WAL-MART: Will It Lose In Translation By Nupur Capila
Are global food retail heavyweights hitting the right nerves in
international markets with the "one size fits all" – knock down
prices, warehouse-style superstructures – approach? Appealing to
discount-hooked customers may garner high yields in rookie mass
markets but does always not guarantee success in a competitive
economy. The trick for food retailers lies increasingly in zeroing in
on non-price differentiators. As Wal-Mart could discover, if India's
home-grown giants cash in on first-mover advantages.
After eight long, unprofitable years, Wal-Mart Stores, Inc. is
finally prepared to admit defeat on one of the world's most
lucrative – and punishing – retail battlegrounds - Germany. The US
goliath announced on July 28 that it had agreed to sell its stores
there to the German retail group Metro AG. The move, along with the
decision in May this year to exit South Korea, throws up questions on
the viability of transferring regionally successful concepts to a
world audience with equally satisfying payoffs.
The world's largest retailer is leaving Germany by selling its 85
stores to Metro AG at an estimated $1 billion loss. Metro, one of the
largest German retail conglomerates, will fold the hypermarkets into
its chain, Real, which is bigger than Wal-Mart (550 stores) but is
also ailing. Wal-Mart's German stores employ 11,000 people and
generate €2 billion, or $2.5 billion a year in sales, according
to Metro.
By adding those stores to Real's 550 supermarkets and hypermarkets,
Metro said it could fortify its purchasing power in what is the
world's third-largest retail market. The company said it was
committed to hypermarkets.
"The locations of Wal-Mart outfits fit very well into our network and
we will have great synergies in logistics, marketing, sourcing and
other parts," says Juergen Homeyer, an official spokesperson at Metro
AG.
"We plan to convert the Wal-Mart stores into Real stores. Both are
hypermarkets and their concepts are in many ways not fundamentally
different."
The decision to sell out to the Metro Group came two months after Wal-
Mart sold its 16 stores in South Korea to Shinsegae Co. for US$ 882
million and amounts to a rare retreat by the world's largest retailer
from its breakneck global expansion.
The Germany debacle has not surprised many. In fact, even as early as
September 2000, Commerzbank Securities analyst Jurgen Eliers wrote in
one of Europe's leading food retail magazines Elsevier Food
International: "The retail giant's initial optimism on entering the
German market has waned, and its managers now have a much more
realistic view of the time required to achieve a proper return on
capital employed."
Analysts say Wal-Mart never really got a grip on a market
characterised by gruelling price competition, well-entrenched
discounters and the cultural resistance of German shoppers to
hypermarkets.
"Both South Korea and Germany are similar markets – they are isolated
(either geographically or by language) and limited in growth due to
stable populations. In both cases, Wal-Mart never got any traction. I
think they judged that the rewards of eventually gaining a dominant
market share were going to simply be too costly in both cases," says
Stephen Hoch, Chair, Marketing Dept., Wharton School of Business, USA.
Figures Love Goel, CEO, Growth Ventures Group, a US-based investment
firm, "Germany's retail markets are among the most competitive in the
world with well-dug in discounters; Wal-Mart did not have the same
scale advantages in Germany when it comes to distribution and
advertising that it has in the US. Despite the tough outlook, Wal-
Mart must have felt it was imperative to be in Germany because of its
size."
However, on the upside, backing away from troublesome markets allows
Wal-Mart to pursue other opportunities globally as well as defend its
position domestically.
"Even a huge company like Wal-Mart can't afford to have a loss making
operation bleeding so much that it hurts the other foreign
operations. I therefore view its decision to divest its German
operation is a radical cure to refocus on other operations, e.g.
China and if the government adjusts the legislation for foreign
ownership India," says Pascal Kuipers, chief editor of Netherlands'
Elsevier Food International magazine.
Some of Wal-Mart's troubles stem from the way it broke into the
German market in 1998.
Tactically
In 1997, Wal-Mart acquired 21 Wertkauf hypermarkets for an estimated
price of Euro 1.23 billion for operations with an annual turnover of
Euro 1.22 billion (including real estate). Prior to the acquisition,
Wertkauf was profitable but looking to be heading for trouble – sales
floor area productivity was falling and pre-tax returns on sales
margins were under pressure. In the eight years leading up to its
sale, the retailer had not expanded; insufficient economies of scale
now prevented them from offering competitive prices at retail.
A year later, Wal-Mart bought over 74 poorly-managed Interspar
hypermarkets, operated by Spar Handels AG (a subsidiary of French
company Intermarché) for Euro 562 million (excluding real estate).
Not only were the Interspar stores decaying physically and manned by
sub-standard staff, Wal-Mart took them in on sub-tenant basis (Spar
remained major tenant). This meant that the renovation of the outlets
could not go through before Wal-mart remoulded its contracts with the
landlords, something that took until the beginning of 2001 to
implement.
Although analysts believe that acquisition rather than organic growth
would have been the only way for Wal-Mart to make any impact in
Germany, the retailer simply chose the wrong ones to acquire and also
underestimated the complexities of German real estate laws and labour
legislations.
By acquiring the outlets of Wertkauf and Interspar, it wound up with
a ragbag of stores, geographically dispersed and often in
inconvenient locations.
As endorses Dr. Bernd Hallier, president, EuroShop: "One was a
profitable hypermarket-company and the other merely passed on its
ailing outlets. With this skewed assortment-mix, customers of the
first one missed their regional flavour while the other outlets
anyway had been only trouble-makers."
"Wal-Mart was keen to expand beyond the US in the late 1990s and it
chose Germany for obvious reasons – it was the largest grocery market
in Europe. However it chose the wrong retailers to take over as they
did not have critical mass and many of their stores were in secondary
locations," adds Nick Gladding, a senior retail analyst at Verdict
PLC, a unit of Datamonitor, UK.
Strategically
A problem of economies of scale, emanating from high-handedness and
under reckoning. Cracking the food segment in Germany is hard
business. Margins on food sales touch a ceiling on 1.0 per cent while
those in non-food segments are much higher – ranging between 2.0 to
6.0 per cent.
"Typically, the higher the food share of total sales, the lower the
profitability of a German hypermarket," says Eliers.
The annual German food/drinks/tobacco-market is estimated at about
Euro 191 billion. "However, stagnation is setting in due to
saturation of the market (decrease of aging population) and bad
economic development, meaning that in retail, the last few years have
driven
run-down competitors out of the market," elaborates Dr. Hallier.
In Germany, two primary discounters, Aldi and Lidl, dominate the
grocery business, with smaller shops that feature cut-rate, though
still good-quality, food. Aldi also heavily promotes sales, featuring
deeply discounted merchandise, ranging from wine to garden hoses,
which draw customers back.
"The Wal-Mart that decided to set up shop in Germany in the late 90's
is a different company than it is today. After successful operations
in Canada and Mexico, it was confident that it had the muscle to play
a role in any market by just establishing a blueprint of its US
formats in overseas markets. Even Germany, which by then already
built a reputation as a graveyard for foreign retailers, as this
market is fiercely competitive and dominated by hard discounters who
educated the German customers to be shrewdly price conscious," points
out Kuipers.
"Clearly Wal-Mart's strength is low prices and low costs. In Germany,
however, it had strong low price competition; they simply did not win
the battle," adds Professor Hoch at Wharton.
While Wal-Mart's vast size gives it enormous leverage with suppliers
of non-food items, it needed to buy much of the food for its German
stores locally. And there, it lacked the muscle of pitched in
discounters like Aldi, which has 4,100 stores and a presence in
nearly every town in the country. Wal-Mart's low store penetration
also meant that it could not command the volumes to practice its
legendary vendor-managed-inventory (VMI) strategies in Germany.
"Being able to compete on grounds other than price was particularly
important in Europe where it did not have the supplier base to
deliver low prices as profitably as in the US," adds Gladding.
"Consumer-level loyalty is typically low; Germans are loyal to the
cheapest price. Period. Each housewife has five to seven outlets for
cherry-picking and local butchers/bakers etc. additionally too,"
according to Dr. Hallier.
Unfit locations contributed. Germans didn't want to travel outside
urban areas, while Wal-Mart's purchased stores were largely parked in
out-of-town locations. Some placements were downright incompatible
with Wal-mart wholesome family image – a store in Wiesbaden was
located a step or two away from two sex shops!
"The trade-structure in Germany is very different from the US market.
Small neighbourhood-discounters dominate consumers' behaviour.
Germans like to walk for shopping. Wal-Mart had just no homework on
these basics," Dr. Hallier says.
Operatively
More strains mounted from the way it functioned. The company
initially installed American managers, who took orders from the
Bentonville headquarters and barely delegated decisions to locally
hired staff.
"Operatively, decisions had been not decentralised – they were taken
largely at the international headquarters. Germany is not the US and
good managers here want to take decisions and not orders," comments
Dr. Hallier.
In addition, the American managers – uninformed on the basics of
German shopping orientations – made cultural slip-ups, like offering
to bag groceries for customers (Germans prefer to bag their own
groceries) or instructing clerks to smile effusively at customers
(Germans, used to curt service, were disoriented. Some shoppers even
interpreted the grins as flirting).
Wal-Mart later went through a series of German managers without much
success, before appointing David Wild a former executive at Tesco as
president of its German operations. One's of Wild's strategies was to
introduce packaged meats at the stores, not realising that German
shoppers traditionally made meat purchases from their neighbourhood
butchers.
"Wal-Mart seriously underestimated the German market; at one time
this country (Europe's largest consumer market!) was managed on a
part time basis by the country manager coming from ASDA," Kuipers
adds.
Adds Love Goel at GVG: "The truth is, they were never able to
culturally connect with the German customers – from basic things like
bagging groceries to levels of service."
Wal-Mart, which doesn't allow its workers in the U.S. to have unions,
also battled with German workers over labour policy issues,
culminating in strikes. They didn't understand that in Germany,
companies and unions are closely connected. Bentonville didn't want
to have anything to do with unions. They thought labour unions were
an offspring of communist ideology.
A policy against dating between employees was seen as profoundly
invasive and later struck down by a judge.
"Wal-Mart may be the world's largest retailer but it has had a humble
track record outside the US. Tesco and Carrefour have been much more
successful internationally – they have understood local culture
better. They also give local management more freedom to develop
stores and product ranges in response to local conditions and
competitors," Gladding says.
Expensive Lessons
Despite these (expensive) setbacks, Wal-Mart does continue to thrive
in many countries outside the United States. The retailer had
international net sales of $7.6 billion in June 2006, a 29.5 per cent
increase over June 2005, though nearly two-thirds of that gain came
from acquisitions.
And it is forging ahead with an aggressive programme of foreign
acquisitions. In a single week last November, Wal-Mart completed the
purchase of the Sonae chain in Brazil, bought a controlling stake in
Seiyu of Japan, and became a partner in the Carcho chain in Central
America. The deals added 545 stores and 50,000 employees to Wal-
Mart's overseas empire.
Starting from scratch 14 years ago, Wal-Mart International has grown
into a $63 billion business operating across 13 countries; it is the
fastest-growing business unit of the company. Even subtracting one-
time gains from acquisitions, it grew at nearly 12 per cent, about
double the rate of Wal-Mart's American stores.
Sustaining that pace is critical for Wal-Mart, because high fuel
prices have helped stifle the buying power of Americans. In June,
store traffic in its home market declined. Wal-Mart estimated that
its sales in the United States in stores open at least one year
increased only
1.0 per cent to 3.0 per cent in July.
The company stresses that its international expansion agenda and
strategy remain unmoved by the recent reverses.
"There has not been a re-work of our international strategy. We are
committed to continued growth. In fact, international is one of the
leading growth opportunities for the company. In 2006, we will open
200 new stores outside the US," says Amy Wyatt from the International
Corporate Affairs department at Wal-Mart Stores, Inc.
"According to McKinsey there are four leading markets of the future:
Brazil (in which it already built a strong position), China (where it
is also active), Russia (a booming market, but without its presence)
and India (here it is waiting for a more liberal legislation). There
is little doubt that Wal-Mart knows this and there is no question
that it will focus on emerging/developing markets," nods Pascal
Kuipers at Elsevier Food International.
Yet, these are all countries with distinctive and disparate cultural
flavours, values and consumer shopping behaviours. Also, Wal-Mart's
imposition of its brand of corporate culture on non-American
employees has long been a topic of dissent and discussion. Will it be
able to adapt? World no: 3 Carrefour – which operates across 29
countries – is often stated as being more successful is localising to
foreign markets because of its greater spread across the globe.
Cultural alignment has always been the weak spot for Wal-Mart, agrees
Kuipers. "It will always be an icon of American business imperialism
for many people and it's impossible to completely turn this
reputation around."
Wyatt responds by saying that her company's key to localisation is
its associates. "We have very talented local associates in each of
our international markets that are experts on the retail industry in
their respective markets. They understand local consumer needs and
tastes and are responsible for tailoring our merchandise assortment
to cater to local consumers."
The India Connection
And there is the big question: India, when and how? There is no
doubting Wal-Mart's intention as far as the Indian sub-continent is
concerned. Is FDI the only thing arresting its entry into what the AT
Kearney Global Retail Development Index for 2006 ranks as "most
attractive destination for mass merchant and food retailers"? Or is
there more?
While that is the subject of another article, we can touch upon the
background of the Wal-Mart-India connection here.
The retail dynamo will be sourcing goods worth an estimated $1.5
billion from India this year and earlier this year, the CEO of its
international operations John Menzer confirmed India as being the
retailer's fastest growing sourcing market.
"We continue to monitor the Indian government's policy on FDI and
continue our market research. Our liaison office application was
recently approved; we are proceeding with plans to open a small
office in Bangalore focused on retail market research," Wyatt says.
Analysts believe the retailer simply has to enter India, primarily to
drive its growth.
"India is very attractive for three reasons first, it offers a larger
retail sector worth almost $380 billion which is growing explosively;
second, its retail sector is – in order of magnitude – less
competitive than Germany or Korea; and thirdly, its organised retail
sector is poised to grow at least 30 per cent annually over the next
decade. Most importantly, India's middle class is hungrier for modern
retailing practices and products sold by Western retailers like Wal-
Mart," says Love Goel at GVG, USA.
The sourcing connection will certainly back up its retailing
operations in India, but what of location and India's less-than-
efficient inland logistics? Detecting just these chokepoints,
domestic goliaths like Reliance Industries are investing millions of
dollars in backward integration, market development and location
sourcing to lay the foundation of its multi-billion dollar retail
aspirations. The company has already signed contract farming
agreements with the West Bengal and Punjab governments over the past
few weeks to set up rural business hubs (RBHs), which will form the
spine of RIL's retail initiative in becoming the nerve centre of its
sourcing chain for fresh fruits, vegetables, milk and other farm
products.
Reliance is also in the process of acquiring or negotiating to
acquire major retail cooperatives in West and North India, which will
give it the critical mass to achieve economies of scale and allow it
to dictate terms to its vendors. With Reliance's entry – taking off
with the opening of its first food outlet this month in Hyderabad –
India's retail transformation is expected to permeate the nation's
semi urban and rural regions in a significant way. That could have
two meanings for the strategists at Bentonville.
One, Reliance and other expanding mass market and discount retailers
such as Big Bazaar, Subhiksha etc. would capture major markets – in
terms of both consumer spends and lucrative locations – ahead of the
Wal-Mart invasion. That would leave the American to try and gain a
foothold on the back of non-price differentiators.
"They could work the other variables – superior and more convenient
locations, higher service levels, and superior produce and prepared
food offerings," suggests Stephen Hoch at Wharton, USA.
"Low prices are increasingly a non-distinguishing issue – especially
if affluence increases, consumers are looking for more. If you are
beaten on price, you stand there empty-handed," warns Kuipers.
Given Wal-Mart's predilection for out-of-town locations and assuming
the best have already been engaged by the domestic biggies, where
would the retailer park its giant stores? Retail space in India is
growing by huge leaps and bounds, but largely in the form of malls –
not suitable for Wal-Mart's signature single-storey, wide-angle
formats. Given the skyrocketing real estate bills, it would perhaps
have to go the vertical route even in advantageous spaces.
Two, the permeation of organised retailing into the hinterlands could
prepare the market for the Wal-Mart format, and allowing it to study
other operators and gain from changed consumer shopping habits.
Already, organised Indian retailers and national media channels are
levelling lifestyle tastes from Tamil Nadu to Kashmir and from Aizwal
to Aurangabad – from Kellogg's breakfast cereal to Titan watches,
from Annapurna atta to McDonald's mahaburgers. Perhaps the
marketplace could be even more homogenised by the time it enters,
thanks to some serious good work done by the Indian retailers in the
interim.
So, what will Wal-Mart do? Will it invade as soon as it is allowed
access? We don't think so. There is some serious homework being done
at the HQ of the world's most powerful retailer. And let us remember,
while it may have faltered occasionally, Wal-Mart remains a role
model – for its elementary, go-for-the-gut discount strategy, its
path breaking Vendor Managed Inventory innovation, its global
networking and simply, its mind-boggling size.
Also, Wal-mart is not the only retail major to have experienced
failure in foreign territories. Tesco and Carrefour, the world's
second- and third-biggest food retailers by market value, have also
exited markets where they failed to win market share. Last year, they
agreed to swap superstore chains in central Europe and Taiwan to step
back from international expansion that left them over-extended. This
year, Carrefour too, backed out of South Korea.
"As Wal-Mart enters new markets it is learning an important lesson –
you adapt to the local culture and customs. They are very aware of
this lesson; it is just that it takes time, resources and energy to
learn. But, as they become good at that, they will truly be a world-
class retailer to reckon with," says Goel.
Wal-Mart is still a young company. If it succeeds in building an
operation in China, it will have enough growth potential to last
decades. Clearly, it is not an adversary to be underestimated.
