The case focuses on how retailing giant Wal-Mart struggled in the Japanese market. It elaborates on the reasons for Wal-Mart's decision to go global in the early 1990s. The case discusses in detail Wal-Mart's entry strategy and describes its efforts to bring in its best practices in retailing like Every Day Low Prices (EDLP) and Rollback to the Japanese market through its joint venture with Seiyu.
The case details the problems that Wal-Mart faced in Japan because of the differences between the operational and cultural environment in its home market and the Japanese market. It finally ends with a discussion on the company's future prospects in Japan.
Issues:
» Nature and structure of the Japanese retailing industry including its size, scope, spread, and unique characteristics
» Entry strategy for an overseas market
» Impact of competition, culture, and unique environmental factors on the performance of a firm in the international market
» Influence of regulation on the success of a company in such markets
"It will be a long-term story to see if Wal-Mart can take advantage of the merits of the Japanese market." 1
-Yasuyuki Sasaki, Retail Analyst, Credit Suisse First Boston in 2002.
"Japan is a challenging market, but it is also a very significant growth opportunity." 2
- Greg Penner, Chief Financial Officer, Wal-Mart Japan in 2004.
"For Wal-Mart, success in Japan is important, since a solid foothold in the world's No. 2 retail market could someday be a key to future growth." 3
-Business Week Magazine in 2005.
Introduction
Wal-Mart Stores Inc. (Wal-Mart) entered Japan in March 2002, through an alliance with Seiyu Limited (Seiyu), Japan's fifth largest retailer in 2002. There were mixed reactions from analysts.
Some cited macro-economic factors like the low rate of growth4 and an aging population that made Japan's retail market less than attractive. However, others felt that despite these factors, Japan's $451 billion retail industry was sufficiently large to justify Wal-Mart's interest.
As soon as it entered Japan, Wal-Mart brought in its best practices in retailing like Every Day Low Prices5 (EDLP) and Rollback,6 for which the firm was renowned. It also attempted to introduce substantial changes to the management of Seiyu stores by revamping its store layouts, and implementing Retail Link,7 its widely appreciated supply chain management software. Despite these efforts, Seiyu registered consecutive losses in 2003 and 2004.
Some experts commented that Wal-Mart's retailing model was not suitable for Japan. They pointed out that Japanese consumers preferred conveniently located stores within the city and were not visibly price-conscious. They added that foreign retailers had trouble with procurements due to the multi layered network of suppliers and retailers in the Japanese retail sector.
Experts began to compare Wal-Mart's experiences in Japan with its experiences in other countries such as Mexico and Germany. While Wal-Mart had a shaky start in Mexico, it later emerged as a market leader in the country. In Germany, however, it could not overcome initial setbacks and was still struggling. Experts wondered whether the Japanese venture would replicate the Mexican success story or the German misadventure. In August 2005, Wal-Mart announced that it was contemplating launching stores with its own brand name in Japan. This seemed like a bold move by Wal-Mart, especially since another big foreign retailer - Carrefour8 - had exited the Japanese market just a few months earlier in March of the same year, after struggling to establish itself for six years.
Despite its troubles with Seiyu, Wal-Mart also made a bid to acquire Japan's fourth largest retailer Daeiei in 2004, when it was being restructured through a bailout. However, Wal-Mart's bid for Daeiei was rejected in September 2005, dealing a big blow to its expansion plans in Japan. Had the bid been successful, Wal-Mart could have emerged as the second largest retailer in Japan after Ito Yokado.
Background Note
In 1962, Sam Walton (Walton) and his brother James Lawrence "Bud" Walton opened the first Wal-Mart store in Rogers (Arkansas), USA. In the first year of its operations, the store registered sales of over $1 million. Initially, the Waltons concentrated on opening stores in small towns and introduced innovative concepts such as self-service. By 1967, Wal-Mart had 24 stores with sales of $12.6 million.
Encouraged by the early success of Wal-Mart, Walton expanded Wal-Mart's operations to Oklahoma and Missouri in 1968. In the following year, Wal-Mart was incorporated as a company under the name Wal-Mart Stores Inc. In 1970, Wal-Mart established its first distribution center in Bentonville, Arkansas. The same year, it was also traded for the first time as a public limited company in over the counter9 stock trading. In 1972, Wal-Mart was listed on the New York Stock Exchange. Wal-Mart continued to grow in the 1970s, benefiting from its highly automated distribution system, which reduced shipping costs and time, and its computerized inventory system, which speeded up the checkout and reordering of stocks.
By 1975, there were 125 Wal-Mart stores in operation with sales of $340.3 million and 7,500 employees. The famous 'Wal-Mart Cheer' was introduced by Walton in the same year to foster cooperation and team spirit among employees (Refer Exhibit II for the Wal-Mart Cheer). In 1978, Wal-Mart purchased the Hutcheson Shoe Company, and later set up pharmacy, auto service center, and jewelry divisions.
By 1980, Wal-Mart had 276 stores with annual sales of $1.4 billion and by 1984 the number of stores increased to 640 with annual sales of $4.5 billion and profits of over $200 million. In the 1980s, strong customer demand in small towns led to the rapid growth of Wal-Mart.
Wal-Mart succeeded in smaller towns because it offered low prices and catered to the specific needs of small towns. It offered the kinds of products that were most in demand by customers and fixed the store's business hours according to its customers' convenience. This made Wal-Mart more popular than the local stores which offered limited selection and had high mark-ups...
Wal-Mart's International Operations
In early 1990s, Wal-Mart announced that it would go global. It wanted to look for international markets for the following reasons:
» Wal-Mart was facing stiff competition from K-mart and Target , which had adopted aggressive expansion strategies and had started eating into Wal-Mart's market share.
» Although Wal-Mart had the scope to expand in the US, it was becoming difficult for the company to sustain its double digit growth rate. Wal-Mart was suffering from soft sales and rising inventories, especially in respect of its Sam's Club divisions.
» Wal-Mart also realized that the US population represented only 4% of the world's population and confining itself to the US market would mean missing the opportunity to tap potentially vast markets elsewhere.
» In the early 1990s, globalization and liberalization opened up new markets and created opportunities for discount stores such as Wal-Mart across the world.
During the first five years of its globalization initiative (1991-1995), Wal-Mart concentrated on Mexico, Canada, Argentina and Brazil, which were close to its home market.
It started with Canada and Mexico due to the similarities in people's habits, culture and the business environments in these countries and also because the North American Free Trade Agreement (NAFTA) made it easier for US companies to enter these markets.
Wal-Mart's decision to enter Argentina and Brazil was based on the high growth rates of the Latin American markets...
Wal-Mart's Entry Into Japan
In the 1990s, real estate prices in Japan declined, prompting many foreign retailers to enter the country. Wal-Mart started exploring the Japanese market in 1997. Other major foreign retailers Costco and Carrefour entered the Japanese market in 1998 and 1999 respectively (Refer Table V for foreign retailers in Japan). Costco and Carrefour entered Japan without a local partner and faced difficulties from the very beginning. This convinced Wal-Mart that it should partner with a Japanese company so as to enable it to understand the peculiarities of the Japanese market...
The Wal-Mart-Seiyu Partnership
Wal-Mart and Seiyu identified IT and distribution as the key areas for reforming the retail business of Seiyu. During 2002-03, Wal-Mart also conducted extensive focus group researches and studied retailers in Japan so that it could apply this insight to the management of Seiyu's stores. Seiyu launched a five-year plan in December 2002, called as the "New Seiyu"program. Through this Seiyu wanted to implement the best practices offered by the Wal-Mart model. In line with the above program, in August 2003, Seiyu began the roll out of Wal-Mart's store information system called as "Smart System". The Impact Of The Partnership
Seiyu's performance improved marginally with a reduction in losses from $754 million in 2002 to $67 million in 2003. By the first quarter of 2004, Seiyu announced that it had cut down 3.6% of costs compared with the same period the previous year.
It had laid off 25% of its full time employees though voluntary retirement schemes. The company announced that it expected to make profits of $4.6 million with sales of $10.2 billion for 2004.
The company's share prices on the Tokyo stock exchange also showed an improvement as compared to the year 2003...
The Future
As of 2005, Seiyu said that it did not hope to make any profits till 2006. The opening of the next Super Center would also be taken up only after 2006. The company had realized that it was not able to cut costs enough to allow it to offer really heavy discounts necessary to make customers shop regularly at its stores.
In Japan, as compared to the US market, Wal-Mart was still to achieve big efficiencies by leveraging Retail Link and increasing its purchasing. As Marra remarked, "In the U.S., Wal-Mart's information technology and huge buying power allows the company to undercut rivals by some 15% across the board...
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