Maoming, Wuhu and Loudi.
They're Chinese cities so far in
the boonies that Lonely Planet doesn't even bother to mention them in
its popular travel guide. But Wal-Mart has found them, as the company
makes an aggressive push into China's smaller markets.
China's
economic growth is rapidly spreading out from the main cities like
Beijing and Shanghai into the hinterlands, where the middle class is
taking off. In a report last year, the consulting firm A.T. Kearney
said 75 percent of the middle market is expected to be in tier-two and
tier-three cities by 2017.
These cities are "small" only by
the standards of a country with 1.3 billion people. For example, Wuhu
in eastern China has 2.3 million people and Maoming in the south has
6.8 million, providing a strong consumer base as incomes rise.
In
response, retailers are pushing into the hinterlands, including
American coffee chain Starbucks Corp. and French store Carrefour SA.
Carrefour, the world's second-largest retailer after Wal-Mart, is the
largest foreign retailer in China.
Faced with saturated
markets at home, these retailers are increasingly looking to emerging
economies such as China to drive sales growth. Wal-Mart's attempt to
gain a bigger foothold in China is anchored in smaller cities: Only
three of the 30 outlets Wal-Mart Stores Inc. opened in China last year
were in Shanghai, Beijing and Shenzhen. The rest were in provincial
capitals or other cities.
"I think the capacity for growth
in China might exceed that of the U.S., if you look at it in the long
term," Terrence Cullen, Wal-Mart's vice president of development in
China, said in an interview in his office in Shenzhen, the southern
boomtown across the border from Hong Kong.
Wal-Mart said its China sales rose 32.2 percent in the second quarter, while international sales overall were up 16.9 percent.
But
experts warn there are risks in smaller markets. People are not as
well-off, so it's harder to turn a profit. Local suppliers may be less
reliable, a concern in a country plagued by quality scandals, including
the recent discovery of contaminated baby formula blamed for killing
four infants and making thousands sick.
Moreover, the
big-bang growth strategy -- opening stores across China -- requires a
bigger investment than the gradual expansion the company pursued in the
U.S.
Two of the newest stores are in Loudi (pronounced
lou-DEE), a steel and mining town of 4 million people in central China.
It's just down the road from Shaoshan, the birthplace of late leader
Mao Zedong -- who would likely be horrified to hear that a flagship of
American capitalism has moved into his neighborhood.
At one
of the new Loudi Wal-Marts, a woman in blue overalls greets shoppers.
The sprawling, brightly lit and spotlessly clean store has the same
general look and feel of one of the company's well-stocked, wide-aisled
stores in the U.S.
But a few steps inside, it becomes clear that Wal-Mart is trying to deliver everyday low prices with Chinese characteristics.
The
smoky scent of thick slabs of dried smoked pork piled high in a display
case mixes with that of laundry detergent and plastic. There are
foreign brands: Raid roach killer, Head & Shoulders shampoo,
Budweiser beer and "pesto Italiano" flavored Pringles potato chips. But
there are also bins of reddish-brown dried squid and vacuum-packed
packages of preserved Wuchang fish, one of Mao's favorites.
"I
come here all the time," said Chen Yatian, a 21-year-old engineering
student. "The prices aren't higher than the small shops outside, and I
think the quality is better. My friends and I buy all our snacks here,
things like spicy dried tofu."
The need to satisfy sharply
different regional tastes is one of the challenges Wal-Mart faces in
smaller markets, said Dean Xu, professor of strategy and international
business at the University of Hong Kong. Wal-Mart will have to source
many goods from local suppliers, potentially raising quality issues.
"If there is one incident, it can ruin your company's reputation," Xu
said.
Still, Wal-Mart's Cullen says the expansion is a
logical step as China's middle class swells and the economy becomes
driven more by consumers than exports. Major markets have their
drawbacks too, he added.
"The big cities are very difficult
to do business in for all the obvious reasons: They're crowded. It's
difficult to find real estate. It's expensive and there's competition,"
said Cullen, who previously helped rival Costco Wholesale Corp. break
into South Korea and Taiwan.
In the United States, Wal-Mart
started with a single store in Arkansas in 1962 and built up its
distribution network slowly, opening stores in adjacent counties and
avoiding big leaps, said Emek Basker, a University of Missouri
economics professor who has done extensive research on Wal-Mart's
growth. The company had a conscious policy to open outlets only within
a day's drive of its distribution centers, she said.
Wal-Mart
declined to comment on whether it would be scaling back its
international expansion plans amid the global financial crisis.
Wal-Mart
is being outmaneuvered by Carrefour because its executives have taken
too long to understand the China market and add stores, said Burt P.
Flickinger III, managing director of retail consulting firm Strategic
Resource Group. Carrefour, with $4.3 billion in sales, ranked sixth
among all retailers in China in 2007, according to the China Chain
Store & Franchise Association. Its sales were up 24 percent over
the previous year.
Wal-Mart was 13th, with sales of $3.1
billion, a 42 percent increase over the previous year. The American
chain also owns a 35 percent stake in Trust-Mart, which operates about
100 stores in 34 Chinese cities.
At the Wal-Mart Supercenter
in Loudi, homemaker Zhang Xiaoling, 32, said the store with the lowest
prices would get her business.
"I always come here. I think
the selection is great and the prices are fair," Zhang said, as she
struggled to keep her 2-year-old son from wandering away. "There was a
small supermarket just down the road. When Wal-Mart opened, it closed.
It just couldn't compete."
A few blocks away, in the dark
and dingy basement of a dilapidated building, most of the merchants at
a traditional food market appeared blase about the new competitor.
Shau Youming, who sells spices and soy sauce in a small stall, said Wal-Mart hasn't hurt his business.
"I've
got my old customers and they all live nearby," he said. "It's
convenient for them to come here. My prices aren't high and I keep an
eye on Wal-Mart's prices. I'm not trying to make a lot of money. Just
enough to make a living."
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