Wal Mart Spoken Here
Store managers here in Mississauga, Ont., don't have a Southern drawl, but don't let that fool you. This is Wal-Mart country. As hundreds of workers gather at the retailer's Canadian headquarters outside Toronto, they give a local twist to the cheer that starts the weekly sales meeting: "Who's No.1? The customer, eh."
More than 1,700 miles away, in a sprawling Wal-Mart store in Monterrey, Mexico, employees gather around international chief Robert L. Martin and other executives visiting from company headquarters in Bentonville, Ark. Before the impromptu pep rally begins, though, the Mexican managers put their American visitors on the spot. "Uno, dos, tres, squiggly," they shout. On command, each American executive performs a kind of dance twist--a company tradition representing the hyphen in "Wal-Mart."
From Canada to Argentina to China, behemoth Wal-Mart Stores Inc. is translating the culture and skills that made it America's most feared retailer. While adapting its goods and store layouts to local needs, Wal-Mart is exporting the information systems, entrepreneurial drive, and efficiency that made it the world's largest retailer, with $105 billion in sales last year.
JUGGERNAUT. Wal-Mart's assault is barely under way, but already the mighty retailer has changed the rules of the game. Foreign rivals have been forced to sharpen prices and boost service, while suppliers at home and abroad are stretching their distribution systems to jump on the Wal-Mart juggernaut. "Wal-Mart is going to change the retailing landscape internationally exactly the same way it's done domestically," predicts Martin Terzian, chief executive of Pacific Connections Inc., a Corona (Calif.) handbag supplier that recently ventured overseas to serve Wal-Mart.
Certainly, Wal-Mart has made its share of blunders--from poorly translated store signs in Mexico to a failed partnership in China. But the chain is nothing if not adaptable. In less than five years, the international division has grown to more than 300 stores in six countries and Puerto Rico and has more than $5 billion in sales--the biggest foreign operation of any U.S. retailer, measured in sales dollars. On June 3, Wal-Mart announced plans to buy a controlling stake in its Mexican partner, CIFRA, for $1.2 billion. In the fiscal year ended in January, the division posted its first operating profit--$24 million vs. a loss of $16 million in 1995. And more profits followed in the typically tough first quarter. "They really emphasize understanding the consumer and being as efficient as possible," says Procter & Gamble Co. CEO John E. Pepper. "They're bringing that same focus to international."
With Wal-Mart's record $3.1 billion in profits last year, the international division is still a rounding error in the eyes of most investors. But that's the point: If Wal-Mart can develop overseas markets as adroitly as it developed the now-mature U.S. market, it has a shot at retaining its title as the world's biggest growth company, able to generate double-digit shareholder returns despite its enormous revenues. That's especially important at Wal-Mart, where rapid promotions and a rising stock price are at the heart of the employee incentive system. Analyst Jeffrey M. Feiner of Salomon Brothers Inc. figures international sales could total $27 billion, or 17% of Wal-Mart's revenues, by 2000.
But raw growth isn't the only thing driving Wal-Mart. Christiana Smith Shi of McKinsey & Co. predicts the rise of four or five dominant global retailers that will enjoy substantial advantages in pricing, sourcing, and logistics. Such super-retailers will be able to gather the best marketing and merchandising practices from around the globe. Adds retail consultant Daniel W. O'Connor of Management Ventures Inc.: "We're really moving to boundaryless retailing."
Martin, CEO of Wal-Mart's international division, aims to put Wal-Mart among that exclusive group by first extending the chain's domination of U.S. retailing to the rest of North America, and then into South America and Asia. Europe isn't on the drawing board yet, but Martin doesn't rule it out.
Wal-Mart is hardly the first U.S. retailer to venture abroad. Sears moved into Mexico in 1947, while Kmart and Toys `R' Us began experimenting overseas more than a decade ago. All three have stumbled or retrenched in the past few years, in some cases because of problems at home. More recently, Gap, Home Depot, and Costco have added international outlets. But for most U.S. retailers, "international expansion has not been a priority," says Shi. "You've seen them dip their toe in the water but not make a major commitment to building a truly robust international business." Wal-Mart, she figures, could be one of the first.
LIMITLESS. No one else has moved overseas with pockets as deep or an array of goods as broad as the goliath of retailing. In the past five years, Wal-Mart has invested more than $2 billion abroad, mostly in Canada and Mexico. This year, it will spend a further $400 million to add at least 30 stores outside the U.S., including both Sam's Club warehouse stores and supercenters--grocery and general-merchandise megastores. In contrast, Costco plans to spend $150 million this year to add seven stores outside the U.S. "We have the resources to move as quickly as we can take advantage of the opportunities," says Chairman S. Robson Walton, son of founder Sam Walton.
And those opportunities seem almost limitless as Wal-Mart pushes into Argentina, Brazil, China, and Indonesia, as well as Mexico and Canada. In Mexico, half the population is under 19, notes Chief Financial Officer John B. Menzer--and "we know the best is yet to come with their buying patterns." In China, where Wal-Mart has only two stores, he figures total purchasing power will equal current U.S. levels in five to seven years, meaning huge sales of such goods as washers and TV sets. "Knowing that the sales are there and the customer acceptance is there, that's the key," says Wal-Mart CEO David D. Glass. "That unlocks the door for me."
HUGE ARRAY. At least so far, the novelty and vast selections have overseas customers flocking to Wal-Mart. In a three-level supercenter in Shenzhen, China, where the piped-in music features Trini Lopez singing If I Had a Hammer, shopper Hu Xiaomei is impressed with the broad array of merchandise--from fermented bean curd to Gerber baby products to German Bosch tools made in China. "People in China aren't used to getting everything in one stop and buying larger quantities," says Hu, a radio talk-show host. Three Buenos Aires supercenters ring up some 15,000 sales on heavy days, twice as many as a U.S. supercenter. "The prices are the lowest," gushes 29-year-old Laura Cerutti.
Just getting customers in the door isn't enough. Wal-Mart must also prove it can keep costs low enough to fend off top-notch competitors such as France's Carrefour and the Netherlands' SHV Makro, which have been building their reputations abroad for decades. Both are pushing into Asia and are well established in Argentina and Brazil. Smaller, local rivals, such as Coto in Argentina, which has its own hypermarkets, are also rising to the challenge. "These aren't meek, confused retailers that are going to lie down and be rolled over," says analyst Mark A. Husson of J.P. Morgan & Co. At first, Wal-Mart underestimated its rivals. When Wal-Mart moved into Brazil and undercut competitors on some items, Carrefour slashed prices too, sparking a price war.
There were other costly misjudgments, which some former managers blame on hubris and poor planning. "It's ready, fire, aim," says one former executive. "Wal-Mart's so big and used to knocking people over." One early casualty was Wal-Mart's partnership with Thailand's Charoen Pokphand Group to open up stores in Hong Kong and China. The partners split in late 1995 after only a year--amid charges that each side wanted too much control. Wal-Mart also stumbled when it opened its first supercenters in Brazil in November, 1995. Managers there were overwhelmed when Christmas sales ran quadruple that of U.S. stores.
FLIP-FLOP. Wal-Mart has also had to cope with political and economic instability. In Mexico, for example, it first bought 80% of its goods locally to get the best prices. But customers, many of whom had shopped at Wal-Mart in the U.S., were disappointed at the lack of American products, so the retailer changed course. Then came the peso devaluation in December, 1994, and Wal-Mart flip-flopped again. Now, only 10% of the goods sold in the Mexican stores are imported.
What emerged from those early lessons is an overseas blueprint calling for a slightly different kind of Wal-Mart in each country. Though U.S. managers have been a big presence so far, the company hopes to create nearly autonomous units run by native managers who will handle their own buying, training, accounting, and other functions in two to three years. Managers will tweak the Wal-Mart formula to serve their local markets better. "We're building companies out there," says Martin. "That's like starting Wal-Mart all over again in South America or Indonesia or China."
But not everything will be decentralized. In the longer term, stores in different markets will coordinate purchasing to gain leverage with suppliers. Developing new technology--a key Wal-Mart strength--and plotting overall strategy will be done from Bentonville. And in Mexico, Wal-Mart plans to merge its stores with CIFRA's successful chains, once it completes the takeover of its Mexican partner. That will let the chains streamline costs.
Figuring out how to withdraw the support of U.S. managers has been one of Wal-Mart's hardest jobs. Wal-Mart execs admit they first underestimated the support local managers would need when such functions as marketing and the planning of store layouts moved from Bentonville to the country headquarters. It tries to have two American managers in each store for the first year or two. But in Mexico, where Wal-Mart is adding eight supercenters this year, the number of expatriate managers has crept up from 30 to 70.
Wal-Mart's plan for autonomous operations around the globe means high initial overhead in each country, sometimes putting the retailer in the unusual position of having a cost disadvantage to rivals. Wal-Mart figures it will take six to eight stores per country before it can cover its fixed costs. But within three to five years of entering a market, it expects to post higher returns than in the U.S. to offset the added risk.
In setting its targets, Wal-Mart had few retail models to learn from. Instead, it studied international giants such as McDonald's Corp. and Ford Motor Co., analyzing everything from their organizational structure overseas to their profits. Where it made sense, it found partners: giant CIFRA in Mexico, Lojas Americanas in Brazil, and the Lippo Group in Indonesia. Wal-Mart put managers on the ground in some places more than two years before store openings to study the marketplace.
FIX IT FAST. Still, given the combination of the huge assortment--50,000 to 70,000 items in each international supercenter--and inexperienced buyers lacking historical data to fall back on, mistakes were inevitable. Wal-Mart has had its share, from a glut of ice-fishing huts in tropical Puerto Rico to a dearth of snowshoes in wintertime Ontario. The test in a new market, though, is not so much whether mistakes get made but how quickly they get fixed---and there Wal-Mart excels. Analyst Michael Exstein of Credit Suisse First Boston Corp. recalls visiting a supercenter in Argentina last year and finding a typical U.S. store, down to the 110-voltage appliances--which were being sold without adapters in a market where 220 is the standard. But by his second visit four months later, he says, the store had improved on almost all fronts, from a better assortment to better relations with vendors.
For Wal-Mart managers, the international experience has reawakened the kind of entrepreneurism and experimentation that hearken back to the early days under Sam Walton. When merchandisers noticed the heavy pasta consumption in Brazil, for instance, they opened fresh-pasta shops in the stores, a new idea in the market. They added smokehouses in Argentina, given the local taste for smoked meats.
So far, such tinkering hasn't helped much with Sam's Clubs, which have struggled in some markets, especially Argentina. "We've tried a lot of things, but they've not had any quantum-leap impact," Martin says. First Boston's Exstein believes Sam's simply vies with the supercenters for the same clientele. "That's a waste of time overseas," he says. "Forget Sam's, over and out."
LOCAL COLOR. Whenever it finds something that does work, though, Wal-Mart tries to build on it, to become a little more efficient with each new store that it opens. At the San Justo store opened in December in a suburb of Buenos Aires, construction costs were 20% less than at Wal-Mart's first supercenter in Argentina, in which store fixtures were imported from the U.S. This time, 95% of the fixtures were acquired locally, says John Lupo, chief operating officer of the international division.
Wal-Mart is already the dominant discounter in both Canada and Mexico. It has done that without some of the weapons that have proved so potent in the U.S. Its logistics, for instance, are still rudimentary in most foreign markets, where roads, communications, and other infrastructure can be primitive. But the company has already set up simple distribution facilities in each market to consolidate shipments and help control the huge volume of goods sent to the stores. That should cut costs and reduce out-of-stock items. In Indonesia, the distribution center already handles 75% of the goods going to two stores. In Argentina and Brazil, that figure is only about 35%.
CLIMBING ABOARD. Wal-Mart's international expansion is shaking up suppliers, which have already been forced to cut costs and meet stringent shipping requirements to serve the retailer in the U.S. Wal-Mart executives complain that, so far, many U.S. vendors lack global expertise and seem ill-prepared to supply the retailer in places such as China and Brazil. That could force Wal-Mart to develop more of its own private-label goods, as Carrefour has done. "It really would be dumb for U.S.-branded manufacturers to just throw in the towel," warns Martin.
But some are rapidly climbing onboard. Consider Pacific Connections. CEO Terzian says the company, with an estimated $70 million in sales this year, would never have ventured overseas without Wal-Mart paving the way. It's now serving its longtime U.S. customers in Argentina, Brazil, Canada, and Mexico. The investment necessary to do that means Pacific won't turn a profit on the business for a few years, but Terzian says he has no choice. "If we don't go international, other people will," he warns. "Americans have to wake up. We are not good international marketers, and Wal-Mart is giving us an opportunity."
Meanwhile, foreign suppliers see a chance to upgrade their information systems and expand their sales throughout the Wal-Mart empire. "Wal-Mart came in here with a very strong policy of partnership with suppliers," says Luiz Fernando Furlan, chairman of Sadia Concrdia IndPound stria e Comercio, a major Brazilian food producer. Furlan says that Wal-Mart's arrival is forcing rivals to upgrade their information systems and to work more closely with suppliers to improve quality and reliability.
That will sound familiar to companies in the U.S., where Wal-Mart has changed the face of retailing in the past dozen years, slowly squeezing out competitors and suppliers unable to meet its standards. Its corporate culture may or may not play in the rest of the world, where it faces entrenched rivals. But it would be a mistake for those rivals to underestimate the threat. Just ask Kmart.