Wal-Mart to focus on private labels in China

CHINA - Wal-Mart Stores, famed for its low prices, has stumbled in the one major market where consumers say price is less of a driver in their buying decisions: China.

There, consumers say they want food that is safe and authentic, and after 17 years, Wal-Mart is changing its approach, closing some big-box stores that never quite caught on with locals. Instead, it's focusing on private-label products and imports, putting its stamp on quality and safety.

"We're closing some stores because we got enamoured with growth," said Raymond Bracy, head of corporate affairs at Walmart China. "We're not going to do that again. We're focusing on quality first."

Getting China right is crucial for Wal-Mart's international ambitions. The world's largest retailer ranks third in China behind Sun Art Retail Group and state-backed China Resources Enterprise, according to Euromonitor. Brazil and India are proving challenging, too.

"If you went out and asked members or customers, 'What's your single biggest worry?' they'll tell you trust and authenticity," said Greg Foran, who took over as Walmart China chief executive officer in 2012. "Once you've got their trust, the next question they ask themselves is, 'How much is it?'"

Walmart International, which contributes less than a third of net sales, has suffered from aggressive expansion and is a big concern for new CEO Doug McMillon, who previously led the international unit.

The retailer on Thursday forecast lower full-year profit than analysts had expected for fiscal 2015. Walmart International net sales for the fourth quarter dipped 0.4 per cent to US$37.67 billion (S$47.72 billion), and November-January operating income fell 45.8 per cent, hit by store closures in Brazil and China and a charge related to terminated agreements in India.

"We have initiated actions in Mexico, Brazil and China to improve our operating performance and this is a priority for fiscal 2015," David Cheesewright, president and CEO of Walmart International, said in a statement.

Mr Foran told reporters during a December tour of Sam's Club stores - where members bulk buy - that Wal-Mart aims to have private labels make up a fifth of its China sales within the next decade, up from less than one per cent now. Private labels typically price at 10-40 per cent below local brands, but profit margins are higher for the retailer. They make up close to half of sales in Britain.

Mr Bracy said that the retailer is rationalising its supply chain in China and building its own distribution centres to manage quality, while also lowering costs. "Our costs have come down so much on pork that people ask us, 'Gee, is it too low?' They wonder, 'Is it legitimate? Can we trust it?'" he said.

On an annual basis, Walmart International's revenue growth last fiscal year was the slowest in four years. Chinese consumers seek out large foreign brands for reliability and quality, said James Roy, an associate principal at Shanghai-based China Market Research. "Yet they're seeing mixed messages from Wal-Mart because they have tried to sell the 'everyday low prices' concept and Chinese consumers equate 'everyday low prices' with being cheap and not very safe."