Thursday, August 24, 2006

The open secret of Walmart in China

In China, there are 60 Walmart outlets, mostly located in the urban centers of coastal cities. But over the past ten years, its total investment in China is only about US$57 million. How could it be possible?

The secret lies at its partner, Shenzhen International Trust & Investment Co. Ltd (SITI) and the "enclosure".

Walmart and SITI ride on the tide of the enclosure movement in Chinese cities. But Walmart did not need to buy any land or build its superstores in China. SITI did. Usually the local governments offered very favourable terms for SITI because of its partnership with Walmart. Last year, in a land auction for Hangzhou city center, the local government even required all bidders to be top 500 world corporates. It turned out that only SITI was eligible. SITI even acquired the land at a price 25% lower than market price. The local governments believe that the arrival of Walmart usually could boost the value of its surrounding land and real-estate. The annual purchase of RMB 20 billion worth of merchandise by Walmart is also extremely attractive to most governments.

SITI usually builds a commercial-residential complex in the new site and rents several stories to Walmart at a very low price. Due to the huge amount of profit from real-estate development, SITI is willing to provide most infrastructure (including air-conditioning, elevator and escalator) for Walmart. That is why the initial fund for each new outlet is only about US$3 million, less than Carrefour's outlet (US$5-6 million).

While many suppliers want to sell their products in Walmart's superstore, it keeps the first order payment as deposit. It is estimated that the amount is about RMB 30 million, which is high enough for opening another new outlet. Walmart could take advantage of its brand name to expand its retailing network persistently.

The market structres and government policies in China becomes more and more favourable to the big corporations. In the retailing markets, the small operators will find more and more difficult to survive. The local governments only pay lip service to job creation by promoting small business.


Information source

photo: Travel Geographer

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