Y'know, you can read all the case studies you want. It's hard to fully understand international business without going to different countries and walking around.
So, let's talk business and walking around. I was in Seoul, South Korea for a month last summer.
I came to like Korean culture a lot. Koreans are some of the strongest, proudest people I've come across. They manage to combine a strong warrior culture with the utmost civility, order, cleanliness, and quality of life.
It's pretty incredible, actually. Many societies with a strong militant, warrior feeling about them descend into kind of a barbaric police state sort of vibe, constant terror in the air.
Korea? Nope. The men are proud, masculine, patriot, somewhat militant, but in a good way. There's a mix of strong, expansive, traditional values, along with a large minority undercurrent of modernity. It's really good - it's the best of all possible worlds. There's problems - the blatant racism and xenophobia kind of sucks, but I don't mind it so much. Nowhere's perfect.
Let's talk Walmart. We'll get back to Korea in a moment.
Walmart has really, really low prices. There's a few reasons for this - the company is one of the best in the world at logistics, so they manage to have fast turnover of inventory without keeping too much onhand at any given store. I'd love to see how their logistics division runs sometime - I remember reading that they've got some of the most sophistication about predicting and automatically changing stock at stores based on factors like the weather changing that are hard to pin down.
So they've got sophisticated logistics and forecasting, which means they order, ship, and sell goods quickly. That's important - the less time an item spends on the shelves unsold, the more money a retailer makes. The less time there's an empty spot on the shelves, the more money a retailer makes. Walmart keeps the shelves not empty most of the time while moving goods quickly.
This means they can charge less. And because they're so big, they've got a lot of bargaining power with their suppliers. There's over 4,000 Walmart-owned stores in the USA doing over $258 billion in sales.
Let's talk 1998. Population of South Korea in 1998 is around 46 million. American economy 1998 is in extremely good shape. Population of South Korea is just a bit under 50 million people. The fundamentals of the South Korean economy were excellent, but the Asian Financial Crisis had just destroyed the exchange value of the Korean won.
Walmart sees all of this and thinks something like, "Hey. Growing economy with good fundamentals. Just had a financial crash, so their currency is trading artificially low. We've got a strong domestic economy. Let's expand into South Korea."
That was, y'know, almost correct. This was a, "Hey! This is a fantastically good opportunity to buy!" type buy on Walmart's part.
And they got it all right. Everything. Except one little thing - Koreans weren't interested in going to Walmart.
Yup, the stars were all aligned, the U.S. dollar was artificially high, the South Korean won was artificially low, Walmart had been experiencing great domestic growth, and the South Korean economy looked like it would be in pretty good shape after the financial crisis shook itself out.
But Koreans weren't interested in the Walmart model.
To explain why, I'll say - you gotta go walk around South Korea. I can explain it and it'll make sense, but it's the kind of thing that wouldn't really resonate unless you go to Korea.
Korea's got the longest work hours in the developed world, and it's not even really close.
According to the OECD's 2004 report, Korean average work hours per year comes in at 2390. Japan, internationally renowned workaholic land? Only 1828. USA? 1777.
Now, I could show you stats all day, but what really drove it home for me was when I was walking back from a bar to where I was staying. I left the bar around midnight, and stopped to have a chicken sandwich and fries, maybe 12:30AM. There was some screwup in the kitchen of the fast food joint, so I wound up having to wait - after having already paid - for about 20 minutes. That's probably a rare occurrence in Korea, but it worked out well because I had a good chat with a Korean guy who works in the marketing/sales side of an animation studio.
He was in a full suit with tie, but his tie was loosened a bit. He looked worn out. After we got our food, we sat and chatted another 30 minutes or so. I ask him what he was doing - some kind of formal party?
Nope. He was just on a break from work. He wasn't even done yet. He started work around the regular time - 9AM or so - and was still working after midnight. He was going to work another hour or two before sleeping for a few hours, and then working some more.
He explained that this is a bit more hours than he normally puts in, but not that much more.
So, Koreans work a lot. A whole lot. A lot, a lot, a lot.
When they're not working, they're not interested in lower quality experiences for less money.
Damn near everything in Seoul is really, really nice. All the restaurants, the food, the transit and trains, the buildings, everything. It's clean and prestigious and high quality and upscale. The whole country. It's like Japan in that regard.
So, Walmart rumbles in, gets a good price on the currency, and opens 16 spartan Walmart stores with low prices.
Things don't sell.
Now, I could again explain and explain, but I'll just say - you had to be there. The Korean chain Emart's parent company eventually bought the scraps off the Walmart Korea heap, Walmart losing $800 million in the process.
Emart and Walmart are night and day different. Emart is closer to a spa than a warehouse. As you walk through the isles, there's samples of fresh juice, fresh coffee, fresh grilled meat, fresh hot and iced teas... I'd just gone in to buy some tuna and fruit, and I walked out (1) having eaten effectively a whole lunch worth of little samples, and (2) with about five times more groceries than I intended to buy. There must've been 40 plus samples in there, all managed by different friendly, smiling staff.
Added to that, Walmart only opened 16 stores, and you see they lose their edge in the logistics system and being able to squeeze suppliers. Really bad combination - none of the economies of scale and established network/market intelligence, plus not understanding local tastes. Thus, their prices aren't that low compared to American Walmart vs. American Walmart's competition. And, Koreans aren't interested in their somewhat low prices. They're working themselves to the bone constantly, everyone's under crazy amounts of pressure (even the kids), and thus, they want every moment they're not working/studying/homemaking to be a full-featured luxurious prestigious life experience.
It speaks to not walking around enough. It's the kind of thing you could read in a case study plenty, but not "really get it" until you see it in real life. The numbers all worked for Walmart - growing economy, good price on currency, and local incumbents a bit weak due to financial situation. If the country rebounded quickly, they'd have gotten in on their real estate and capital investment cheaply. If the economy stagnated or deteriorated, they'd be in the kind of competitive environment that discount retailers thrive in.
But they didn't walk around enough. Koreans work, work, work, work, work. When Koreans aren't working, they want the best. Not the best price. The best. Combine that with a bit of a nationalist sentiment that favors local companies, and you've got an $800 million loss on your hands.
Y'know, getting into Korea with the American discounting model still might've been worth a try. But after some walking around, it seems like the kind of place you'd need a strong fallback plan if Koreans don't buy into discounting. Either a contingency plan to revamp the stores to Korean standards, or start negotiation in advance on licensing/partnering with a Korean company, something like that.
Numbers are good, but you can't just trust the numbers. Gotta walk around too.
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Nice one, they go with Quality and I like it.... Nice stuff and will definitely use it in my course assignment :)
Very interesting Article! Thank you for your post on this! I just read an article about Walmart's failure in Germany and there were parallels there as well.
First, you would have to understand how the furniture industry works in South Korea.
When I first came to the US, I was fascinated by the idea of IKEA, where you pay less and assemble the furniture yourself. But then I realized that those furniture don't last as long as you hope. They tend to break or get scratched easily.
This goes back to the idea of Koreans focusing more on better quality than better prices. Although every industry have some type of "discount" shops, furniture is not one of them.Where ever you go, unless you're buying second handed furniture, it's going to be expensive. and yes, it's going to be good in quality as well.
I think the Korea furniture industry has exquisite taste. In that sense, I personally love IKEA in how modern and simple their designs are with bright colors and such. Koreans would probably love the designs IKEA has to offer. BUT, they're willing to pay the extra to have the furniture in good quality, already assembled, and delivered to their front door. This is just the way they buy furniture, and I doubt that they're going to start assembling them theirselves for cost cuts.
Rather than buying three furniture that is cheaper, have to be self-assembled, and will last prob for only 2-3 yrs, Koreans will buy one furniture that is uniquely designed, good quality, professionally assembled, delivered to their home, and yes expensive.
In that sense, I don't think IKEA will work in Korea. Maybe later in the future, but not now.
I am a US citizen, but I have been living and working in South Korea for the past four months. I love it here! The culture is great.
I do not know specifically what IKEA would need to change to fix the issues that Walmart suffered from, but I can give you my insights into Korea from an American perspective.
From my experiences in the US, the generally philosophy is that having stuff shows your status. This is probably true of most countries, but Korea and the US have very different ways of doing this. In the US, people show status and wealth by having lots of "stuff." It's not as important what it is and some is fancy, but it doesn't necessarily have to be. In Korea, they do show status through "stuff," but they do not buy lots of things like Americans do. Instead, Koreans seem to live with less things but the things they buy are superior in quality (and price) to what we would buy in the US. When I go shopping at almost any store, everything is super expensive in my opinion. That's how Koreans live though; one nice thing that is going to last and do everything it needs to do, instead of multiple cheap things that are just going to break and be replaced repeatedly.
After getting used to it, I think it's a better philosophy. However, it means that American discount or wholesale stores will have a very difficult time surviving. So, I don't know what should be changed to make it work, but I know that the current business model isn't right for this country.
As a side note, others have also mentioned the bias against non-Korean things. It's very true. Koreans are extremely proud of their culture and tend to resist most outside things. I'm an English teacher and even though Koreans understand the need for English instruction and will send their children to expensive private schools, I feel like my teaching style has to resemble Korean schools and teachers. So even if they were willing to embrace the IKEA products, they would still expect the store to be set up in a way that closely mirrors Korean stores.
Your totally right about the quality over low prices statement. Koreans don't care as much about the price as they do about quality. They RARELY do cheap. EVER. they put their best and all into EVERYTHING they do.
yes, I'm a proud Korean :) ~
With such a big expansion into a new country, you think they'd have carried out some opinion polls or something?
That's crazy - definitely illustrates the need to look further than just the numbers, as you said.
Awesome article!! I have worked for Wal-Mart for 14 years now and was just curious if there was one in Korea. This pretty much answered my curiosity. Interesting!! Thank-You :)
So the moral to the story is Koreans work too long and have to squeeze in some quality time in a few short years of their lives. Not a good model for quality living. I don't think Walmart needs Korea any more than Korea needs Walmart. I love Korean products. I have LG appliances, one of my cars is a Kia, and I have a Samsung TV, but I wouldn't trade an hour of my time for theirs.
I just got back from spending a week in Songtan and Seoul. Although I will have to say that their subway / train system is definitely cleaner than what I have seen in the US, the same cannot be said for many of the places that I went to. The air-conditioning is somewhat lacking, so everything seems to just have sticky feeling to it. I did not find the prices to be noticeably lower there than here in the US.Also, I would not classify the young men there as all that "masculine". My impression from riding the subway / train is that the country is full of a bunch of effeminate youths. Maybe the ones who have served in the South Korean Army are not that way, but their youth definitely seemed that way to me.
I thoroughly enjoyed your article! I'm a Korean American marketing major student at UAB and we were talking about Walmart and their expansion to other countries in our retail marketing class. I was wondering why Walmart never succeeded in the Korean retail market and came across this interesting article. Very well said :)