Wal-Mart has announced plans to double its number of outlets in China to tap into a liberalizing market. Despite regulatory relaxation, the chain intends to continue investing in partnership with Chinese players rather than via solo ventures. Yet such an approach appears prudent, enabling Wal-Mart to reassess in the future if its stores prove successful.
Intensifying competition is clearly one factor that has influenced Wal-Mart's [WMT] decision to expand within China's $330 billion food retail market, with another being the surging recent growth in the company's sales in this country.
China is an attractive market thanks to its huge, and still increasing, population and consumers' growing levels of disposable income (among the salaried classes at least). In addition, certain parts of China are proving especially appealing as the government has established zones that encourage inward investment.
Despite the opportunities the Chinese market offers foreign players, which have been enhanced after regulations requiring foreign companies to have local partners were lifted last year, Wal-Mart has not yet been bold enough to make plans to go it alone. Instead, for now at least, the company intends to continue in joint ventures with local partners.
This approach may at first glance seem half-hearted. However the strategy makes sense because the company's local partners have a greater understanding of the Chinese market and thus offer Wal-Mart a possible competitive advantage over firms that do choose to invest as standalone operations.
Indeed, cooperating with local firms will enable Wal-Mart to adapt to bridge cultural gaps and meet the needs of Chinese customers, which will be vital to its success in this market. For example, unlike the weekly shop common to western households, in China, food is typically bought more frequently and in smaller quantities. In contrast, one factor already working in Wal-Mart's favor is its low cost' image, which could be key to its success as China remains a price-conscious market, despite the emergence of an increasingly affluent - but limited in number - middle class.
The giant US retailer is rightly taking a cautious view of its investment in China. Yet if its latest expansion proves successful over the longer term, Wal-Mart will be able to reconsider its partnership strategy and opt to go solo.