Wal-Mart's Rollback
After retreating from Germany, the giant retailer makes a last stand in Britain
A marriage made in heaven. That was the consensus in 1999 when Wal-Mart spent $10.8 billion to buy British grocery chain Asda. Not only was Asda healthy and profitable-it was, as one analyst says, "Wal-Mart lite."
Asda had already borrowed Wal-Mart's "Every Day Low Prices" formula, and like the folks back in Bentonville, Ark., it stressed customer service. Certainly, they enjoyed a fairly long honeymoon period. But seven years later, the pairing, while not on the rocks, is going through a rough patch. Yes, Asda is profitable, but sales growth has been down for nearly four years, Asda has missed profit targets for four quarters running, and it's in danger of slipping from second to third place in the U.K. market.
What's worse, Wal-Mart's ongoing woes in Britain coincide with its embarrassing and costly divorce in Germany. Last summer, it sold its 85 stores there to rival Metro at a loss of $1 billion. That led to a profits stumble in the second quarter-Wal-Mart's first in a decade. Eight years after buying into the highly competitive German market, Wal-Mart, which is accustomed to using its massive market muscle to squeeze suppliers, admitted it couldn't attain the economies of scale it needed in Germany to beat rivals' prices. So it packed up and left.
Growth spurt. For all its success at home, Wal-Mart faces unique challenges abroad, as its European troubles document. International outlets account for about 40 percent of the company's total of 6,600 stores, but they bring in a mere 20 percent of sales. Yet, venture abroad Wal-Mart must: Only overseas markets offer the world's biggest retailer the kind of room it needs to grow. "Its credentials are going to be influenced by its international record," says Richard Hyman, managing director of retailing consultant Verdict Research. "Wall Street will increasingly look at its international record."
Right now, that record is decidedly mixed. Wal-Mart is successful in neighboring Canada and Mexico. But as Hyman notes, the Canadian market is very similar to America's, and "underdeveloped Mexico was theirs for the taking." Brazil and China are bright spots, too. But this year the retailer also sold its 16 supercenters in South Korea. It's losing money in Japan. And few analysts would be surprised if it bailed out of Argentina, another money loser.
No foreign market is as important to Wal-Mart as Britain. Asda CEO Andy Bond has called his company the "jewel in the crown" of Wal-Mart's overseas ventures. Asda generates more than 40 percent of overseas sales and 10 percent of total revenues. "It's one of our better-performing markets, on the whole," Wal-Mart spokesperson Amy Wyatt says.
So improving its results in Britain, the proverbial nation of shopkeepers, is critical to Wal-Mart's global aspirations. It's also why it's doubtful that Wal-Mart will cut and run from Britain, too. "That would send out a pretty shaky message," explains George Wallace, CEO of retailing consultant Management Horizons. "It would look like they acquired a good company and screwed it up." Adds Darrell Rigby, a global retailing expert at Boston's Bain & Co.: "It needs to succeed in the U.K. market and is willing to make significant investments there to make that happen."
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