story by Kim Souza
ksouza@thecitywire.com
China holds huge opportunity for Wal-Mart Stores and the retail behemoth has pledged to stay the course by building on the billions in annual sales it recorded there last year. Wal-Mart’s plan to grow sales and win consumer confidence in mainland China is linked closely to the burgeoning middle class expected to comprise almost half of the country’s urban population by 2020. Wal-Mart said it does not break out individual country sales, but its international division garnered $135 billion in revenue last year.
A report by McKinsey & Company notes that winning favor with this more affluent segment is a wide departure from serving the lower-income masses that Wal-Mart is known for worldwide.
The consumers in this more affluent segment tend to live in China’s higher-tier cities and coastal areas and enjoy household incomes between 106,000 and 229,000 renminbi ($16,000 to $34,000) a year, according to McKinsey. Their opinions are also strikingly different from those of their mass-market counterparts, the report notes.
“We're building a strong foundation for growth, being disciplined around growth, investing and retail basics and developing strong operations and compliance across the portfolio in China,” Scott Price, CEO of Walmart Asia, recently told investors.
He said Walmart China has made steady progress in key areas of operations like merchandising within the everyday low cost, low price focus; acquiring talent and shoring up compliance protocol. Price admitted that China presents an enormous opportunity as by 2018 nominal GDP will reach almost 3,300%. But that rise is not without its challenges. He said the frantic pace has created market issues such as uneven infrastructure development, fragmented supply base, a developing regulatory environment and scarce talent.
“We believe that China's complex environment presents unparalleled opportunity and we believe that we are making great progress on that path to high growth,” Price said.
EXPANSION PLANS
In the past quarter Walmart China outlined a three-year plan for success that includes the opening of 110 new facilities by 2016. Walmart China CEO Greg Foran said the primary focus of this expansion will be on Wal-Mart Supercenters and Sam’s Clubs.
At the same time Walmart China will close up to 9% of its stores, those which have been deemed non-performing. Foran said the loss of these stores could dent total sales between 2% and 3% throughout this fiscal year.
Another 45 older stores will get renovated this year, with 100 more store updates slated by the end of 2016.
While the store count in China will expand over the next two years, Walmart said it continues to reduce the headcount in its home and regional office by approximately 25% since 2012 as it works toward centralizing the management within China.
SAM’S CLUB APPEAL
A key component of the retailer’s plan to grow sales in China is linked to the accelerated development of Sam’s Club. Walmart China opened two Sam’s Clubs in Hangzhou and Suzhou this past year, bringing the total number of Sam’s Clubs in China to 10. The company hopes to open several more in the next three years.
Foran said Sam’s outlook is promising and the business model is especially ripe for the burgeoning middle-income and upper-income consumers, and because many cities are well-suited for this format. 
The key to the success of Sam’s Club in China is closely linked to the rapid increase of car ownership. CNN reports that every two seconds somewhere across China a consumer takes delivery of a new car. This consumer buying blitz will add another 21 million new cars and trucks to China’s fleet in 2014.
Foran said Sam’s Club is now exceeding Walmart expectations within China. He said the membership fee is not an obstacle for the middle income shoppers it targets and some 90% of shoppers to Sam’s Club arrive in a car, giving them the ability to stock up and buy more volume.
“This 90% of car shoppers at Sam’s Club compares to as low as 10% at a Walmart China Supercenter,” Foran said recently.
He said having the ability to stock up means that shoppers may only come to the Sam’s Club once a month, where shoppers to a supercenter would come daily. Even with fewer trips, Foran said three of the 10 Sam’s Clubs in China lead the pace for the retailer’s clubs throughout the world.
“We know that Sam’s Club is well-received by the members in China and we want to continue to grow at significant rates,” Foran said.
WINNING MARKETSHARE
McKinsey reports that retailers that remain focused on consumers trying to meet basic needs at affordable prices could run the risk of losing out on millions of Chinese consumers looking to trade up.
With that, retailers must be willing to offer aspirational brands – a change of pace from the pragmatic approach that Chinese consumers have historically used when making their purchases. Aspirational brands, already relevant for China’s new upper middle class, will become even more important as it grows. These are brands that evoke an emotional tug in the consumer.
“The new upper-middle-class opportunity is where the future is,” according to Alan Jope, the head of Unilever’s businesses in north Asia. “It’s huge across categories and even more important than the luxury class of consumers,” Jope noted in the report.
McKinsey’s research indicates that these higher net worth consumers are more likely to buy laptops, digital cameras, and specialized household items, such as laundry softeners (purchased by 56% of the upper-middle-class consumers we surveyed last year, compared with just 36% of the mass middle).
Along with affluent consumers, upper-middle-class ones are stimulating rapid growth in luxury-goods consumption, which has surged at rates of 16% to 20% annually for the past four years. By 2015, barring unforeseen events, more than one-third of the money spent around the world on high-end bags, shoes, watches, jewelry, and ready-to-wear clothing will come from Chinese consumers in the domestic market or outside the mainland, McKinsey notes.
IMPORT DEMAND
Foran said Walmart China and Sam’s Club will benefit from broader inventory selections that appeal to China’s consumers as the retailer delivers more products through its seven distribution centers and seven fresh distribution centers, while also controlling prices and guaranteeing quality.
"We hope that in the next year, Walmart China will become the price leader of the retail industry," he said.
Foran said as customer demand for imported goods increases, Walmart China will continue to add imported products to its shelves. Using the Walmart Qinghe store in Beijing as an example, he said the display floor of imported products increased by around 50% over the last year while sales in this section nearly doubled. Many products such as cocoa dusted truffles from Belgium, pistachios from the U.S. and wines from various countries around the world are directly imported by Walmart China.
"Our merchandising team is adding new imported products every week. A year from now, Walmart China will add another 400 to 500 imported products," Foran said.
He estimates that after a year, sales of imported food products at Walmart's Supercenters will double, and sales of directly imported products at Sam's Clubs, which have performed exceptionally well, can grow more than five times.