International Business: Europe
Wal-Mart's Not-So-Secret British Weapon
It's using its Asda unit for an all-out assault on Europe
Allan Leighton has just gotten one of the hottest jobs in retailing--president and chief executive of Wal-Mart Europe. His mandate: Turn Wal-Mart's European incursion into an all-out assault. And leading the assault will be Asda, the giant British retailer Wal-Mart bought last July and which Leighton ran until he got his new title.
Asda's own home-grown philosophy of low prices and aggressive expansion fits neatly with Wal-Mart's worldview, so the giant U.S. chain sees it as the perfect cornerstone for its European plans. And Leighton is wasting no time. On Jan. 10, scarcely a month after his promotion, he announced plans to open six new Asda stores, expand six others, build a dozen or so distribution centers for online shopping, and add 27,000 new jobs to the Asda/Wal-Mart payroll in Britain by 2005.
That's the kind of blistering pace Wal-Mart needs to achieve its foreign ambitions. Buying Asda doubled Wal-Mart's international sales to almost $25 billion, overnight. But that's still a fraction of overall sales of $165 billion. Wal-Mart wants international operations to account for a third of sales growth by 2004. Analysts figure that could mean $72 billion in international revenue within four years. Other regions, like Latin America, will contribute. But the big action will be in Europe, where Wal-Mart has 95 stores in Germany under its own name, and 231 Asda outlets in Britain.
Germany is a key market, but Wal-Mart is losing about $150 million annually there because of renovation costs and the impact of price wars. Asda, in contrast, is nicely profitable: Operating profits in 1999 were about $715 million on sales of $13 billion.
Asda's stores were known for good deals on groceries, apparel, and electronics even before Wal-Mart bought the chain last July for $11 billion. But since Wal-Mart took over, Asda has embarked on its biggest discount drive ever, pledging to roll back prices by 5% to 10% on 10,000 items. The price offensive is putting serious pressure on leading British rivals Tesco, Safeway, and Sainsbury, whose publicly traded shares have been battered by the Wal-Mart invasion. There are even signs that Wal-Mart-induced price wars are lowering inflation in food prices. "Anywhere Wal-Mart goes, a disinflationary trend follows, because Wal-Mart is seen as an agent for prices going down," says Credit Suisse First Boston's director of retail research, David M. Shriver.
Leighton, who rose through the ranks at Asda, is turning up the heat further. On Jan. 7, Asda defied British price protections on over-the-counter drugs by lowering the cost of Nicorette gum by 20%, to $7.40 a pack. "It's not right to sell ordinary health-care items at rip-off prices," says Leighton. He's bringing the price wars to the Web, too. Wal-Mart's first European online venture, Asda@Home, plans free access to the Internet, low prices on goods, and free delivery to British consumers. Asda's inexpensive but hip clothing brand, George, may be rolled out across the Continent.PROWLING. Good start. Leighton also plans to roll out Wal-Mart's super-efficient logistics systems from the U.S. to all European operations. But other European giants are bulking up to meet the Wal-Mart threat. France's Carrefour is integrating French rival Promodes Group, which it bought for $16.5 billion in August. Other retailers, including Germany's Metro and Royal Ahold in the Netherlands, are on the prowl.
So to add heft fast, Leighton will have to consider takeovers. In Germany, "Wal-Mart does not have enough of a presence yet," says Merrill Lynch Europe retail analyst Vera Diehl. Possible German targets for Wal-Mart could include retail co-operative Ava or Metro's hypermarket business, Real. In France, discounters Casino and Auchan could make for interesting acquisitions. The timing is right too to make shrewd buys: Share prices for European retailers are off about 11% from a year ago.
Meanwhile, Asda is managing to teach Wal-Mart a few lessons. Burt P. Flickinger III of U.S. retail consultancy Reach Marketing says Asda is helping Wal-Mart improve its productivity in selling food and restocking grocery shelves. Asda may even inspire Wal-Mart to offer some novel incentives. A current staff incentive program offers the top-performing employee free use of a Jaguar for a week. Trunk's kind of small for groceries, though.By Kerry Capell and Heidi Dawley in London, with Wendy Zellner in Dallas and Karen Nickel Anhalt in BerlinReturn to top