Bottom line: Wal-Mart's (NYSE:WMT) new layoffs underscore the intense competition in China's retail market, which could cause it to miss its new store target while Heinz's (HNZ) expansion reflects the big potential for big global food brands.
Two new stories are casting a spotlight on diverging trends in the retail and consumer space for major multinationals, with retailing giant Wal-Mart making big new cuts in its China operations even as US food maker Heinz launches a massive new China factory. Wal-Mart's move highlights the intense competition that has gripped China's retail sector over the last three years, forcing several major players to leave the market or consider doing so. At the same time, there's still huge opportunity for makers of quality food and other consumer products, especially from major foreign brands that are generally more trusted by Chinese buyers than domestic names.
Let's begin with Wal-Mart, which is one of the few major global retailers that previously refused to dampen its China outlook, even as global rivals Carrefour (OTCPK:CRRFY) and Tesco (OTCPK:TSCDY) became much more bearish on the market. All that has changed in the last two weeks, however, with Wal-Mart announcing a couple of major retrenchment moves in the face of stiff competition in a rapidly changing Chinese retail environment.
Last week, the company announced it was laying off 30 mid- and senior-level managers, and now it has further announced it will cut another 250 China-based employees and shutter one of its major facilities in the northeastern city of Dalian. Wal-Mart made an official announcement about the moves in a relatively rare display of openness designed to squash any rumors that might have emerged otherwise as news of the layoffs filtered into the market.
Wal-Mart tried to put a positive spin on the move, calling it an adjustment as it sought to maintain its competitiveness. It reiterated that it has opened 31 new stores in China this year, keeping it on track for its target to open 110 new China store openings between 2014 and 2016. Some simple math will show that it needs to open around 37 stores in each of the next three years to achieve that goal, meaning it's really not exactly on target, even though it could accelerate its openings in the next two years.
Frankly speaking, I would be quite surprised if Wal-Mart meets its three-year target since current trends are looking mostly negative for its traditional retailing model. Within the retailing sector, buyers are increasingly moving to e-commerce that offers better prices and more convenience. And at the macro-economic level, growth in retail spending is almost certain to slow sharply over the next few years as China's economy goes through a major transition.
While Wal-Mart stumbles, US food giant Heinz is steaming ahead full steam with its new announcement of the opening of a 430 million yuan ($70 million) factory in southern Guangdong province to make cereal products for infants. That investment is quite large for this kind of factory, and Heinz points out it will become its largest infant cereal-making plant in the world.
Heinz already operates six other facilities in China, and its announcement of the new opening focuses on the state-of-the-art technology being used in this latest plant. That's an obvious effort to underscore Heinz's attention to food safety, which has become a major concern for Chinese consumers over the last five years, especially for products aimed at infants and children.
Other major food makers that have eyed expansion in the market include chocolate giant Hershey (NYSE:HSY), leading salt maker Morton and top soup maker Campbell (NYSE:CPB), all of which have taken major new initiatives in the market over the last two years. Their aggressiveness contrasts with the difficulties being faced by major retailers like Wal-Mart, and highlights the growing likelihood for more expansion and other strategic moves by foreign food brands in China over the next few years.