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CHUNG Sangho

Wal-Mart's Departure and the "Localization" Myth

CHUNG Sangho

June 21, 2006

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Wal-Mart made a surprising announcement on May 22 that it is leaving Korea after struggling for nearly eight years in the local discount-store market worth US$25 billion. The world's biggest retailer said it agreed to sell its 16 stores to Shinsegae Co., the operator of Korea's E-Mart discount stores, for around US$880 million.

The latest sell-off came only three weeks after the Carrefour's decision to exit the Korean market in late April. The French retailer, the second largest retailer in the world, sold its 32 local stores to Korea 's homegrown fashion retailer E-Land for US$1.85 billion.

The New York Times ran a story on May 23, saying that Korea has become "a graveyard for some of the most competitive global brands." Indeed, there are so many instances of failures, or near-failures. In addition to Wal-Mart and Carrefour, Coca-Cola and McDonald's have a tough time competing against formidable local brands.

In the technology sector, Google is suffering from an embarrassing obscurity in a market dominated by Naver and Daum. Nokia, the world's largest maker of mobile phones, gave up promoting its cell phones in Korea years ago.

All this prompts a question: Is Korea's consumer market so special that foreign consumer-goods giants can't possibly succeed here? This seems to be the view of some retail analysts here and abroad. They attribute the recent departures of discount-store operators to their inability to adapt to local peculiarities, such as Korean housewives' preference for vaguely upscale ambiance over no-frills warehouse, bulk-selling culture.

SERI researcher Jin-Hyuk Kim says that the two retailers made fatal strategic mistakes in this fickle market. First, they erroneously assumed that Korean consumers would flock to their outlets as long as they offered low prices, just as in the US and Europe where consumers drive long distances to buy foods and goods in boxes.

As it turned out, Korean consumers wanted more than low prices. Instead, they prefer to shop in a more pleasant atmosphere a few blocks away from their homes.

The second reason for their failure is linked with the fact that they missed the right timing for expansion. Launching stores at lucrative locations at an early stage of the market and thereby reaching economies of scale faster than anyone is the most essential condition for the success of the discount-store business. According to Kim, both Wal-Mart and Carrefour lost their opportunities to lead the market by failing to invest in opening new stores quickly enough.

From the above analysis, one may get the impression that localization is the way to go.

However, there are many global retail brands doing extremely well in Korea without even trying a bit of local adaptation. Starbucks is one good example. In addition, the US-based restaurant chains Bennigan's and TGI Friday's attract young, affluent Koreans by serving all-American dishes.

Most likely, their success formula lies in positioning themselves in the upscale market. These chains are strategically located in high-traffic areas or near of pricey fashion and accessories shops. They also charge higher prices that reflect their upmarket positioning, typically costing more than $50 for a dinner of two. In return, customers enjoy attentive service rendered by efficient and eager servers, giving the feeling that customers are enjoying a meal in an American city, for at least a couple of hours.

This means there are ways for foreign companies, especially those in consumer markets, to become successful in Korea without pretending to be a local company. Indeed, nothing is as unseemly as a foreign brand trying to look like a local one. Instead, it is much better to announce early on that you are a foreign company and make the most of this fact.

Foreign companies can offer something that local rivals can't possibly match. For example, an American retailer can "educate" Korean consumers by holding a Thanksgiving festival through which store visitors may sample American-style holiday meals like turkey, cranberry sauce, and pumpkin pies.

If you are a German restaurant operator, you can regale customers with a free beer, grilled chicken, and gigantic pretzels on the Oktoberfest, bringing the famous Bavarian cuisine to Korean customers.

Localization, certainly, is important in many areas. But too much of it may prove to be more dangerous for foreign companies doing business in Korea or in any other Asian markets for that matter.

It may be that Wal-Mart and Carrefour were unsuccessful in Korea because they were neither localized nor global. It would have been different if they defined their strategy more clearly and forcefully.

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