The Great Wal-Mart Of China

In the grocery section of a big-box store in north Beijing, shoppers struggle to catch a bargain. And a fish. "We'd still rather pick it out ourselves," says law student Guo Jiao, as she and a friend repeatedly plunge fishing nets into a tank full of slippery grass carp. Other shoppers with nets mob serve-yourself tanks swimming with crabs, clams and eels. Nearby, Yang Fuming has already landed his fish and carefully watches a clerk gut it. Once his fresh catch is eviscerated, Yang takes the bloody bag of still-convulsing carp and drops it into his shopping cart beside a pair of duvets he's buying to cover his sofas, and a new kitchen apron. "I come here every day or two for the fresh stuff," says the retired physicist. "They've got everything you need."

Such is life in the Great Wal-Mart of China. Recognize the place? For Wal-Mart, China represents the biggest frontier since it conquered America. China's voracious consumers are pushing retail sales to a 15 percent annual growth rate; that market will hit $860 billion by 2009, according to Bain & Co. But the standard-bearer of American retailing has pains-takingly discovered that success in China requires more than dutifully replicating its formula of cheap, steep and deep. It requires the kind of flexibility Wal-Mart has rarely shown: it requires going native. And now, after a decade of ingratiating itself to Chinese consumers by adopting their customs and culture, Wal-Mart is making its move from a minor player with just 3.1 percent of the market to a dominant force. Word emerged from Asian retailing sources last week that Wal-Mart is more than doubling its presence in China by spending $1 billion to acquire Trust-Mart, a Taiwanese-owned chain of more than 100 big-box stores in 20 Chinese provinces. The deal, expected to be approved by the Chinese government by the end of the year, will catapult Wal-Mart past its main foreign rival in China, French retail giant Carrefour, which it outbid for Trust-Mart. All three retailers declined to comment on the deal because it is still pending.

Wal-Mart execs have long cited China as the best place on earth to export the U.S. merchandising miracle Sam Walton began 45 years ago. China represents the same wide-open retail landscape and burgeoning middle class that made Wal-Mart ubiquitous in the United States. Wall Street is also starting to believe. "China will be as big and as successful a market for Wal-Mart as the United States," says retail analyst Bill Dreher of Deutsche Bank Securities.

For now, it's a distant prospect. China remains an economy controlled by domestic retailers. Becoming the largest foreign retailer there will give Wal-Mart less than 9 percent of the Middle Kingdom's vast retail market. And for Wal-Mart, China is still small change. After absorbing Trust-Mart over the next three years, Wal-Mart will have fewer than 200 stores in China, generating about $2.6 billion in annual sales--a slender sliver of the $312 billion in annual sales that makes the retailer America's biggest company. In fact, Wal-Mart will build more stores in America this year--370--than it will have managed to amass in China in 13 years.

Still, Wal-Mart's Great Leap Forward is essential to its future growth, and sheds light on the company's ability to adapt successfully to new markets. Wal-Mart has struggled to export its brand of American consumer culture elsewhere, as it rigidly tried to reproduce its Everyday Low Price model overseas. It pulled out of South Korea and Germany this year after battling strong labor unions and more nimble competitors. At home, Wal-Mart is suffering a slowdown in sales as its relentless expansion finally reaches a saturation point and it increasingly confronts community backlash. (Virtually every American now lives within 25 miles of a Wal-Mart.) "Wal-Mart is really hitting the wall in the U.S.," says retail consultant Burt Flickinger III. "So China is absolutely critical."

In China, Wal-Mart seems to have found kindred spirits in a culture of shopkeepers and bargain hunters. "Chinese consumers are more open to Americana than shoppers in Europe," says Dreher. But Wal-Mart, for its part, learned to do things the Chinese way, starting with food, which consumers insist be freshly harvested, or even killed in front of them. Initially, Wal-Mart offended Chinese consumers by trying to sell them dead fish, as well as meat packaged in Styrofoam and cellophane. Shoppers turned up their noses at what they saw as old merchandise. So Wal-Mart began displaying the meat uncovered, installed fish tanks and began selling live tortoises for turtle soup. Sales soared. "Between the fish and the turtles," says Dreher, "it feels more like you've walked into the pet department of a U.S. Wal-Mart."