Wal-Mart Takes on the World

by Mark Friedman  on Monday, Dec. 12, 2011 12:00 am  

Despite receiving a setback in India last week, Wal-Mart Store’s international division, which already accounts for more than a quarter of the Bentonville retailer’s sales, is planning even more growth as it marches around the globe.

During the last 10 years, Wal-Mart’s international division’s sales have ballooned 240 percent to $109.2 billion for the fiscal year that ended Jan. 31. If the division were a separate company, it would have ranked No. 40 on the Fortune Global 500, just behind Citigroup.

And the division is on pace to shatter last year’s record sales. For the nine months that ended Oct. 31, Wal-Mart’s international sales were $90.4 billion, up 16.1 percent over the same period in 2010. The international sales have fueled Wal-Mart’s overall sales, which were up 6 percent to $321.57 billion for the nine-month period ending Jan. 31.

The retailer’s attempt to export its business model to India, however, has stalled. In November, the Indian government said it would, for the first time, allow Wal-Mart and other foreign firms to own 51 percent of supermarket chains in India.

Wal-Mart viewed the move as “an important first step,” according to a Nov. 25 company news release. Currently, Wal-Mart can own only wholesale stores in the country of 1.2 billion people.

But last week, the Indian government reversed its position, deciding not to allow foreign companies to enter the country by buying a 51 percent stake in an existing supermarket company.

“We respect the Government’s decision and look forward to a consensus being reached on [foreign direct investment] in multi-brand retail,” Kevin Gardner, a spokesman for Wal-Mart’s international division, said in an email to Arkansas Business.

Other international markets are flourishing, but some retail watchers are questioning how much more Wal-Mart can grow.

“Wal-Mart International will drive growth, will drive aggressive growth,” Doug McMillon, Wal-Mart’s CEO of International Operations, said at a meeting for analysts that was held in Bentonville in October.

At the meeting, McMillon laid out his plan for growing the division and boosting income. For the nine months that ended Oct. 31, net income for the division was $3.9 billion, up 8.4 percent from the previous year.

The top theme for the division’s growth will be “first and foremost” a focus on everyday low prices, McMillon said during the meeting. “We will be an EDLP operator over time around the world,” he said. (EDLP is Wal-Martspeak for “everyday low prices.”) 

The Local Impact Debate

When Wal-Mart enters a market, the debate over whether the retailer is good for local business invariably arises, Vijay Prashad, a professor of international studies at Trinity College at Hartford, Conn., told Arkansas Business last week. He has studied Wal-Mart extensively.

The question of its impact on small businesses was raised, Prashad said, even when Wal-Mart tiptoed into the international market in 1991 by entering into a joint venture with Cifra S.A. de C.V. to open a Sam’s Club in Mexico City.

He said the debate recently played out in India as the parliament there was split over allowing Wal-Mart and other big-box retailers into the country. One faction of Indian leaders thought that “if you allow corporations from outside to come into India, they will bring technology and methods of doing business,” said Prashad.

Others thought that allowing Wal-Mart into the country would destroy the mom-and-pop businesses, he said.

It is unclear when — or if — India will change its mind and allow Wal-Mart to open stores inside the country, Prashad said.

India was one of the places Wal-Mart was banking on for explosive growth.

“If you look at China and India, they represent probably two of the very few countries in the world where there is a chance in the future to end with more stores in those countries than we have here in our home market,” Scott Price, CEO and president of Wal-Mart Asia, said during the October meeting for analysts.

The rest of the world altogether has more Wal-Mart stores than the United States. As of Oct. 31, Wal-Mart had 3,850 stores domestically and 5,366 internationally.

But the key to Wal-Mart’s growth is the projected growth of the middle class internationally, McMillon said in October.

For the 10-year period that ends in 2020, China is projected to add 189 million middle-income households, and 54 million will be added in India, giving them about the same middle-class population as North America, he said.

“It’s an incredible number,” McMillon said. “And that has an impact on what we do.”

Wal-Mart is already involved in a massive rollout of stores in China. Between Jan. 1 and Oct. 12, it opened 24 stores in China and was on pace to open 56 more by the end of the year, Price said.

It had 352 stores in China at the end of October, and it plans to hire 160,000 Chinese workers in the next five years. (Wal-Mart is already the largest employer in the world with 2.1 million employees.)

Victories and Stumbles

The foreign reaction to Wal-Mart has been mixed, Chris Tilly, director of the Institute for Research on Labor & Employment at the University of California at Los Angeles, told Arkansas Business last week.

Chinese consumers have flocked to Wal-Mart. In some areas, though, Wal-Mart has stumbled. In 2006, it pulled out of Germany and South Korea after failing to gain momentum there, he said.

“So it’s not like it’s batting 1,000,” said Tilly, who has also studied Wal-Mart.

Still, when Wal-Mart has been able to get its foot in the door of a new country, it uses that position to stretch across the territory or continent, Tilly said.

In 2010, Wal-Mart bought 51 percent of South Africa’s Massmart for $2.2 billion, with the intention to spread and gain market share in all of Africa.

It is already making moves there.

Grant Pattison, a member of Wal-Mart’s Sustainability & Transformation Committee, told analysts in October that Wal-Mart plans to add 100 stores to South Africa in the next four years. It already had nearly 300 stores at the end of October.

“In South America, they’ve now got a foothold in Brazil, Argentina and Chile, but they’re also eyeing the rest of the continent,” Tilly said.

And Wal-Mart isn’t alone. Other retailers are also making similar moves around the globe.

“It’s a race for markets,” Tilly said.

Looking for Opportunity

McMillon told the group of analysts in October that Wal-Mart had a four-point plan for growth outside the United States.

In addition to implementing the “Everyday Low Prices” theme, Wal-Mart will grow through its online sales.

“We have a great opportunity to take [online sales] … and build business faster than those markets would’ve been able to build on their own,” McMillon said.

Other avenues of growth are through opening stores and acquisitions, he said.

McMillon didn’t say what markets he was considering for acquisitions.

“We’re not anxious to make anything happen, but we won’t miss an opportunity if the right one presents itself,” he said.

But the professors who have studied Wal-Mart wondered how much more Wal-Mart could grow. The U.S. and Europe account for about 66 percent of the sale of the consumer products, Prashad said.

If the rest of the world copied American demand for products, it would spell disaster for the environment, he said.

“We have to come to terms that we live in a country that has 5 percent of the world’s population and currently consumes 25 percent of the total energy in the world,” Prashad said. “So the model that we have enjoyed is not sustainable for the planet.”

Tilly also wonders how much Wal-Mart’s international division can grow, although he doesn’t see it slowing down anytime in the near future.

“But looking ahead 10-15 years, you start to run out of prosperous markets to move into,” he said. “There’s only so much retail that the world’s going to absorb.”

 

 

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