Wal-Mart Fortifying Itself in the Land of the Samurai

Himanshu is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Have you ever witnessed a situation where a company is being punished for its strategy of value for money? Is it possible that a company which tries to provide products at the lowest prices possible is being punished by the consumers? Yes, it is indeed possible. The Japanese consumers had reacted in a similar way when the discount retailer Wal-Mart (NYSE: WMT) had made a debut in the region some years ago.

Initially, the consumers were skeptical to buy any product from Wal-Mart since its low prices gave an impression that its products were poor in quality. However, the retailer did not give up and managed to survive in the region so much so that it has now announced an expansion plan in Japan. It intends to open as many as 22 more stores in the next couple of years, making its footprint stronger in the region. Let us understand how Wal-Mart managed to make this happen.

Climbing the Mountain…

Wal-Mart had to really work hard to grab a 2.6% market share in Japan. Economic shifts played a major role in the retailer’s growth. Due to weak economic conditions and a large number of pensioners, who have limited income, the discount retailer’s strategy of “Everyday Low Prices” finally worked. Among all the offerings, its meals for as low as $4, for the aged population, worked miraculously. It helps people with limited income to plan their expenses comfortably.

Moreover, Japan has been planning to increase the consumption tax to 10% from 5% by the end of 2015. This will have a major impact on many low income households. Hence, an obvious way of escaping the unfavorable effects will be to switch to the low price retailer. This will be quite helpful for Wal-Mart going forward.

Wal-Mart has been the market leader when it comes to offering low prices. Even its arch rival Target (NYSE: TGT) has not been able to outperform the giant. However, Target has been quite close and has been attracting huge traffic by way of heavy discounts on its products in the back-to-school season. Also, it beats Wal-Mart when it comes to promotional efforts. Its increased marketing efforts lure shoppers to its stores. Nonetheless, Wal-Mart is not much affected by it since Target’s discounts are seasonal in nature giving the former an advantage over the latter.

A very strong weapon in the company’s arsenal is its global footprint and a wide distribution network. This has helped Wal-Mart in offering cheaper goods since it does not have to pay the middlemen in Japan who can influence both supply and prices. Hence, Wal-Mart gets most of the products imported which costs lesser compared to other regional players.

Some More Positives Apart From Low Prices…

The Arkansas-based company has also enjoyed the benefit of offering new products to the consumers because of its global footprint. Its products, such as Hershey’s peanut butter candies, are imported into Japan and have attracted great demand.

Additionally, the retailer earned a good position when it brought food from other countries in times of crisis such as tsunami and earthquake. On the other hand, other competitors were unable to do so.

Wal-Mart has also been smart enough to open stores in areas where there are no grocery stores owing to less population in the area. This gave the local residents the option of not going very far for their daily needs.

Hence, these strategies have helped the grocer earn a reputation for itself over the years. Also, the company is not building its new stores, which requires a lot of time. Instead, it is moving into already built stores which are vacant and can quickly help the retailer expand.

On the other hand, peer Costco Wholesale (NASDAQ: COST) is also planning to increase its presence in Japan by adding stores by 2013. But Costco plans to build new stores, unlike Wal-Mart, which might be a costly and a time consuming process. Costco has a very small presence in Japan with only 13 stores all over the region. Though slow in its growth plans, the company has been strengthening its foothold in Japan. Its membership based model, which provides lower prices to its members, has been quite attractive to the Japanese customers, giving stiff competition to Wal-Mart's similar segment called Sam's Club.

The Takeaway

Wal-Mart’s future in Japan seems to grow brighter with each passing day. Its struggles have paid off, helping it attain a strong position as compared to the regional players. Its forever low price strategy, nearby stores and a wide product portfolio will be the key drivers in its growth. This discount retailer is definitely up for a good move. I believe investors should not mind having this one in their portfolio.

justhimanshu has no positions in the stocks mentioned above. The Motley Fool owns shares of Costco Wholesale. Motley Fool newsletter services recommend Costco Wholesale. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.

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