Wal-Mart Takes a Pause in China; Retailer Plans to Close About 25 Underperforming Stores

Wal-Mart Takes a Pause in China

Retailer Plans to Close About 25 Underperforming Stores

LAURIE BURKITT and SHELLY BANJO

Updated Oct. 16, 2013 11:28 a.m. ET

BEIJING—After years of furiously opening stores in China, Wal-Mart Stores Inc.WMT +1.65% has concluded that a couple dozen of them just aren’t working. As a result, the retailer on Tuesday told investors it will be closing about 25 stores in China, even as it continues to open others. Based on its current expansion plans, China would still add more stores than it subtracts. Wal-Mart is set to open about 30 stores this year as part of a three-year, 100-outlet expansion effort, which will continue to 2015. Currently, Wal-Mart has 398 China-based stores.The stores to be closed were weighing on performance and closing them would “enable the team to focus on the healthy core,” said Scott Price, president and chief executive of Wal-Mart’s Asia division.

“Centralization is a continuing theme,” Mr. Price said. The company will expand in cities where it already has stores before it moves into new regions, he added.

Wal-Mart executives said some of the stores to be closed were gained through a 2007 acquisition of Trust-Mart, a Taiwanese chain that operated more than 100 big-box stores in mainland China but that Wal-Mart struggled to incorporate into its own operations.

The changes are part of the company’s plans to retool its international strategy, some details of which were laid out to investors at a conference held on Tuesday at its Bentonville, Ark., headquarters. Wal-Mart told investors that, overall, it plans to close 50 poorly performing stores in Brazil and China. And while it will continue to expand internationally, it has ratcheted down the plan: It will add 14 million square feet of new store space in overseas markets, down from its earlier forecast of 20 to 22 million square feet, said Wal-Mart International CEO Doug McMillon.

Part of the decrease in planned new store space can be attributed to Wal-Mart’s decision last week to shelve plans to open retail stores in India and end its joint venture with Bharti Enterprises Ltd. amid difficulties in navigating regulations on foreign investment in the South Asian country. The big box retailer said it would still operate its Indian wholesale businesses, a sector where the restrictions on foreign operators are looser.

With 6,200 stores outside the U.S., Wal-Mart’s international operations posted $135 billion in sales in the year that ended Jan. 31—29% of the total—and have long been seen as the company’s most important source of growth. But the growth rate slowed to 7.4% in the most recent fiscal year from 15.2% the year before and more than 20% before the recession. Sales at stores open at least a year declined last quarter in Canada, Japan, Mexico and Central America, while traffic declined in Canada, Brazil and China.

“Wal-Mart international continues to be a growth engine for us, even with moderation in square footage,” said Chief Financial Officer Charles Holley.

Mr. Price didn’t divulge sales figures for China, but it has faced challenges in the market, which is key to its international expansion ambitions. Wal-Mart has lost market share in China over the past few years, with share of hypermarket sales sliding to 10.9% last year from 11.6% in 2009, according to market research firm Euromonitor International. Hypermarkets or megamarkets are large stores that sell household goods and items like clothing in addition to groceries.

China is the world’s biggest market for groceries by sales, according to the Institute of Grocery Distribution, a U.K.-based industry group.

Wal-Mart expanded rapidly in China five years ago, when shoppers were still more interested in buying their produce at a wet market (selling fresh meat and produce) or a nearby mom-and-pop shop, said James Button, a senior manager at Shanghai-based consulting SmithStreet. “Now rivals are filling a high demand for import food products and Wal-Mart has gone too local with its products,” said Mr. Button.

Mr. Button said the closures could help Wal-Mart create a more consistent brand image, adding, “they need to focus on existing locations to align the stores with where the customer is today.”

Wal-Mart needs both size and improved profitability in China. Profit margins in the hypermarket business there can be as low as 1% or 2%, according to analysts and industry executives.

Wal-Mart is also looking to hire more local talent, Mr. Price said. While the company once had a suite full of Chinese executives to run its stores in the country, a string of resignations over the past few years wiped out its domestic talent pool.

It has also recently simplified the way it buys products to stock on shelves, consolidating buying offices to eight from 29 and reducing its pork vendors by 67%, Mr. Price said.