Why Wal-Mart is Losing Market Share in China

Last month, Wal-Mart lost Roland Lawrence its chief financial officer in China, and Rob Cissell, its chief operating officer in the country. They left to “seek new development opportunities.” On Saturday, the management turmoil continued as Shawn Gray its vice president of operations also resigned for "personal reasons".

Walmart Stores
Source: Walmart
Walmart Stores

Even though Wal-Mart has 333 outlets and $7.5 billion in revenue in China, my firm estimates its market share has plummeted to 5.5 percent from 8 percent three years ago because it has not reacted fast enough to key trends. Wal-Mart needs a strategy re-think because it faces increasing headwinds as new sales channels like e-commerce; soaring real estate and labor costs; and evolving consumer preferences change the Chinese retail landscape.

Wal-Mart made the mistake of leaning too heavily on the big box retailer format like in the U.S., rather than smaller, conveniently located retail outlets. Expecting China to develop the same way towards big box retailing, as America did, is the same mistake Home Depot and Best Buy made. Both of those retailers ultimately retreated from the market. China may have high compound annual revenue growth rates, but traffic and the lack of free parking means consumers often prefer to shop in neighborhood stores. A government ban on free plastic shopping bags has also resulted in consumers shopping more often, and buying less each time, further fueling the popularity of stores closer to home.

Consumers tend to buy expensive products such as imported blue berries and meats in high-end organic and fruit stores opened by domestic entrepreneurs, while going to Wal-Mart to stock up on low-margin products such as Colgate toothpaste and Procter and Gamble Tide detergent. As one middle aged Shanghainese female shopper told us, “I buy fruit from high-end stores because it’s fresher than Wal-Mart. I don’t care if the price is double, if healthier. And I have to pay for parking at Wal-Mart.”

That woman’s willingness to pay for more expensive fruit and to shy away from retailers that don’t have free parking highlights a key attribute Wal-Mart and many retailers miss about the Chinese consumers — they pay when they see value, especially for products that are healthy, but are price sensitive on things like parking.

Wal-Mart surprisingly has struggled with consumer perception and their branding. They espouse the 'everyday low price' concept, yet are positioned relatively high in the market when compared to street vendors that are truly low price. Our research suggests that the consumers who spend the most at Wal-Mart and account for most of their revenue tend to be upwardly mobile, middle class, or wealthy. They are not looking at Wal-Mart as a low price destination but rather as a location where they can buy safe, high-quality products.

They don’t like the low price image Wal-Mart presents in its store ambiance and product selection, and they don’t like the crowds of shoppers, preferring more relaxed and less crowded environments. Savvy chains have opened shops that take premium consumers from Wal-Mart, leaving them with aisles packed with unprofitable consumers.

Most foreign retailers will never be the cheapest option as mom and pop stores are willing to cut corners and exist on paper-thin margins, so competing on price is a foolish strategy. It is impossible for foreign retailers that have expatriate salaries and adhere to international standards of business to compete on price with stores where the owner and his family live in the back and are content to make $300 a month.

Wal-Mart has also been hit hard by the rise of e-commerce, which is growing at the rate of 40% a year. In fact, the retailer recently led a consortium to buy a $500 million stake in e-commerce electronic retailer, 360Buy. The problem with e-commerce is many firms like Dang Dang and Mecoxlane are trying to gain market share at the expense of profits.

For instance, Dang Dang took eleven years before it made a $2.4 million profit. Inevitably the rise of e-commerce will cause margins to shrink. To combat this and overcome the high costs of rent and labor, retailers that rely on physical stores will need to differentiate product selection, just as Apple has done, to command fatter margins or establish destination-shopping environments as IKEA is doing.

Rising costs and more demanding consumers are changing the retail landscape in China. Wal-Mart needs to adjust its strategy by shrinking the size and locations of its stores, going upscale in product selection and ambiance, and by differentiating its product lines. Unless it does that, Wal-Mart might end up another casualty of the fast growth but hard to win Chinese retail market.

Shaun Rein is the founder and managing director of the China Market Research Group (www.cmrconsulting.com.cn) a strategic market intelligence firm, and is based in Shanghai. Follow him on Twitter at @shaunrein.