Game theory is a branch of applied mathematics which for the first time was discussed a letter written by James Waldegrave in 1713. In this letter Waldegrave provides a minimax mixed strategy solution to a two-person version of the card game le Her. It was not until the publication of Antoine Augustin Cournot’s Researches into the Mathematical Principles of the Theory of Wealth in 1838 that a general game theoretic analysis was pursued.
The game theory studies strategic situations where players choose different actions in an attempt to maximize their returns.First developed as a tool for understanding economic behavior, game theory is now used in many diverse academic fields, ranging from biology to philosophy. Game is an abstraction of the particular economic situation and such information may have either descriptive or normative. In our case we’ll use game theory to analyze an oligopoly competition of two great rivals, Wal-Mart and Carrefour, in the Chinese market.
This research will focus on particular sets of strategies known as equilibria, which form an extensive form game in our case. Brief history of Wal-Mart:In 1962 Sam Walton founded a discount store in Arkansas, US, and it was the first Wal-Mart store. The advantage of her store over its rivals lied in everyday low prices offered to the customers and a promise of satisfaction together with high quality goods supplied.
In the early 70’s Wal-Mart extended its operation all around the USA and started opening stores abroad. There were branches set in Canada, Mexico, Brazil and Western Europe. The first Wal-Mart superstore was established in Montana in 1988.
The super centre was a new type of stores which was created through combination of a grocery store with a discount store.Wal-Mart had succeeded in selling general merchandise and durables, but besides that its managers wanted to make profits in grocery for people shop for food twice as often as for the other goods. At the same time Wal-Mart was developing a new concept called the Neighbourhood market. Such markets used to sell and store fruit and vegetables, pharmacy, offered a 24-hour photo shop service and a selection of classic Wal-Mart hard goods. The purpose of these Neighborhood markets was to keep on attracting surrounding neighbors who might be in a hurry or want only a few items.Apart from Wal-Mart’s everyday low prices strategy, the company has also established highly automated distribution centers accompanied with a wide-ranging commercial support and implemented a computerized inventory system.
This meshwork allowed the company to check every commodity in stock and on shelf within more than 4000 stores globally during one hour. All these measures lowered expenses and sped up the check out. Nowadays the company operates 3600 Wal-Marts: Sam’s club membership – only warehouse stores, Wal-Mart super centers worldwide with major operations in Latin America, Canada, Europe and Asia.The executives of Wal-Mart expect South American market to build many more stores. In 1997 Wal-Mart acquired 21 stores of Wertkauf chain in Germany and in 1999 ASDA in Britain, a company which served over 100 million customers worldwide weekly, was bought by Wal-Mart too (Economist 2002). Besides that, in 2000 Wal-Mart sales exceeded those of GM for the first time and Wal-Mart became the largest world enterprise. Brief history of Carrefour The first ‘hypermarket’ was opened in France in 1950. Just after the world war the consumer’s shopping desire was active and the hypermarket became a profitable business.
It was Carrefour’s idea to initiate ‘hypermarket’ which would specialize in mass-sales: low delivery cost and everyday discounts to achieve high stock rotation and asset turnover. The success aspect includes low selling price, one-step shopping, fresh food, free parking and self-service. Carrefour presented a public offering in 1970 and introduced its own payment card (pass card) in 1989. In 1991 45 shops were opened in Western Europe.
Since 1999 the Carrefour group has drawn its developments and acquisitions into various businesses to implement an innovative strategy – the multi-format approach.The first step that Carrefour made out of France was to Belgium and from mid-70’s Carrefour started expansion out of the EU to such countries as Brazil and the USA. However, the strategy appeared to be a failure in the USA.
The only two hypermarkets in America had to close down and Carrefour completely withdrew its stores from the US retailing market. Although Carrefour had no success in the United States, it still had 7 030 stores and more than 340 thousand employees all around the world. The sales ran up to 80 billion that made Carrefour become the largest retailer in Europe and the second largest in the world.
Asia conflict These two giant retailers were rarely faced with each other in direct competition. Wal-Mart prefers not to enter Carrefour force regions in Europe – Germany and the UK. In South America – both Carrefour and Wal-Mart didn’t compete vehemently. It seems to be a tacit avoid notwithstanding that both retailers have increased the speed of global expansion. Since China actualized open-door policy, the purchasing power dramatically increased. Since 1980 both traditional supermarket and department store hasn’t been meeting the demands of one-step shopping.Therefore, huge amount of retailers with required conditions emerged as time required. Carrefour has been doing business in China since 1995 and is very familiar with local customs and trends.
The company executives believe that rapid changes in consumer behavior in the countries where they do business are promising. China is the continent with the greatest potential for long-term growth. Through its becoming a member of the World Trade Organization in 2004 it opened a market of over one billion people to international companies (Carrefour official website). Carrefour has become the country’s top foreign retailer.Now it is expanding in fifteen of the seventeen major cities.
In 2001 a process of Carrefour’s legal structures reorganization, which was being carried out in cooperation with Chinese authorities, temporarily slowed their growth in the country and delayed some store openings. Solely on the basis of its marketing strategies the Group increased its sales in local currency by 15% comparing with 2000. At the end of the year Carrefour received the authorizations required to continue its growth.
It resumed its expansion projects in January 2002 and had plans to open between seven and ten stores a year further on.China’s membership in the World Trade Organization opens up new possibilities of medium-term growth for international retailers. Carrefour is in a good position to take advantage of these opportunities. The US retail giant, Wal-Mart, entered the China market in 1996 and concentrated on the southern Chinese province of Guangdong near the Hong Kong border. The reason for it was, first of all, that the Hong Kong border is the door to outside world and, secondly, the city government provides this special economics region with preferential tax treatment.
Wal-Mart made the boom city of Shenzhen its first focus and since has established chain stores in cities like Dong guan, Dalian and KunMing. Compared to its French-based rival Carrefour, which opened about 50 chain stores in China, Wal-Mart has pursued a conservative strategy in China and has 26 units now, including Super centers, SAM’S CLUBs and a Wal-Mart Neighborhood Markets. However, in October 2000 Wal-Mart announced that it was investing 85 million USD to grow its network in China.
This meant that Wal-Mart’s presence in China increased dramatically in 2000/2001.Almost as many stores were opened in 2001 as in the previous five years of operations. Now the chain seems to be intent on catching up with Carrefour and is expanding out of Southern China into Beijing and other provincial cities.
Sourcing in China is significant for Wal-Mart’s operations and the company is the largest single sourer in the PRC. If Wal-Mart was a nation it would be China’s eighth-largest export destination. To sum up, Carrefour established stores in 15 cities first and then integrated them to gain economies of scale and scope. It is obvious that from 2001 Wal-Mart boosts the speed of store opening in China.The number of new stores opened within the following three years was double that of the previous five years.
Besides that, Carrefour, which had just stepped out the reform limitation, was even more too impatient to wait for expansion. According to statistics Carrefour launched eight new stores from January to August 2005, one each month in average. The competition of two giants began when they faced each other through the dithyrambic roping strategy in NanJing, TiaNjing, Kunming, Changsha and Dalian. Carrefour and Wal-Mart were hassling up to at least 20 major cities.Although there are many foreign and world class retailers in China market, their strength cannot be compared with ones of these two giants. Despite local competitors, Carrefour and Wal-Mart are the only rivals for each other in China market.
Hence, taking into consideration and having analyzed strategies, situations and major factors which lead to success, we can come to a conclusion that it is an oligopoly competition. Carrefour took advantage Although the world ranking indicates the strength difference, Carrefour and Wal-Mart ranks the same in China retailing market which gives even more suspense to this competition.Both were launched in China market nearly at the same time: Carrefour came in 1995 and Wal-Mart was one year later. But Carrefour has carried out more outstanding achievements in China than Wal-Mart.
Business department published retail statistics which show that up to January 2006 Carrefour ranked number one among China foreign chain enterprises with 240 stores and 372. 25 billion RMB sales. Wal-Mart was only number 2, with 56 stores and 53.
45 billion RMB sales that are not even half of Carrefour’s. Therefore, from single store sales point of view, Wal-Mart is in obvious disadvantage.As for the profit aspect, Wal-Mart China is one step backward.
According to the investigation of China commercial union, Wal-Mart China lost 2. 4 billion RMB in 2002 and this loss decreased to 40,000,000 RMB in 2003 until early 2004 when Wal-Mart China reached breakeven. But Carrefour China makes profits in 2003 already. In order to explore details about the differences we can see that Carrefour China occupied the advantageous position and shows better understanding of and adaptation to local market requirements.Although the experience gained in Taiwan market helped Wal-Mart China, its flexible reaction needs more policy decentralization. Marketing executive of Carrefour said that ‘there is only one person needed to carve out, every time Carrefour enters a new place.
Only one person is appointed in Carrefour Taiwan market and one person for China mainland. ‘ This parlance maybe a little exaggerated, but the abundant authorization is certain. Carrefour is more like a local retailer rather than a foreign firm, although the stores are wide spread; each of them is a successful legend.The right location is half success Once Carrefour came to China, it occupied commercial shopping areas in the front lines of metropolitan cities. On the other hand, Wal-Mart stores were located mostly in south-west China cities and entered only Shanghai, Beijing and Guangzhou – the cities with the largest purchasing power. However, Carrefour also entered those three cities stealthily. Location, a necessary condition of retailing, determines the success of business and can not be ignored.
Six Carrefour stores in Shanghai, for example, make the revenue of nearly 30 billion RMB a year.That’s a challenge for Wal-Mart. Nevertheless, opportunity never waits for anyone. Though the retailers competed in front line cities, they had to follow the government restrictions. Wal-Mart opened only one store in PuDong, a new district in Shanghai, and couldn’t enter the central part for the government had stated that all chain stores or large markets were to be regulated. Business program of 2003 restricted the number of hypermarkets (larger than 10000 square meters) – within the inner city there could be not more than 60 and the existing number of hypermarkets within Shanghai is more or less 60.Even though Wal-Mart enters some cities, the location is doubtful. The reason for this is Wal-Mart’s low cost strategy which led to stores location in devious areas where rents are lower.
This strategy worked well in the US because its community is not concentrated and car is a commonplace vehicle. In China cities the population is locally distributed. Even in metropolitan cities satellite towns are still under construction. Moreover, cars are not common for household use; the majority of people are still shopping within walking distance or using public conveyances.Consequently, the cost reduction strategy of Wal-Mart China is not optimal and restricts customers’ liquidity. Comparing with Wal-Mart, Carrefour acts smarter when choosing a place to situate a store. According to my investigation, nearly all Carrefour stores locations are more appropriate to compromise China household shopping activities. Since 11 years ago Carrefour had entered China market, it was insisting on launching its stores in business commercial areas.
For example, in Chongqing two Carrefour stores were opened: in JieFangBei and GuanYin Bridge flourishing shopping centers.On the contrary, Wal-Mart chose west village which is quite far from business and residential areas. (This situation may change later due to the completion of city light-train) Wal-Mart may had realized what a ponderate problem that is and opened new stores in city centers of Shenyang, Guiyang, Nananing and two hypermarkets in business commercial area of Beijing. The statistics I collected include locations and total sales before and after Wal-Mart changed its strategy in comparison with Carrefour, which insists on locating in central areas.