Comment: Is Walmart taking a gamble in China?

Walmart has renewed efforts to expand in China, soon after reining in plans for India. Is this a risk given a mooted slowdown in Chinese demand?

October has been a big month for Walmart in Asia. Two weeks ago the world’s largest retailer separated from its Indian partner Bharti Enterprises, counting it out of any Indian retail investments in the foreseeable future.

Now the world’s largest retailer has revealed plans to open 110 new stores in China over a three year period to 2016.

This seems to place China back at the heart of Walmart strategy even as other retailers have shied away from committing to the market.

The decision by Walmart to refocus on China is significant for three reasons.

First of all the move seems to be at odds with current sentiment of a slowdown in Chinese demand.

Many retailers have been reining in operations, or consolidating strategy, highlighted by the recent tie-up between Tesco and China Resources. As recently as April Walmart closed three superstores in China, citing rising labour costs and rents.

Secondly it comes as foreign firms are coming under greater scrutiny from Chinese regulators and consumers over issues such as pricing.

A recent example is the uproar over Starbucks’ pricing but many firms including Danone, Nestle, Fonterra and Yum have been affected in the last 12 months. Walmart and Carrefour have both been fined over allegations of price-fixing.

Finally refocusing on China could have significance in India.

It seems Walmart is signalling a break in its Indian ambitions, choosing instead to devote resources to China. This could be counterproductive. Despite reform stalling, other retailers remain interested in a market with huge potential. Investing in China, where Walmart already has a presence, could be spurning opportunities elsewhere.

While the risks to investing in China are significant, they are hardly new. Fears of a Chinese slowdown have emerged and receded several times in the last five years.

Meanwhile, Walmart is no stranger to regulatory issues whether in China, India, Mexico or the USA, where it recently faced down wage reform legislation.

It should also be remembered that slower growth in China is still eye-watering by mature-market standards.

According to Economist Intelligence Unit forecasts, the next five years will see annual retail volumes in China grow by 8% to 9% compared to an annual average of 0.1% in Western Europe, 1.8% in North American and 3.2% globally.

Growth in China is also expected to be faster among third and fourth tier cities in the interior, a market segment that WalMart has singled out for attention. The retailer is also well placed in the fast-growing e-commerce channel thanks to a controlling stake in online retailer Yihaodian.

By comparison the situation in India is unlikely to be resolved any time soon.

Retail growth will be hampered by inflation, elections in 2014 and the ongoing FDI saga. The elections are particularly important since some parties have pledged to reverse FDI liberalisation if they come to power, preventing global retailers from making commitments for some time yet.

It’s also worth noting that Walmart is matching strategy with circumstances.

Earlier this year India was seen as Walmart’s priority. Now focus is back on China, but it could revert to India after next year’s elections.

In fact, October 2012 WalMart unveiled plans for 100 Chinese store openings over three years, adding a strong sense of déjà vu to the latest announcement.