Wal-Mart's Overseas Stumbles
By Carol Matlack
Can the Wal-Mart juggernaut be exported around the globe? That's clearly what executives of Bentonville (Ark.)-based Wal-Mart Stores (WMT ) are hoping as they gear up for a major push into China (see BW Online, 7/26/05, "Wal-Mart's China Card"). But the U.S. discounter's experience in Britain -- currently its biggest overseas market -- shows that even a giant can stumble in unfamiliar terrain.
After acquiring British discount chain Asda in 1999, Wal-Mart quickly established itself as a formidable contender. With 10% average annual sales growth, Asda nearly doubled its market share, pulling ahead of Britain's J Sainsbury to become the country's No. 2 retailer, behind local discounter Tesco.
CHANGING THE GUARD.
Now, though, Asda's momentum has stalled. Although it doesn't release sales figures, Asda acknowledged in May that first-quarter growth was in "low single digits" and that operating profits were below expectations.
Meanwhile, Asda's rivals are gaining ground. Figures released by survey group Taylor Nelson Sofres in late June show that over the past year, Asda's market share slipped from 16.5% to 16.4%, while Tesco's grew from 27.9% to 30.3%, and Sainsbury's rose from 15.3% to 15.9%.
In March, Asda replaced its chief executive, and in the past few weeks, it has announced two major staff realignments, cutting hundreds of management jobs while putting 1,200 more employees into stores to improve customer service.
Andy Bond, Asda's new CEO, has promised to reignite growth. He has solid credentials, having become the company's chief operating officer last September after four years in charge of its successful George line of low-cost apparel.
Bond's early moves are winning praise. "Asda had become slightly bureaucratic, with too much mid-management creeping in, while there were often long queues in the stores," says Bryan Roberts, an analyst with London-based M+M Planet Retail.
But Bond faces several tough challenges. One is the surprising strength of Asda's competition. Tesco has lured shoppers into stores with aggressive price-cutting while squeezing deep discounts out of suppliers -- tactics long used successfully by Wal-Mart in the U.S. No. 3 Sainsbury also is slashing prices and could reclaim the No. 2 position from Asda this year, analysts say.
A key Asda weakness is its lack of smaller supermarkets and convenience stores. Britain, like many European countries, has placed sharp restrictions on construction of "big box" stores in suburbs and rural areas. While most Asda stores fall into that category, two-thirds of Tesco's outlets are small or midsize stores, according to Retail Forward, a Columbus based retail consulting group.
"Tesco has a better portfolio," says Steve Spiwak, a Retail Forward analyst. "Even if [Asda's] big stores are doing well, it's difficult to expand with that format."
WATCH ON THE RHINE.
Could Asda's woes make a serious dent in Wal-Mart's bottom line? Probably not. Wal-Mart's 2004 sales topped $285 billion, and though it doesn't release country-by-country figures outside the U.S., most analysts peg Asda's sales at only about $26.5 billion. Still, that represents nearly half of all Wal-Mart sales outside the U.S.
Wal-Mart faces even worse problems in Germany, where it has struggled since acquiring two local retailers in 1997. Its German nemeses have been the Aldi and Lidl chains, "hard discounters" that operate relatively small stores stocked with a limited array of house-brand goods. Aldi, Lidl, and other discount chains now are expanding rapidly into Eastern Europe, where Wal-Mart also hopes to expand.
Wal-Mart has experimented with smaller stores in Britain, including six George apparel stores now operating on a trial basis. Yet most industry watchers doubt the U.S. company will make a major break with its traditional reliance on megastores.
That's why China looks so appealing. Unlike Europe, China places few restrictions on big-box stores. And with Chinese economic growth expected to top 8% this year -- more than twice the level in Britain and four times the rate across much of Western Europe -- Wal-Mart has plenty of reasons to seek its fortune in Asia.
Matlack is Paris bureau chief for BusinessWeek
Edited by Patricia O'Connell