Retail Traditions Hit a Wall at Wal-Mart China
More Chinese consumers are shopping online, which is putting more pressure on Wal-Mart and it's old-fashioned store model
By staff reporter Li Xuena
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(Beijing) – Zhong Shidan started climbing the Wal-Mart career ladder 18 years ago after she joined the U.S. retail giant's Shenzhen outlet as a shop assistant.
Today, Zhong holds a high-level operations department position and oversees the company's more than 80,000 employees in China. She goes by the English name Grace and works hard to reflect well on Wal-Mart as an executive who is persistent, smart and focused.
But there's another aspect of Zhong's professional image – and Wal-Mart's image as a big, U.S. retailer in China – that could be working against her. Like her employer, Zhong prides herself as a little old-fashioned, which means she favors traditional retailing with bricks-and-mortar stores.
As e-commerce spreads in China, Zhong and Wal-Mart face mounting pressure to adjust their business approach as well as update their attitudes. So far, though, the company appears more committed to the physical store business than cyber shopping in China.
Big stores and payrolls are pillars of the old-fashioned retail business model that some experts say are starting to teeter for companies such as Wal-Mart, which has over 400 outlets in China.
Basic retail real estate costs in China are rising fast. A recent report by PricewaterhouseCoopers and the China Chain Store & Franchise Association, for example, said that rental costs for commercial space in China rose an average 3 to 5 percent every year between last few years. Rents have been climbing more than 10 percent annually in some premium business locations.
Meanwhile, the report said, retail industry labor costs have been rising an average 10 percent annually in recent years.
And these costs have been rising even while retail industry growth has been slowing for the past seven years in a row. The sector grew 9.9 percent 2013, according to a report by the consultant Deloitte, which marked the first time this growth fell to single digits in seven years.
The report cited China's current economic slowdown and e-commerce competition as reasons for the cooling growth among traditional retail companies.
Wang Xiao, an executive partner at PricewaterhouseCoopers' China retail and consumer goods division, said the country's consumer goods market is changing as e-commerce and social media empower consumers.
"Consumers can have more shopping conduits at their disposal," Wang said. "All of these changes are having a far-reaching impact on China's retail industry."
Traditionally oriented Wal-Mart, which has enjoyed impressive performance for decades, has been among the retailers affected by the switch to online shopping.
To adapt, Zhong said Wal-Mart is directing more resources toward after-sale deliveries, particularly door-to-door free delivery services for customers within two kilometers of a store. It also plans to team up with product suppliers to sponsor promotions and price items according to what e-commerce retailers offer.
Zhong refused, however, to admit that these strategies were tailored to offset the impact of the Internet. Rather, she said, the plans emerged "out of Wal-Mart's own needs."
Slow to the Game
Wal-Mart joined the e-commerce revolution in 2007 when it started letting shoppers order goods online and pick them up at stores. Three years later, it began taking e-commerce more seriously.
Wal-Mart China CEO Sean Clarke, who considers himself traditional and an old-fashioned retailer, says real-store shopping is still an important experience for families. Speaking to Caixin, he said e-commerce hasn't seemed to have changed that experience.
Clarke said online shopping accounts for about 10 percent of retail sales in China, which means traditional stores still control the largest piece of the pie.
Wal-Mart sales in China rose 3.6 percent in 2012 and 24.5 percent last year. E-commerce provider JD, meanwhile, saw revenues jump 67.6 percent in 2013 to 69.3 billion yuan.
The PricewaterhouseCoopers report said consumers are rapidly migrating from outlet stores to the Internet. This is particularly true in China, where one-seventh of the population shops online every day and 60 percent every week, compared to the global average of 21 percent weekly.
Downsizing and Upsizing
During the first half of 2014, retail chains in China excluding those selling furniture and electrical appliances had altogether closed 158 outlets across the country, five times the number of closures reported in 2013.
Wal-Mart closed at least 15 stores in China in 2013, which was its first downsizing in China. Raymond Bracy, a senior vice president at Wal-Mart China's Public Affairs Department, said a major reason for the closures was that targeted outlets had failed to meet financial targets.
At a late 2013 meeting, Wal-Mart's top executives particularly acknowledged declining consumer loyalty in China, and that this loyalty had been eroded by e-retailers.
"In the face of the volatility in consumer needs, it has become a very big challenge for us to meet these needs, and (to determine) how to keep our own development in pace with these needs," said Clarke.
Wal-Mart China began a feasibility study of e-commerce in China in 2007, when Alibaba's Taobao, a wholesale e-commerce platform, recorded 43.3 billion yuan in sales. That was more than the combined China sales for Wal-Mart and the Carrefour retail chain.
Zhuang Shuai, an official working in Wal-Mart China's marketing department, led the 2007 study. He said his company decided to survey the landscape after Taobao's runaway sales and big moves into e-commerce by competitors including Carrefour. But he said Wal-Mart headquarters decided not to act on the study's results, citing high logistics costs and the company's size in China.
Since then, e-commerce has grown exponentially in China. More consumers than ever are buying through Alibaba's Tmall and Taobao, JD, eBay and Amazon.
Wal-Mart is slowly catching up. After failing to strike a proposed deal for a controlling stake in JD, Wal-Mart acquired a stake in the smaller online company Yhd, giving the U.S. retailer a platform for promoting its own brands online. It also shares its global sourcing and logistics network with Yhd, but it does not get involved in the Chinese company's daily management.
Meanwhile, Wal-Mart is looking for a better way to incorporate e-commerce with its Sam's Club membership stores and supermarket outlets.
Wal-Mart introduced China to an online version of Sam's in 2010, giving club members the option of ordering online and getting delivery in every city with a Sam's store. Wal-Mart also started experimenting with an online platform for its supermarket unit in July.
Industry analysts said Wal-Mart's underlining motive in introducing e-commerce is to address a general decline in the number of shoppers who visit supermarket outlets.
E-commerce may be the future for the retail sector, but for the time being e-commerce is not a key concern for the company, according to Andrew Mile, Wal-Mart China's senior vice president.
"Our priority is retail stores before we consider e-commerce," said Mile. "We're not (becoming) an e-commerce business simply to sell more goods."
Wal-Mart also prides itself as an employer both of store staff members and talented executives. But even in this area, the company is feeling the heat from Chinese e-commerce and retail companies.
For example, Wal-Mart recently lost several senior executives to a Chinese retail chain called China Resources Vanguard.
Scott Price, Wal-Mart's former chief executive for Asia, admitted at an investors' conference in 2013 that the company was suffering from a brain drain. Wal-Mart is currently seeking candidates for general manager slots to work in the 110 stores it plans to open over next three years.
Zhong said she still remembers what a former Shenzhen store general manager told her: "If you want to be successful at Wal-Mart, you must be honest, diligent, persistent and a little smart."
Zhong took that advice to heart, and often worked 15 hours a day to get ahead. But the company also helped her: Zhong benefited from a long-standing Wal-Mart tradition through which locally trained staffers are promoted to managerial positions.
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