By Nandita Bose and Adam Rose
MUMBAI/BEIJING, Feb 21 (Reuters) - Wal-Mart Stores Inc , famed for its low prices, has stumbled in the one major market where consumers say price is less of a driver in their buying decisions: China.
There, consumers say they want food that is safe and authentic, and, after 17 years, Wal-Mart is changing its approach, closing some big-box stores that never quite caught on with locals. Instead, it's focusing on private-label products and imports, putting its stamp on quality and safety.
"We're closing some stores because we got enamored with growth," said Raymond Bracy, head of corporate affairs at Walmart China. "We're not going to do that again. We're focusing on quality first."
Getting China right is crucial for Wal-Mart's international ambitions. The world's largest retailer ranks third in China behind Sun Art Retail Group Ltd and state-backed China Resources Enterprise Ltd, according to Euromonitor. Brazil and India are proving challenging, too.
"If you went out and asked members or customers, 'What's your single biggest worry?' they'll tell you trust and authenticity," said Greg Foran, who took over as Walmart China CEO in 2012. "Once you've got their trust, the next question they ask themselves is, 'How much is it?'"
Walmart International, which contributes less than a third of net sales, has suffered from aggressive expansion and is a big concern for new CEO Doug McMillon, who previously led the international unit.
The retailer on Thursday forecast lower full-year profit than analysts had expected for fiscal 2015. Walmart International net sales in the fourth quarter dipped 0.4 percent to $37.67 billion, and November-January operating income fell 45.8 percent, hit by store closures in Brazil and China and a charge related to terminated agreements in India.
"We have initiated actions in Mexico, Brazil and China to improve our operating performance and this is a priority for fiscal 2015," David Cheesewright, president and CEO of Walmart International, said in a statement.
Foran told reporters during a December tour of Sam's Club stores - where members bulk buy - that Wal-Mart aims to have private labels make up a fifth of its China sales within the next decade, up from less than 1 percent now. Private labels typically price at 10-40 percent below local brands, but profit margins are higher for the retailer. They make up close to half of sales in Britain.
Bracy said the retailer is rationalising its supply chain in China and building its own distribution centres to manage quality, while also lowering costs. "Our costs have come down so much on pork that people ask us, 'Gee, is it too low?' They wonder, 'Is it legitimate? Can we trust it?'" he said.
On an annual basis, Walmart International's revenue growth last fiscal year was the slowest in four years.
Chinese consumers seek out large foreign brands for reliability and quality, said James Roy, an associate principal at Shanghai-based China Market Research. "Yet they're seeing mixed messages from Wal-Mart because they have tried to sell the 'every day low prices' concept and Chinese consumers equate 'every day low prices' with being cheap and not very safe."
Wal-Mart has previously exited markets such as Germany and South Korea where its cheap prices and large stores model failed to work, but it has stuck it out in China, the world's second-largest economy, for nearly two decades, struggling with its brand positioning.
Its international business has been under the spotlight after it was accused in 2012 of bribery in Mexico, its biggest business outside the United States. It later launched graft probes in China and Brazil and in India, where the investigation hit its first-mover advantage in a $500 billion market.
The graft has less of an effect on the business in China, but food safety scandals - from fatal tainted milk to recycled 'gutter oil' used for cooking - have hurt it. In January, Wal-Mart recalled its popular "Five Spice" donkey meat after tests showed traces of fox meat.
Food, especially fresh produce and meat, is an acknowledged traffic driver for Chinese hypermarkets, making it a bigger part of the retail equation than elsewhere. "That's the most fundamental thing about getting food right," said Bracy. "If you ... say, 'I'm not satisfied with the quality,' then you may go to another store. So we lose not just the food purchase, but also the jean purchase."
Just to make things tougher, though, Chinese "will walk a block to save 1 renminbi on a kilo of rice," said Bracy.
Wal-Mart's share of China's hypermarket segment dropped to 10.4 percent last year from 11.3 percent in 2008. It was overtaken as market leader in 2009 by Sun Art Retail, which is now tied for first place at 14 percent with CRE, according to Euromonitor, whose data indicates that hypermarkets make up 15 percent of China's grocery retail market. Wal-Mart's grocery retail value in China has grown 50 percent since 2008.
Even as it plans to open 110 new stores by 2016, Wal-Mart has announced the closure of at least 29 stores in China.
"For the first year a lot of my attention, and my team's attention, has been focused on just getting the foundation fixed, sorting out what stores we need to exit, being much more clever about where we're going to open stores," Foran said.
BIG ISN'T ALWAYS BEST
Chinese customers prefer small neighbourhood stores, where they don't have to travel far and can buy just a few items per visit. It's a similar picture in Brazil, where market leader Grupo Pão de Açúcar (GPA) better serves local customers' preference for smaller convenience stores. GPA also appealed to Brazilians' desire for special deals with limited duration, heavily advertised promotions.
The big box store model has been a costly mistake in terms of real estate losses for Wal-Mart, said Stephen Springham, senior retail analyst at Planet Retail in London. As more Chinese opt to shop online, the U.S. firm acquired web retailer Yihaodian in 2012, which claimed 24 million online users last October.
China, though, will be a slow turnaround for Wal-Mart, said Himanshu Pal, director of retail insights at London-based Kantar Retail. "They are not able to invest as much as they should because shareholders are not as patient as they used to be, especially with U.S. and European markets not doing very well."