The case study is a perfect example of how failure to know and understand the market one is competing in can be disastrous, even for corporations as large and as experienced as Wal-Mart. Just because something has been successful in America it does not mean that the same business model can be duplicated in a different global market with the same results. Wal-Mart entered into a joint venture with Charoen Pokhand (CP) Group to facilitate their entry into the Chinese market. However, they failed to utilize one of CP’s greatest assets, their market knowledge, and this ultimately led to the demise of their Value Club stores.
If Wal-Mart had properly used CP’s expertise to better understand the Chinese marketplace they would have devised an entry strategy that catered to the wants and needs of the local market and subsequently increased their chances of success. Every industry has certain key success factors that all businesses must possess to be a viable competitor. For warehouse clubs, “The key operating strategy is to maintain low costs and high turnover” (Herndon p. 3). Companies need to have a strong and extremely efficient logistics system in place in order to keep their costs down and to keep their stores stocked with the right merchandise mix.
Knowing the right merchandise mix is essential to the success of warehouse clubs because they offer limited choices and product categories in order to maintain their low costs. Before they can determine what products to sell, they must fully understand their target market. Knowing who your customers are is a key success factor for any business, and this is especially true for warehouse clubs. The opening of these stores requires a tremendous investment of time and capital. In order to maximize this investment companies need to know which products will sell so they do not end up with a warehouse full of useless inventory.
They need to know what brands their target market prefers, what sizes, how many they want, and how often they shop. Another key component of knowing your market is choosing the right location. If the business is not easily accessible it does not matter what type of products they are selling because they cannot generate enough traffic to remain in business. While most key success factors are universal no matter where businesses operate, such as creating and maintaining strong customer relationships, some factors vary according to the specific country or market.
For example, warehouse clubs in America offer few services in order to keep costs as low as possible. In other markets, like Hong Kong, warehouse clubs must become more service oriented in order to succeed because service and convenience are just as important as price to consumers. In fact, there are a multitude of differences between the market environment in Hong Kong and the United States. The physical environment is radically different with only fifteen percent of Hong Kong suitable for development.
This leads to, “astronomical land prices,” and “rent for prime locations among the highest in the world, some 130 percent higher than comparable locations in New York” (Herndon p. 6). The lack of space for development also means that most Hong Kong residents live in very cramped quarters; “Families of five often live in 400 square-foot apartments with extremely limited storage space and small refrigerators” (Herndon p. 11). The high land prices forced Wal-Mart to build their Value Club stores in secondary locations whereas the Sam’s Club stores in the U.
S. are established in high traffic and easily accessible locations. The sizes of the stores are also radically different. In the United States warehouse clubs are usually around 100,000 square feet and stock 4,000-5,000 different items. The Hong Kong stores were 20,000 square feet and stocked about 1,000 different items which suggest a much more limited product assortment. The average warehouse club shopper in America also has a car to transport themselves and their purchases, but only four percent of the population in Hong Kong owns an automobile.
These conditions serve to create a radically different market for warehouse stores in Hong Kong compared to the United States. The average Hong Kong resident does not have anywhere near the storage space that the average American does. This means that they have no where to store the large bulk items that comprise the majority of warehouse store’s inventory. They also have no way to transport these large bulk items because most people use public transportation. American and Hong Kong shoppers are both price sensitive, but “Hong Kong customers seem to place a premium on convenience, quality service and store atmosphere” (Hendon p. 1). The bare-bones warehouse clubs function well here in America because the low costs is what ultimately pulls in the customers, but simply having lower prices is not enough for many Hong Kong consumers. In fact, “they may realize that the lower price at the store might be offset by the high transportation costs” (Herndon p. 11). Most apartments and residential blocks have their own small grocery and retail stores on the first floors and provide convenient access to most Hong Kong residents. This is very different for the majority of Americans that drive to there nearest grocery store or mass merchandiser to do their shopping.
There are also several cultural differences that impact the marketing environment in Hong Kong. Whereas the average American does most of their shopping once or twice a week (usually during the weekend), Hong Kong housewives normally shop daily. The bulk items are welcome in America because it means fewer trips to the store, to the Chinese most of these items are just too large and take up too much space to be helpful “even at bargain prices. ” (Herndon p. 7) Chinese people are also very prideful and it would be embarrassing for them to throw away any product they did not like which is definitely not something Americans have a problem with.
The product assortment was also perceived very differently by Hong Kong shoppers who were unfamiliar with many of the products because 70% of the items at Value Club were American brands. The differences between the Hong Kong and American markets are staggering, but Wal-Mart could have greatly enhanced their chances for success if they had taken a different approach from just doing what worked in America. Herndon himself writes that, “The warehouse club can’t be transferred directly to the Hong Kong market without modifying it” (Herndon p. 11).
Before Wal-Mart even attempted to construct any stores in Hong Kong they should have fully utilized Charoen Pokhand’s knowledge of the Asian competitive landscape. The main idea behind joint ventures is that each company takes their core strengths and combines them to create a better, more efficient company. Wal-Mart might be a global powerhouse, but CP is one of the largest business conglomerates in Asia and they know what the consumers want. Wal-Mart just tried to transplant their American business model to Hong Kong and it was like trying to fit a square peg in a round hole.
One of the biggest problems Wal-Mart had was that their product mix was not tailored to the Hong Kong market. Seventy percent of the products in the Value Club stores were American brands that many Hong Kong consumers were weary to purchase, especially in bulk. If Wal-Mart tailored their inventory to products that Chinese shoppers were more willing to buy the Value Club stores would have been immensely more profitable. In fact Wal-Mart learned from their failures in Hong Kong, and when they opened their stores in mainland China they were much more tailored to the Chinese market.
According to a Discount Store News article by Teresa Andreoli on Wal-Mart’s success in China, “Assortment is key, and as of opening day, about 85% to 90% of the mix will be domestically sourced. ” Herndon also writes that “product assortment should be increased and package size decreased. ” Of course the product mix does not matter one bit if you can not get anyone to visit the store. Wal-Mart chose locations that were located outside the public transportation “backbone” which was not good for business. The land might have been cheaper, but that is irrelevant if you cannot get any customers to frequent the stores.
If Wal-Mart had chosen more convenient locations they would have greatly enhanced their chances for success. Another location feature that would have helped greatly would have been the addition of parking lots to their store locations. Perhaps the best strategy for Wal-Mart would have been to simply enter with Wal-Mart stores as opposed to trying to force the Value Club concept on an unwilling market. Wal-Mart has seen tremendous growth in China, but this is mainly due to their Wal-Mart stores and Supercenters; the warehouse club concept has still not caught on with Chinese consumers.
Works Cited Andreoli, Teresa, “Wal-Mart sees potential fortune in China debut,” Discount Store News, July 15, 1996, pg. 1-2. Herndon, Neil, “Hong Kong shoppers cool to Wal-Mart’s value Club,” Marketing News, November 20, 1995, pg. 11. Mintel. (2005). Warehouse Club Buying – US – February 2005. Retrieved September 12, 2007, from Mintel Market Research Reports database. ;http://libproxy. library. unt. edu:3224/sinatra/oxygen_academic/my_history/show=my_history/display/id=121119/display/id=151773/display/id=151702? select_section=121119;