Why Wal-Mart Did Not Succeed in South Korea
Franco Gandolfi, Mindy Braun, Phil Nanney & Ki-Jun Yoon
Regent Global Business Review 2008
Despite Wal-Mart’s unprecedented success, from its humble beginnings as a discount shop in Arkansas to one of the world’s most powerful and successful corporations, there were two occurrences in 2006 that deeply impacted Wal-Mart’s unrelenting quest to expand globally – Wal-Mart was forced to withdraw international operations in both Germany and South Korea. While the pull-out from Germany was highly publicized, the South Korean withdrawal or failure received almost no media attention in the United States.
In August 1998, Wal-Mart acquired four stores and six undeveloped sites in South Korea. At the time, the units were operated as Makro stores, a chain of Netherlands-based membership clubs. Three of them were located in the capital city of Seoul and one in Taejon. Each store was a single level unit with more than 100,000 square foot space. Since Makro had only been operating in South Korea for two years, the stores were fairly new. Wal-Mart’s international division Senior VP and COO, Carlos Perez, was also part of Makro’s entry into South Korea when he was executive VP of Makro. At the time, South Korea’s economy was on a rebound and its currency had declined sharply in 1997 along with all other Asian countries. Wal-Mart believed that the long-term potential for South Korea’s operations to contribute to the sales of Wal-Mart’s international division was considerable. While the geographical size of South Korea is comparable to the size of Florida, the population is three times as large. At the time, there were 135 Wal-Mart stores and 33 Sam’s Club stores in Florida. There was an underlying expectation that the successful business model in Florida could be replicated in South Korea.
However, prior to Wal-Mart’s withdrawal, Wal-Mart was ranked in the mere bottom five major discount stores in all of South Korea. Wal-Mart South Korea had sales of about $787 million in 2005, when in fact, at a subsequent press conference in Seoul, it was revealed that the company had operating losses of nearly $10 million in 2005. On May 22, 2006, Wal-Mart added their name to a list of multinational firms (Nokia, Nestlé, Google) that failed to adjust to the taste of South Korean consumers. Wal-Mart sold its 16 stores to Shinsegae for $882 million, which constituted a considerable loss. Wal-Mart was the second Western retailer to retreat from South Korea in less than a month. France’s Carrefour, the world’s second largest retailer behind Wal-Mart, had sold its 32 South Korean outlets to local retailer E-Land on April 28, 2006 for $1.85 billion – also at a significant loss.
Most individuals believe that Wal-Mart failed to understand South Korean’s consumer preferences. Wal-Mart had relied on its proven business model and its strategy in offering low prices for products. However, low prices alone were insufficient to make a successful business case in South Korea. South Koreans have different consumer preferences than Americans do. For instance, South Koreans like fresh vegetables and fresh food rather than dry products and the type of clothing that Wal-Mart sells. The South Korean culture is also very tied into its markets; they are one of the largest countries that are deeply involved in local markets. Some individuals commented that the location of Wal-Mart was poor and miscalculated. A South Korean professor Byung-Chul Shin commented, “The most important mistake of Wal-Mart South Korea was its location.”
Most Wal-Mart outlets in South Korea were placed outside instead of in the cities. South Koreans expect easy accessibility to shopping facilities within the larger cities without the need to travel. Also, South Korean consumers shop more frequently than most Americans do. They may not purchase many things at once, but they will usually get at least one item. Some individuals felt that Wal-Mart should have been located in the center of the cities where consumers felt more comfortable with their shopping needs. Gen Kanai, a South Korean marketing professional observed, “Wal-Mart put off South Korean consumers by sticking to Western marketing strategies that concentrated on dry goods, from electronics to clothing, while their local rivals focuses on food and beverages, the segment that specialists say attract South Koreans to hypermarkets. South Koreans really like fresh vegetables and beverages.”
South Koreans are also visually-oriented customers. They tend to purchase products not just because of the product itself, but also because of its appearance or the service the customer receives in the store. “In fact, some South Korean ladies do not like the warehouse-like atmosphere of Wal-Mart, which the American consumers seem not to mind since the products are still cheap. They prefer the department store-like, neat, clean, and sophisticated atmosphere. If you go to E-mart which is the biggest South Korean supermarket, you never think of it as a discount market,” said Hye-Won Jang, of the Korea Times. These and other characteristics seem subtle and intricate to the foreign observer, yet are obvious, even standard to local marketers. As a result, local perspective among Koreans is that Wal-Mart’s failure in South Korea was primarily due to its inability to understand the shopping preferences of local consumers and to adjust its business model to the prevailing domestic culture.
Wal-Mart is a corporation unaccustomed to failure. When financial failure struck at Wal-Mart, there were many stunned constituencies. Mike Duke, Vice Chairman of Wal-Mart Stores, Inc. oversees international operations. His perspective was that in the existing environment at that time “it would be difficult for us to reach the scale we desired.” Wal-Mart also believed the pursuit of its Western market strategies that mainly focused on dry goods, electronics, and clothing hurt them while in South Korea. For example, E-Mart used techniques, such as megaphones and hand clapping along with fancy displays, while Wal-Mart sold products out of boxes. Wal-Mart designed its South Korean stores based on US customer preferences, but different cultures have different idiosyncrasies. Wal-Mart has come to realize that even though it is a very large, powerful firm, it is subject to relentless market, environmental, and business pressures and continually exposed to localized cultural expectations. The retailer learned that local customization, flexibility, and adaptation are essential ingredients in the successful pursuit of international business operations.
While not widely exposed in the U.S. media, international business analysts had no shortage of perspective, “Wal-Mart is a typical example of a global giant who has failed to localize its operations in South Korea,” said Na Hong Seok, an analyst at Good Morning Shinhan Securities in Seoul. South Koreans strongly believe that Wal-Mart brought over its Western sales tactics and company culture. South Korean consumers expect to see local products presented in a localized fashion; this is probably the main reason why South Koreans did their shopping at E-Mart rather than Wal-Mart. Wal-Mart could not offer what localized stores, such as E-Mart had.
Wal-Mart Finds That Its Formula Doesn’t Fit Every Culture
August 2006, New York Times
…… In South Korea, Wal-Mart had only 16 stores — a small presence that contributed to its decision in May to sell out to a Korean discount chain. Many Koreans have never heard of Wal-Mart. In Seoul, a sprawling area of 10 million, there is only a single store. This lack of scale causes another problem that has afflicted Wal-Mart in several countries: its inability to compete with established discounters, like the Aldi chain in Germany and E-Mart in Korea. ……
Wal-Mart’s most successful markets, like Mexico, are those in which it started big. There, the company bought the country’s largest and best-run retail chain, Cifra, and has never looked back. This year, Wal-Mart is spending more than $1 billion in Mexico to open 120 new stores.Taking over Cifra “gave them a critical mass to build from,” said Tufic Salem, an analyst at Credit Suisse First Boston in Mexico City. “The management stayed, and they knew the market very well.”Perhaps the most striking example of a Wal-Mart success is Asda, which was Britain’s No. 1 discount chain when Wal-Mart acquired it in 1999. With sales of $26.8 billion, Asda now accounts for 43 percent of Wal-Mart’s international revenue.Wal-Mart’s German experience also taught it to use local management. The company initially installed American executives, who had little feel for what German consumers wanted.“They tried to sell packaged meat when Germans like to buy meat from the butcher,” Mr. Poschmann said.Some of Wal-Mart’s missteps — selling golf clubs in Brazil, where the game is unfamiliar, or ice skates in Mexico — are so frequently mentioned, they have become the stuff of urban legend. But even more subtle differences in shopping habits have tripped up the company.
In Korea, Wal-Mart’s stores originally had taller racks than those of local rivals, forcing shoppers to use ladders or stretch for items on high shelves. Wal-Mart’s utilitarian design — ceilings with exposed pipes — put off shoppers used to the decorated ceilings in E-Mart stores. Beyond the ambience, Wal-Mart’s shoes-to-sausage product line does not suit the shopping habits of many non-American shoppers. They prefer daily outings to a variety of local stores that specialize in groceries, drugs or household goods, rather than shopping once a week at Wal-Mart. “They have stacks of goods in boxes,” said Lee Jin Sook, 46, a housewife sitting on a subway in Seoul. “That may be good for some American housewives who drive out in their own cars.” But Koreans, she said, prefer smaller packages: “Why would you buy a box of shampoo bottles?”
IKEA’s Global Strategy
Walk into an IKEA store anywhere in the world, and you would recognize it instantly. Global strategy standardization is rampant! The warehouse-type stores all sell the same broad range of affordable home furnishings, kitchens, accessories, and food. Most of the products are instantly recognizable as IKEA merchandise, with their clean yet tasteful lines and functional design. With a heritage from Sweden (IKEA was founded in 1943 as a mail order company and the first store opened in Sweden in 1958), the outside of the store will be wrapped in the blue and yellow colors of the Swedish flag. IKEA had sales of about $34 billion in 2014 and some 147,000 employees. Interestingly, IKEA is responsible for about 1 percent of the world’s commercial-product wood consumption.
The IKEA name comes from its founder—the acronym consists of the founder’s initials from his first and last names (Ingvar Kamprad) along with the first initials of the farm where he grew up (Elmtaryd) and his hometown in Sweden (Agunnaryd). Overall, Sweden has 20 IKEA stores, which is only fewer than in Germany (49 IKEA stores), United States (42), France (32), and Italy (21). Spain also has 20 stores. With 351 stores in 46 countries, IKEA is the largest furniture retailer in the world. Basically, the furniture market is one of the least global markets, with local tastes, needs, and interests much different than for many other products across industries. The largest IKEA store is in Gwangmyeong, South Korea, at some 640,000 square feet).
The IKEA store itself will be laid out as a maze that requires customers to walk through every department before they reach the checkout stations. The stores are often structured as a one-way layout, leading customers counterclockwise along what IKEA calls “the long natural way.” This “way” is designed to encourage customers to see the store in its entirety. Cut-off points and shortcuts exist but are not easy to figure out. It is even difficult to get back out after having a meal in the famous IKEA restaurant with its Swedish food (meatballs anyone?).
Immediately before the checkout, there is an in-store warehouse where customers can pick up the items they purchased. The furniture is all packed flat for ease of transportation, and requires assembly by the customer. Value is stressed to a great extent (the price customers pay for the quality furniture they get). If you look at customers in the store, you will see that many of them are in there 20s and 30s. IKEA sells to the same basic customers worldwide: young, upwardly mobile people who are looking for tasteful yet inexpensive “disposable” furniture of a certain quality standard for the price they are willing to pay.
A global network of more than 1,050 suppliers based in 53 countries manufactures most of the 12,000 or so products that IKEA sells. IKEA itself focuses on the design of products and works closely with suppliers to bring down manufacturing costs. Developing a new product line can be a painstaking process that takes years. IKEA’s designers will develop a prototype design (a small couch, for example), look at the price that rivals charge for a similar piece, and then work with suppliers to figure out a way to cut prices by 40 percent without compromising on quality. IKEA also manufactures about 10 percent of what it sells in-house and uses the knowledge gained to help its suppliers improve their productivity, thereby lowering costs across the entire supply chain.
Look a little closer, however, and you will see subtle differences between the IKEA offerings in North America, Europe, and China. In North America, sizes are different to reflect the American demand for bigger beds, furnishings, and kitchenware. This adaptation to local tastes and preferences was the result of a painful learning experience for IKEA. When the company first entered the United States in the late 1980s, it thought that consumers would flock to its stores the same way that they had in western Europe. At first they did, but they didn’t buy as much, and sales fell short of expectations. IKEA discovered that its European-style sofas were not big enough, wardrobe drawers were not deep enough, glasses were too small, and kitchens didn’t fit U.S. appliances. So the company set about redesigning its offerings to better match American tastes and was rewarded with accelerating sales growth.
Lesson learned, when IKEA entered China in the 2000s, it made adaptations to the local market. The store layout reflects the layout of many Chinese apartments, where most people live, and because many Chinese apartments have balconies, IKEA’s Chinese stores include a balcony section. IKEA has also had to shift its locations in China, where car ownership lags behind that in Europe and North America. In the West, IKEA stores are located in suburban areas and have lots of parking space. In China, stores are located near public transportation, and IKEA offers a delivery service so that Chinese customers can get their purchases home.
Sources: D. L. Yohn, “How IKEA Designs Its Brand Success,” Forbes, June 10, 2015; J. Kane, “The 21 Emotional Stages of Shopping at IKEA, From Optimism to Total Defeat,” The Huffington Post, May 6, 2015; J. Leland, “How the Disposable Sofa Conquered America,” The New York Times Magazine, October 5, 2005, p. 45; “The Secret of IKEA’s Success,” The Economist, February 24, 2011; B. Torekull, Leading by Design: The IKEA Story (New York: HarperCollins, 1998); P. M. Miller, “IKEA with Chinese Characteristics,” Chinese Business Review, July–August 2004, pp. 36–69.
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