Wal-Mart’s Entry Into Japan

Case Study: “Wal-Mart’s Rising Sun? A Case on Wal-Mart’s Entry Into Japan

This information was taken from the book Global Marketing Management (Kotabe & Helsen, 2010). This is a case write-up meant to introduce and provide examples of basic concepts involving international business, global marketing and globalization in the real world. The following is a summary of the business situation and what I learned after reading.

About Wal-Mart

Wal-Mart is a retailer of consumer goods founded in 1962 by Sam Walton. The company obtains profits through volume, with a low-cost strategy. It’s “Every Day Low Prices” business plan is supported by aggressive pricing policies,  a state-of-the-art  retail and supply chain distribution system, advanced inventory management systems, and little promotion and advertising efforts. The large success of the company led to global expansion that began in the early 1990′s.

Global Expansion:

Wal-Mart, the second largest retailer in the world, entered Japan in 2002.

It used its usual foreign strategy of forming a joint-venture (used to help with economic and political challenges). The company enters foreign markets by purchasing large stakes in similar retailers and takes gradual control of ownership by increasing investment through time. Historically these acquisitions are gradual, and have been met with both success and failure.

The retailing giant has operations in 28 countries under 60 different banners. Examples of failed and abandoned markets include South Korea, Germany and Indonesia. Expansions that have proven largely profitable are Mexico and Canada. A struggling market similar to that of Japan is the United Kingdom. Judging from these varying country performances, one can see that its formula for success has not yet been perfected.

Summary of  Strategy & Performance: Wal-Mart in Japan

1999- 

  • Talks begin with struggling Japanese retailer Seiyu. Seiyu had 400 retail units across Japan

2002-

  • Wal-Mart purchases 6.1% stake in Seiyu, beginning expansion

2003-

  • Seiyu begins reorganizing structure; implements point-of-sale and SMART inventory tracking systems across 53 stores. Store efficiencies increase by capturing consumer trends
  • Wal-Mart acquires 34% stake in company, becoming the Seiyu’s biggest shareholder
  • Net income fell to lowest level between 2002-2007, with a loss of $772 million
  • 9 new locations open

2004-

  • Wal-Mart opens its first pilot superstore, Japanese are not familiar with the “supercenter” concept
  • The company implements its supply-chain and distribution management system, Retail Link, in half of its locations
  • Company lays off  1500 (25%) of headquarters  staff, resulting in bad PR
  • Reduces advertising
  • Seiyu manages to cut costs by 6.1%
  • Reports annual loss of $66 million
2005-
  • Seiyu announces loss of $118 million
  • CEO Masao Kiuchi takes blame and resigns
  • Wal-Mart increases ownership to 42%
2006-
  • Wal-Mart built and opened U.S.-style distribution center
  • Some individual store sales turned positive
  • Company reports loss of $151 million
  • Wal-Mart ends year with 54% stake in Seiyu
2007-
  • Wal-Mart implements SMART system in more than 75% of its stores to help better meet customer needs, enhance product selection, hopes to increase sales
  • Seiyu reports loss of $469 million
2008-
  • Wal-Mart completely acquires Seiyu for $875 million, taking 100% ownership of the company
  • Makes Seiyu a subsidiary of the company
  • Introduces new activities including merchandising, distribution and logistics
  • Closes 20 outlets and cut 6 percent of its workforce

Business Challenges and Suggestions: 

So, where did Wal-Mart go wrong? The company’s global marketing strategy had many flaws. Read below to find an explanation of these challenges and what could have been done to prevent or control them.

Cultural misunderstanding:

Wal-Mart failed to grasp the consumer and retail environment in Japan. With a population of 127 million, the highest per capita income and the second largest economy in the world, Japan is a very attractive market for retailers. The opportunity exists, but there is much more research and planning that needed to be done before expansion began. Instead of adapting business operations to the Japanese culture, the company essentially assumed the Japanese would readily adapt to Wal-Mart’s. This was not the case. For example, in Japan there is a much larger need for local store customization. Consumer buyer behavior is much different than in the United States, with purchasing patterns and product selection varying greatly between regions. They have a tendency to buy smaller quantities in regular intervals rather than the more American idea of “stocking up.” Similarly, the concept of large retail stores is foreign. Retailers with the highest growth rate are small specialty stores; quite the opposite of Wal-Mart. The culture tends to buy more fresh produce than pre-packaged goods as well (something Wal-Mart does not usually specialize in). Lastly, the Japanese view high price as equaling high quality. This mentality causes them to purchase 40% of the world’s luxury goods annually. Packaging and appearance of goods play a huge role in their purchasing decisions. When looking at Wal-Marts product selection, it is obvious they do not usually cater to luxury-brand customers. All of these cultural misunderstandings lead Wal-Mart away from success in Japan. Perhaps more research into their cultural values and patterns could have helped avoid some of these mishaps.

Inability to carry out a low cost strategy
Given the above facts, it is obvious that the idea of  “Every Day Low Prices” does not appeal to the Japanese market in the same way it does in the American, Mexican and Canadian markets. This is a very different culture and population to cater to. Wal-Mart’s low cost marketing strategy may not be as effective globally as it is domestically. They earn their profits through high volume sales over differentiation, and this approach is just not as successful in Japan.
Supply chain inefficiencies
In Japan there are strong and close-knit supplier webs that provide retailers with their goods. This country puts a higher value on close, local relationships, making it very difficult for foreign firms to enter the industry. With so many changes in products due to local store specifications, it forces firms to deal with many different suppliers. This is not favorable to large retailers, as they don’t have the time or national presence to make the necessary relationships to do business. Wal-Mart is not used to this high level of supplier power. Their value usually comes from cutting costs with suppliers enough to pass onto their customers while using synergy to increase efficiencies. Difficulties managing their supply chain are another substantial reason Wal-Mart is struggling in Japan.
Pressure from competition:
The types of competition in Japan include both domestic and international players. It’s biggest Japanese competitors are 7-Eleven Japan Co. Ltd., Aeon Co. Ltd., and Ito-Yokado Co. Ltd. As of 2008, all of these companies drastically outperformed Seiyu Ltd. (Wal-Mart). Although all of these companies have different strategies, much of their success can be credited to their experience in understanding how their country buyers and sellers interact. Two main international competitors are Carrefour from France and Tesco from the United Kingdom. These firms had similar challenges to Wal-Mart with their international expansions, but each faced them differently. While Carrefour had complications so complex that it exited the market in 2004, Tesco was able to gradually expand and prosper. Tesco made large investments in market research that allowed them to build stores that better met the Japanese consumer’s needs. Their cautious expansion and well thought out plans have helped them succeed in the Japanese retail industry. It is imperative for Seiyu and Wal-Mart to recognize their competition’s advantages and formulate better ways to respond.
Seiyu’s pre-Wal-Mart conditions:
Lastly, it is necessary to examine Seiyu’s business situation before Wal-Mart took over the company. Formed in 1956, Seiyu was successful until the 1990′s when Japan experienced an economic recession. During this time the company acquired a large amount of debt that totaled $7.46 billion at the start of the millennium. Although the company was in trouble, they did not receive assistance from its larger owner, Saison Group, because they too were experiencing the financial crisis.  This situation is important to consider when evaluating Wal-Mart’s performance. Although it was predicted that Wal-Mart could save the Japanese retailer, their debt and economic troubles may have been too much to reverse. Looking back, Seiyu may not have been the best company for Wal-Mart to begin their expansion with.

Summary/What next?: As of 2008, Wal-Mart had invested over $3 billion dollars in its expansion into Japan. The question is, will it be worth it in the long run? They have made many mistakes in the past, but as of 2011, Wal-Mart is still operating in Japan under the same brand name, Seiyu. According to their most recent annual financial report, they claim profits are growing as the Japanese become more favorable towards the Every Day Low Price strategy and as their operational efficiencies increase. Despite these claims, the firm closed 23 additional stores by the end of their 2009 fiscal year, and net investment now totals $5.7 billion. I believe the root cause Seiyu and Wal-Mart’s failure can be traced back to their initial global marketing strategy. A better understanding of Japan’s culture and how it affects supplier-relations and the competitive landscape could have prevented many of the companies problems. Will their low-cost strategy ever actually turn a profit for the company? My guess is not any time soon, but only time will tell.

Read More about Wal*Mart in Japan:

Source:
Kotabe, Masaaki, and Kristiaan Helsen. Global marketing management. Hoboken, NJ: J. Wiley, 1998. Print.

2 thoughts on “Wal-Mart’s Entry Into Japan

  1. Rifan says:

    Really useful article in particular to the students..i appreciate you to have published this kind of quality article..i used this to understand ‘risk management’..thanks a lot..

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