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."
Success, however, won't come cheaply. Asda faces strong competition in Britain, mainly from the well-respected Tesco. "Tesco is a very, very, very good business run by exceptional people," Hyman says. The low-pricing strategy works best for the market leader, but Asda is nowhere near that level. Tesco has 31 percent of the market. Asda's share is 16.6 percent, and Sainsbury is close behind at 16 percent. Moreover, most major chains in the U.K. have also successfully adopted the everyday low-price concept, and Tesco has been particularly adept at it. Asda also faces a squeeze from German chains Aldi and Lidl. They've been aggressively expanding into the U.K., brandishing cut-rate prices.
With good prices a given here, the Wal-Mart pricing formula isn't the competitive cudgel it was a few years ago. British consumers have become more sophisticated over the past decade; Tesco estimates that its customers split their purchases fifty-fifty between value goods and premium products. Premium brands, ready-to-eat meals, and organic foods have become increasingly popular, yet Asda has lagged behind rivals in adding them to its shelves.
Super Tesco. Though CEO Bond has pledged to rectify that omission, Wal-Mart's retailing heritage is in general merchandise, not groceries. Asda pioneered the concept of big supercenters that sell food and higher-profit nonfood goods under the same roof. But that lunch you see Tesco eating is Asda's. When it comes to moving general merchandise, "they [Tesco] are doing the same thing and doing it better," Wallace says. Tesco's half-year results, released last week, showed its nonfood sales in the U.K. were up 12.6 percent. Asda's clothing line, George, was such a hit that Wal-Mart imported it to the States. But now Asda is feeling increased heat from several highly successful budget clothing chains, including Primark, H&M,and New Look. In response, it has opened 10 stand-alone George outlets and six Asda Living housewares shops. But "the outlook is not good-they've stalled the rollout of both of them," says Ben Perkins, senior retail analyst at Mintel International. Asda spokeswoman Jennifer England says the company is pleased with their performance.
Bond has admitted that Asda needs to improve its once highly touted customer service and to upgrade its online operation, another area that has proved fruitful to Tesco (tesco.com sales were up 28.7 percent in the half year). And both Tesco and Sainsbury have carved out more market share by opening convenience stores. Asda has opened just two. A heavy amount of executive turnover hasn't helped, either. Bond's well-regarded predecessor, Tony DeNunzio, left in March 2005, amid speculation that he tired of interference from Arkansas. "There's been a revolving door," Hyman says. "People find it difficult to work with Bentonville."
Not true, says Wyatt, who denies that Wal-Mart keeps foreign executives on too short a leash. "Decentralization is key," she says, because local executives "know their markets best." Certainly, cultural differences in the executive suite were a factor in Wal-Mart's German sturm und drang. But Bain's Rigby says Wal-Mart learned from that experience and now gives local executives more autonomy. In Britain, however, "it hasn't happened as much as it needs to."
Wal-Mart once seemed eager to spread farther into Europe. That seems less likely now, given its debacle in Germany. Also, it would probably incur high costs as well as animosity from anticompetition regulators in some western countries. And Tesco is already firmly entrenched in much of the East.
The developing markets of Asia-Wyatt says it's looking at India-and South America are the most promising foreign outposts for Wal-Mart. Of course, other big players, including Tesco and France's Carrefour, are also pouring into Asia. But at least in those markets, Wal-Mart has a fighting chance of becoming market leader.
That's a dream deferred in the U.K. Nevertheless, Rigby says, "Wal-Mart could learn to live with being in second place if sales continued to grow and profitability turned around." And it sure beats divorce court.
This story appears in the October 16, 2006 print edition of U.S. News & World Report.