Opening Walmart in Saudi Arabia - Essay Example

Wal-Mart: Mission ment: "We save people money so they can live better." (Walmart Corporate: Our Story n.d) The mission ment of Wal-Mart basically sums up their entire modus operandi in a sentence. Their mantra for success has been bringing cheaper goods into people’s lives so they have money left over to spend on other things. Brief History of Wal-Mart: According to Fortune 500, 2013, Wal-Mart is the world’s largest company and the world’s biggest employer with in excess of two million employees worldwide. More than 245 million customers and members visit 11,000 stores in 27 countries every week, in addition to ecommerce websites in 10 countries. The Financial year 2013 recorded approximately $466 billion in sales for Wal-Mart. (Aruvian, 2013). Wal-Mart Stores Inc. operates retail stores worldwide under the brand name Walmart. It is a company based out of Bentonville, Arkansas, USA. Wal-Mart Stores Inc. has three sections: Walmart US, Walmart International and Sam’s Club. (Aruvian, 2013). In the business end of scheme, it has operations for “retail stores, restaurants, discount stores, supermarkets, supercenters, hypermarkets, warehouse clubs, apparel stores, Sam’s Clubs, neighborhood markets, and other small formats, as well as walmart.com; and samsclub.com.” (Aruvian, 2013) The company is engaged in selling products such as “meat, produce, deli, bakery, dairy, frozen foods, alcoholic and nonalcoholic beverages, and floral and dry grocery; health and beauty aids, baby products, household chemicals, paper goods, and pet supplies; and electronics, toys, cameras and supplies, photo processing services, cellular phones, cellular service plan contracts and prepaid service, movies, music, video games, and books. Its stores also provide stationery, automotive accessories, hardware and paint, sporting goods, fabrics and crafts, and countless other products. Further, it operates banks that provide consumer financing programs; and offers financial services and related products, including money orders, prepaid cards, wire transfers, check cashing, and bill payment.” (Aruvian, 2013) Retail Sector in Saudi Arabia: The demographics and domestic demand in Saudi Arabia encourages Retail Markets. However, it is subject to similar issues that face the retail sector globally and the market is qualified with its own set of unique situations. (David Macadam and Soraka Al-Khatib n.d) Saudi Arabia is one of the biggest and rapidly growing markets in the retail sector across the Middle East and North African Countries (MENA). (David Macadam and Soraka Al-Khatib n.d). The Nation has a strong youth population which is quissentially the target market for big Retail Stores such as Walmart, TESCO or Carrefoure. A strong number of companies from Middle East and other parts of Asia are trying to get a foothold into the Kingdom’s lucrative Retail Industry. (David Macadam and Soraka Al-Khatib n.d). David Macadam, Head of Jones Lang LaSalle’s retail team in MENA commented: “Despite its unique challenges, Saudi Arabia remains an exciting retailing opportunity. Retailers across the spectrum are looking to enter this market to cater to a large and growing domestic demand, driven by its sizeable young population. Those retailers and retail centers that can create a uniquely Saudi experience will be the ultimate winner as they will be able to fully capitalize on the market potential and increasing levels of spending power available to the Kingdom’s consumers. (David Macadam and Soraka Al-Khatib n.d) The unique challenges Macadam talks about are, that, despite its favorable youth population as well as growing demand for an ‘International shopping experience’ some major retailers in the Arab Kingdom have begun to lose market share to newer stores which offer leisure activities along with the shopping experience. The challenge in Saudi Arabia will be to provide a perfect cocktail of leisure along with keeping up with the demand for cheap but quality goods. Wal-Mart in Saudi Arabia: In order to analyze Wal-Mart’s proposed foray in to Saudi Arabia and its chances of success, let us consider some basic yet powerful analytical tools such as Porter’s Theory of ‘Five Forces’, and SWOT Analysis. Porter’s Five Forces: Threat of New Entrants-LOW Entry barriers both in Saudi Arabia as well as Retail Industry is relatively high, as it requires a great investment in infrastructure and an outstanding distribution systems, locations, brand name, and financial capital. It may be said that Wal-Mart enjoys these advantages globally and there is no reason to believe that it cannot achieve the same performance in the Arab Kingdom. Bargaining Power of Buyers: LOW Generally, it is seen in the retail industry, individual buyers have little or no say with a Giant Conglomerate. The only option a consumer can utilize is to shop at a competitor of Wal-Mart. Bargaining Power of Suppliers: LOW Walmart controls the lions share of the market in most of the countries they operate in, Manufacturers and whole sale suppliers get a lot of business from Walmart. Walmart sources around 61000 suppliers from 70 countries worldwide. Hence the influence of Walmart on its suppliers is more than the suppliers influence on Walmart. Revlon and Del Monte has approximately 23% and 24% of their food income respectively from Walmart. (Shaw, 2007 p. 155) Competitive Rivalry within the Industry: HIGH There are some major players already operating in Saudi Arabia in the Retail Industry. For example, Carrefour already has operations in the country under KSA Carrefour. (About Us, 2004). Company No. of stores Sales area Avg. sales area Grocery sales Market share Panda 144 628,500 4365 $1742 mn 4.20% Bin Dawood 30 205,000 6833 $929 mn 2.30% Al Othaim 106 162,440 1532 $879 mn 2% Carrefour 17 107,000 6294 $683 mn 1.70% Farm 43 115,850 2694 $327 mn 0.80% Total 340 1,218,790 21,718 $4,560.00 11% [Source: EIU, Al Rajhi Capital] As we can see in the above mentioned table, Walmart will certainly not have a first movers advantage in Saudi Arabia. The top five retailers in the Kingdom have a combined market share of only 11%. The retail industry in Saudi Arabia is certainly crowded. However, the good news is that the Retail Industry is expected to grow from $73 billion to approximately $112 billion by 2015 according to a market analysis report by BMI. (Solaim, 2013). Moreover, the Retail Industry accounts for approximately 17% of the Kingdoms GDP (Solaim, 2013), making it an extremely lucrative option, with the Arab Nations GDP forecasted to grow at 6.8% p.a. (Naqvi, 2013) Substitute Products: MEDIUM The Retail industry does not really provide substitutes. There are competitors but online shopping comes across as the only real alternative. The cheap discounted goods on the shelf by Retailers can only be matched by online companies owing to their absence of costs for setting up shop. However, Walmart has experience in the online shopping sector as well and it might be a good strategy to invest resources in online shopping as well. SWOT Analysis: STRENGTHS Saudi Arabia has a youth population in excess of 28 million who are hypersensitive to the growing trends in the West. Hence, Saudi Arabia becomes a lucrative option for Western Retail Companies to foray into. Like the rest of the Middle Eastern countries, Saudi Arabia too is home to a lot of expats who have a high demand for the type of goods generally found in Walmart. Saudi Arabia’s supermarket industry is quite well established, and the Government provides a number of sops and a low cost export to other Gulf countries. Politically, Saudi Arabia is much more stable than its neighboring countries, making investments viable and safe. WEAKNESS The consumer base in Saudi Arabia is more conscious about prices than the other neighboring Gulf nations. The convenience store segment in the Kingdom is underdeveloped. There are restrictions on women participation under the Islamic Law, hence, it is difficult for companies to tap them as a potential target group. OPPORTUNITIES Unorganized account for fifty percent of total sales in this industry in Saudi Arabia, there is a huge potential for big players like Walmart to successfully penetrate the market. The major concentration of supermarkets seems to be in the major cities, with smaller cities missing out. This may work well with Wal-Mart’s global positioning strategy of entering the market in smaller cities and expanding to the major cities. THREATS The demand for high value goods has declined since 2009, and in spite of improvements in the recent past, consumer confidence is still lower than the highs achieved in 2009.\ Despite the abundance of oil resources, there is great inequality of wealth in Saudi Arabia, hence poverty remains a big threat even after the governments big hearted efforts in helping the poor. Strategy in Saudi Arabia for Walmart: 1. Take over a Major Retailer in the Country (ENTRY) Walmart has enjoyed success foraying into different international markets such as China, Mexico etc. with the exception of Germany. Their strategic ‘treat different customers of different countries DIFFERENTLY’ has paid off for them in the past. (Wei et al, 2013) Their strategy is simple: "Different Stores for Different Folks" (Hayden et al, 2002). Walmart has a history of gaining entry into an international market (outside the US) by taking over a national retailer. It is a strategy in three countries such as Canada, UK and Germany. This strategy has paid off for them as it hits multiple targets with a single arrow. Walmart eliminates a potentially big competitor. (Patrick Hayden, 2002) Walmart almost instantaneously gets access to the Real Estate holdings of the company. (Patrick Hayden, 2002) Walmart gets trained employees, who have been working locally at the retail sector. (Patrick Hayden, 2002) Walmart gets a big customer base even before entering the market and can look to expand its customer base with its brand equity and target demographics. (Patrick Hayden, 2002) They retain local stores in terms of layout design and employees, to get a feel of the customer base and build its brand familiarity. Gradually, the local designs are phased out to lookalikes of Walmart Internationally as customers get more comfortable with Walmart. (Hayden et al, 2002). Walmart can buy out Al Othaim. It is the second biggest supermarket in the country. (Sayegh, 2010) Al Othiam has a business model similar to Walmart and transition would be easy. 2. Visit Saudi Arabia: In order to understand the local requirements regarding infrastructure and facilities, and see for themselves, the local competition, Walmart must first send its high ranked executives to Saudi Arabia. They will be able to analyze the country’s demand and market requirements more comprehensively. They have to make the effort to understand the Saudi way of life. Face to face meetings with the locals will help them build trust and confidence. (Mousa, 2009) 3. Understand the Local Culture: Many US companies make the fatal mistake of ignoring the cultural requirements of Asian public, particularly in the Middle East. Walmart must try and be an exception to that. It needs to understand that a favorite pastime in the Kingdom is to visit malls that offer a 360 degree experience in terms of shopping, entertainment and passing time. They need to understand that women are a large target audience in any economy. However, in Saudi Arabia, it is hindered as women are not allowed to drive; hence it is mandatory for a woman to be present with a man. Moreover, there are restrictions on single men going to supermarkets and malls on weekends which are strictly a family affair. Moreover, certain products such as pork and alcohol are strictly banned in Saudi Arabia, being a harsh enforcer of Muslim Law. They must adhere to these sentiments or face sanctions and action by the Government. (David Macadam and Soraka Al-Khatib n.d) 4. Recruitment: The power to employ and then retain quality management and workers can be the difference to success and failure in the global economy. Walmart shall certainly attract workforce in Saudi Arabia due to its massive popularity amongst workers. It currently employs over 2 million workers worldwide. (Aruvian, 2013). However, Saudi Arabia has a composite labor policy which may hinder Walmarts plans. Moreover, there is a regulation on gender segregation in Saudi Arabia which might thwart exchange of ideas and communication between workers of different genders. Also, the skills of the local workers may not match up to Walmarts Expectations; therefore it may need to invest a lot of resources in Human Resource Training. (Aruvian, 2013) 5. Rely on its successful Supply Chain Management: The strategy of Walmarts Supply Chain Management has been an incredibly successful one in the past. It gives Walmart an edge over its competitors. It keeps product costs low, reduces inventory carrying costs and gives a Walmart a larger variety of products on the shelf. (University Alliance, n.d) Implementing Strategy: The retail sector is a benchmark of economic and national trends of a country. (Andy, n.d). It compares the social and economic structure of the country. Retailing improves the overall quality of life. (Andy, n.d). It allows people to choose from a larger stock of goods based on their needs and budget. Walmart needs to implement the strategies mentioned above in order to have a successful venture in the Kingdom. We examine their implementation prowess through the 7Ps analyses. 7Ps is, price, promotion, people, process, physical environment, product, place and strategies i. Price: The pricing component will play probably the most important part in Walmarts success strategy. Walmart is renowned for keeping the cost of products down. Even Walmarts tagline and mission statement talk about keeping prices affordable to the end user. In order to guarantee low prices, Walmart tries to purchase locally wherever it can, and rules our middlemen and deals directly with manufacturers/farmers to keep prices down. (Andy, n.d) ii. Product: When it comes to the product strategy, Walmart must develop and promote private brands. This will create a sense of loyalty in the Arab community; they must localize international brands to make them familiar with the consumers. This will result in creating an additional value to its products. It needs to lay a solid foundation in order for Walmart to succeed in the long run, and emerge as the front runner of the retailing industry in Saudi Arabia. (Andy, n.d) Moreover the products should not include things banned in the country such as pork or alcohol. (David Macadam and Soraka Al-Khatib) iii. Promotion Walmart does not invest in Promotional activities typically. It invests heavily in charitable activities though, which increases the goodwill as well the brand name of Walmart. (Aruvian, 2013) However, various channels of promotional activities are at the disposal of Walmart if need be. Apart from the previously mentioned ‘sponsorship and emotional promotion’ Walmart can indulge in the various sources and mediums of advertising which may be but is not limited to Television, News Channels, Online Promotions. Moreover, promotions don’t mean advertising. Giving free samples or other benefits also represent Promotion which Walmart may need to exercises in order to gain customer trust and loyalty. (Andy, n.d) iv. People Employees are the actual face of the company in front of the purchaser. His behavior influences the thought process of the consumer regarding the image of the company. Walmart needs to identify strong employees and provide training. Moreover, employing locals instead of expats would be strong signal to the locals to bond with the company. (Andy, n.d) v. Process: The process has to be customer focus. As the culture dictates in Saudi Arabia and most of Middle East, customer satisfaction and attention goes a long way in creating loyalty. Walmart needs to focus on the demands of the local customers, familiarize itself with the wants needs and desires of the local customers as well the expatriates in the country. (Andy, n.d) vi. Physical Environment: The design of the store should be convenient. Products should be displayed meticulously. Shelf strategy should be properly considered and researched. (Andy, n.d)Moreover, as per law, male and female sections need to be segregated along with strict adherence of not allowing single men to enter malls on weekends. (David Macadam and Soraka Al-Khatib) vii. Place: Location should be easily accessible. Distribution centers need to be established to cater and support to branches. Delivery trucks should be equipped with GPS to help tracking and thus providing an efficient logistical system. (Andy, n.d) To further understand the implementation possibilities of Walmart in Saudi Arabia, let us examine it with a PESTEL Analysis and see how it can make some external factors work to its advantage. PESTEL Analysis: Political: The Government in Saudi Arabia is quite stable; it is ruled by a Monarch as the Head of the State. The general public obeys the Monarchy diligently and respects the King. This provides Walmart with the security it needs to invest billions of dollars. (BBC Monitor, 2013) Moreover, the tax system in the Kingdom is simple. (Zufari, 2009). However it is strictly enforced with cases of extreme punishment on any irregularities found. (Zufari, 2009) Economic: The Economy in Saudi Arabia is stable. Most rating agencies have a favorable economic outlook on Saudi Arabia. On March 08, 2014 Fitch Ratings “upgraded Saudi Arabias rating from ‘AA’ to ‘AA+’ thanks to stronger sovereign and external balance sheets.” (Staff, 2014). The recorded GDP of the Arab Nation was close to $930 billion with forecasts of GDP growing at a stable rate of close to 7%. (The World Factobook 2013-14, 2013). The recent measures by the Saudi Government to attract FDI in the country includes increasing FDI in the retail sector to 100%. (Lucintel, 2012). This is a favorable situation for Walmart as its Entry Strategy in international markets has been by acquiring a current retailer in the country of operation. (Patrick Hayden, 2002) Social:The population demographics of Saudi Arabia favor Walmart. It has over 28 million young people. Moreover, 76% of its population is under the age of 40. (Lucintel, 2012) However, Walmart should be cautious as despite a stable government, there is an anti-US sentiment in the Kingdom as is the case with most Muslim countries. However, the younger population are quite susceptible to the Western trends and fashion. There are several constraints on women in Saudi Arabia. Hence Walmart must examine the best way to reach out to them, while respecting the social norms. For example, women are not allowed to drive in Saudi Arabia. It might be a good idea to place stores in residential areas where women have easy access to the supermarket. Technological: With more on more people having access to internet in the Saudi Arabia, and several restrictions on women, Walmart should consider selling through the world wide web as it does in several other countries through its portal www.walmart.com (Walmart Stores, n.d). The RFID technology provides a certain boost in the Supply chain management of Walmart. It should continue to use it in Saudi Arabia as well. (University Alliance, 2012) Environmental: Walmart has a history of breaking Environmental Laws in Mexico, USA and Canada. (Doug Alexander, n.d). It needs to be cautious as it can spoil its hard earned reputation. However, Walmart has begun investing in “Green products” These are “products that [are] supposed somehow to be environmentally ‘improved’” The main environmental change and improvement is selling items that are 100% recycled. 3 out of 5 local Wal-Mart stated that their store carried green products. (Doug Alexander, n.d) Legal: The legal system in Saudi Arabia is based on the Islamic Law – Sharia. This law has been criticized by the West for being slow and sometimes biased. However, the challenge for Walmart would be to adhere to these laws strictly or face punishments which are extremely rigorous and harsh in the Kingdom. (Al-Sheikh, 2010) Critical Reflection: The effect on culture  Saudi Arabia sees influx of approximately 2.5 pilgrims for the Hajj every year. (Macadam and Al-Khatib) This is a major shot in the arm for the retail sector as it sees new customers every year, many of them coming from countries that already have Walmart. Hence, it is convenient for these pilgrims to rely on Walmart as it is a renowned international brand. Moreover, the local markets are basically unorganized and there is a huge scope of a giant like Walmart to quickly capture a big piece of the market share. Mecca and Medina are the two primary places that pilgrims visit for the Hajj and Umrah (Macadam and Al-Khatib, n.d.), and the retail sector in these two places remain a potential market waiting to be tapped. The effect on competition  The supermarket/hypermarket sector in the country is unorganized chaotic and crowded. “The retail sector in Saudi Arabia, though bigger in size, is still evolving as compared to a country like the UAE, where it is much more developed due to the latter’s history of being a trading hub. Although big-box retail formats (supermarkets and hypermarkets) have sprung-up in Saudi Arabia, they remain relatively under-penetrated compared to other global markets. Small convenience stores called “bakalas” currently dominate the retail sector with around 59% of the market share.” (Solaim, 2013). However, with the entry of big player like Walmart, it is expected that Small convenience stores will be gradually phased out   The effect on political and legal Walmart needs to take into account competition laws and taxation and labor policies in the Kingdom of Saudi Arabia and relate them to its own business policies. The legal scenario in Saudi Arabia is relatively rigid and harsh owing to the Islamic Sharia Law in practice. Moreover, Walmart has a history of environmental law violations. Violations in Saudi Arabia are generally met with tough punishment. There may be monetary fines and even criminal prosecution against employees if these laws are not properly adhered to. (Wei et al, 2013) Soraka Al-Khatib, Co-head of Jones Lang LaSalle, Saudi Arabia says:   “Shopping centers in the kingdom will need to offer activities beyond shopping to sustain or maximize consumer footfall. Some of the unique cultural challenges cannot be addressed directly by retailers or mall operators but there remain opportunities to ‘add value’ to the overall shopping experience and differentiate both brands and malls more effectively. Proactive asset and property management is required to overcome a feeling of ‘sameness’ caused by the concentration of franchisors and operators. It is important that the quality and design of a shopping centre creates a sense of belonging and has a ‘soul’. (Macadam and Al-Khatib, n.d.)   References About Us. (2004). Retrieved March 10, 2014, from Carrefour: http://www.carrefourksa.com Al-Sheikh, M. A. (2010). Doing Business in Saudi Arabia. Riyadh: Latham & Watkins LLP. Andy. (n.d). 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