Académique Documents
Professionnel Documents
Culture Documents
1528-6940
1059-9231
WAPB
Journal
of Asia-Pacific Business,
Business Vol. 9, No. 4, Sep 2008: pp. 00
Renee B. Kim
Renee B.ofKim
Journal
Asia-Pacific Business
ABSTRACT. Wal-Mart entered South Korea in late 1990s for its international expansion; however, IT had a major failure in this market and left
Korea in 2005 as the American way of marketing did not translate well
in Korea. Wal-Mart had critical shortfalls in enabling value exchange with
the Korean consumers as the Korean consumers had significantly different
taste and preferences compared to American consumers. Wal-Marts Every
Day Low Price (EDLP) strategy was not perceived to have the value in
the minds of the Korean consumers, while its store locations were not strategically well positioned to create sufficient customer traffic. Wal-Marts
competitive advantage of low cost and low price was not suitable in the
Korean competition and consumption context. Wal-Mart was not prepared
to develop an effective localization strategy that might have stemmed from
not having a clear projection of how much it was willing to invest and grow
in this market. This Wal-Mart Korean case shows the importance of the
compatibility of a corporate unique value proposition and strategic fit with
the local market conditions.
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Renee B. Kim
345
INTRODUCTION
Wal-Mart is the worlds largest retailer, operating in 15 countries with
6,500 stores, and generating $62.7 billion in 2006 (Wal-Mart, 2006). By
2007 its stock price skyrocketed over 180,000% since its initial public offering (IPO) in 1972. Wal-Mart has been forced to initiate international expansion in the early 1990s due to changes in the U.S. market condition. Market
saturation was becoming a problem in the U.S. market. With more than 200
new Wal-Mart stores being opened each year, the rapid growth in the number of stores in the United States placed new stores close to older ones, and
the newer stores began cannibalizing the older ones. The demographics of
the U.S. market were also evolving as the baby boomer segment was
increasing and family sizes were decreasing, which led to slower growth of
U.S. market on demand side. Dynamics of the U.S. retail industry has also
changed significantly, posing a threat to Wal-Marts market leader position.
Wal-Mart disrupted the U.S. retail market with its aggressive price offering and has held market dominance for the past few decades. However, other
major competitors in the U.S. retail sector have adopted strategies similar to
Wal-Mart and learned to have a retail format with superior technology and
lean business operations. Consequently, the retail price differences between
Wal-Mart and other retailers have narrowed and weakened consumers
incentives to visit Wal-Mart. All these factors have contributed to slowing of
Wal-Marts earning growth in the United States, and international expansions have become a strategic priority for further growth of Wal-Mart.
Wal-Marts international expansion showed mixed performance.
Although the proportion of international sales has grown substantially from
9% of total sales in 1998 to 22% in 2007, Wal-Marts market positioning in
different markets resulted in a different outcome. Although it has had considerable success in Mexico, Canada, and the United Kingdom, Wal-Mart
failed to position itself in several overseas markets, including Germany and
South Korea. In May 2006, Wal-Mart retreated from Korea by selling its 16
stores to a major local discount chain, Shinsegae Co., at U.S.$882 million,
and exited from Germany in July 2006. Wal-Marts stores in Korea lost
approximately $10 million in 2005 on sales of $720 million (Ramstad,
2006b). Wal-Marts exit from these two markets shows that the American
way of marketing does not translate well in every market.
These exits raise several important questions from an international
marketing perspective: how can Wal-Mart localize its products and
services to foreign markets tastes and preferences when the core existence of Wal-Mart is primarily associated with marketing and retailing the
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American way? In other words, how can Wal-Mart strike the balance
between localization of its service and products while maintaining its core
competitive advantage that is ultimately American? How much of
Wal-Marts cookie-cutter model of everyday low prices and information
technology (IT)-based centralized distribution system should be applied
to a local condition? How much would Wal-Mart need to reinvent a localized strategy for consumers who are significantly different from American consumers? A retailers decision to export a retail format to another
cultural environment may require a drastic modification of initial competitive advantages (Dupuis & Prime, 1996). The ability to adapt to overseas
market conditions largely determines success of international operations
of these firms. The key question in this regard is how a multinational
corporation (MNC) can convey its competitive advantages and experiences from domestic market to a new foreign market, which may have
significantly different expectations and market conditions. This article
attempts to address this question with a comprehensive analysis of the
Wal-Mart Korea case. The first section identifies three aspects of Korean
consumers preferences that do not match with Wal-Mart offerings and
strategies. In the following section, three distinctive market characteristics of Korea are examined, which hindered Wal-Mart from having a successful implementation of its business model in Korea. The final section
presents managerial implications for future retail internationalization.
Renee B. Kim
347
348
LG Corp
Shinsegae
Lotte Shopping Co. Ltd.
Tesco - Samsung
Samsun Cheil Industries
2003 Sales
2002 Sales
$7,499
$5,804
$3,330
$2,817
$2,086
$6,129
$5,172
$3,187
$2,147
$2,088
Renee B. Kim
349
Superior Technology
Superior Operations
Superior Offering
Superior Access
Superior Segments
Superior Customers
Enable a firm to create and capture value
Source: Robert Lamb (2005).
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Location Preference
To enter and consolidate a market position in a foreign market, it is
strategically important to take over commercially crucial and high-traffic
locations. In the Wal-Mart Korea case, the choice of store location was
particularly important as Korean consumers shopping mostly takes place
in the metropolitan areas because of strong preferences for the stores with
close proximity. Korean consumers have substantially different shopping
styles and preferences compared to North American consumers. They
prefer to purchase smaller units on a more frequent basis and to have
accessibility to a store in walking distance. Convenience and store location
are major determinants of where a Korean consumer will shop. American
consumers largely use vehicles to purchase large quantities of products on
a less frequent basis, thus store location and distance is a far less critical
factor.
Wal-Mart attempted to penetrate the Korean market by building stores
in distant areas where land prices were low, replicating the U.S. strategy
of smaller city store build-up. Wal-Mart had only 16 stores in all of Korea
with just one in the Seoul metropolitan area and could not achieve the
economies of scale. Wal-Mart expected the Korean consumers to drive to
its stores for price shopping as the American consumers do, and this
expectation was not met. Wal-Mart failed to attract Korean consumers as
the store locations were not strategically well positioned to create sufficient
customer traffic. Local rivals, which built stores in the early 1990s, had
the higher store traffic location advantage compared to Wal-Mart, which
had stores mostly in distant, less crowded areas. This affected Wal-Marts
competitive position significantly, as the company had no alternative
location strategies to compensate.
Renee B. Kim
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2000s (Park et al., 2003). In the late 1990s and early 2000s, the Korean
retail industry experienced globalization, industry consolidation,
increased costs of procurement and merchandising, continued pressures
on food safety and supply chain management costs, and an increasingly
competitive marketplace, with an imperative for providing customer
service and promotional campaigns. Major international retailers such as
Price Club, Carrefour, Wal-Mart, and Tesco entered the Korean discount
retail market in the late 1990s in response to the liberalization of the retail
sector by the Korean government in 1997 (Kim, 2006).
However, when the foreign retailers were allowed to enter the Korean
retail market in 1997, the Korean retail market was already saturated.
Strategically critical commercial areas for discount outlets had been
mostly taken by the local retailers. Korean local food retailers such as
Lotte, Shinsegae, Samsung, and LG developed their own discount retail
outlets (see Table 1). Conglomerates called Chaebols own diversified
business units, and all of them merchandise everything from discount
items to luxury goods through various retail outlet options. For example,
LG Trading Co., the largest Korean retailer, has four distinctive retail
divisions, including LG Supermarkets, LG25 convenience stores, LG
Department stores, and LG Mart (the discount chain). These four
divisions comprise 1,600 LG stores in South Korea (Scardino, 2004).
Shinsegea is the second best-performing Korean retailer, and its E Mart
discount retail format has 86 stores, accounting for 30% of the Korean
discount market. In terms of marketing, it is critical that the stores are
built in lucrative locations such as residential and key commercial areas
with high levels of consumer traffic. However, it appeared the foreign
latecomers such as Wal-Mart were not able to capture strategically important
retail locations in Korea that may be critical in effective market entry and
positioning.
Renee B. Kim
353
IT System of Wal-Mart
One of Wal-Marts main competitive advantages is its superior information technology (IT) system (see Figure 1) that links the vendor
supply operations with Wal-Marts distribution network. This system
creates a superior operation that compresses the cost throughout the
value chain, maximizes operational efficiency, and enables Wal-Mart to
have superior offering: (i.e., low prices). This integrated supply chain
network enables Wal-Mart to understand and have access to the supplier
operational process and the costs, and to negotiate the vendor prices.
Information advantage lets Wal-Mart be the toughest negotiator in the
world and have a superior input by purchasing its supply at the lowest
prices, driving down the retail price to the lowest possible level (i.e.,
superior offering). Wal-Mart has superior access to American consumer
market and is able to capture the value that is created with superior
input, superior operation, superior technology, and superior offering
(Figure 1).
Wal-Mart faced serious challenges in implementing this core competence in South Korea. South Korea has market constraints, such as supply
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LOOKING FORWARD
In a general sense, the prospect for doing lucrative business in a foreign
market depends on the size of the market, the present wealth of consumers in that market, and the likely future wealth of consumers (i.e., future
economic growth of the market). However, it is more important for international business managers to recognize the importance of the compatibility of its unique value proposition and strategic fit with the local market
conditions.
Wal-Mart originally had a very clear definition of its strategic positioning in the U.S. market that brought a rapid growth and profitability. Its
strategic positioning was derived from its core competence of EDLP and
centralized distribution network that were considered to be unique and to
have perceived value in the minds of American consumers. Wal-Mart was
Renee B. Kim
355
able to create and capture this value from the consumers that led to its
impressive profitability and rapid profit growth. Thus, its strategic positioning fit with the U.S. demand market conditions. The timing also
seemed to be working for Wal-Mart as its high-growth period matched
with the period of the U.S. retail sector restructuring and consolidation.
Wal-Marts attempt to employ this business model in the Korean market
resulted in failure. Wal-Marts competitive advantage of low cost and low
price was not suitable in the Korean competition and consumption context.
Prior to the market entry, Wal-Mart should have asked the following
questions: whether the timing of the market entry was appropriate;
whether to have a joint venture with a local partner; how to project or
employ its core competence to the Korean market; how to develop and
execute a business strategy for long-term growth in the Korean market;
how much of Wal-Marts American cookie-cutter model of EDLP and
low cost centralized distribution system should be applied; how much
Wal-Mart should develop a localized identity in Korea; how fast WalMart should expand and allocate its investment capitals among the target
markets.
Wal-Mart appeared to have lack of preparation in answering above
key questions in entering the Korean market. Wal-Mart has miscalculated the market prospects in Korea by focusing too much on prospective
macro environmental factors such as the liberalization of the retail sector
in South Korea and the favorable economic growth of the Korean economy. However, Wal-Mart might have underestimated the extent of the
differences in the Korean retail market condition. The Korean retail
discount sector had high level of pressure for local responsiveness and
cost reduction, as the Korean consumers had significant different taste
and preference compared to American consumers, and as the competition
among the major retailers were already intense when Wal-Mart entered
the market. This implied that Wal-Mart needed to invest significant
resources to strike a balance between cost compression and margin
expansion by working upstream and downstream of the value chain in
Korea.
When an international business identifies a foreign market with a high
potential for growth and profit, the firm must consider the scale of entry
and strategic commitments. A large-scale market entry involves the
commitment of significant resources and enables the firm to capture firstmover advantages that are associated with demand preemption, economies
of scale, and switching costs. If a firm decided to be a late entrant to a
foreign market, it should be well prepared to deal with late mover
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disadvantages. When the Korean retail market opened its door to foreign
retailers in late 1990s, it was already saturated with highly competitive
domestic players. Wal-Mart entered the Korean market on relatively
small scale and did not obtain a rapid entry. Prior to the market entry,
Wal-Mart should have defined its strategic commitments for the
Korean market. In other words, Wal-Mart should have asked whether
Korea was a strategically important market to enter for its international
expansion and whether it was worthwhile to allocate significant capital
resources to capture customers and distributors in Korea. Wal-Mart was
not prepared to develop an effective localization strategy that might have
stemmed from not having a clear projection of how much it was willing to
invest and grow in this market.
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