With millions of people in the world’s emerging markets moving into the consumer class, there are rich pickings for Walmart International’s global expansion strategy. But how does the retail giant decide which markets to enter next – and is it guaranteed to succeed when it does? Cathy Smith, the segment’s CFO and executive vice-president of strategy, talks about the challenges of venturing into these new markets, some of which are yet to make the transition to ‘brick-and-mortar retail’.
Understanding the size and scale of Walmart's operations across the globe is a challenge on a par with navigating one of its signature 'big-box' stores. Outside the US, the world's largest retailer racks up a number of staggering stats: 103 million customers every week; $126 billion in annual sales; 6,165 retail units in 26 countries.
At the latest count, the business that grew from Sam Walton's initial pile-'em-high grocery stores in the Midwest now employs 2.2 million people, with more than a third of them outside the US.
Quite how this giant arrived at such a strong position across the globe is a story of unbridled pursuit of market opportunities and a continuing determination to capitalise on the growth of the consumer classes in emerging markets across the globe.
Cathy Smith, Walmart International's CFO since March 2010, has overseen a good deal of this expansion. From the company's Arkansas headquarters, Smith works with a range of local partners across the world to streamline Walmart processes in each of its markets, optimising marketing and operations in order to serve the growing ranks of aspirational shoppers across the globe from Latin America to China, and from Europe to South Africa.
Clearly, understanding and assessing what markets are suitable for expansion forms a central part of company strategy. So how does Walmart go about determining the next destination for an outpost?
"The first filter we use focuses on risk," Smith says. "And then we filter out using market trends and look at our ability to capture market share. And then, most importantly with certain customers, we really look for markets where there is an emerging consumer. That's where Walmart tends to do really well, and we can serve our mission of saving people money so they can live better. Every market we're in has that characteristic."
Certainly, the growing middle class in the world's emerging markets is one of the central demographic shifts confronting retailers across the world. In Brazil alone, Smith estimates that over the last seven years or so there have been 40-43 million people entering the middle class. Understanding their habits and aspirations has now become a science, exercising some of the finest minds in consumer businesses: how does the newly affluent shopper in Brazil differ from their counterpart in South Africa?
For Walmart, the question largely focuses on format: will the US 'supercenter model' - huge-square-footage warehouse stores pioneered and developed by Sam Walton when he founded the business in the 1960s - really translate well to Nigeria? How does Walmart, therefore, find the right balance for each market? How do they know which model will work?
"We do a lot of our own research on a market first and foremost before we ever enter, and we do so both organically as well as through acquisition," explains Smith. "So, we've done it both ways and we've been successful.
"But the first thing we do is go and spend a lot of time in the market. And even in markets where we don't have a presence, we've learned from other competitors and seen what customer trends are happening, to help us really understand that market. So, we start there, and then we develop a strategy on how we might want to enter."
Smith emphasises the importance of Walmart's quantitative analysis, which makes use of a filter to identify what it deems to be the key 25 markets in which it makes sense for the company to operate (she says Walmart is already in most of them). "And then, after we've decided that, there'll be a small handful of markets that might be attractive. And we'll go through some research on it, so we'll send some teams into the market to get a deeper view."
That team will typically carry out competitor analysis and, most importantly, customer research, the depth of which goes beyond simple sampling. "We oftentimes go into customer homes," Smith explains. "In fact, I did that recently, about a year and a half ago. We were looking at a couple of markets, including one that we're not even in today. And we arranged that with a third party, to go in and try to understand that shopper.
"So once we've done all of that, and having looked at good local retailers along with taking into account our retail expertise from around the world, we can then develop a strategy. So, for instance, are we going to want to grow organically and start by developing our own stores or grow through acquisition?"
Raising the level of retailing
It is this question that sits at the very heart of Smith's mission: buy or build? So far, Walmart has taken a 'horses for courses' approach in each market. In the UK, for instance, it acquired the third-largest supermarket chain, Asda, a move that cemented a significant market share on arrival. Elsewhere, as in China, it has grown organically, opening Walmarts in areas poorly served by large-scale, big-box stores.
Whatever the approach, the typical new market is one in which Walmart is able to raise the level of retailing. In the case of a developing market, it will usually be at the pre-supermarket stage of retail, where the majority of shopping is done at street markets or small local stores, with little formal brick-and-mortar retail. "That's what an informal market is, and so you move from covered roofs and no floors into formal brick-and-mortar retail," says Smith.
But while she reiterates the desire to maintain a locally led approach in all customer-facing aspects in its markets, Smith makes no secret of the desire to streamline back-office functions where possible. "If we've acquired a retailer in a new market, they would have had their own functions, like shared services. So we have a philosophy that, over time, we would want to think about moving those into more of a common regional shared-service platform to take out some of the inefficiencies, but also just to free up the local management to do what they should be doing best, which is servicing our customers and not worrying about things like paying our bills."
All of which makes good sense: so far, Walmart has developed a Latin American shared service, which the regional businesses are being migrated into, with a view to replicating this regional approach elsewhere in the world. Is it possible to take that further, into a global set-up? "We doubt it will ever get to a global reach," Smith says. "And frankly, we probably don't have a desire for it to, because of currencies, languages and cultures, and all of those things. But there are some regional similarities that make sense."
So while Argentina, Brazil, Central America, Chile and Mexico form the Latin American hub, Africa, Canada and the UK account for the EMEA region, and the Asia region is made up of China, India and Japan.
Talk of the growing middle classes in other emerging markets is put into context when Chinese demographics enter the conversation: there are now around 300 million people that fall into the globally accepted measure of middle class - close to the entire population of the US. They are largely concentrated in cities, filling urban centres ripe for large-scale supermarkets.
This growth is set to continue - good news for Walmart China, which now has 393 outlets in the country, 172 of which are 'supercenters'. The company has had a Chinese presence for 16 years, and now employs over 100,000 people. Smith is excited about the new phase of growth.
"We've just announced that we'll be opening an additional 100 new stores in the next three years and providing another 18,000 jobs. So, we're continuing to grow. Our business has been pretty decentralised in China and we're trying to start moving it toward more regional and central purchasing, so we can start to get some economy to scale, if that makes sense."
Economies of scale
However, despite the continuing strength of the Chinese economic miracle, there are more voices muttering darkly about stagnating wages, growing unemployment (especially in rural areas) and slowing growth rates. Is that a cause for concern?
"I really am not as concerned about China as I could be about other markets," Smith says. "China has 1.35 billion people. A good portion of them are still in the lowest economic classes, and will continue to move into the consuming sector. There's going to be 7-8% growth for a long time just because of that."
Indeed, the CFO highlights Beijing's recent 35-point plan focusing on efforts to redistribute wealth and stimulate domestic consumption of the economy, moving away from reliance on exports. Smith, for one, is reassured.
"The Government of China recognises that we'll continue to raise the standard of retail business in the country," she says. "I think we just have to go be a great Walmart there."
Given the track record, it's unlikely Walmart will fail to overcome the very real challenges it faces in China. That assumption is based partly on its achievements but also on its failures, since the 'Walmart goes global' story is not one of unbroken success.
As Smith acknowledges, there are some places where the Walmart recipe fails to fertilise and grow. Germany was one such: having identified it as a market ripe for expansion, in 1997 Walmart bought two well-established supermarket chains there. Despite years of investment (and research-led changes), the experiment failed. That failure was variously blamed on the Germans' reluctance to embrace the big-box store approach, a mismatch of corporate culture with Germany's strong employee council heritage, and the simple fact that people didn't want to buy what Walmart was selling.
Whatever the truth, the failure in Germany (and likewise that in the Republic of Korea) serves as a reminder that it's not enough to simply muscle in, undercut the competition and leverage economies of scale, and wait for the money to roll in.
And while economies of scale are clearly the holy grail for the CFO of a growing international retailer, in Smith's view there is a recognition that the business will only thrive by marrying its own proven techniques and approaches with a strategy that acknowledges and incorporates local mores and dynamics.
"It's a really interesting balance between serving the customer locally - and being locally relevant is absolutely critical - and bringing the best of Walmart to bear," she explains.
"Things that we can do include format expertise, so we know what a great layout should look like when you're talking about dealer merchandise and food and consumables.
"We also know that a rectangular box on one single floor is the best strategy, by and large. However, in some markets, you can't always get one single floor. Ultimately, you have to merchandise locally, because of that local consumer and the local flavour that's required."