Wednesday, February 28, 2007


Wal-Mart buying up big in China

David Barboza in Shanghai, China
March 1, 2007

WITH growth slowing at its outlets in the US and its stock price slumping, Wal-Mart Stores is aiming to gain greater access to the world's most rapidly growing major economy by buying into one of China's biggest retailers.

Wal-Mart said on Tuesday its purchase of a 35 per cent stake in the Bounteous Co., a Taiwan-owned group that operates more than 100 retail outlets in China, was part of a strategy to expand in large emerging markets such as Brazil and India, as well as China.

Wal-Mart declined to say how much it paid to buy a piece of Bounteous, but people close to the deal said Wal-Mart had agreed to pay close to $US1 billion ($1.3 billion) to assume control of the Chinese retailer.

China has a fast-growing middle class that may now number close to 50 million. But China's market is fragmented, and so far it has no dominant national retail chain such as Wal-Mart.

Bounteous, which operates in 34 cities in China under the name Trust-Mart, will continue to operate independently for now.

But eventually, Wal-Mart is expected to take control of Trust-Mart. Wal-Mart, the world's largest retailer, operates 73 stores in China and has more than 37,000 employees here. Trust-Mart has more than 31,000 employees in China.

If Wal-Mart takes control of Bounteous, it would move into position to become the country's dominant foreign retailer. But it faces stiff competition from other large Chinese retailers, as well as European retail rivals such as Carrefour of France, Metro of Germany and Tesco of Britain.

"This is an important step in bringing additional scale to our China retail business," Michael Duke, the vice chairman of Wal-Mart, said in a statement.

By acquiring a stake in Trust-Mart from Bounteous, which is privately held, Wal-Mart could surpass Carrefour, which has about 90 superstores operating here and had $US2.3 billion in sales in 2005.

But Wal-Mart's profits here are unlikely to contribute significantly to the company's earnings over the next few years.

Before the deal, Wal-Mart's China operations accounted for only a tiny fraction of its global sales, which were more than $US344 billion last year. In 2005, the most recent year with figures available, Wal-Mart had sales of about $US1.3 billion in China, trailing Trust-Mart, which had sales of $US1.7 billion, according to the China Chain Store and Franchise Association.

In order to manage integration of the two operations, Wal-Mart said it would appoint one of its executives as chief operating officer of Trust-Mart stores.

The Chinese Government also recently made it easier for foreign retailers to set up operations here. Home Depot and Best Buy are opening branches in China, and dozens of other American and European retailers are also planning to move in.

Analysts say Wal-Mart, which first entered the Chinese market in 1996, is trying to create a broader presence in China, which could mean many more acquisitions.

"From Wal-Mart's perspective, it's a foot in the door," said George Svinos, the chief of Asia Pacific retail for the accounting firm KPMG in Australia. "You can clearly see why Wal-Mart is looking to invest in a country that by 2015 could have the largest economy in the world."

With the deal, Wal-Mart is also trying to get back on track after the company stumbled in South Korea and Germany; it sold its operations in those countries last year.

The market in China is tough as well. Prices are extremely low, and infrastructure problems continue outside of the biggest cities. The market is fast evolving and sometimes unpredictable.

Wal-Mart now has to cope with China's state-controlled unions, which are pushing their way into foreign-owned companies and retail operations.

Last year Wal-Mart agreed to allow unions to be set up in nearly all of its stores in China. And while unions in China are controlled by the state-run union federation and often lack bite, some analysts say they could be gaining influence here, and may begin bargaining for higher wages and better compensation packages.

China is also Wal-Mart's huge procurement centre. Last year more than $US9 billion worth of goods from here went to Wal-Mart stores operating outside of China, so Wal-Mart plans to be a presence here in both procurement and retailing.

The New York Times