Wal-Mart's British Accent Needs Polish
Six years after it entered the British market with its bold $10.8 billion purchase of ASDA Group Ltd., Wal-Mart Stores Inc. (WMT ) is suddenly struggling. Following five solid years, sales and profits at the discount chain have stagnated in 2005. "We're not where we used to be, and we're not where we want to be," ASDA President and Chief Executive Andy Bond told a retail conference in London on Oct. 18. "I'm not saying it's bad. But it's not good enough."
Britain's retail scene has become increasingly competitive since Wal-Mart made landfall in 1999, intensifying the nation's price wars. Tesco, the No. 1 player, with $51.3 billion in sales in Britain, has nabbed more than 30% of the grocery market, according to London researcher TNS Superpanel. ASDA's share, meanwhile, has held steady at just below 17% for the past two years. And while ASDA and Tesco log the same sales per square foot, ASDA's operating margins of 4.8% are lower than Tesco's 6.2%. Although Wal-Mart is famed in the U.S. for wresting deep discounts from suppliers, Tesco is the champ in Britain because of its size. "Tesco has a much bigger stick to beat local suppliers with," says Bryan Roberts, retail analyst at London consultancy Planet Retail.
Another issue ASDA must contend with is Tesco's broad appeal. ASDA attracts mostly lower-income shoppers, while Tesco ranks No. 1 among both blue- and white-collar workers. It seems that no matter what shoppers want -- be it portobello mushrooms or plain white ones -- Tesco has it. "I love Tesco's," says Lubna Khan, a 32-year-old Pakistani stay-at-home mom in London. "Even the smallest shop has everything I need."
With outlets as small as 300 square meters to as large as 5,500 square meters, Tesco has a presence on both the High Street and the out-of-town areas. By contrast, ASDA's reliance on the megastore format has hampered it, since local zoning laws do not favor big-box stores -- or their shoppers. Nicola Hall, a 24-year-old British nurse who resides in central London, is a case in point: "I do prefer ASDA as it's cheaper, but there aren't any near me." So where does she shop? Tesco.
To tackle this issue, ASDA has opened 10 small stand-alone stores since 2003 that sell its popular George clothing line, as well as five ASDA Living stores that carry household furnishings, toys, and jewelry. "There's no refuting the fact that it's a tough property market," says Bond, who was promoted to CEO in March. "That's one of the reasons we are looking at new formats. All of those are trying to bring ASDA to a broader customer base." Analysts say the new formats look promising.
Still, Bond faces strong head winds. Britain's economy is slowing down, with retail sales in the third quarter rising by just 1% over last year's level. Plus, there are signs that ASDA, which accounted for 45% of Wal-Mart's $56 billion in international sales in the 12 months through Jan. 31, is losing business. Wal-Mart's trademark "everyday low prices" formula is no match for the endless promotions run by rivals Tesco and No. 3 J. Sainsbury. According to a TNS survey, ASDA lost $17 million in sales to other retailers in the 13 weeks through Oct. 9, vs. the same period last year. During the same time frame, Tesco gained $414 million in sales.
Most analysts are optimistic that Bond will turn ASDA around. He's adding healthier food sourced from local producers, and selling new products online, such as contact lenses and airline tickets. In July he announced about 1,400 job cuts. But what about beating out its archrival? "Tesco is too far ahead," says Gavin Rothwell, senior analyst at Verdict Research in London.
By Laura Cohn, with Maha Aziz in London