The Great Wal-Mart Of China

As it did at home, Wal-Mart is growing up with China's middle class, which is expected to quintuple to 200 million by 2015. "They offer a fantastic opportunity," says former Wal-Mart vice chairman Don Soderquist, "because they've been underserved and overcharged." When it opened its first Chinese store in 1996, Wal-Mart didn't offer cosmetics, which then seemed an unnecessary luxury. Today, Wal-Mart's stores have elaborate cosmetics counters just inside the front door, complete with moody backlit displays beneath giant posters of attractive Asian women with extreme makeovers. Nearby, rows of Johnson's Baby Oil are stocked alongside moisturizers infused with sheep placenta--which the natives swear reduces wrinkles. Wal-Mart's buyers even learned to chart the Chinese calendar. They stocked up on diapers in the Year of the Monkey because it's considered a lucky year to bear children. The Pampers flew off the shelves.

The biggest cultural change for Wal-Mart, though, has been its acceptance of organized labor in China. At home Wal-Mart fiercely fights unions, and it took the same hard line in its first eight years in China. But analysts suspect that Wal-Mart initially didn't appreciate the role unions play in China. Unlike those in the United States, they don't bargain contracts. Instead, Chinese unions are an arm of the state, providing funding to the Communist Party, and, in the government's view, securing the social order. "Taking on a Chinese labor union is not tantamount to taking on the Teamsters," says Flickinger. In 2004 Wal-Mart softened and agreed to accept unions, but it still put up a roadblock--it required workers to ask for representation. In a country where unions are seen as a management tool, no workers asked. But the Chinese government persisted, sending union organizers direct-ly to Wal-Mart workers. The move wore down Wal-Mart's resistance. Finally seeing organized labor as a cultural and po-litical imperative in China, the company accepted the first union into its stores this past July.

It was a pivotal moment in Wal-Mart's assimilation into China. Analysts believe it set the stage for Wal-Mart to win the Trust-Mart bid. But the company took one more step last week to solidify its China cred: it replaced its Asia chief, Joe Hatfield, a 32-year Wal-Mart vet, with a Hong Kong retailing executive. The move surprised analysts who viewed Hatfield, a chain-smoker with a heavy Southern drawl, as the "Sam Walton of China." But sources familiar with the transition, who asked not to be named because they're not authorized to speak about it, say Wal-Mart wanted a big operator rather than a start-up man to take its Chinese business to the next level. Wal-Mart declined to comment, as did Hatfield. Its new China boss, Ed Chan, ran 1,400 stores in Asia for the Dairy Farm chain, opening 800 since 2001. Hatfield, by contrast, methodically opened just 66 Wal-Marts in a decade.

Chan's challenge now is to delicately integrate the Wal-Mart way into Trust-Mart, a downscale chain most known for its rock-bottom prices. (Sure, that might sound like Wal-Mart to you, but it's not the Wal-Mart of China.) He can learn plenty from Wal-Mart's international hits and misses. In places like Germany, South Korea and Japan, where the big retailer has lost $1 billion, its troubles partly came from underestimating the local competition and failing to grasp the local culture. In Mexico, though, Wal-Mart first invested in a threadbare retail-ing chain in 1991 and grad-ually transformed it by incorporating its Everyday Low Price strategy while hiring locals to manage the stores and make sure the merchandise reflected its surroundings. Today, Wal-Mart de México controls 60 percent of the market. Industry insiders expect Chan to emulate the Wal-Mex approach by leaving the Trust-Mart name on the stores until they can be brought up to Wal-Mart standards.

Judging by a visit to a Trust-Mart in Beijing last week, Wal-Mart has its work cut out for it. The store was badly in need of a Wal-Mart smiley face. Cheap watches, cell phones and shoes lined its cluttered aisles. At the seafood tanks, the clerks do the fishing. And they're not very patient. When one young woman couldn't decide whether she wanted to take away her shrimp dead or alive, an older female clerk dumped them out. "There," she snapped. "They'll be dead soon." So will Wal-Mart if it sticks to that approach in China. But the big retailer's recent China policy suggests it's already learned plenty about how to woo Chinese shoppers. Grab your net.

With Sarah Schafer and Jonathan Ansfield in Beijing and Jackie Lin in Taipei

© 2006