It’s interesting to note that rather than expanding aggressively, the retailer is strategically planning its approach. While it is slowing down its expansion in emerging markets such as Brazil, China and Mexico, it is aggressively expanding in Canada. With significant investment in e-commerce, the retailer is now well-positioned in China and the U.K. Additionally, Wal-Mart will soon be entering India which provides tremendous growth opportunities.
Significance Of Wal-Mart’s International Business
Wal-Mart already serves more than 100 million U.S. customers every week and its domestic growth is now largely dependent on population growth, per-capita consumer spending and inflation.  As a result, Wal-Mart’s international business is of great importance. With its low price advantage and a wide range of merchandise, Wal-Mart is attracting customers in emerging economies.
Ever since the launch of its first international store in 1991, the revenue contribution from international markets has been increasing. In 2006, the international business accounted for about 22% of Wal-Mart’s overall revenues.  This figure jumped to 29% by 2012, and we expect it to reach 35% by the end of our forecast period.
During the last three quarters, Wal-Mart generated positive comparable store sales from each of its international markets, with major contributions from the U.K., Brazil, Canada and Mexico. Brazil, Mexico and China still remain Wal-Mart’s key focus areas for future growth as they are some of the most promising markets among the developing countries in the world.
Slow Expansion In Brazil and Mexico To Improve Productivity
Comparable store sales growth in Brazil and Mexico stood at around 5% during the second and third quarters of fiscal 2013. Despite promising results, Wal-Mart plans to slow down store expansion in these regions to build a strong foundation for comparable store sales (CSS) growth.  The impact was immediately visible as CSS growth in Brazil jumped to 8% in Q4 fiscal 2013. Interestingly, Mexico’s CSS increased by 2.1% despite a 3% decline in store traffic.  Although the delay in expansion will slow down revenue growth, store productivity will improve. It appears that Wal-Mart doesn’t want to compromise on its profits to gain market share.
Controlled Expansion And Investment In E-Commerce In China
Wal-Mart has been struggling with its local strategy in China. Chinese consumers are sophisticated and discerning and are attracted to specifically tailored products. The company has been facing stiff competition from a local big box retailer, Sun-Art Retail Group, who has managed to gain a higher market share through its traditional Chinese style stores.  Although Wal-Mart has tried to acquire the local touch, its strategies have not been as successful as Sun-Art’s. 
China is the world’s fastest growing retail market with more than 18% growth recorded annually, and it makes sense for Wal-Mart to strengthen its position in the region. ((How Wal-Mart is changing China, The Atlantic, Dec 2011)) Last year, the company acquired a major stake in Yihaodian, a Chinese e-commerce retailer.  This will help Wal-Mart in capitalizing on booming online retail sales and rising consumer spending in China.  Given the shift in Chinese shoppers’ buying patterns, having a strong e-commerce channel becomes vital for Wal-Mart. The shopping trend in the region has shifted from daily visits to weekly stock-up visits, leading to a 6.6% decline in store traffic in Q4 fiscal 2013.  Additionally, the retailer is looking to strengthen its position in the region by centralizing its management, improving operational efficiency and expanding efforts to gain price leadership. 
While Wal-Mart is slowing down its store expansion in China, it is also reducing square footage per store to improve productivity. This strategy mitigated the impact of lower store traffic in the recent quarter and as a result, comparable store sales increased slightly by 0.4%.
Aggressive Expansion In Canada and Entering New Markets
As opposed to controlled expansion in Brazil, Mexico and China, Wal-Mart is aggressively expanding in Canada. For fiscal 2013, Wal-Mart had planned 73 store projects, which was largest annual expansion in Wal-Mart Canada’s history. In the current fiscal year, it plans to open about 37 more supercenters. The retailer will also be expanding its distribution network to support its expansion plans. Given the similarity between the U.S. and Canadian consumers, expansion becomes relatively easy compared to markets such as China.
Last year, Wal-Mart also revealed its plans to open stores within the next two years in the second most populous country in the world, India. The country provides a large pool of value-conscious customers and we believe that Wal-Mart can use this to its advantage. With a specific focus on different markets, Wal-Mart’s international segment is well-poised to drive the stock to $80.
Our price estimate for Wal-Mart stands at $80, implying a premium of about 10% to the market price.
- Wal-Mart Company Statistics, Statistics Brain, July 31 2012
- Wal-Mart’s SEC filings
- Wal-Mart’s Q3 fiscal 2013 earnings transcript, Nov 15 2012
- Wal-Mart’s Q4 fiscal 2013 earnings transcript, Feb 25 2013
- The China’s Copycat Walmart Is Beating The Real Thing, Business Insider, Dec 10 2012
- Wal-Mart China
- Wal-Mart Raises Stake in Yihaodian, FT, Feb 20 2012
- Online Retailing Spurs Changes In Economy, Study Says, China Daily, March 26 2013
Disclosure: No positions