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How high is up in China

With 329 stores in China producing $7.5 billion in sales annually, Walmart has experienced dramatic growth since it entered the market in 1996 with two stores. Last year, the company pursued its most aggressive expansion to date with the opening of 49 stores, and at a meeting for financial analysts earlier this week in Shenzhen, China, senior executives detailed plans to get a lot bigger.

How much bigger wasn’t exactly clear, as the company stopped short of providing company specific targets, but Walmart China president and CEO Ed Chan and CFO Roland Lawrence made it clear Walmart is well positioned to serve China’s rapidly expanding middle class.

While China’s rise to become the world’s second largest economy and the migration of its population to urban centers are well documented trends. However, Lawrence put those developments in context of what it means for a retailer whose bread and butter is serving the mass market. He noted that the year Walmart entered the market there were 42 million household that would have been classified as middle class but by the year 2025 there will be an estimated 295 million households classified as middle class.

The migration to urban areas will result in eight cities in China with populations greater than 10 million people. Lawrence and Chan referred to these cities as tier one markets and noted that of even greater significance is the expectation that China will have more than 200 cities with populations in excess of one million people. These are the markets Walmart expects to target in the years ahead as Lawrence noted the Chinese retail industry is forecast to grow at a double digit pace for the next 30 years.

Speaking of Walmart China’s emphasis on smaller tier two, three and four cities, Lawrence said, “This fortuitously aligns our strategy with that of the Chinese government and the growth patterns that are happening in these cities. This is a key strategic advantage of Walmart to be a first mover in many of these locations.”

Aside from simply opening new stores and growing at the overall pace of the market, Walmart has an opportunity to improve profitability by increasing its private label penetration rate beyond the current 3.5% and improving consumer awareness of its low price value proposition. According the Chan, Walmart conducts price comparisons with 51 other companies and it is the lowest price but consumer research show that no single retailer in China is recognized as being the low-price leader in the market.

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