Wal-Mart Korea:

Challenges of Entering a Foreign Market

Renee B Kim
Hanyang University
School of Business
Seoul Korea
Tel 822.2220.2597
Fax 822.2220.1169
Email: Kimrby@gmail.com
 Wal-Mart Korea:
Challenges of Entering a Foreign Market
Renee B Kim
Hanyang University

Introduction
Wal-Mart is the world’s largest retailer, operating in 15 countries with 6500 stores, and
generating $62.7 billion in 2006 (Wal-Mart, 2006). Its stock price has skyrocketed over
180,000 percent by 2007 since its IPO in 1972. Wal-Mart has been forced to initiate
international expansion in the early 1990s due to changes in the US market condition.
Market saturation was becoming a problem in the US market. Over 200 new Wal-Mart
stores being opened each year, the rapid growth in the number of stores in the US placed
newer stores close to older ones and the newer stores start to cannibalize the older ones.
Demographics of the US market was also evolving as the baby boomer segment was
increasing and the family sizes were getting smaller, which led to slower growth of US
market on demand side. Dynamics of the US retail industry has also changed
significantly, posing a threat to Wal-Mart’s market leader position.

Wal-Mart’s core competitiveness stems from having a low price/high volume orientation
to dominate the discount retail sector. Wal-Mart implemented a superior information
technology (IT) system (Figure 1) and established a centralized automated distribution
system that connected itself with its supplier through Electronic Data Interchange (EDI)
system. The EDI system gave Wal-Mart an access to information on the entire value
chain and allowed maintaining constant cost-cutting. This enabled Wal-Mart to have
superior productivity, significant reduction of operational costs and overall lean business
model. This enabled Wal-Mart to offer the lowest retail prices. Wal-Mart disrupted US
retail market with its aggressive price offering and had the market dominance for past
few decades. Wal-Mart’s strategy fitted well in North America where consumers were
willing to compromise service and quality for low price. Wal-Mart’s low price offering
was matched with customers’ definition of value and this created “value-exchange”
between Wal-Mart and its customers.

However, other major competitors in the US retail sector have adopted strategies similar
to Wal-Mart, and learned to have a retail-format with superior technology and lean
business operations. The retail price difference between Wal-Mart and other retailers
have narrowed consequently and weakened consumers’ incentives to visit Wal-Mart. All
these factors have contributed to slowing of Wal-Mart’s earning growth in the US, and
international expansions have become a strategic priority for further growth of Wal-Mart.

International Expansion 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 different outcome.

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While it had considerable success in Mexico, Canada, UK, Wal-Mart failed to position
itself in several oversea markets such as Germany and South Korea. Wal-Mart has
retreated from Korea, however, by selling its 16 stores to a major local discount chain,
Shinsegae Co. at $882 millions in May 2006, and exited from Germany in July 2006.
Wal-Mart's stores in Korea lost about $10 million in 2005 on sales of $720 million
(Ramstad, 2006a). Wal-Mart’s exit from these markets showed that the American Way of
marketing did not translate well in every market. This raises an important question from
an international marketing perspective; how can Wal-Mart localize its products and
services to foreign market’s tastes and preferences when the core existence of Wal-Mart
is primarily associated with marketing and retailing the “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 American cookie cutter model of everyday low prices and IT-based
centralized distribution system should be applied to a local condition? How much would
Wal-Mart need to reinvent a localized strategy for consumers who are significantly
different from American consumers? A retailer’s decision to export a retail-format to
another cultural environment may require a drastic modification of initial competitive
advantages (Dupuis and Prime, 1996). The ability to adapt to overseas market conditions
largely determines success of international operations of these firms. The key question in
this regard is how a MNC can convey its competitive advantages and experiences from
domestic market to a new foreign market, which may have significantly different
expectations and market conditions. This paper attempts to address this question with a
comprehensive analysis of the Wal-Mart Korea case.

Wal-Mart’s Failure of Market Penetration and Market Positioning in Korea

Wal-Mart has missed a proper timing to enter the Korean market, and was unable to
capture logistically efficient locations which can allow building an efficient distribution
system with advantage of economies of scale that it enjoyed in the US 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 $26 billion (28 trillion
won), with 300 stores nationwide in early 2000s (Park, 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 (SERI, 2006).

However, when the foreign retailers were allowed to enter the Korean retail market in
1997, the Korean retail market was already saturated. Strategically critical commercial

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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 (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 1600
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 late-comers such as Wal-Mart were
not able to capture strategically important retail locations in Korea which may be critical
in effective market entry and positioning.

Comparison of Wal-Mart’s Market Penetration Strategies in the US vs. in South Korea

One of the important aspects of Wal-Mart’s successful business model in the US was its
unique approach to market penetration and market positioning. Wal-Mart established
itself in the US market by penetrating small sized rural communities and spread 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 efficient
management of operating costs. Thus, minimization of the operating costs is important
for the profitability of the retail business and this can be achieved when several stores in
near proximity can share merchandising, distribution networks, and resources. These
retail clusters became fundamental components of its centralized distribution system
which enabled Wal-Mart to have low inventory levels and cost control and effectively
respond to the market demand and changes.

Wal-Mart attempted to penetrate the Korean market by building stores in distant areas
where land prices were low, replicating the US 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. However, this
location strategy did not match well with the Korean consumers’ lifestyle and shopping
habits. 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 consumer will shop. Wal-Mart failed to
attract Korean consumers as their locations were not strategically well positioned to
create sufficient customer traffic.

The Wal-Mart Business Model in Korea

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 et al. 2005). These cost savings were used to promote its “Every

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Day Low Price” (EDLP) strategy which ensured the lowest price among competitors. The
EDLP strategy led to a high volume sales and higher earnings and company growth. The
earnings were reinvested into further advancement of the operating system, and resulted
in further reduction of the operating cost. This “Productivity Loop” was a key driver in
Wal-Mart’s rapid success in the U.S. Wal-Mart managed to set the competitive retail
price with its EDLP strategy in the US and acquired its market dominance in the US retail
industry for past few decades. Wal-Mart was price competitive and successful in
attracting price conscious shoppers who were willing to compromise customer service
and quality for the low price in the US. Given its previous success in the US market,
Wal-Mart intended to employ this EDLP strategy in the Korean market as its core value
proposition to the Korean consumers.

Korean Consumers’ Response to Wal-Mart’s EDLP Strategy

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, less likely to
switch to less expensive products. Korean consumers were unwilling to compromise the
customer service and the quality for the low price, and expected to see sales people in
each aisle of the retail stores and aggressive promotion in the value of service and
products offered by the retailers (Ramstad, 2006b). Korean consumers perceived Wal-
Mart stores as a “cheap marketplace” with warehouse-style layout and poor quality
products (Kim and Sim, 2006). This retail format was not well received by the Korean
consumers who were used to the assistance of the sales ladies who gave out free samples
and helped packaging and wrapping the products in the store (Kim, 2001). The Korean
discount stores even had employees at the parking lot that gave out the parking tickets
and guided the parking directions. Wal-Mart’s EDLP was perceived to be insufficient
“value” in the minds of Korean consumers.

Korean Consumers Taste and Preference and Wal-Mart’s Merchandising Strategies

Korean consumers considered the freshness of food products very seriously and were
willing to make frequent trips to supermarkets or corner stores or traditional wet-markets
in order to buy small volumes of fresh produces. The Korean local retailers
accommodated this preference for the freshness of food product by transplanting the
traditional outdoor market into a convenient format indoors in hypermarkets. The local
retail stores placed live-seafood, local delicacies and on-site packaging service that
replicate the features of a traditional outdoor market, and their merchandise mix heavily
focused on food and beverages. The local retailers have extensively used a localization
strategy that fitted well with Korean consumers’ taste and preference. In contrast, Wal-
Mart’s merchandising mix offered everything from dry goods to electronics and clothing,
which was viewed to be more westernized than those of its local competitors. Wal-Mart
had uniform merchandising and distribution strategies that limited differentiation in its
merchandize mix which was also a constraint to adapting to local taste and preference.
Korean consumers viewed Wal-Mart as a store to visit when they need large purchase of
non-food products and to see variety of products, including foreign products. They
preferred to visit local domestic supermarkets for food purchases and items for daily uses.
Korean consumers also like to shop daily instead of weekly or bi-weekly and purchase
small package size, given small houses with limited storage and freezing spaces. This

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Korean consumers’ shopping behavior and their preference did not match with the Wal-
Mart’s retail format which was set up to serve consumers’ infrequent large bulk
shopping. The local retailers such as E-Mart offered discounted pricing in smaller
quantities and in familiar environments similar to conventional department stores rather
than warehouses, while offering more fresh produce and feature special in-store events
(Coyner, 2007).

Sources of Competitive Advantage of Wal-Mart

One of Wal-Mart’s main competitive advantages was its ‘superior information
technology (IT)’ system (Figure 1) that linked the vendor supply operations with Wal-
Mart’s distribution network. This system created a ‘superior operation’ that compressed
the cost throughout the value chain, maximizing the operational efficiency and enabled
Wal-Mart to have ‘superior offering’ (i.e. low prices). This integrated supply chain of
network enabled Wal-Mart to understand and to have access to the supplier operational
process and the costs, and to negotiate the vendor prices. Information advantage let Wal-
Mart to be the toughest negotiator in the world and to 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 had ‘superior access’ to American
consumer market and was able to capture the value that was created with ‘superior input’,
‘superior operation’, ‘superior technology’ and ‘superior offering’ (Figure 1).

Wal-Mart’s Relationship with Local Suppliers

Wal-Mart faced serious challenges in implementing this core competence in South Korea.
South Korea had market constraints such as supply chain fragmentation and local
protectionism that prohibited foreign companies’ market-entry, and the food distribution
system in Korea had much inefficiency. Several layers of distributors existed between the
manufacturer/importer and the retailer, and each layer received a markup, adding
transaction costs for the retailers. Relationships with the distributors were often as critical
as salesmanship and the distribution was localized in Korea. The Korean vendors were
reluctant to have an open information exchange EDI system with Wal-Mart, and they
held certain 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 US and had lack of control over its Korean supply chain
and the procurement. Given these local conditions of the distribution channel and of the
vendor markets, Wal-Mart could not effectively developed a national distribution
network in South Korea, resulting in fundamental default in the application of Wal-Mart
business model to South Korea.

Importance of Value Exchange Optimization

Grant and Schelsinger (1995) introduced the concept of “value exchange” which defines
the relationship between the financial investment a company makes in particular
customer relationships and the return that customers generate by the response to the
company’s offering. This concept highlights the importance of focusing on value
determined by customers and tailoring products and service accordingly rather than
focusing on performance based on comparisons with last year’s figures or competitors.
General performance measures of market share, productivity, quality, customer

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satisfaction do not illuminate the value exchange that needs to be created between the
company and customers.

In North America where consumers want low price, Wal-Mart’s low price offering was
matched with customers’ definition of value, resulting in effective value exchange
between Wal-Mart and its customers (Figure 1). However, Korean consumers in the
discount retail market proved to have a different definition of “value” in the retailers’
product and service offerings. Korean consumer responded more to free products and
promotional sales than to everyday low price and expected more customer service and
tailored retail environment. Thus, Wal-Mart’s EDLP 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 offered cash or free product incentives worth up to $200 for spending a
certain amount in the store. These promotions enhanced “perceived value” of the stores
among consumers and increased visits to these local stores. Wal-Mart’s lack of
understanding regarding Korean consumers’ taste and preference and mismatch of the
definition of “value” between the Korean consumers and Wal-Mart resulted in
insufficient value exchange. Wal-Mart’s attempt to employ its standard EDLP strategy,
lack of adaptation to the local supply chain conditions, ineffective market entry time led
to the failure in market penetration in the Korean retail sector.

Limitations of Wal-Mart’s Business Model in Korea

There are three aspects of the Wal-Mart’s business model that became major challenges
for Wal-Mart, which could have been examined and considered for possible solutions
prior to the market-entry. First, timing and choice of market-entry and the location
selection were major factors that led Wal-Mart to have disadvantage in the Korean retail
discount market. To enter and consolidate a market position in a foreign market, it is
strategically important to take over commercially crucial locations that have high traffic.
In Korean case, the choice of the store location was particularly important as the Korean
consumers’ shopping mostly took place in the metropolitan areas as they had strong
preference for the stores with close proximity. Local rivals had the location advantage as
they managed to build stores in the early 1990s that had much higher store traffic
compared to Wal-Mart, which had stores mostly in distant, less crowded areas. This
affected Wal-Mart’s competitive position significantly. Wal-Mart should have assessed
whether it could come up with alternative strategies that could compensate its location
disadvantage.

Second, 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 had effective ‘localization’ strategy
for downstream activities. Tesco Korea has enjoyed significant success in the Korean
discount retail market (Table 1). Tesco entered the Korean market by forming a joint
venture with a major local partner, “Samsung” and leveraging on Samsung’s knowledge
and expertise of the local market condition. Tesco devoted 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

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managers with only a few operational experts from the U.K. Tesco learned to strike a
balance between the Western style hypermarket retail format and the Korean way of
retailing that entailed extra services from its local partner.

One key factor that contributed to Tesco’s success was its ability to create ‘value’ that are
suitable for the Korean tastes and preference. For example, Tesco offered fresh produce
/fruits that have been partially processed and repackaged into a form that is ready to cook
or eat. Tesco also had a deli section that sold popular Korean traditional food items, while
its meat section had sales staff that cut and custom-packaged meat product according to
each consumer’s preference. Wal-Mart, on the other hand, entered the Korean market
without any local partner, and implemented its original merchandise mix from the US
model, yet its ‘global standardization’ 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.

Third, 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.
Consequently, 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 US market.

Managerial Implications for Retail Internationalization

In a general sense, the prospect for doing a lucrative business in a foreign market depends
on the size of the market, the present wealth of consumers in that market, and the likely
future wealth of consumers (i.e. future economic growth of the market). However, it is
more important for international business managers to recognize the importance of the
compatibility of its unique value-proposition and strategic fit with the local market
conditions.

Wal-Mart originally had a very clear definition of its strategic positioning in the US
market that brought a rapid growth and profitability. Its strategic positioning was derived
from its core competence of EDLP and centralized distribution network which were
considered to be unique and to have perceived value in the minds of American
consumers. Wal-Mart was able to create and capture this value from the consumers which
led to its impressive profitability and rapid profit growth. Thus, its strategic positioning
had a fit with the US demand market conditions. The timing also seemed to be working
for Wal-Mart as its high growth period matched with the period of the US retail sector
restructuring and consolidation. Wal-Mart has attempted to employ this business model
in the Korean market which resulted in failure. Wal-Mart’s competitive advantage of low
cost, low price was not suitable in the Korean competition and consumption context.

Prior to the market entry, Wal-Mart should have asked : whether the timing of the market
entry was appropriate ; whether to have a joint venture with a local partner; how to

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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 miscalculated 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 economy. However, Wal-Mart might have underestimated the extent of the
difference in the Korean retail market condition. The Korean retail discount sector had
high level of pressure for both 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
both 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 mover 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 which might have stemmed
from not having a clear projection of how much it was willing to invest and grow in this
market.

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Table 1. Top Five Retailers in Korea by Market Share*
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
* sales are in South Korea only, in millions; in $US terms based on exchange rate for 2003 and 2002.

Figure 1. 7 Sources of Competitive Advantage

Superior Inputs

Superior Technology Superior Operations

Superior Offering

Superior Access

Superior Segments

Superior Customers

Enable a firm to create and capture value

Source: Robert Lamb’s Competitive Strategy 2005. New York University, New York.

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