Retail giant Wal-Mart Stores Inc. works hard every day to crack the China consumer code. Realistically, the 1.3 billion people in China won't become customers overnight, but in areas like Shenzhen in southern China, millions are working and consuming well beyond a subsistence level.
Understanding who is buying and what they want is only part of the job for the world's largest retailer. It isn't alone in the world's largest marketplace, but cultural lessons learned over the 10 years Wal-Mart has been in China are a major force driving its success.
From just over 200 employees a decade ago, Wal-Mart has grown to 26,000 in 2005 and expects to have 40,000 by the end of 2006. That workforce looks very different from its U.S. retail mix. For one thing, 20% or more have university degrees.
Training takes place every day in every store, points out Joe Hatfield, president and CEO of Wal-Mart Asia. Those with good skills and potential are sent to the U.S. to attend the Walton Institute. But, Hatfield continues, some of the best people Wal-Mart had in China didn't speak English fluently enough to attend the U.S. training. Undaunted, Wal-Mart brought the training to them. Working with the U.S. training group, it developed the same capability in China, including computer-based training. It's also starting a Master of Business Administration program.
That's a hefty investment in people in an area where skills are in short supply and job poaching is common. But even in the face of active recruiting, Wal-Mart's China operations have a 16% employee turnover rate. That's the lowest of any operation worldwide, says Hatfield, pointing to the U.S. rate of 40% as just one example.
Wal-Mart operates 43 Supercenters in China and has two distribution centers (DCs) supplying them. A third DC (400,000 square feet) will open in Shenzhen in 2006. That doesn't sound like much of a logistics network to support operations in areas as widespread as Shenzhen, Shanghai, Beijing and places in between. Wal-Mart has buying agents in every city where it operates a retail center because many items have to be bought locally through state-approved vendors. They may negotiate centrally, but very few items are imports, explains Hatfield. There aren't many national brands, he points out, noting 90% of the market is in local brands.
Of the factors leading to the current localized structure of the Chinese market, one is a definite holdover of the Maoist period when every village was designed to be self-sufficient. Moving goods from one city to another, as in an inter-store transfer or conventional regional distribution strategy, would require approval of local officials.
Recordkeeping is critical in an environment that focuses on local sourcing for local consumption. When Wal-Mart started in China, there were 21 documents for every purchase order. Every store had to write its own purchase orders by hand and issue checks. Now, many of the suppliers use Retail Link, the same online portal Wal-Mart's suppliers in the U.S. use to communicate electronically with the retailer. Things may be easing up a little, but the rules are still there, says Hatfield.
Adapting to local practices and adjusting to the market are important facets of remaining competitive in China. Wal-Mart discovered that its food products are critically important to its success in developing a strong customer base and achieving its goal of being the " community store." Fresh produce, meat and packaged food products occupy much of the first level of the Wal-Mart Superstore in Shenzhen. Walking past bins of fruit and vegetables, Shawn Gray, vice president of operations, points to huge tanks of fish and seafood, explaining that Chinese shoppers prefer to select their own live fish and seafood.
Moving on a little further, case after case of in-store prepared foods give off an almost overpowering mix of aromas. This is one of the most successful parts of the store, Gray notes. Workers come in for their "morning lunchbox," their "lunch lunchbox" and then their " goinghome lunch box," he says. For about seventy cents, they get two or three items — a complete meal.
A food court next to the Wal-Mart entrance includes a U.S. favorite, KFC. The Colonel smiles down from a large, round lighted sign next to what appears to be his Chinese cousin with an equally glowing smile. Yum! Brands, parent company of KFC, has done a good job of adjusting to the market, says Hatfield, and they are opening about 250 units per year in China.
Next to each KFC is the Chinese noodle house that mimics the Colonel's happy face but offers a more Asian alternative to diners. The two co-exist and, Hatfield explains, the Chinese competitor next door hasn't hurt KFC's business. Neither has it impeded Wal-Mart's ability to sell prepared foods, including some high-end gourmet lines.
To understand this penchant for fast food, you only have to look at Shenzhen and its growth. Just over 10 years ago, about the time Wal-Mart was moving into China, Shenzhen was a small, special economic zone north of Hong Kong. At the time, they were trying to cope with growth from about 30,000 inhabitants to 300,000, a guide explains. The current official estimate for Shenzhen is 10 million inhabitants, but most people quickly add that there are likely a couple million more people in the economic zone — "It's difficult to say because there are so many people coming and going."
To put Shenzhen into perspective, Hong Kong has an official population of 7 million. That means, in a decade, Shenzhen has gone from the level of a small village to a major metropolitan area with a population greater than New York City. Many residents are workers without permanent documents. Most live in dormitory-style housing with four or more people sharing a room. That makes it easy logic when Wal-Mart's Hatfield says his company couldn't succeed in China if it didn't carry food. But that isn't as simple as it sounds. The products and quality have to be trusted, and the retailer has to accommodate some of the regional tastes that come with the workers who have migrated to Shenzhen.
On the merchandise side, Wal-Mart has also learned some lessons. Its cosmetics weren't moving until the store put in demonstration stations where customers could be shown how to apply the various types of make-up. Not only has that improved sales, it has helped Wal-Mart move high-end brands that cost the equivalent of US$100 per item.
Other merchandise categories demonstrate the rise of consumer culture. The electronics department carries items as high-end as plasma televisions. Wal-Mart's Gray doesn't offer sales figures, but he says the US$8,000 plasma TVs aren't exactly slow movers.
Wal-Mart is certainly not the only major retailer trying to tap the China market. Hatfield comments that European retailers Tesco and Carrefour are building rapidly in China. He points to construction in the parking lot next to the Shenzhen Supercenter and explains a major retail center is being built there. "We'll have a bridge across from their building to the Wal-Mart Supercenter," he says. That will allow shoppers to move easily between the two.
For the moment, competition seems to be less of an issue than coping with structural issues in the China market. Like the Kentucky Fried Chicken restaurant and its neighboring Chinese noodle house, Wal-Mart does not appear to be uncomfortable with competition. As Hatfield points out, it is vision and a willingness to reinvent that keep it out in front on the China retail scene.