In the beginning in 1962, Wal-Mart founder, Sam Walton, who opened the companys first discount store in Rogers, Ark. In October 1969, Wal-Mart officially incorporated its business and operates over 4150 retail facilities globally. At the year of 1962, Wal-Mart has its competitors- KMart and Target. Walton studied his competitors and borrowed liberally. In the United States, Wal-Mart is the largest retail store. It mainly has its retail store in Canada, Mexico, and the United Kingdom. (“Walmart Corporate, 2012)
Throughout the United States, Wal-Mart is engaged in the retail stores operation. Wal-Mart is most practicing mode of entry which is wholly-owned subsidiary and joint ventures globally currently. In China, Wal-Mart is practicing joint venture and acquisition entry modes (Hornblower, 2004). Wal-Mart needs to be careful in choosing the appropriate strategy in order to develop the future expansion successfully.
Wal-Mart operate its business is because it wants to save people money tend to help them live better. It continues to deliver that promise to families around the globe. Therefore, Wal-Mart works harder to do their part in protecting our planet and conserving our natural resources (“Walmart Corporate, 2012).
Joint Venture is an entry strategy for a single target country in which the partners share ownership of a newly created business entity (Warren & Mark, 2011). This means that Wal-Mart joint venture with local partner and local parent earn more than 51 percent share attributed to China’s government policy. Through joint venture, Wal-Mart may able to share the risk with the local partner and it can limit financial risk as well in 1996 (“Wal-Mart’s Strategies in China”, 2005). Wal-Mart joint venture expands their strategy in order to gain successful entry into many of its international markets (Marcus, Jon, Wayne, and Constince, 2007). Wal-Mart may able to gain access, increase profitability, enhance global market share and explore into more global market (Gary and Ryan, n.d.).
However, Wal-Mart may enter the new market quickly, avoiding costs and risks of new product development, gaining market share and acquiring new knowledge and capabilities. In 2007, Wal-Mart successfully acquired Trust-Mart. Wal-Mart has been established the brand name of Trust-Mart (David, 2007).
Current Expansion Strategy
Joint Ventures and Acquisition in China
Today, Wal-Mart is one of the leading international retailers in China. It is also one of the largest international retailers in China. It is estimated that the firm will have 150,000 employees in its stores and warehouses in China alone by 2010. China is the largest emerging market, and Wal-Mart could expand their business rapidly. Wal-Mart has followed much of this expansion in China through joint ventures because of government restricted foreign retailer not to own a store. Therefore, Wal-Mart followed government policy strictly (DePamphilis, 2009).
Learning about a market through a joint venture is a particularly powerful motivator when a firm seeks to enter an emerging or developing market. When Wal-Mart entered China, partnered with local firms in the new cities, tend to enter to learn about their challenging environment and distribution system (Jim, 2004). The nature of China is that the culture and political power can vary widely from one major city to another. Hence, joint ventures in such situations allow Wal-Mart to learn about the local “system,” such as legal standards, consumer characteristics, labor markets, and building relationships with the government and local distributors (Hornblower, 2004).
China is the cheapest workshop and emerging market in Asia, so it would like to attract Wal-Mart to invest in its country. Wal-Mart tend to enter the emerging market is because it operates on a smaller scale in new market before making a more significant investment. Apart from that, Wal-Mart divides the responsibilities and liabilities with others to keep a minimum cost. It also combines assets and skill-sets with other companies. (Wal-Mart Store Inc., 2010 Annual Report)
China could offer the opportunity to foreign firm operated with no taxes on foreign business for the first few years of operation. Therefore, Wal-Mart caught a chance and tends to expand their business into China. (Hornblower, 2004)
One of the reason Wal-Mart expand their business to China because the impact of competition and the restriction and lowered the market trade barrier caused U.S operation could not control attributable to the faster growth of Wal-Mart. Moreover, due to China has the strong economic growth and it has 1.3 billion population of people and also cheap labor they could provide. It would compete with Carrefour, Tesco and Metro more easily because China removed all limits on business location, amount and share structure. Therefore, Wal-Mart endeavors to gain a better marker share in China’s $240 billion retail market. (“Wal-Mart Bulks up China Expansion Strategy”, 2005)
Wal-Mart entered China through this entry mode is successfully. China could offer a way of getting around high Chinese tariffs, allowing a company to gain a competitive price advantage over imports. (Philip, Mary and John, 2009) China government has provided Wal-Mart the benefits of synergy which the local partner providing the access to the Government officials and market information besides sharing the risk.
Acording to (Gerald and Edwin, 2008), sales and profits of the joint venture may be greater than those of a subsidiary, because the operation is looked upon with more favor by nationalist-oriented consumers than would be the case if it were considered a foreign operation. Therefore, Wal-Mart could be sustained its growth and sales will be increased through this joint venture.
Stern and Stalk (1998) found that the expansion in China has been proven Wal-Mart could reduce stock-carrying and transportation costs and increase profitability by 2.5 percent compared with their competitors.
However, through the joint venture with local partners, Wal-Mart is able to gain valuable knowledge on Chinese market, economic and political conditions. Joint Ventures are really a good option for their expansion since China’s government regulated the foreign retailers enters China market should use joint venture strategy. This could allow Wal-Mart apply the valuable resource to improve market, economic as well as political condition (Clem, 2009).
There is also an acquisition Trust-Mart in China which bought 35 percent of its shares. Trust-Mart is one of the leading retailers in Chinese market. Wal-Mart is willing to acquire and invest huge amount of capital because Trust-Mart has several number of stores. In addition, Trust-Mart also is leading position in China. This could enable Wal-Mart to capture much more competitive advantages in China. (Lee, 2011)
Indeed, Wal-Mart’s retail footprint could become doubled where taking full control of Trust-Mart. At the same time, China tends to develop its economy sustainably in promoting the domestic consumption (David, 2007). This acquisition helped Trust-Mart expand on the Chinese mainland. Nowaday, it had more than 100 retail outlets in 34 cities on the mainland and employed more than 30,000 employees (Li, 2011).
Wal-Mart planned to acquire the rest of the Trust-Mart, but the plan has been delayed because of several top executive resigned in 2010. This caused to Wal-Mart unable to acquire Trust-Mart the rest of the share (Li, 2011). Through this acquisition, Wal-Mart’s sale is less than 3 percent of its sales in America (“Walmart v Wumart, 2011).
Future Expansion Strategy
According to Bishop (2006), a firm’s entry mode is how to enter the foreign market, and how to make its goods or services available to foreign customers. Basically, there are six different modes for a multinational firm to choose, such as licensing, exporting, turnkey project, joint venture, franchising and wholly-owned subsidiary (Hill, 2004).
The current entry mode of Wal-Mart in China is through joint venture with Shenzhen International Trust & Investment Co., Ltd, China due to the government restriction on foreign ownership. But joint venture benefits Wal-Mart from knowledge of the host country’s competitive conditions, political systems, language, culture, and business system. However, joint venture could bring negative effect to Wal-Mart because it has a risk of giving control its technology to its partner when it entry into a joint venture and it would also caused to conflict happen when the shared ownership arrangement is different and the goals and objectives is change. Hence, it is important for Wal-Mart to convert its entire joint venture stores into wholly-owned subsidiary.
In order to completely convert into wholly-owned firm, the very first step that Wal-Mart should take into consideration is acquiring its partner – Trust-mart. By acquisition, Wal-Mart is able to reduce risk over losing control and tighten control over operation in country and by the way maximize the profits. It is possible for Wal-Mart to acquire Trust-mart because China had lighten the limitations towards foreign company after joining WTO in year 2001 and after so many years operation in China, Wal-Mart is know well about the cultures and customer preferences in that country. At the same time, the large number of stores and leading position of Trust-mart in China makes the strong attraction for Wal-Mart to acquire. Undoubtedly, this acquisition would help Wal-Mart to capture more competitive advantage in China.
The successful role models of acquisition that can be benchmark by Wal-Mart were the acquisition done by it in Canada and European countries. The company entering Canada by acquiring 122 Woolco stores in 1994. Due to continuously suffering a loss in Canadian operation, Wal-Mart quickly restructured the operation by applying the practices that had been successful in United States and the action taken was profitable. And the acquisition made in Germany and United Kingdom in year 1998 and 1999 also proved to be successful where it allowed Wal-Mart to build market share quickly within the highly developed and competitive European market. (Source: Wal-Mart takes on the world)
Besides that, Wal-Mart should also build up a partnership or joint venture with local supplier in near future to ensure the flexibility, freshness of the foods and understand more about customers’ needs and tastes. It is because the strategy adopted in United States may not be fitted in China. The Chinese consumers are more prefer to consume fresh food rather than frozen food. A good example can be follow is Carrefour; it did a great job on building partnership and direct sourcing agreement with local suppliers. It focuses on locally sourced products, especially regarding fresh food. It also rely them to distribute goods directly to stores. A greater emphasis on partnerships with farmers enables Carrefour to have better control over food quality, and to reduce buying costs. Finally, it proved to be more flexible to customers than any others do.
Additionally, joint venture with local suppliers and purchase locally not only create flexible to customers, at the same time also reduce the costs in development than having joint venture with Investment Company. As deeply understand of the customers around, local suppliers have more experiences about the customers which are more accurately than foreign companies.
Lastly, another future expansion that would recommend to Wal-Mart is through mergers. According to Valentine (n.d.), successful mergers businesses are reaping benefits and gain more profits. Therefore, a merger with Trust-mart and any other giant company in China may help Wal-Mart to obtain quality staffs and knowledge or additional skills to cope with different in culture and customer preference. Apart from this, merging also provide Wal-Mart the opportunity to increase market share and expand to new geographical areas and sectors. The best evidence to illustrate was Carrefour making its first merging with NextMart Shanghai store after entering the China retail market for more than ten years. This movement had marked a basic change in their expansion strategy and indicated the second climax of Carrefour expansion in China. (Sources¼šwww.China-cbn.com, 2007)
Wholly-owned subsidiary in Philippine
We would like to recommend Wal-Mart to expand their operation in Philippine. Philippine is one of the richest and developing countries in Asia. We suggest Wal-Mart using wholly owned subsidiary. This is because under the Retail Trade liberalization Act (RA 8762), this law indicates that foreigners may own up to 100 percent of a store with pad-in capital of the Peso equivalent of USD $7.5 million. This mean that Wal-Mart could paid up capitalization of USD $7.5, wholly own a firm in Philippine (Abigail, 2011). It is more suitable using wholly-owned subsidiary which is acquired a Philippine’s local firm.
According to Philip et al. (2009), wholly-owned subsidiary could develop its operation with a greater control and higher profit compare with other entry mode strategy. However, this strategy has a higher risk. In another word, higher risk will get high return. Besides that, through the wholly-owned subsidiary, Wal-Mart could also state-of-the art technology hence resulting in increased operational efficiency. Wal-Mart could offer control over the local firm.
In addition, Wal-Mart has its wholly-owned operations in Canada, Brazil and Argentina, there are extremely successful since Wal-Mart has past experience operate in these Country. For instance, Wal-Mart successfully became a wholly owned subsidiary in Japan, Seiyu recent year. (“Walmart Corporate, 2012). Wal-Mart could learn the strategy same as in Japan because Wal-Mart has its experience and knowledge to use this entry mode into Japan.
Wal-Mart can form a new firm or find a local company to do the business. By doing this way, Wal-Mart could earn a valuable knowledge from local partner since they operated in Philippine several years because they know the economic, government policy, consumer buying pattern and consumer purchasing power (Gerald and Edwin, 2008). For instance, David and Gary (2010) found that Wal-Mart often acquires ongoing firm as they move into a new market. Wal-Mart’s 2005 acquisition of controlling interest in the Central American Retail Holding Company helped Wal-Mart acquire valuable knowledge about this important market.
Retail trade in Philippine is very vital and essential in order to boom the economy. Thus, Philippine’s government encourage foreign retail to invest in their country. In view of the fact that Wal-Mart is giving the low price of the retail grocery service for Pilipino, this would more satisfy them to buy Wal-Mart’s products (“Retailing in the Philippines”, 2002).
The reason we recommend for Wal-Mart to expand in Philippine due to Philippine is an open economy which is freely and business-friendly economy. Government also gives multinational company some incentives such as tax exemptions and tax and duty-free importation of particular materials and equipment. Aside from tax and government incentive, Philippine has a strategic business location which suitable for European and American businesses to operate their business there (“Why do business in the Philippines”, n.d.).
Joint venture in Malaysia
Furthermore, as many foreign retailers looked forward to invest in Malaysia because of the purchasing power of local consumers, we recommend that Wal-Mart can expand their business in Malaysia in the future. However, Malaysia has restricted and controlled the foreign hypermarkets to expand and enter to the local market in order to protect smaller local businesses over recent years. But some of the major foreign retailers such as Carrefour, Tesco, Giant, and Isetan have operated and doing well in Malaysia. Wal-Mart can try to enter Malaysia’s market because the entry of foreign giant retailer would bring benefit for both parties including the profit for Wal-Mart itself, and at the same time create job opportunities for the local workers. Furthermore, other than create job opportunities; the entry of Wal-Mart will also make the retail market more competitive and simultaneously benefit consumers by providing additional place to shop.
Moreover, we recommend Wal-Mart to apply joint venture as the entry mode into Malaysia retail market. Wal-Mart can try to joint venture with the local giant enterprise such as Berjaya Group, YTL, and IOI Corporation. However, Wal-Mart normally applies acquisition to enter into the countries. Unfortunately, Malaysia government has restricted and tightly controlled the entry of foreign retailers. Before that, Wal-Mart has tried to enter into Malaysia but have been rejected because the government realizes that the entry of Wal-Mart into Malaysia will greatly affect the local retailers. Moreover, Wal-Mart is able to provide the goods to the customers at a very low price because its business model is very efficient, but the low price of Wal-Mart has threaten the small local retailers as they may not able to fight the lower price with Wal-Mart and their business will be greatly affected, at the same time unable to survive.
The reason we recommend Wal-Mart to expand by using joint venture in Malaysia is because the minister of Malaysia stressed that Wal-Mart is not allowed to operate new retail stores or hypermarkets at their own discretion. However, according to Vivian (2007), Malaysian authority was planning to loosen the limitations on foreign hypermarket so as to attract foreign direct investment in Malaysia retail market. Therefore, Wal-mart might have an opportunity to expand into Malaysia. In order to successfully enter into Malaysia, Wal-Mart should joint venture with Berjaya Group to open a new store named as Berjaya-Mart as Berjaya Group is one of the successful companies. Through joint venture, Berjaya-Mart is able to access larger markets because Berjaya Group provides larger geographical markets and customer bases. Furthermore, Berjaya-Mart is new to the market and may need to spend a lot and the process is complicated. Through joint venture can helps to overcome some of the problems such as government regulation, direct financial losses, operating complexity, and reduce the cost of entry. Moreover, start a business in a new country might confront with political factors and the strict rules and regulations by the national government. Joint venture will help Berjaya-Mart to penetrate into the local market in Malaysia.
In conclusion, China is always an attractive market among countries for foreign investment. Although the retail market in China has a great potential, but the competition is very fierce from both local Chinese retailers and foreign retailers. However, Wal-Mart was a well-known company which with high reputation in global. Wal-Mart will continue to success in the future in China is mostly depend on the future expansion and their market strategy. As mentioned above, other than joint venture, we were recommended that Wal-Mart can try to use wholly-owned subsidiaries, partnerships, and merger. The wholly-owned subsidiaries from both acquisition and Greenfield investment will create advantage and help to expand in the future. Acquisition helps Wal-Mart to access and enter foreign market quickly and a way to achieve greater market power. Wal-Mart applies acquisition to achieve the larger market power to consent to exercise of a core competency and capture competitive advantage in global market. Although it is high risk due the potential high cost, but it is the most probable to provide above average return. However, for partnerships is somewhat easy to establish, Wal-Mart able to get fresh products much more easily through partnership with the local suppliers. Partnerships can help Wal-Mart to save cost as each partner specializes in certain aspects of their business.