Wal-Mart Is in a Race to Win China’s West

Buying Trust-Mart’s 100 stores in China would give Wal-Mart Stores Inc. a leg up in its race with French rival Carrefour to expand in the fast-growing inland provinces.

The deal, which a source familiar with the situation said would involve Wal-Mart paying about $1 billion to buy Taiwanese-owned Trust-Mart’s China business, would nearly triple Wal-Mart’s Chinese store count and sales and make it the top foreign player in a highly fragmented Chinese retail sector.

Bentonville, Ark.-based Wal-Mart has not confirmed that any deal has been reached, and it has declined to comment on market speculation.

After high-profile failures in South Korea and Germany, where it recently agreed to sell its stores, Wal-Mart could certainly use good news from China. Beating Carrefour to key western cities there would be a major coup.

“If Wal-Mart is going to succeed in capturing market share over the long term, it needs to rapidly expand geographically in China,” said Merrill Weingrod, chief executive of consulting firm China Strategies.

China is Wal-Mart’s best hope for replicating its U.S. success overseas. But with just 60 stores there now, it trails well behind Carrefour, whose 73 hypermarkets there had sales of $2.17 billion last year, nearly triple that of Wal-Mart.

Like Wal-Mart, Carrefour has largely focused on China’s major east coast cities, such as Shanghai, but both companies are eagerly heading west as the government steps up infrastructure investment and incentives for businesses to develop the inland provinces.

China’s middle class lives mostly in its 400 or so cities, which have a population of about 550 million. Consumer spending is expected to grow at a rate of about 10% for the next decade -- far better than what Wal-Mart can hope to achieve in developed countries such as the U.S.

“A lot of these people like to shop in hypermarts and modern food marts, even if they aren’t technically ‘middle class’ in China, which is currently a family income of $4,000 to $6,000,” Weingrod said. “However, much of the highest growth will take place in Tier 2 and Tier 3 cities, not in Shanghai, Beijing, Shenzhen and Guangzhou.”

Retail consultants have targeted about 60 Chinese cities that are ripe for development. The first retailer to reach each one gains a major edge because it can build a following among brand-loyal consumers before competitors can muscle in.

According to data from market researcher Euromonitor International, Trust-Mart has stores in key provincial capitals including Xian, Kunming and Chengdu, which would be prime locations for Wal-Mart.

Carrefour operated hypermarkets in 29 cities as of June, including Urumqi in the west, Harbin near the Russian border and Kunming in the south, Euromonitor said.

Wal-Mart has superstores in 23 Chinese cities, according to its website, with the heaviest concentration in Shenzhen, its Chinese headquarters.

As it did in the United States, Wal-Mart has built its Chinese business from the ground up. It has relied on acquisitions, however, in many other countries, such as Japan and Britain.

Buying an established partner would spare Wal-Mart the tough task of learning local tastes, which vary widely from region to region. Unlike the United States, where products such as Heinz ketchup are the same in California and Maine, retailers in China must quickly adapt to local tastes in each city, down to stocking the preferred variety and consistency of rice.

Raphael Moreau, a retail analyst at Euromonitor in London, said smaller cities also posed bigger challenges for retailers because logistics and communication networks were less developed than in major cities.

Companies must negotiate with powerful local governments in each province. Wal-Mart may have gained an advantage there with its recent acceptance of trade unions at all of its China stores. That will probably play well with regional politicians, Moreau said.

He said Carrefour still had an advantage over Wal-Mart through its discount chain, which has about 242 stores in China, more than triple the number of its larger hypermarkets, and Carrefour probably would not stand still if Wal-Mart were successful in buying Trust-Mart.

“Carrefour will be seeking to buy another Chinese retailer,” Moreau said, although he declined to speculate on likely targets.