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Wal-Mart Korea: Challenges of
Entering a Foreign Market
Renee B. Kim
Published online: 12 Dec 2008.
To cite this article: Renee B. Kim (2008) Wal-Mart Korea: Challenges of
Entering a Foreign Market, Journal of Asia-Pacific Business, 9:4, 344-357, DOI:
10.1080/10599230802453604
To link to this article: http://dx.doi.org/10.1080/10599230802453604
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Downloaded by [136.243.18.10] at 07:45 01 March 2015Wal-Mart Korea: Challenges of Entering
1528-6940
1059-9231
WAPB
Journal of Asia-Pacific Business,
Business Vol. 9, No. 4, Sep 2008: pp. 0–0
a Foreign Market
Renee B. Kim
Renee B.ofKim
Journal Asia-Pacific Business
ABSTRACT. Wal-Mart entered South Korea in late 1990s for its inter-
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national expansion; however, IT had a major failure in this market and left
Korea in 2005 as the American way of marketing did not translate well
in Korea. Wal-Mart had critical shortfalls in enabling value exchange with
the Korean consumers as the Korean consumers had significantly different
taste and preferences compared to American consumers. Wal-Mart’s Every
Day Low Price (EDLP) strategy was not perceived to have the “value” in
the minds of the Korean consumers, while its store locations were not stra-
tegically well positioned to create sufficient customer traffic. Wal-Mart’s
competitive advantage of low cost and low price was not suitable in the
Korean competition and consumption context. Wal-Mart was not prepared
to develop an effective localization strategy that might have stemmed from
not having a clear projection of how much it was willing to invest and grow
in this market. This Wal-Mart Korean case shows the importance of the
compatibility of a corporate unique value proposition and strategic fit with
the local market conditions.
KEYWORDS. International market expansion, Wal-Mart, value exchange,
strategic fit
Address correspondence to: Renee B. Kim is an Associate Professor, Faculty of
Business, Hanyang University, 17 Haendangdong, Seongsu-dong, Seoul, 133-791,
Korea (E-mail: kimrby@hanyang.ac.kr).
Journal of Asia-Pacific Business, Vol. 9(4) 2008
© 2008 by The Haworth Press. All rights reserved.
344 doi:10.1080/10599230802453604Renee B. Kim 345
INTRODUCTION
Wal-Mart is the world’s largest retailer, operating in 15 countries with
6,500 stores, and generating $62.7 billion in 2006 (Wal-Mart, 2006). By
2007 its stock price skyrocketed over 180,000% since its initial public offer-
ing (IPO) in 1972. Wal-Mart has been forced to initiate international expan-
sion in the early 1990s due to changes in the U.S. market condition. Market
saturation was becoming a problem in the U.S. market. With more than 200
new Wal-Mart stores being opened each year, the rapid growth in the num-
ber of stores in the United States placed new stores close to older ones, and
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the newer stores began cannibalizing the older ones. The demographics of
the U.S. market were also evolving as the baby boomer segment was
increasing and family sizes were decreasing, which led to slower growth of
U.S. market on demand side. Dynamics of the U.S. retail industry has also
changed significantly, posing a threat to Wal-Mart’s market leader position.
Wal-Mart disrupted the U.S. retail market with its aggressive price offer-
ing and has held market dominance for the past few decades. However, other
major competitors in the U.S. retail sector have adopted strategies similar to
Wal-Mart and learned to have a retail format with superior technology and
lean business operations. Consequently, the retail price differences between
Wal-Mart and other retailers have narrowed and weakened consumers’
incentives to visit Wal-Mart. All these factors have contributed to slowing of
Wal-Mart’s earning growth in the United States, and international expan-
sions have become a strategic priority for further growth of Wal-Mart.
Wal-Mart’s international expansion showed mixed performance.
Although the proportion of international sales has grown substantially from
9% of total sales in 1998 to 22% in 2007, Wal-Mart’s market positioning in
different markets resulted in a different outcome. Although it has had con-
siderable success in Mexico, Canada, and the United Kingdom, Wal-Mart
failed to position itself in several overseas markets, including Germany and
South Korea. In May 2006, Wal-Mart retreated from Korea by selling its 16
stores to a major local discount chain, Shinsegae Co., at U.S.$882 million,
and exited from Germany in July 2006. Wal-Mart’s stores in Korea lost
approximately $10 million in 2005 on sales of $720 million (Ramstad,
2006b). Wal-Mart’s exit from these two markets shows that the American
way of marketing does not translate well in every market.
These exits raise several important questions from an international
marketing perspective: how can Wal-Mart localize its products and
services to foreign market’s tastes and preferences when the core exist-
ence of Wal-Mart is primarily associated with marketing and retailing the346 JOURNAL OF ASIA-PACIFIC BUSINESS
“American way”? In other words, how can Wal-Mart strike the balance
between localization of its service and products while maintaining its core
competitive advantage that is ultimately American? How much of
Wal-Mart’s cookie-cutter model of everyday low prices and information
technology (IT)-based centralized distribution system should be applied
to a local condition? How much would Wal-Mart need to reinvent a local-
ized strategy for consumers who are significantly different from Ameri-
can consumers? A retailer’s decision to export a retail format to another
cultural environment may require a drastic modification of initial compet-
itive advantages (Dupuis & Prime, 1996). The ability to adapt to overseas
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market conditions largely determines success of international operations
of these firms. The key question in this regard is how a multinational
corporation (MNC) can convey its competitive advantages and experi-
ences from domestic market to a new foreign market, which may have
significantly different expectations and market conditions. This article
attempts to address this question with a comprehensive analysis of the
Wal-Mart Korea case. The first section identifies three aspects of Korean
consumers’ preferences that do not match with Wal-Mart offerings and
strategies. In the following section, three distinctive market characteris-
tics of Korea are examined, which hindered Wal-Mart from having a suc-
cessful implementation of its business model in Korea. The final section
presents managerial implications for future retail internationalization.
KOREAN VERSUS AMERICAN CONSUMERS’
PREFERENCES
Grant and Schelsinger (1995) introduced the concept of “value
exchange,” which highlights the importance of focusing on value deter-
mined by customers and tailoring products and service accordingly
rather than focusing on the comparison of the previous year’s figures as
well as competitor-based performance. Wal-Mart’s strategy fits well in
North America where consumers are willing to compromise service and
quality for low price. Wal-Mart’s low-price offering is matched with
customers’ definition of value creating “value exchange” between
Wal-Mart and its customers. However, Wal-Mart had critical shortfalls
in enabling this value exchange with the Korean consumers as the
Korean consumers had significantly different tastes and preferences
compared to American consumers.Renee B. Kim 347
Korean Consumers Taste and Preference
Korean consumers consider the freshness of food products very
seriously and are willing to make frequent trips to supermarkets, corner
stores, and traditional wet-markets to buy small volumes of fresh produce.
American consumers, in contrast, make fewer frequent trips to supermarkets
and purchase bulk-size products for longer storage. The Korean local
retailers accommodate this preference for food product freshness of by
transplanting the traditional outdoor market into a convenient indoors
format in hypermarkets. The local retail stores have live seafood, local
delicacies, and on-site packaging services that replicate the features of
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traditional outdoor markets, and their merchandise mix is heavily focused
on food and beverages. The local retailers have extensively used a localiza-
tion strategy that fits well with Korean consumers’ taste and preference.
In contrast, Wal-Mart’s merchandising mix offers everything from dry
goods to electronics and clothing, which is viewed by Koreans to be more
Westernized than those of its local competitors. Wal-Mart has uniform
merchandising and distribution strategies that limit differentiation in its
merchandize mix—also a constraint in adapting to local tastes and prefer-
ences. Korean consumers viewed Wal-Mart as a store to visit when they
needed to purchase large nonfood products and to see a variety of products,
including foreign products. They prefer to visit local domestic supermar-
kets for food purchases and daily use items. Korean consumers also like
to shop daily, instead of weekly or biweekly, and purchase small pack-
ages, given their small houses with limited storage and freezing spaces.
Thus, Korean consumers’ shopping behaviors and preferences did not
match with Wal-Mart’s retail format, which was set up to serve consumers’
infrequent bulk shopping. The local retailers such as E-Mart, on the other
hand, offer discounted pricing in smaller quantities and in familiar
environments similar to conventional department stores rather than ware-
houses, while offering more fresh produce and feature special in-store
events (Coyner, 2007).
Mismatched merchandising, assortment, and marketing that missed
local needs and context were other factors that contributed to Wal-Mart’s
failure in Korea. Tesco, a British origin global retailer, is a successful case
that has an effective “localization” strategy for downstream activities.
Tesco Korea has enjoyed significant success in the Korean discount retail
market (see Table 1). Tesco entered the Korean market by forming a joint
venture with a major local partner, Samsung, and leveraged on Samsung’s
knowledge and expertise of the local market condition. Tesco devoted348 JOURNAL OF ASIA-PACIFIC BUSINESS
TABLE 1. Top five retailers in Korea by
market sharea
Company 2003 Sales 2002 Sales
LG Corp $7,499 $6,129
Shinsegae $5,804 $5,172
Lotte Shopping Co. Ltd. $3,330 $3,187
Tesco - Samsung $2,817 $2,147
Samsun Cheil Industries $2,086 $2,088
Source: Euromonitor International (2007).
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a. Sales are in South Korea only, in millions; in U.S.$ terms
based on exchange rate for 2003 and 2002.
considerable attention to transferring its core capabilities to this new
market yet did not attempt to reiterate the British version of its retail
format in Korea. For example, it preferred to hire local managers with
only a few operational experts from the United Kingdom. Tesco learned
to strike a balance between the Western-style hypermarket retail format
and the Korean way of retailing, which entails extra services from its
local partner.
One key factor that contributed to Tesco’s success was its ability to
create “value” that is suitable for Korean tastes and preferences. For
example, Tesco offers fresh produce that has been partially processed and
repackaged into a form that is ready to cook or eat. Tesco also has a deli
section that sells popular traditional Korean food items, while its meat
section has sales staff that cuts and custom packages meat products
according to each customer’s preference. Wal-Mart, on the other hand,
entered the Korean market without any local partner and implemented its
original merchandise mix from the U.S. model, yet its “global standard-
ization” strategy did not elicit sufficient responsiveness from the Korean
consumers. This shows that the entry mode can have a significant impact
on how an international retailer develops its strategy and on how the
retailer positions itself in a foreign market.
Perceived Value of Wal-Mart
In North America, where consumers want low price, Wal-Mart’s low-
price offering is matched with customers’ definition of value, resulting in
effective value exchange between Wal-Mart and its customers (see Figure 1).
However, Korean consumers in the discount retail market proved to haveRenee B. Kim 349
FIGURE 1. Seven Sources of Competitive Advantage.
Superior Inputs
Superior Technology Superior Operations
Superior Offering
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Superior Access
Superior Segments
Superior Customers
Enable a firm to create and capture value
Source: Robert Lamb (2005).
a different definition of value in the retailers’ product and service offerings.
Korean consumers respond more to free products and promotional sales
than to everyday low price and expect more customer service and a more
tailored retail environment. Thus, Wal-Mart’s EDLP strategy, which was
its core competence and competitive advantage in other international
markets, was not perceived to have the “value” that the Korean consumers
expected from retail products.
Several local Korean discount retailers offer cash or free product
incentives worth up to $200 for spending a certain amount in the store.
These promotions enhance “perceived value” of the stores among
consumers and increase their visits to these local stores. The warehouse
retail format was not well received by the Korean consumers who were
used to the assistance of the salespeople who give out free samples and
help package and wrap products in the store (J. O. Kim, 2001).
Wal-Mart’s lack of understanding regarding Korean consumers’ taste and
preferences and the mismatched definition of value between the Korean
consumers and Wal-Mart resulted in insufficient value exchange. Wal-Mart’s350 JOURNAL OF ASIA-PACIFIC BUSINESS
attempt to employ its standard EDLP strategy, lack of adaptation to the
local supply chain conditions, and ineffective market entry time led to the
failure in market penetration in the Korean retail sector.
Location Preference
To enter and consolidate a market position in a foreign market, it is
strategically important to take over commercially crucial and high-traffic
locations. In the Wal-Mart Korea case, the choice of store location was
particularly important as Korean consumers’ shopping mostly takes place
in the metropolitan areas because of strong preferences for the stores with
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close proximity. Korean consumers have substantially different shopping
styles and preferences compared to North American consumers. They
prefer to purchase smaller units on a more frequent basis and to have
accessibility to a store in walking distance. Convenience and store location
are major determinants of where a Korean consumer will shop. American
consumers largely use vehicles to purchase large quantities of products on
a less frequent basis, thus store location and distance is a far less critical
factor.
Wal-Mart attempted to penetrate the Korean market by building stores
in distant areas where land prices were low, replicating the U.S. strategy
of smaller city store build-up. Wal-Mart had only 16 stores in all of Korea
with just one in the Seoul metropolitan area and could not achieve the
economies of scale. Wal-Mart expected the Korean consumers to drive to
its stores for price shopping as the American consumers do, and this
expectation was not met. Wal-Mart failed to attract Korean consumers as
the store locations were not strategically well positioned to create sufficient
customer traffic. Local rivals, which built stores in the early 1990s, had
the higher store traffic location advantage compared to Wal-Mart, which
had stores mostly in distant, less crowded areas. This affected Wal-Mart’s
competitive position significantly, as the company had no alternative
location strategies to compensate.
KOREAN DISCOUNT MODEL VERSUS AMERICAN
WAL-MART MODEL
Wal-Mart’s core competitiveness stems from having a low price/high
volume orientation to dominate the discount retail sector. Wal-Mart imple-
mented a superior IT system (see Figure 1) and established a centralizedRenee B. Kim 351
automated distribution system that connects itself with suppliers through
an Electronic Data Interchange (EDI) system. The EDI system gives
Wal-Mart access to information on the entire value chain, allows for
maintaining constant cost cutting, and enables Wal-Mart to have superior
productivity, significant reduction of operational costs, and an overall
lean business model. Wal-Mart can therefore offer the lowest retail prices
and preempt the U.S. market. Wal-Mart attempted to implement this busi-
ness model in Korea, which was found to lack compatibility with the
Korean retail market conditions. There are three distinctive market char-
acteristics of Korea that hindered Wal-Mart from having a successful
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implementation of its business model: market penetration and positioning,
pricing strategy, and the IT system.
Market Penetration and Positioning
One of the important aspects of Wal-Mart’s successful business model
in the United States is its unique approach to market penetration and posi-
tioning. Wal-Mart established itself in the U.S. market by penetrating
small rural communities and spreading out its stores to nearby cities to
form retail clusters. The retailing business incurs high levels of fixed
costs, and the profit margins primarily come from sales volume and the
efficient management of operating costs. Thus, minimization of the oper-
ating costs is important for the profitability of the retail business, which
can be achieved when several stores in near proximity can share merchan-
dising, distribution networks, and resources (J. O. Kim, 2001). These retail
clusters became fundamental components of Wal-Mart’s centralized dis-
tribution system that enabled the retail giant to have low inventory levels
and cost control, and respond effectively to market demand and changes.
Wal-Mart missed a strategic time to enter the Korean market and was
unable to capture logistically efficient locations (those that can allow
building an efficient distribution system with advantage of economies of
scale that Wal-Mart enjoys in the U.S. market). Major Korean retailers
had already located their stores in key commercial areas and developed
their distribution networks to optimize the merchandising and the retailing
operations prior to Wal-Mart’s market entry. Wal-Mart was unable to
consolidate its market position in the Korean discount retail segment and
posted a net loss of $10 million in 2005 on revenue of 728.7 billion won
(Choe, 2006; Troy, 2006).
The Korean discount market was estimated to be approximately at
U.S.$26 billion (28 trillion won), with 300 stores nationwide in early352 JOURNAL OF ASIA-PACIFIC BUSINESS
2000s (Park et al., 2003). In the late 1990s and early 2000s, the Korean
retail industry experienced globalization, industry consolidation,
increased costs of procurement and merchandising, continued pressures
on food safety and supply chain management costs, and an increasingly
competitive marketplace, with an imperative for providing customer
service and promotional campaigns. Major international retailers such as
Price Club, Carrefour, Wal-Mart, and Tesco entered the Korean discount
retail market in the late 1990s in response to the liberalization of the retail
sector by the Korean government in 1997 (Kim, 2006).
However, when the foreign retailers were allowed to enter the Korean
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retail market in 1997, the Korean retail market was already saturated.
Strategically critical commercial areas for discount outlets had been
mostly taken by the local retailers. Korean local food retailers such as
Lotte, Shinsegae, Samsung, and LG developed their own discount retail
outlets (see Table 1). Conglomerates called “Chaebols” own diversified
business units, and all of them merchandise everything from discount
items to luxury goods through various retail outlet options. For example,
LG Trading Co., the largest Korean retailer, has four distinctive retail
divisions, including LG Supermarkets, LG25 convenience stores, LG
Department stores, and LG Mart (the discount chain). These four
divisions comprise 1,600 LG stores in South Korea (Scardino, 2004).
Shinsegea is the second best-performing Korean retailer, and its E Mart
discount retail format has 86 stores, accounting for 30% of the Korean
discount market. In terms of marketing, it is critical that the stores are
built in lucrative locations such as residential and key commercial areas
with high levels of consumer traffic. However, it appeared the foreign
latecomers such as Wal-Mart were not able to capture strategically important
retail locations in Korea that may be critical in effective market entry and
positioning.
Pricing System (EDLP)
Wal-Mart’s main competitive advantage has been its ability to offer the
most competitive price to consumers by having a cost-efficient operating
system that ensures low costs. Wal-Mart’s expense structure, measured as
a percentage of sales, was among the lowest in the industry (Shah, Phipps,
& Offstein, 2005). These cost savings are used to promote its EDLP strat-
egy that ensures the lowest price among competitors. The EDLP strategy
led to a high volume sales, higher earnings, and company growth. The earn-
ings were reinvested into further advancement of the operating system,Renee B. Kim 353
and resulted in further reduction of the operating cost. This “productivity
loop” was a key driver in Wal-Mart’s rapid success in the United States.
Wal-Mart managed to set the competitive retail price with its EDLP strategy
in the United States and acquired its market dominance in the U.S. retail
industry for the past few decades. Wal-Mart is price competitive and
successful in attracting price-conscious shoppers who are willing to com-
promise customer service and quality for low prices in the United States.
Given its previous success in the U.S. market, Wal-Mart intended to
employ this EDLP strategy in the Korean market as its core value proposition
to the Korean consumers.
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Wal-Mart’s EDLP strategy had lack of a strategic fit to the nature of
Korean consumers. Korean consumers were quality conscious and tend to
be more brand loyal, therefore less likely to switch to less-expensive
products. Korean consumers are unwilling to compromise customer
service and quality for low price, expect to see salespeople in each aisle of
retail store, and expect aggressive promotion in the value of service and
products offered by the retailers (Ramstad, 2006a). Korean consumers
perceived Wal-Mart stores as a cheap marketplace with warehouse-style
layout and poor-quality products (Kim, 2006). Wal-Mart’s EDLP was
perceived to be insufficient “value” in the minds of Korean consumers.
IT System of Wal-Mart
One of Wal-Mart’s main competitive advantages is its “superior infor-
mation technology (IT)” system (see Figure 1) that links the vendor
supply operations with Wal-Mart’s distribution network. This system
creates a “superior operation” that compresses the cost throughout the
value chain, maximizes operational efficiency, and enables Wal-Mart to
have “superior offering: (i.e., low prices). This integrated supply chain
network enables Wal-Mart to understand and have access to the supplier
operational process and the costs, and to negotiate the vendor prices.
Information advantage lets Wal-Mart be the toughest negotiator in the
world and have a “superior input” by purchasing its supply at the lowest
prices, driving down the retail price to the lowest possible level (i.e.,
superior offering). Wal-Mart has “superior access” to American consumer
market and is able to capture the value that is created with “superior
input,” “superior operation,” “superior technology,” and “superior offering”
(Figure 1).
Wal-Mart faced serious challenges in implementing this core compe-
tence in South Korea. South Korea has market constraints, such as supply354 JOURNAL OF ASIA-PACIFIC BUSINESS
chain fragmentation and local protectionism, which prohibited foreign
companies’ market entry, as well as an inefficient food distribution
system. Several layers of distributors exist between the manufacturer/
importer and the retailer, and each layer receives a markup, adding trans-
action costs for the retailers.
The Korean vendors were reluctant to have an open information
exchange EDI system with Wal-Mart, and they held certain an extent of
seller market power as they had an option of supplying to other major
local retail discounters. Thus, Wal-Mart could not enjoy its buyer power
in the Korean vendor market as in the United States and had lack of
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control over its Korean supply chain and procurement. Given these local
conditions of the distribution channel and of the vendor markets, Wal-Mart
could not effectively develop a national distribution network in South
Korea, resulting in fundamental default in the application of Wal-Mart
business model to South Korea.
This shows that effective channel mix organization was an important
part of the competitive advantage that was missing in Wal-Mart’s
business model for the Korean market. In other words, Wal-Mart needed
to build a strong alliance with local suppliers, as this facilitated effective
merchandising and tighter integration along the value chain. Conse-
quently, Wal-Mart could not obtain the ability to control all logistic
phases, from sourcing to delivery, which dampened Wal-Mart’s price
competitiveness, which was its core competitive advantage in the U.S.
market.
LOOKING FORWARD
In a general sense, the prospect for doing lucrative business in a foreign
market depends on the size of the market, the present wealth of consum-
ers in that market, and the likely future wealth of consumers (i.e., future
economic growth of the market). However, it is more important for inter-
national business managers to recognize the importance of the compati-
bility of its unique value proposition and strategic fit with the local market
conditions.
Wal-Mart originally had a very clear definition of its strategic position-
ing in the U.S. market that brought a rapid growth and profitability. Its
strategic positioning was derived from its core competence of EDLP and
centralized distribution network that were considered to be unique and to
have perceived value in the minds of American consumers. Wal-Mart wasRenee B. Kim 355
able to create and capture this value from the consumers that led to its
impressive profitability and rapid profit growth. Thus, its strategic posi-
tioning fit with the U.S. demand market conditions. The timing also
seemed to be working for Wal-Mart as its high-growth period matched
with the period of the U.S. retail sector restructuring and consolidation.
Wal-Mart’s attempt to employ this business model in the Korean market
resulted in failure. Wal-Mart’s competitive advantage of low cost and low
price was not suitable in the Korean competition and consumption context.
Prior to the market entry, Wal-Mart should have asked the following
questions: whether the timing of the market entry was appropriate;
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whether to have a joint venture with a local partner; how to project or
employ its core competence to the Korean market; how to develop and
execute a business strategy for long-term growth in the Korean market;
how much of Wal-Mart’s American cookie-cutter model of EDLP and
low cost centralized distribution system should be applied; how much
Wal-Mart should develop a localized identity in Korea; how fast Wal-
Mart should expand and allocate its investment capitals among the target
markets.
Wal-Mart appeared to have lack of preparation in answering above
key questions in entering the Korean market. Wal-Mart has miscalcu-
lated the market prospects in Korea by focusing too much on prospective
macro environmental factors such as the liberalization of the retail sector
in South Korea and the favorable economic growth of the Korean econ-
omy. However, Wal-Mart might have underestimated the extent of the
differences in the Korean retail market condition. The Korean retail
discount sector had high level of pressure for local responsiveness and
cost reduction, as the Korean consumers had significant different taste
and preference compared to American consumers, and as the competition
among the major retailers were already intense when Wal-Mart entered
the market. This implied that Wal-Mart needed to invest significant
resources to strike a balance between cost compression and margin
expansion by working upstream and downstream of the value chain in
Korea.
When an international business identifies a foreign market with a high
potential for growth and profit, the firm must consider the scale of entry
and strategic commitments. A large-scale market entry involves the
commitment of significant resources and enables the firm to capture first-
mover advantages that are associated with demand preemption, economies
of scale, and switching costs. If a firm decided to be a late entrant to a
foreign market, it should be well prepared to deal with “late mover356 JOURNAL OF ASIA-PACIFIC BUSINESS
disadvantages.” When the Korean retail market opened its door to foreign
retailers in late 1990s, it was already saturated with highly competitive
domestic players. Wal-Mart entered the Korean market on relatively
small scale and did not obtain a rapid entry. Prior to the market entry,
Wal-Mart should have defined its “strategic commitments” for the
Korean market. In other words, Wal-Mart should have asked whether
Korea was a strategically important market to enter for its international
expansion and whether it was worthwhile to allocate significant capital
resources to capture customers and distributors in Korea. Wal-Mart was
not prepared to develop an effective localization strategy that might have
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stemmed from not having a clear projection of how much it was willing to
invest and grow in this market.
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