Walmart in drive to expand Sam’s Club chain in China

December 29, 2013 5:30 am

Walmart in drive to expand Sam’s Club chain in China

By Tom Mitchell in Beijing

The Sam’s Club on the outskirts of China’s capital is not, technically speaking, a drive-through operation. But almost all of the customers at the Walmart-operated discount warehouse drive there to shop and are prepared to pay as much as Rmb175 ($30) for a bag of imported Massachusetts cranberries. Walmart’s international expansion of its Sam’s Club chain, which in China targets increasingly affluent customers in the country’s largest cities, is a key part of the US retailer’s strategy to offset stagnant sales in its home market.It is part of Walmart’s efforts to “reset” its business in China, where it has had a poor return on investment in recent years and made a series of missteps in its haste to grow.

The expansion of Sam’s Club is also tapping into a trend that is transforming Chinese consumption habits: the rapid growth of China’s auto market.

“About 90 per cent of the people who shop in our Sam’s Clubs drive to the club versus our Supercenters, where that number can be as low as 10 per cent,” says Greg Foran, head of Walmart’s China business, on a tour of one of Beijing’s two Sam’s Clubs. “They’re coming to this particular location maybe once a month and they’re buying enough items to last them that month . . . The frequency of shopping is less but the value of [each customer’s] basket is a hell of a lot more.”

Walmart operates about 400 stores in China. It recently announced plans to close 15 to 30 stores – including some with bad locations and layouts that it regrets – and to open 110 new ones as it takes a fresh run at expansion.

Some other closures stem from overlaps with Trust-Mart Stores, the Taiwanese-owned retailer it acquired in 2012, but Walmart still expects a net gain of 70 to 80 stores over the next three years. “We’re closing some stores because we got enamoured with growth [in China],” says Ray Bracy, a senior vice-president for Walmart in China. “We were focusing more on growth than we were on quality in some cases. We’re not going to do that again.”

Only 10 of its China outlets are Sam’s Clubs, although Walmart is now opening two in the country every year and three of its biggest-selling Sam’s Clubs are located in the country. Unlike Walmart’s more traditional Supercenters, Sam’s Club outlets make money from annual memberships rather than sales, which simply offset each club’s operating costs.

More video

According to Shaun Rein, a Shanghai-based retail consultant, early attempts by retailers to cater to car owners stalled, especially in downtown locations. “Traffic congestion was too serious,” he says. “A lot of consumers still wanted to go by bus or by metro.”

But as city-centre rents drove Sam’s Clubs, Ikea and other outlets to more suburban locations that were also easier to drive to, they began to catch on with richer car owners. The Sam’s Club in southern Beijing is located just off the city’s fifth ring road.

Shoppers at Sam’s Clubs pay an annual membership fee of Rmb150, a cost of entry that has not changed in the 17 years since the first outlet opened in the southern city of Shenzhen. There are now 1.7m members across the country, translating into an annual income of Rmb255m.

That is just a fraction of the $1.9bn in operating income Walmart reported for its Sam’s Club stores globally in 2012, including more than 600 outlets in the US.

The large parking lot outside the Sam’s Club in southern Beijing, which was previously a car sales centre, is just one indication that the customers it serves are upwardly mobile. Walmart is concentrating the discount warehouses in the outskirts of “tier 1” and “tier 2” cities – primarily provincial capitals and independently administered conurbations such as Beijing and Shanghai – where incomes and car penetration rates are highest.

Annual per capita gross domestic product ranges between $7,100 and $12,700 in top-tier cities, compared with $4,100-$5,400 in the smaller third- and fourth-tier cities where Walmart is aggressively expanding its network of Supercenters.

Sam’s Clubs also offer a much more limited selection of goods – 4,000 items as opposed to as many as 60,000 in a typical Supercenter – with an emphasis on carefully chose higher-priced products, many of them imported. “In a club I’m often offering you a choice of one,” Mr Foran says. “In here it’s Levi’s or it’s not denim.”

In China, a typical Sam’s Club displays products not usually carried by local stores, such as the imported Massachusetts cranberries, 10 pairs of “Made in the USA” athletic socks for Rmb119, or Indian bath towels on sale for Rmb98 each.

Such imported items account for about 30 per cent of Sam’s Club annual sales in China – which the company does not reveal – versus just 5 per cent in a Walmart Supercenter. Mr Foran expects the value of imported goods sold at his 10 Sam’s Clubs in the country to increase fivefold over the next year alone.

Mr Foran points to a display of Post brand Blueberry Morning cereal, imported from the US, which is selling only about 12 boxes a day despite a prime position along the store’s centre aisle.

“In a location like this, that’s not a great sales cycle,” he says. “But we’ll persevere for a period of time and see what happens.” Sometimes customers have to be led to the items they don’t know they like yet, he says.

“When we started selling muffins, the response was, you can’t sell muffins – people in China don’t like muffins,” Mr Foran adds, noting that assertion did not tally with all the muffins he saw on sale at Starbucks coffee outlets across the country. “And here we are four or five months down the track and it’s the number one item in the bakery department.”