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Rocket Capital

Image Courtesy (Source) — Arnieishere by Tenor.com

Asia Next — Walmart’s Power-Packed Asian Blunder

In 1997, when Walmart first started exploring Japan to expand, it was a no-brainer on the surface. Japan’s retail sector accounted for 55% of the Asian Market. It was -

  • World’s second-largest economy by nominal GDP,
  • Third-largest by Purchasing Power Parity, and
  • World’s second-largest developed economy.

Japan’s market also was a significant opportunity for advancing into other Asian markets. Then what went wrong? Before answering this question, let’s take a look at Walmart’s strategy and its home-ground success.

The Hyper “Hyper” Localized Walmart’s Strategy

Founded in 1962 in the U.S., Walmart had a very unique proposition — its founder. Sam Walton cultivated Walmart’s strategy with an extreme customer- and business-centric approach. Through a tedious process of examining the competitors and studying the retail market, he curated the WALMART STRATEGY. The three key features of that strategy are-

  1. Power of Discounting — Selling products at a lower margin to maximize sales. This increases the sales volume, the inventory moves fast, and it gives Walmart more bargaining power over suppliers.
  2. Market Research and its Targeted Implementation- While everyone can implement the power of discounting, Walton’s market research is what sets Walmart apart from the competition. After visiting and meticulously analyzing pitfalls and successful elements from every retail store in town, he embedded the hook elements from each store into the business model to attract more customers. From a simple frozen yogurt machine that helped parents shop more efficiently to as well thought as selling basic commodities at a loss to make customers believe that the store offers the best prices — if there was a customer-centric strategy in town, it was definitely at Walmart.
  3. Shared Ownership — Walmart to this date incorporates Walton’s three basic principles to turn managers into extraordinary leaders — Safety, Collaboration, and Shared Ownership.
    All managers of Walmart own a percentage of their store to instill a sense of ownership and inspire them to work harder. The managers also have the liberty to experiment, the failure of which doesn’t result in serious consequences. Every store also holds meetings every Saturday morning to solve even the silliest of issues.

Walmart became very successful in its home ground. Americans spent about $46 million at Walmart every single hour for 24 hours a day and 365 days a year. They employ about 2.2 million people a year and in 2021 alone Walmart generated a profit of $1.5 million every single hour.

Asia — Attacking Walmart’s ‘Perfect’ Strategy

In March 2002, when Walmart entered Japan, it purchased a 6.1% stake in Seiyu — a 371-store chain. Seiyu had a well-established network of retail chains (so a higher market penetration) but it was struggling. The company’s crisis made it easy for Walmart to eventually acquire it in 2008.

Walmart entered Japan by acquiring a 6.1% stake in the 371-store chain Seiyu.
Walmart entered Japan by acquiring a 6.1% stake in the 371-store chain Seiyu.

The Perfect Strategy for the ‘Conscious’ Consumer Market

The “Everyday Low Prices” (EDLP) strategy, on paper, looks perfectly cut out for conscious Asian markets, but it backfired. Not all Asian economies are the same, and Japan is a big expectation of this rule. In Japan, prices alone weren’t enough to draw local consumers.

The Cultural Conundrum

Culture is a strong indicator of consumer behavior in a country. When you look at the fundamental attributes of society in Japan and the US, you can see the reason for the drastic variation in the behavior.

USA vs. Japan — Cultural Dimensions — Hofstede Insights — Rocket Capital
USA vs. Japan — Hofstede’s Cultural Dimensions

As evident from the index, the Japanese society leans towards collectivism and is highly prone to avoid uncertainty, i.e., they’ll hardly test out something new. Society is masculine and thus looks for perfection & quality in products rather than good value. People have a long-term orientation that restrains them from spending and buying unnecessary things.

Challenges in Japan

Walmart’s standardized technique — forcing out supply chain inefficiencies to cut costs and increase sales volume didn’t work in Japan because:

  1. Inclination to Minimalism — People in Japan don’t buy in bulk, unlike Americans, primarily because of the high real-estate cost. They avoid unnecessary purchases which tend to occupy more space and keep everything to a minimum. Bulk purchases might also lead to more waste generation, and waste disposal is an expensive endeavor in the country. Therefore, megastores are not practical for this audience.
  2. The Fresh Food Factor — Japanese are more inclined to buy fresh products. The perishable nature of the products doesn’t fit the Walmart model which offers a huge variety of pre-packaged products.
  3. Luxury Lifestyle: Quality over Price — The aging and mature Japanese audience is more inclined towards sophistication and luxury purchases. They tend to be finicky and at times shun low-priced products as cheap or of poor quality and Walmart doesn’t cater to this high-end segment. Its entire model is built on offering “everyday low prices”.
  4. Close-Knit Relationships — The strong bond between manufacturers, wholesalers, and retailers shifted the bargaining power towards the supplier-end, preventing Walmart from tweaking the prices in their favor.

Walmart’s Counter Approach

The U.S. giant entered the market with neither a strong overall strategy nor its famous ‘in-store’ tactics to establish its presence in a country with an aging population. As a result, after 18 years of struggle, Walmart sold a majority (85%) stake of Seiyu to PE firm KKR and Japanese e-commerce group Rakuten for $1.6 billion.

Rakuten & Walmart — A Nudge Into the right direction. Asia Next — Rocket Capital
Rakuten & Walmart — A Nudge Into the right direction. Source — deliMARKET News

This partnership finally pushed things in the right direction. With the COVID pandemic, the audience began shifting to online shopping and the popularity of discount stores increased as the Japanese audience gravitated towards low-priced solutions.

Walmart’s Asian Success

Walmart took a hit in Japan, but it made its presence felt in Asia. It has a strong foothold in China and India -

  1. Walmart India — Walmart exists under a different brand name in India — Flipkart. It acquired a 77% stake in Flipkart for US$16 Billion. The brands remained distinct until 2020 when Flipkart absorbed Walmart India to strengthen its supply chain and compete against the country’s rising local and global players.
  2. Walmart China — Walmart entered China in 1996 with three retailing formats: Supercenters, Sam’s Club, and Neighborhood Markets. It operates more than 400 stores in over 180 Chinese cities with a plan to open 30 to 40 new stores every year. The American giant also acquired a 35% stake in Trust-Mart, a Taiwan-based hypermarket chain plan, to accelerate its expansion across China. It sources about 95% of the goods locally. Walmart also sold its e-commerce side to JD.com in 2016 which now operates on behalf of Walmart China. This move allowed them to tap into Chinese consumer needs.

Tackling the Asian market

Asia is not just a story of scale, it’s also about diversity, changing behaviors, and shifting preferences. While companies recognize the geographic, demographic, and economical characteristics of the markets, the importance of Cultural aspects can never be underestimated. In Asia, the cultural heterogeneity (and the existence of many local cultures within) puts a roadblock for the companies. To counter this -

  • Make Market Research foundational to the Strategy — If a company tries to transplant its business model as-is from its parent country into a new market — it breaks the most fundamental rule of strategy. An in-depth understanding of geography, demography, and most importantly culture could have helped Walmart’s standing in the Japanese market.
  • In-Depth Cultural Understanding — It means not just the overall cultural dimensions of the country, but understanding the local cultures within.
  • The role of Local Partnerships — In a market like Japan, the close-knit relationship between manufacturers, wholesalers, and suppliers prevented Walmart from gaining bargaining power disrupting its low-cost model.
  • Embed Continuous Market Feedback into the Strategy — Market research is an ongoing process. Your offering can be perfect but it might not be the right fit for the market at that time. Just as Google Glass failed in 2012 because the market was not prepared for it, the Japanese market didn’t respond to Walmart as expected until the pandemic.

Asia Next

Asia Next is a vlog and blog series about challenges & opportunities faced by global companies, and the Go-To-Market(GTM) strategies Rocket Capital has curated to make your navigation through the landscape easier. With a massive investor network and strong connections in the industry, we help Founders fulfill their Asian Ambitions.

Rocket Capital

Rocket Capital is a VC fund focusing on New Media Technology start-ups globally. We invest in pre-Series A, Series A & B companies and help founders scale in Asia.

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Rocket Capital is a VC fund investing in New Media Technology start-ups globally. We invest in pre-Series A, Series A & B companies and help founders scale in Asia.

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Akarsh Dhaiya

Akarsh Dhaiya

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