Wal-Mart Said to Be Acquiring Chain in China

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October 17, 2006
Wal-Mart Said to Be Acquiring Chain in China
By DAVID BARBOZA and MICHAEL BARBARO
SHANGHAI, Tuesday, Oct. 17 — Wal-Mart Stores, the largest retailer in the United States, is laying the groundwork to become the biggest foreign chain in China with the $1 billion purchase of a major retailer here, according to people briefed on the deal.

The move represents a large step for Wal-Mart’s strategy in China, allowing the American retailer to more than double its presence in a country that, despite its size and growing middle class, remains largely untapped by foreign retailers.

Though the size of the acquisition — of a Taiwanese-owned supermarket chain called Trust-Mart — may be modest for Wal-Mart, it is a critical one because the Chinese market is becoming much more pivotal in the retailer’s overall international strategy. For Wal-Mart, China represents an opportunity to tap a vast and fast-growing market abroad at a time when the company’s sales are lagging elsewhere and it has run into obstacles to expansion at home.

“China is the only country in the world that offers Wal-Mart the chance to replicate what they have accomplished in the U.S.,” said Bill Dreher, an analyst at Deutsche Bank Securities.

Wal-Mart expects to close the deal for Trust-Mart by the end of the year, but it still needs approval by Chinese authorities, according to a person briefed on the transaction.

The acquisition is likely to trigger an intense battle among foreign and domestic retailers to gain a strong foothold in the world’s fastest-growing economy.

The deal puts Wal-Mart neck-and-neck in China with Carrefour, the giant French retailer, which also bid for Trust-Mart. Wal-Mart, which has only 66 stores in China compared with Carrefour’s more than 200, outbid not only Carrefour, but also Tesco of Britain and one of China’s large retailers, Lianhua.

The purchase also highlights the staggering reach of the $300 billion Wal-Mart empire. The company started in rural Arkansas 45 years ago and has become the largest foreign retailer in Mexico and Canada. In numerous other foreign markets, however, Wal-Mart has been stymied, pulling out of Germany and South Korea, or has met strong challenges, as in Japan, where it has struggled to gain a share of the market.

By acquiring Trust-Mart, Wal-Mart will not only be able to match Carrefour, but also to compete with much bigger Chinese retailers, like China Resources and the Shanghai Brilliance Group, which are the country’s largest retailers with more than $3 billion in sales and more than 8,000 stores combined.

Trust-Mart has more than 100 stores with 30,000 employees in more than 20 Chinese provinces, but it operates mainly at the low end of the supermarket chains. One challenge for Wal-Mart will to determine where it will position itself in the retailing market.

China’s economy is expanding at a rate of 10 percent to 11 percent a year, making it by far the world’s fastest-growing major economy. Retail sales are even more robust, jumping by about 15 percent a year for the last several years.

Big retailers are fairly new in China, which for decades has been dominated by small regional chains. Indeed, China has no dominant national players in the retail market, which is why Wal-Mart and other international retailers are battling aggressively to expand there.

“China’s a very fragmented market and very diverse,” says George Svinos, head of Asia Pacific retail at KPMG’s office in Australia. “So in order to get any penetration into that market you’d need to make a big move.”

China, however, is a tricky market for American retailers. Chinese consumers spend less than Americans when they go into stores, but they shop more frequently.

The average Chinese shopper spends about $4 at Wal-Mart, compared with $20 for the average American, according to Wal-Mart.

But Wal-Mart and other retailers hope to lure the middle-class Chinese, one of the fastest-growing segments of the population. Already, middle-class shoppers crowd into Carrefour, Wal-Mart and Ikea.

Other retailers, like Toys “R” Us, Home Depot and Best Buy, have just announced plans to open outlets in China.

The government has opened its retail market to foreigners, but at the same time, it has also encouraged Chinese companies to merge. In one example, the Shanghai Bailian Group struck a deal with Dashang, which operates the second-largest chain store group, to create new stores.

Moreover, China’s biggest state-owned retailers and a handful of aggressive entrepreneurs are pushing to create national chains, like Beijing-based WuMart and Gome, the country’s largest consumer electronics store, which is owned by one of the country’s wealthiest men.

Carrefour, which is the largest foreign retailer in China by sales, with more than $2 billion, has been expanding much more aggressively than Wal-Mart. Carrefour plans to open 100 new superstores this year, which will raise its total to more than 300.

Analysts say that Wal-Mart’s expansion has stepped up only in recent years. Up until now, they say, the retailer has not had great advantages over its bigger competitors. It has had high costs in China because systems for purchasing, transportation and distribution are clogged and complicated in a country that is still largely inefficient and without a strong national highway grid.

Wal-Mart appeared to smooth the way for expansion in China in July when, for the first time, it allowed employees to form a trade union, the company’s first in China. The retailer has long battled unions in the United States, arguing they will make the company less efficient.

In the United States, where Wal-Mart has more than 4,000 mostly suburban stores, its performance has begun to trail that of major competitors, like Target, particularly in sales at stores open at least a year. And Wal-Mart has encountered growing resistance to locating new stores in urban areas.

A Wal-Mart spokeswoman, Beth Keck, declined to comment on the Trust-Mart transaction.

Wal-Mart entered China in 1996 with a supercenter under its own name and a Sam’s Club in Shenzhen, near Hong Kong. In a departure from its practice of buying domestic chains with strong local name recognition, Wal-Mart started by building its business in China on its own.

But the pace of Wal-Mart’s growth in China has been slow. A decade after arriving, it has just 66 stores, failing to crack the list of the country’s top 20 retailers; hence, the move to acquire Trust-Mart.

Wal-Mart operates stores in 13 countries, including Brazil, Japan, and England, but foreign sales represent just $64 billion, or 20 percent, of its more than $300 billion in annual sales.

In several countries, it has discovered its American formula for success — rock-bottom prices, zealous control of inventory and a wide array of products — simply does not translate.

In Germany, for example, Wal-Mart never established comfortable relations with the powerful unions, which dominate retail in the country. In South Korea, it failed to satisfy the tastes of finicky local consumers.

Thus, in a stinging admission of defeat, Wal-Mart pulled out of Germany and South Korea this year after failing to turn around poor sales.

Wal-Mart, however, remains committed to Japan, where it operates stores under the name Seiyu, despite lackluster performance.

A major obstacle overseas for Wal-Mart has been building a big enough network of stores to compete with local chains and to secure low prices from suppliers. That may explain, in part, why Wal-Mart is eager to grow in China.

Mr. Dreher, of Deutsche Bank, expects Wal-Mart to expand aggressively there. By the year 2010, he predicts the company will have as many as 400 stores in China.

David Barboza reported from Shanghai, and Michael Barbaro from New York. Keith Bradsher contributed reporting from Hong Kong.