Sourcing in China – WalMart’s Edge

Friday, February 22, 2008 4:04

Over the last couple of months, the economic news has been pretty bleak in the U.S. Talk of a recession, dropping consumer confidence, daily analysis on statistics showing the looming slowdown that is upon the U.S.

Going into Christmas, the news was particularly bad as you had a focus on product safety as well, and as a result a lot of retailers felt the pinch.

What is interesting is that if you just look at Wal-Mart, this was a good news bad news scenario, and depending on how you look at things… Walmart’s good news cycle will probably last longer than others, and defiantely longer than the bad news cycle.

Let me explain….

Last summer, the ONLY topic in the news was product safety. Everyone, including myself, was covering it in some way, and going into Christmas I saw Wal-Mart’s association to China as something that could lead consumers away from WalMart. Nothing new here, their production lines are deeply rooted in China and other low cost countries, and I think a lot of the news media showed WalMart more than anyone else. It was not good news for the firm that has been shown to have done so much to help consumers reduce their monthly expenses.

At the same time, you had clouds forming on the horizon of an economic slowdown the in the U.S. It wasn’t high priority in the media until the subprime market started crushing the U.S. banks, but once that happened it highlighted the fact that a lot of people had been getting crushed before that… and so the news cycle kicked into full force. Talk of over-extended consumers loosing confidence in the economy were at the top of the news hour, and questions of how this could impact retailers begun coming out soon after the holiday shopping season started.

Where I saw this as good news was that Wal-Mart has built a model of providing the lowest price points in the retail industry for many items. It is an issue that has been cast in a negative light by many, but the reality is that consumers really don’t care. If their pocket books are tight, it is a 5 minute ride in the family war wagon to the nearest Wal-Mart.

Target on the other hand has always tried to be a notch above, perhaps a couple notches above, Wal-Mart in terms of product placement… and price. Target usually puts more into the stores, and the demogaphics of the typical buyer will reflect this…. when the market is on the way up.

Bringing this all together, it is once again Wal-Mart’s investment in China that really saved them, and the news cycle of product safety bring trumped by the economy. with some experience working with big box retailers, one of the most interesting phenomonon I have seen is that while Wal-Mart has invested so much, and made so much money from that investment, others have yet to really take the same steps. Instead, they chose to continue working through the traders in Chicago, NY, LA, etc who will purchase from a trader in HK/ TW… who will buy from a trader in China… who will buy from a factory in Suzhou.

In an up market, when consumers are not worried about making minimum payments this works, but in a down cycle these intermediate steps become insurmountable in a couple of ways. first, the ability of a group like Target, who operates through more trading firms than through direct relationships, cannot bring their prices down to the level of Walmart – even for the same goods because all those traders who are in the middle need their take too.

2 years ago, I saw this firsthand as I visited a factory in South China. At this single factory, all of the tools in one category were being sold to more than 4 name brands, and as luck would have it I knew the person responsible for one of the brands. when I told him that I found the factory, he was a bit shocked but admitted that since 75% of his products were coming through trading relationships, he wasn’t surprised that he was paying 40% more than we would have charged him.

the second big problem with traders, is that pricing aside the jump from a trading model to a direct model cannot be made fast. Sure, in a few categories they jump can be made, but in a store that has hundred of thousands of SKUs, it takes years of investment in people, warehouses, relationships, etc to make this happen, and it cannot happen in 6 months.

So in my mind, for Wal-Mart, their investment has paid off and will continue to do so as worries of a U.S. slump continue because, for right or wrong, their efforts to invest into the China market (and surely others) has not only saved them a lot of money.

It has saved their customers a lot of money.

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6 Responses to “Sourcing in China – WalMart’s Edge”

  1. Jefferson Sy says:

    February 22nd, 2008 at 6:15 pm

    I am particularly intrigued by your figures on purchasing through a trader… If this amount is the average difference (it should be more since the 40% difference between the trader and the author), that is quite a considerable amount of spend which needs reconsidering.

  2. Paul Tittmann says:

    February 22nd, 2008 at 9:35 pm

    Jefferson,
    Like you, I question this 40% figure.
    Its not uncommon for a trader to work with a tool house to make a two or four cavity tool, each a clone of the other, and simply insert in each single cavity a separate brand logo. The trader charges his first customer – who often owns the design, and is thinking the tools is exclusively his – about 80% of the total tool cost, (or as much as he can get from the customer), and has available then a free mold for production of the same product to others with their logo.

  3. Rich says:

    February 23rd, 2008 at 2:02 am

    Jefferson/ Paul,

    The 40% was for a single product. Not a category, nor an entire business. and I used it to show the point that there were cost savings that WalMart had found through their investment in china that others (who used trading firms) did not.

    Hope that clears it up.
    R

  4. Qingdao Apartments says:

    February 24th, 2008 at 7:41 am

    Interestingly, the wall*marts here in China are usually packed with locals taking advantage “price roll-backs”. Most all major cities in China have a Wall*Mart.

    I’m sure that the company can take a mild US recession.

    ~cheers

  5. Rich says:

    March 2nd, 2008 at 9:36 pm

    that’s Qingdao.

    Thanks for stopping by. The Wal-Mart model has taken time in China, they were getting hammered in the south a few years back, but it appears that things are getting better for them in china…. and like American Auto, the China market could provide a nice buffer from the U.S. economic woes.

    R

  6. madmilker says:

    April 3rd, 2009 at 7:15 am

    People in America need to realize jus what got America in this shape…”cheap” yes so-call cheap items from a foreign land.

    quote*Wal-Mart firmly believes in local procurement. We recognize that by purchasing quality products, we can generate more job opportunities, support local manufacturing and boost economic development. Over 95% of the merchandise in our stores in China is sourced locally. We have established partnerships with nearly 20,000 suppliers in China. *end quote!

    Now! if there be 182 country’s making items for the world to buy and they have only 5% of the pie in China…duh! This company makes the nice people of China support their currency(yuan) by keeping it in their country working for the people there…. but with the “yuan” going up in value and the US dollar going down…all the foreign items that the American consumer buys thinking it is cheap has went up in price.

    People…its all about the currency and to keep a currency strong you got to keep it floating around the country you live in so it can work for you. For the past 12 years all them US dollars are being shipped overseas to a foreign bank and with the American worker not making anything for the foreigner to buy the “we the people” have to turn to the “second” largest employer in America(Uncle Sam) to sell “we the people” debt in order to get all them dollars back!

    50 years ago a foreigner would had given their left nut for a US dollar or a Hershey’s chocolate bar and today the same foreigner has got Uncle Sam and the American consumer by both all the while Hershey is moving the chocolate factory to Mexico. Wake up! America and think “MADE IN AMERICA.”

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