May 25 (Bloomberg) -- Kim Jung Hyun stopped shopping at the Wal-Mart Stores Inc. outlet near her Seoul home last year when Shinsegae Co. opened a discount competitor 4 miles away. She prefers to drive there twice a week, she said.

``I just don't like to shop in a place that looks like a warehouse,'' said Kim, 38, a housewife. ``I can get everything I need, from fresh produce to televisions, at a cheap price while being treated like a customer in a department store.''

Wal-Mart's retreat from 16 stores in South Korea this week after two years of losses underlines the perils of transplanting its U.S. model overseas. The world's biggest retailer misread consumer preferences with warehouse stores that emphasized frozen foods in a Spartan layout. The missteps raise the risk Wal-Mart could fail in Japan if it doesn't adapt to local tastes, said Yasuyuki Sasaki, a retail analyst at Credit Suisse Group in Tokyo.

``There's no guarantee that the same thing won't happen in Japan if Wal-Mart sticks to its own way and ignores the Japanese consumers' demands,'' Sasaki said.

Koreans, like Japanese, look first for fresh produce when they visit discount supermarkets, Sasaki said. Wal-Mart's low- price strategy doesn't compensate for a lack of localization, which includes the look and feel of stores, he said. Wal-Mart's South Korea stores had $768 million in sales last year, the company reported.

Bentonville, Arkansas-based Wal-Mart entered Japan in 2002 by buying into debt-ridden Seiyu Ltd. Now majority owned by Wal- Mart, the Tokyo-based retailer forecasts a fourth year of losses from about 400 stores in 2006.

German Stores

In Germany, Wal-Mart plans to close three of its 88 stores this year to try and make the business profitable, the company said. It bought separate retailers located in the north and south of the country in 1997.

``Japan is not America; Korea is not America,'' said Edwin Merner, who oversees $1 billion as president of Atlantis Investment Research Corp. in Tokyo. ``Global giants like Wal-Mart fail in these countries because they don't try hard enough to localize their businesses.''

Wal-Mart remains confident about its Japanese unit, said Billie Cole, the company's spokeswoman in Tokyo. ``Seiyu has a national store network and we are committed to remodeling 65 stores this year,'' she said.

In Germany, Wal-Mart has ``yet to see a turn in the retail market,'' Vice Chairman Mike Duke said during the company's May 16 earnings conference call.

Wal-Mart arrived in Korea in 1998 through an undisclosed majority stake in four supermarkets and six plots of land.

3.8 Percent Share

It leaves with a 3.8 percent share of the country's $30 billion-a year discount market and a 9.9 billion won ($10.4 million) loss last year.

Seoul-based Shinsegae agreed to pay $869 million for Wal- Mart's business on May 22. Its shares since have risen 2.6 percent to 472,000 won, while Wal-Mart's have gained 1.4 percent to $48.03.

The U.S. company fell short on several fronts in Korea, said Na Hong Suk, a retail analyst at Good Morning Shinhan Securities Co. in Seoul.

With 16 stores -- only one in the most populous city of Seoul -- Wal-Mart suffered first for the scope of its operation, Na said.

Shinsegae, the discount leader in Korea through its E-Mart chain, has 79 stores throughout the country. On average, E-Mart adds about 10 new stores a year, Na said.

Bargaining Power

That network gives Shinsegae bargaining power with suppliers. A pack of five Shin Ramyun noodles was selling for 2,350 won yesterday at Wal-Mart's Seoul store, compared with 2,150 won at E-Mart. Incheon rice was 55,700 won for 20 kilograms (44 pounds) and 50,400 won at E-Mart.

Wal-Mart lost out on product mix, too. The frozen foods it stocks with fresh meat and vegetables have limited appeal to Koreans, Na said. Even the subdued lighting and the height of the shelves are wrong for local consumers, he said.

Wal-Mart's Seoul store looks like a ``cheap marketplace,'' said Kim Se Hee, 31, a housewife who shops at E-Mart in Seoul.

For Min Jung Ah, Wal-Mart's warehouse-style layouts are inconvenient for comparing prices and products.

``Besides, I never liked shopping in those dark stores where they sell frozen imported food in bulk, not fresh products sold in smaller bundles,'' said Min, 35, a Seoul housewife.

Wal-Mart isn't the only outsider to fare badly in Korea.

Carrefour SA, Europe's largest retailer, sold out in April, a decade after opening the first of its 32 stores. Paris-based Carrefour also quit Japan in 2005, losing about $320 million in four years, the company said.

Google, Yahoo!

U.S. Internet search-engine operators Google Inc. and Yahoo! Inc. have made little headway in Korea against local rivals, said Wayne Lee, an analyst at Woori Investment & Securities Co. in Seoul. EBay Inc., the world's largest Internet auctioneer, shut its money-losing Japanese site in 2002.

``It's not like you just change the language and everything's solved,'' Lee said.

Local companies in both North Asian markets have the competitive advantage of connections, said David Abella, an analyst at Rochdale Investment Management in New York.

That gives them enviable networks to draw on, he said.

``The South Korean economy uses the chaebol system of inter- related companies, forming friendly conglomerates,'' Abella said. It's ``similar to the Japanese system, but even stronger.''

Local brand recognition helps, too, said Na, of Good Morning Shinhan Securities.

Tesco's Samsung Brand

Tesco Plc, the U.K.'s largest retailer, teamed with Korea's Samsung Group to open its first Korean store in 2000. Tesco owns 89 percent of the venture and pays royalties to Samsung to trade under the name Samsung Tesco Home Plus.

``Tesco was smart to pay to use Samsung's name, a brand that all Koreans are fond of, and trust,'' Na said.

Cheshunt, England-based Tesco also hired a Korean CEO, which Wal-Mart and Carrefour failed to do. Tesco plans to more than double its Korean outlets to 102 by 2009, the company said.

``Asian consumers are showing a new form of modernity and sophistication that would challenge even the most experienced brands,'' said Martin Roll, a strategist at VentureRepublic Pte, a branding consultant in Singapore. ``The retailers with the local-market knowledge and distribution network will ultimately emerge as the winners.''

To contact the reporters on this story: Seyoon Kim in Seoul at skim7@bloomberg.net; William Sim in Seoul at wsim2@bloomberg.net.

Last Updated: May 25, 2006 03:12 EDT