened its first units in Shenzhen, a city of more than one million people about 22 miles north of Hong Kong, in 1996.

Mark Miller, an analyst at William Blair investment banking, estimated in a March research report that Wal-Mart China’s revenues within five years might rise to $10 billion from $1 billion.

Wal-Mart has already added two extra managers to each of its stores to ensure there are enough trained people to operate new units.

“We’ve got two-and-a-half to three years of people already in place for growth,” Menzer told reporters at a Wal-Mart media conference in April.

It’s an unusual move for Wal-Mart, which strictly controls labor costs. More remarkable, the antiunion retailer has said it would allow its Chinese workers to unionize if they request to do so under the country’s labor provisions. So far, no store has unionized.

On the prospect of unions, Menzer said: “It works best in China to do what the government tells us to do.”

Wal-Mart is far from alone in its China push.

“There is a mad dash to grab as much land, as much real estate as you can,” Joe Mueller, a partner in Accenture’s Asia retail and consumer goods practice, said in an interview. “There is a lot of newfound wealth in China and a lot of opportunity for companies to grab consumers and run with them.”

Still, there are hurdles. Infrastructure is wobbly in many places. Each Wal-Mart China SuperCenter has two backup generators to protect food against power failures, said Christine Augustine, a Bear Stearns analyst who toured Wal-Mart China’s operations in March. Development of roads, water and sewage barely keeps up in cities exploding with growth.

Getting merchandise “to the right place for the right price has been a tremendous challenge over the years and it still remains an area to be tackled,” Mueller said.

Wal-Mart’s expansion coincides with China’s decision to lift expansion restrictions on foreign retailers in December, a concession that was part of the nation’s entry in the World Trade Organization in 2001. That move — linked with the WTO’s abandonment of textile and apparel quotas — has sparked a gold rush among the world’s largest retailers, including Holland’s Makro Cash & Carry, the U.K.’s Tesco plc and Germany’s Metro AG. Wal-Mart China is a joint venture between Wal-Mart Stores Inc. and three investment firms backed by the Chinese government. The entity operates SuperCenters, Sam’s Clubs and Neighborhood Markets in 20 cities.

Many analysts predict Carrefour, a skilled international operator, will provide some of Wal-Mart China’s stiffest competition. The French company generates $2 billion in revenues from 62 stores in China, making it the fifth-largest retailer there, according to Accenture research.

Wal-Mart, by contrast, is China’s 19th-largest retailer. Wal-Mart China’s SuperCenters lag their U.S. counterparts in revenues, generating on average $35 million annually, compared with $80 million to $120 million in the U.S.

Chinese spend an average of about $5 on a typical Wal-Mart visit.

“The average ring [customer transaction] in the U.S. is around $27, so $5 is not quite doing it,” said Smith Barney analyst Deborah Weinswig, who also took part in the March tour in China. “The upside is they’ve got really cheap labor, but you’ve also got greater wear and tear on the stores without necessarily getting the sales.”

Wal-Mart China needs another five years of growth before it makes a significant contribution to the larger company, she said.

Wal-Mart’s stores are “in their infancy in China,” Augustine said. “I thought their format was much like their competitors. It wasn’t so terribly unique, but that’s probably OK at this stage.”

Still, domestic companies are gaining clout in China. In 2004, the Chinese government formed the nation’s largest retailer, $8.1 billion Shanghai Brilliance Group Co. Ltd., by merging China’s largest department store, drugstore and hypermarket chains to form a conglomerate overseeing 8,000 stores.

Sandy Kennedy, president of the Retail Industry Leaders Association, an Arlington, Va., lobbyist for mass merchants, traveled to Shanghai this month with representatives from Home Depot, Target Stores, Wal-Mart and Gap.

“It’s a complex market and certainly the opportunities are overwhelming,” Kennedy said. “Our members are looking at it cautiously. In some cases they are looking for partners, in some cases they are looking at acquisitions.”

Kennedy continued, “We are committed to working with the Chinese government and Chinese industry in furthering social responsibility in factories.”

Some experts believe China is an even larger retail market than government sales data suggest. The dominant form of retailing involves small merchants in so-called wet markets, which consist of open-air stalls selling items ranging from live chickens to housewares. Those sales are generally not reported.

Accounting for wet markets, China’s retail sales might be closer to $2.6 trillion than the reported $654 billion, William Blair analyst Miller calculated, citing Wal-Mart executives and the Chinese Ministry of Commerce.

Despite the challenges — and perhaps because of them — China represents significant benefits for Wal-Mart.

The retailer was forced to build its first multilevel stores in China and learned valuable lessons about how to serve customers in urban environments. The company’s three-story Wal-Mart in Baldwin Hills, Calif., for example, adopted several Chinese practices, including using a conveyor to shuttle shopping carts between floors. Wal-Mart China is experimenting in densely settled areas with underground Neighborhood Markets, a hybrid drugstore and supermarket. One such store in Shenzhen processes 9,000 transactions per day.

“We’re getting great practice in China as we look at moving into more congested urban areas not only in the U.S. but even in the U.K. or Japan,” Wal-Mart’s Keck said.

Wal-Mart China has also encouraged suppliers to develop new products intended for city dwellers. For example, since many Chinese wash their clothes in bathroom basins, Procter & Gamble developed Tide White, a powdered laundry soap for hand-washing that comes sealed in a lightweight packet.

“It’s turned out to be an excellent seller at something like 33 cents a package,” Keck said.

By sourcing goods directly from Chinese factories, Wal-Mart can fatten its profit margins and offset rising health care and labor costs in the U.S., Miller wrote in his research note. He cited apparel, which is 80 percent imported to the U.S., but is only 17 percent directly sourced, as one of the best opportunities for Wal-Mart’s operation to recapture margin.

Wal-Mart’s 2,000-person global procurement operation buys $18 billion worth of goods annually from about 5,000 Chinese factories.

In the Fenghuang Road SuperCenter, 95 percent of goods are grown or manufactured domestically.

That includes apparel, which was on the third floor with other high-margin goods such as home linens, electronics, toys, furniture and sporting goods. Prices were rock bottom, even by Chinese standards. A visit found cotton polo shirts, for example, selling for less than $4. Women’s jeans cost $4 to $8 and leather shoes start at a bit under $10, although some go for as much as $24.

Clothing sales in China are soaring, rising 15.3 percent in April over a year ago, according to the Chinese National Bureau of Statistics.

Although there is a growing appetite for Western fashions, the clothing assortment on the second floor of the Fenghuang Road SuperCenter was small, dominated by men’s wear and by basics, such as sweatpants and polo shirts. The women’s offering was mostly hosiery and Simply Basic jeans in an unfashionably roomy cut, hawked by an employee hollering like an auctioneer.

Bear Stearns’ Augustine characterized the apparel as “fairly rudimentary,” particularly when compared with more fashionable presentations at Carrefour and Hymall, Tesco’s concept, in Shanghai.

“The competitors had done better interpretations of fashion trends in apparel,” she said.

James Lee, vice president of corporate affairs for Wal-Mart China, said in an e-mail that apparel was a “growing category” for the business.

“Our focus in apparel is to educate our customer on how to mix-and-match garments to create an image,” he wrote.

The retailer hangs complete outfits from the ceiling, and hosts fashion shows, one of its many forms of “retail-tainment.” Wine tasting and dumpling-making contests are also prevalent.

While some customers were browsing apparel, the Fenghuang Road store’s busiest area was the warehouse-like first floor, where household staples such as soda, cooking oil and rice were stacked on crates, boxes and no-frills metal storage racks.

Recalling the cluttered feel of U.S. stores before an epidemic of lawsuits over falling merchandise changed Wal-Mart’s stocking practices, Chinese stores are crammed with product. On Fenghuang Road, shelving built over handrails of stairs was loaded with books, toilet paper and sacks of peanuts. In other SuperCenters, seasonal merchandise was positioned along a slow-moving cart conveyor to tempt customers into purchasing.

On Fenghuang Road, the second floor focused on perishables. The centerpiece was a 40-foot deli counter of prepared foods ranging from rotisserie chicken to seaweed salads. The counter has been a huge success, Keck said.

In some stores, factory workers visit daily to buy lunch, Smith Barney’s Weinswig noted in a March research report. Seventy percent of seafood is sold live.

Every store manager is a local Chinese, Wal-Mart China officials said. The strategy has helped the retailer adapt some of the best practices of the wet markets. For instance, in many SuperCenters, customers dip nets right into tanks of live fish, Keck said.

Executive ranks are heavy on locals, or Americans familiar with the country, such as Wal-Mart Asia president and chief executive officer Joe Hatfield, a 20-year company veteran who has lived in China since 1994.

“Joe knows the market unbelievably well, and has a real passion for the culture,” Weinswig said. “He came in advance of them opening up and has worked really hard to get it.”

Still, the net effect is of a U.S. company operating in China.

Stores display an employee of the month, and many signs are in English and Chinese characters. Employees wear blue jeans and red shirts, chant Wal-Mart cheers and have American names on their identification badges. (Some things get lost in translation. One recent visitor noted seeing a Chinese name translated as “Creamy.”)

Wages average $2,100 annually for cashiers, significantly better than factory jobs that bring in about $800 annually, Weinswig said. Wal-Mart’s package also includes medical and retirement benefits, time off for maternity, illness, marriage and funerals, and contributions to a government housing fund that provides low-interest loans, Keck said.

Perhaps because of the wages and benefits, service is a strength. When Accenture’s Mueller could not find replacement pedals for a child’s bike, a Wal-Mart associate personally escorted him to a small shop down the street that stocked the part. And when a recent visitor left the Fenghuang Road store, a Chinese employee followed protocol by leaning into a microphone and announcing, “Thank you, dear customer, for coming.”


  • Stores: 46
  • Annual sales: About $1 billion
  • Daily transactions: 450,000
  • Average sale: $5
  • Growth plans: 30 to 50 percent square footage annually
  • Main rivals: Carrefour, Makro Cash & Carry, Tesco plc, Metro AG
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