WALMART’S GLOBAL EXPANSION

Established in Arkansas in 1962 by Sam Walton, over the last four decades Wal-
Mart has grown rapidly to become the largest retailer in the world, with 2005 sales
of $315 billion, 1.8 million associates (Wal-Mart’s term for employees), and
almost 7,000 stores. Until 1991, Wal-Mart’s operations were confined to the
United States. There it established a competitive advantage based upon a
combination of efficient merchandising, buying power, and human relations
policies.
Among other things, Wal-Mart was a leader in the implementation of information
systems to track product sales and inventory, developed one of the most efficient
distribution systems in the world, and was one of the first companies to promote
widespread stock ownership among employees. These practices led to high
productivity that enabled Wal-Mart to drive down its operating costs, which it
passed on to consumers in the form of everyday low prices, a strategy that enabled
the company to gain market share first in general merchandising, where it now
dominates, and later in food retailing, where it is taking market share from
established supermarkets.
By 1990, however, Wal-Mart realized that its opportunities for growth in the
United States were becoming more limited. Management calculated that by the
early 2000s, domestic growth opportunities would be constrained due to market
saturation. So the company decided to expand globally. Initially, the critics
scoffed. Wal-Mart, they said, was too American a company. While its retailing
practices were well suited to America, they would not work in other countries
where infrastructure was different, consumer tastes and preferences vary, and
where established retailers already dominated.
Unperturbed, in 1991 Wal-Mart started to expand internationally with the opening
of its first stores in Mexico. The Mexican operation was established as a joint
venture with Cifera, the largest local retailer. Initially, Wal-Mart made a number of
missteps that seemed to prove the critics right.
Wal-Mart had problems replicating its efficient distribution system in Mexico.
Poor infrastructure, crowded roads, and a lack of leverage with local suppliers,
many of which could not or would not deliver directly to Wal-Mart’s stores or
distribution centers, resulted in stocking problems and raised costs and prices.
Initially, prices at Wal-Mart in Mexico were some 20 percent above prices for
comparable products in the company’s U.S. stores, which limited Wal-Mart’s
ability to gain market share. There were also problems with merchandise selection.
Many of the stores in Mexico carried items that were popular in the United States.
These included ice skates, riding lawn mowers, leaf blowers, and fishing tackle.
Not surprisingly, these items did not sell well in Mexico, so managers would slash
prices to move inventory, only to find that the company’s automated information
systems would immediately order more inventory to replenish the depleted stock.
By the mid-1990s, however, Wal-Mart had learned from its early mistakes and
adapted its Mexican operations to match the local environment. A partnership with
a Mexican trucking company dramatically improved the distribution system, while
more careful stocking practices meant that the Mexican stores sold merchandise
that appealed more to local tastes and preferences. As Wal-Mart’s presence grew,
many of Wal-Mart’s suppliers built factories near its Mexican distribution centers
so that they could better serve the company, which helped to further drive down
inventory and logistics costs. Today, Mexico is a leading light in Wal-Mart’s
international operations. In 1998, Wal-Mart acquired a controlling interest in
Cifera. By 2005, Wal-Mart was more than twice the size of its nearest rival in
Mexico, with some 700 stores and revenues of $12.5 billion.
The Mexican experience proved to Wal-Mart that it could compete outside of the
United States. It has subsequently expanded into 13 other countries. Wal-Mart
entered Canada, Great Britain, Germany, Japan, and South Korea, by acquiring
existing retailers and then transferring its information systems, logistics, and
management expertise. In other nations Wal-Mart established its own stores. As a
result of these moves, by mid-2006 the company had more than 2,700 stores
outside the United States, employed some 500,000 associates, and generated
international revenues of more than $62 billion.
In addition to greater growth, expanding internationally has bought Wal-Mart two
other major benefits. First, Wal-Mart has also been able to reap significant
economies of scale from its global buying power. Many of Wal-Mart’s key
suppliers have long been international companies; for example, GE (appliances),
Unilever (food products), and Procter & Gamble (personal care products) are all
major Wal-Mart suppliers that have long had their own global operations. By
building international reach, Wal-Mart has used its enhanced size to demand
deeper discounts from the local operations of its global suppliers, increasing the
company’s ability to lower prices to consumers, gain market share, and ultimately
earn greater profits. Second, Wal-Mart has found that it is benefiting from the flow
of ideas across the 14 countries in which it now competes. For example, a two-
level store in New York State came about because of the success of multilevel
stores in South Korea. Other ideas, such as wine departments in its stores in
Argentina, have now been integrated into layouts worldwide.
Wal-Mart realized that if it didn’t expand internationally, other global retailers
would beat it to the punch. Wal-Mart faces significant global competition from
Carrefour of France, Ahold of Holland, and Tesco from the United Kingdom.
Carrefour, the world’s second-largest retailer, is perhaps the most global of the lot.
The pioneer of the hypermarket concept now operates in 26 countries and
generates more than 50 percent of its sales outside France. In comparison, Wal-
Mart is a laggard with less than 20 percent of its sales in 2005 generated from
international operations. However, there is room for significant global expansion.
The global retailing market is still very fragmented. The top 25 retailers controlled
less than 20 percent of worldwide retail sales in 2005, although forecasts suggest
the figure could reach 40 percent by 2010, with Latin America, Southeast Asia,
and Eastern Europe being the main battlegrounds.
Case Discussion Questions
1. How does expanding internationally benefit Wal-Mart?
2. What are the risks that Wal-Mart faces when entering other retail markets? How
can these risks be mitigated?
3. Why do you think that Wal-Mart first entered Mexico via a joint venture? Why
did it purchase its Mexican joint venture partner in 1998?
4. What strategy is Wal-Mart pursuing: a global strategy, localization strategy,
international strategy, or transnational strategy? Does this strategic choice make
sense? Why?

Sources: A. Lillo, “Wal-Mart Says Global Going Good,” Home Textiles Today, September 15, 2003, p.
12–13; A. de Rocha and L. A. Dib, “The Entry of Wal-Mart into Brazil,” International Journal of Retail
and Distribution Management, 30 (2002), pp. 61–73“Wal-Mart: Mexico’s Biggest Retailer,” Chain Store
Age, June 2001, pp. 52–54; M. N. Hamilton, “Global Food Fight,” Washington Post, November 19,
2000, p. H1; “Global Strategy—Why Tesco Will Beat Carrefour,” Retail Week, April 6, 2001, p. 14;
“Shopping All over the World,” The Economist, June 19, 1999, pp. 59–61; G. Samor and C. Rohwedder
and A. Zimmerman, “Innocents Abroad?” The Wall Street Journal, May 16, 2006, p. B1; and Wal-Mart
Web site, accessed June 2006.