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Walmart In South Korea Case Study

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Managing in Troubled Times Case Study


Case Title:

Wal-Mart�s Withdrawal from South Korea

Publication Year : 

Authors: Doris John

Industry: Retailing

Region:South Korea

Case Code: TRTC

Teaching Note: Available

Structured Assignment: Not Available


OR


In May , Wal-Mart, world�s largest retailer announced its exit from South Korea selling its 16 stores to Shinsegae Co., the country's top discount chain for billion won ($ million), subject to approval from South Korean regulators. Wal-Mart said that its decision to withdraw from South Korea was in keeping with its global growth strategy to expand in markets where they could realise the desired economies of scale. Wal-Mart�s performance in the South Korean market which was considered highly competitive and demanding had not been encouraging. Analysts blamed Wal-Mart�s failure to localise as the main reason for its exit. They argued that Wal-Mart had not tailored its stores and offerings to suit the needs of the Korean consumer. Analysts wondered why the world�s largest retailer, with annual total sales of $ billion, as of January and serving more than million customers weekly in 15 countries worldwide decided to pull out of a growing economy like South Korea.

While the majority blamed Wal-Mart�s failure to localise its strategies as the reason for the debacle many felt that the environment in South Korea was not conducive to foreign brands. Hardly a month before Wal-Mart�s announcement, Carrefour of France, world's second-largest retailer quit the South Korean market. Many international brands like Nokia, Nestl� and Google, struggled in the South Korean market. While analysing the reason for its withdrawal, experts felt that Wal-Mart should use this failure to its advantage in other Asian economies like Japan and China. How it would do this was to be seen. The case offers scope for discussion on localisation strategies to be adopted by retailers in overseas markets and the impact of failure to localise.

  • To teach localisation strategies
  • To discuss the outcome of a company�s failure to understand and tailor localized strategies.

Wal-Mart; Localisation Strategy; South Korea; Asian Markets; Consumer behavior; Managing in Troubled Times Case Study; E-Mart; Shinsegae; Samsung Tesco HomePlus; Retail Industry; Multinational brands; Trade Unions; Carrefour Korea; Competitive Markets

  • Background
  • South Korean Retail Market
  • Wal-Mart in South Korea
  • Wal-Mart's dismal performance
  • Reasons for exit
  • Need for localization
  • Lessons for Wal-Mart

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Y'know, you can read all the case studies you want. It's hard to fully understand international business without going to different countries and walking around.

So, let's talk business and walking around. I was in Seoul, South Korea for a month last summer.

I came to like Korean culture a lot. Koreans are some of the strongest, proudest people I've come across. They manage to combine a strong warrior culture with the utmost civility, order, cleanliness, and quality of life.

It's pretty incredible, actually. Many societies with a strong militant, warrior feeling about them descend into kind of a barbaric police state sort of vibe, constant terror in the air.

Korea? Nope. The men are proud, masculine, patriot, somewhat militant, but in a good way. There's a mix of strong, expansive, traditional values, along with a large minority undercurrent of modernity. It's really good - it's the best of all possible worlds. There's problems - the blatant racism and xenophobia kind of sucks, but I don't mind it so much. Nowhere's perfect.

Let's talk Walmart. We'll get back to Korea in a moment.

Walmart has really, really low prices. There's a few reasons for this - the company is one of the best in the world at logistics, so they manage to have fast turnover of inventory without keeping too much onhand at any given store. I'd love to see how their logistics division runs sometime - I remember reading that they've got some of the most sophistication about predicting and automatically changing stock at stores based on factors like the weather changing that are hard to pin down.

So they've got sophisticated logistics and forecasting, which means they order, ship, and sell goods quickly. That's important - the less time an item spends on the shelves unsold, the more money a retailer makes. The less time there's an empty spot on the shelves, the more money a retailer makes. Walmart keeps the shelves not empty most of the time while moving goods quickly.

This means they can charge less. And because they're so big, they've got a lot of bargaining power with their suppliers. There's over 4, Walmart-owned stores in the USA doing over $ billion in sales.

Let's talk Population of South Korea in is around 46 million. American economy is in extremely good shape. Population of South Korea is just a bit under 50 million people. The fundamentals of the South Korean economy were excellent, but the Asian Financial Crisis had just destroyed the exchange value of the Korean won.

Walmart sees all of this and thinks something like, "Hey. Growing economy with good fundamentals. Just had a financial crash, so their currency is trading artificially low. We've got a strong domestic economy. Let's expand into South Korea."

That was, y'know, almost correct. This was a, "Hey! This is a fantastically good opportunity to buy!" type buy on Walmart's part.

And they got it all right. Everything. Except one little thing - Koreans weren't interested in going to Walmart.

Yup, the stars were all aligned, the U.S. dollar was artificially high, the South Korean won was artificially low, Walmart had been experiencing great domestic growth, and the South Korean economy looked like it would be in pretty good shape after the financial crisis shook itself out.

But Koreans weren't interested in the Walmart model.

To explain why, I'll say - you gotta go walk around South Korea. I can explain it and it'll make sense, but it's the kind of thing that wouldn't really resonate unless you go to Korea.

Korea's got the longest work hours in the developed world, and it's not even really close.

According to the OECD's report, Korean average work hours per year comes in at Japan, internationally renowned workaholic land? Only USA?

Now, I could show you stats all day, but what really drove it home for me was when I was walking back from a bar to where I was staying. I left the bar around midnight, and stopped to have a chicken sandwich and fries, maybe AM. There was some screwup in the kitchen of the fast food joint, so I wound up having to wait - after having already paid - for about 20 minutes. That's probably a rare occurrence in Korea, but it worked out well because I had a good chat with a Korean guy who works in the marketing/sales side of an animation studio.

He was in a full suit with tie, but his tie was loosened a bit. He looked worn out. After we got our food, we sat and chatted another 30 minutes or so. I ask him what he was doing - some kind of formal party?

Nope. He was just on a break from work. He wasn't even done yet. He started work around the regular time - 9AM or so - and was still working after midnight. He was going to work another hour or two before sleeping for a few hours, and then working some more.

He explained that this is a bit more hours than he normally puts in, but not that much more.

Wow.

So, Koreans work a lot. A whole lot. A lot, a lot, a lot.

When they're not working, they're not interested in lower quality experiences for less money.

Damn near everything in Seoul is really, really nice. All the restaurants, the food, the transit and trains, the buildings, everything. It's clean and prestigious and high quality and upscale. The whole country. It's like Japan in that regard.

So, Walmart rumbles in, gets a good price on the currency, and opens 16 spartan Walmart stores with low prices.

Things don't sell.

Now, I could again explain and explain, but I'll just say - you had to be there. The Korean chain Emart's parent company eventually bought the scraps off the Walmart Korea heap, Walmart losing $ million in the process.

Emart and Walmart are night and day different. Emart is closer to a spa than a warehouse. As you walk through the isles, there's samples of fresh juice, fresh coffee, fresh grilled meat, fresh hot and iced teas I'd just gone in to buy some tuna and fruit, and I walked out (1) having eaten effectively a whole lunch worth of little samples, and (2) with about five times more groceries than I intended to buy. There must've been 40 plus samples in there, all managed by different friendly, smiling staff.

Added to that, Walmart only opened 16 stores, and you see they lose their edge in the logistics system and being able to squeeze suppliers. Really bad combination - none of the economies of scale and established network/market intelligence, plus not understanding local tastes. Thus, their prices aren't that low compared to American Walmart vs. American Walmart's competition. And, Koreans aren't interested in their somewhat low prices. They're working themselves to the bone constantly, everyone's under crazy amounts of pressure (even the kids), and thus, they want every moment they're not working/studying/homemaking to be a full-featured luxurious prestigious life experience.

It speaks to not walking around enough. It's the kind of thing you could read in a case study plenty, but not "really get it" until you see it in real life. The numbers all worked for Walmart - growing economy, good price on currency, and local incumbents a bit weak due to financial situation. If the country rebounded quickly, they'd have gotten in on their real estate and capital investment cheaply. If the economy stagnated or deteriorated, they'd be in the kind of competitive environment that discount retailers thrive in.

But they didn't walk around enough. Koreans work, work, work, work, work. When Koreans aren't working, they want the best. Not the best price. The best. Combine that with a bit of a nationalist sentiment that favors local companies, and you've got an $ million loss on your hands.

Y'know, getting into Korea with the American discounting model still might've been worth a try. But after some walking around, it seems like the kind of place you'd need a strong fallback plan if Koreans don't buy into discounting. Either a contingency plan to revamp the stores to Korean standards, or start negotiation in advance on licensing/partnering with a Korean company, something like that.

Numbers are good, but you can't just trust the numbers. Gotta walk around too.

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