World Vision

Wal-Mart Stores, bound by a saturated domestic market, is ramping up its international operation to be a world dominator in food retailing. Since the Bentonville, Ark.-based retailer opened its first store in Rogers, Ark., in 1962, the core focus has been on rolling out big box units throughout the United States. But late last year something seismic happened. Wal-Mart said it would scale back its

Wal-Mart Stores, bound by a saturated domestic market, is ramping up its international operation to be a world dominator in food retailing.

Since the Bentonville, Ark.-based retailer opened its first store in Rogers, Ark., in 1962, the core focus has been on rolling out “big box” units throughout the United States. But late last year something seismic happened. Wal-Mart said it would scale back its domestic store openings from 170 supercenters to 140 this year. This compares with previous averages of 200-plus stores a year. Capital expenditures instead would increasingly be skewed to overseas markets with Wal-Mart International (WMI) receiving 65% of investments in new space even though it represents only 24% of Wal-Mart's total sales.

This strategy has been well received by Wall Street analysts and retail experts as the international operation now represents the most exciting growth area for Wal-Mart when judged on key parameters. Consider these facts: Sales at WMI grew 17.5% last year, compared with 5.8% at Wal-Mart stores and 6.7% at Sam's Club. Operating profit overseas grew 11.8%, compared with Wal-Mart stores at 5.4% and Sam's Club at 9.3%.

Deborah Weinswig, analyst with Citigroup Global Markets, New York, supports Wal-Mart's overseas focus. “Wal-Mart International is increasingly becoming an important valuation driver and part of Wal-Mart's growth strategy. We view the international division as the company's next leg of growth,” she stated.

Weinswig cites the big switch in growth strategy as being largely due to the struggle Wal-Mart has had in growing its domestic square footage on a sufficiently profitable basis. Although it has been able to develop plenty of real estate, Weinswig said cannibalization had become a problem and as a result its returns on capital investments disappointed the financial community.

David Rogers, president of DSR Marketing Systems, Deerfield, Ill., pointed out that in certain areas, Wal-Mart sought to put rivals out of business with its “market development,” which effectively is a “saturation bombing” strategy.

Oklahoma City is an example of that somewhat flawed domestic strategy from which it has now pulled back. Its 55% market share enabled it to deliver more cost-efficient marketing and reduce its overheads, but its like-for-like sales suffered from cannibalization.

In contrast, finding profitable square footage in overseas markets and emerging economies is proving to be a much more fruitful exercise for the company, and on a five-year compound annual growth rate (CAGR) Citigroup is forecasting WMI growth will be in the mid-double digits compared with the mid-single digits in the domestic market.

Even though WMI has experienced some failures in the world arena — most notably it pulled out of South Korea and Germany in 2006 — it maintains a formidable presence overseas. According to Citigroup, WMI has grown sales at a 16.8% five-year CAGR from 2001 to 2006, compared with 9.7% for Wal-Mart's U.S. sales.

“[WMI] is less than 25% of total sales, so people think it's a small bit, but this is a loss of perspective,” said Ben Miller, head of research at international food and grocery experts at IGD in Watford, United Kingdom.

“WMI is a $90 billion business that would be the fifth-largest global retailer in the world. It is bigger than Kroger, Albertsons and Supervalu. It is easy to lose track of this fact.”

Placing it just below Wal-Mart U.S., Carrefour, Tesco and Metro Group as the leading global players, WMI stands a good chance of moving up the list based on its international growth rates.

What is interesting about the international business, Miller said, is that it comprises a significantly more diverse portfolio of operations than the U.S. “It's a lot more varied. International maturity is an acceptance of multi-format and multi-brand.”


This is partly due to Wal-Mart's strategy of entering a country that has typically involved purchasing a relatively small-scale local operator, which it has then rolled out aggressively either organically or through further acquisitions. (Asda as an entry into the U.K. was the big exception.) The well-rehearsed plan is to then introduce Wal-Mart's well-respected back office systems and look to gain some synergies between the new operation and the U.S. “mother ship.”

Wal-Mart's current overseas focus represents the third phase in its international development, which began in the late 1990s with its “learning phase.” At that time, Miller said it looked to enjoy early exploitation of its new markets. In 2000, its second “refining phase” involved the reworking of some of its practices along with a consideration of the potential of its overseas business.

Last year saw its entry into its third “unlocking value” phase, which involves it looking to generate greater returns from its overseas businesses. This has been driven by a desire to be more ROI-focused as Wall Street has more aggressively challenged the company on its rate of return.

This third phase splits into a number of components. Firstly, there is portfolio optimization forcing the company to make exits from unprofitable markets — namely South Korea and Germany, where it believed it would not achieve its required levels of returns.

Secondly, there is greater drive toward global leverage that not only involves enjoying market-beating buying terms on general merchandise and food but also the transfer of best practices between countries.

As an example, Bryan Roberts, global retail research manager at PlanetRetail, London, said U.K.-based Asda has developed a successful premium private-label “Best” range that is now going out to Canada and Mexico and is possibly also on trial in Japan. And the low-income format Bodega, developed in Mexico, is being replicated in Argentina and Brazil as the Toda Dia format.

Another asset within WMI that is being increasingly leveraged globally is the expertise of people. Roberts said there is “fluidity” with management that shows it has learned from its exploits in Germany, where it simply put ex-pats into senior jobs and ended up with a “hideous nightmare.”

In contrast, it is now much more sensitive to the rest of the world, said Rogers of DSR Marketing, through its utilization of international management rather than solely using home-grown executives. In the past year, a large amount of maneuvering has occurred, with Asda Chief Operating Officer David Cheesewright moving over to head up Canada, and a number of senior U.S.-based executives moving over to help with the Japanese business.

Several new international hires have also taken place, including Rob Cissell from the U.K., who has been appointed COO of Wal-Mart Supercenters in China, and Stephan Fanderl, former boss of hypermarkets and supermarkets at German-based Rewe, who has joined Wal-Mart to develop its business in Russia and Eastern Europe.

The final component in unlocking value is the better tailoring of its offer to each market. “Traditionally, this has not been a great strength of the company and there was a lack of tailoring to the tastes of local markets,” Miller said.

He cites the Chinese as being addicted to offers, which meant that market was not especially suited to everyday low prices, but the heavy communication of price rollbacks Wal-Mart has given shoppers creates the feeling of a high-low offer that ideally suits the local market.

Weinswig points to a similar situation in the U.K. with Asda where its rigidly sticking to EDLP had left it open to attack from major rival Tesco. “It was shocking that they had not couponed. They'd tried to be consistent [with EDLP] but with Tesco being aggressive, it had to bring in promotions. They should have done it a long time ago.” (See “Asda Back on Track,” Page 20.)

The combination of all these factors undoubtedly has had a marked effect on the performance of WMI with the result that Weinswig suggests it is performing “amazingly well” in its key markets — especially Canada, Mexico, Brazil and, more recently, the U.K.

Emerging markets also offer it great potential, such as China, India and Russia, but these are still relatively immature. But it is not all smooth sailing for WMI. Japan remains a problem child in which Wal-Mart still has to sort out some serious issues.


Taking a look at each of Wal-Mart's key international markets gives a flavor of the variety of businesses that it now operates around the world and the future prospects in each of these markets.

Mexico

Wal-Mart, the No. 1 player in Mexico, generates $20 billion in annual sales derived from a variety of formats that enable it to focus on the whole spectrum of shoppers from value-conscious to affluent. It even operates a total of 349 restaurants, which helps make it bigger than the next three largest operators in Mexico combined.

Weinswig believes the country is a “standout” in Wal-Mart's portfolio. She applauds management on its success in adapting to the local market, and believes its diversified formats are benefiting the rest of the Wal-Mart business. For example, the smaller-format stores in the U.S. currently in trial run are said to be derived from the Mexican business.

PlanetRetail expects the focus of future store openings to be on the low-income segment with an acceleration of the smaller format Mi Bodega Express. This could account for 60 of the 200 new outlets planned for Mexico in 2008. This tactic allows Wal-Mart to target towns with fewer than 50,000 people of which there are nearly 3,000 locations.

It illustrates how the retailer has managed to expand its presence in Mexico. Wal-Mart now has only 47% of its stores located in Mexico City compared with 70% in the 1990s. Expansion calls for an 11% increase in capital expenditures this year to $1.2 billion, a further indication of how important Mexico is to Wal-Mart.

Canada

Wal-Mart has built an $11 billion business in Canada. It expects fast rollouts of supercenters will significantly boost sales.

This expansion is being spearheaded by David Cheesewright, who recently moved over from Asda in the U.K. Roberts believes it is a logical personnel move because Canadian supercenters have many similarities to the Asda superstores. “They are Asda-esque with their fresh produce, private label and stylishness, so clearly there is some influence. And they are going gangbusters,” he said.

The focus on supercenters follows the gradual introduction of a greater share of food into the predominantly general merchandise stores that Wal-Mart has operated in Canada since it bought them from Woolco in 1994. Some of these have recently been converted to the supercenter format, which when combined with new store openings has enabled the company to rapidly grow the market to 31 stores.

More supercenters are planned as Wal-Mart vies to take market share from local food retailer Loblaw where coincidentally the newly named president, Allan Leighton, was a key architect behind the resurrection of Asda before its eventual purchase by Wal-Mart in 1999.

Brazil

The potential for Wal-Mart in Brazil was highlighted in a recent report from Citigroup that suggested it could be a bigger opportunity than Mexico, which currently has sales of $20.5 billion compared with Brazil's $8 billion.

This is feasible given a 200 million population — twice that of Mexico. Many shoppers are attracted to Wal-Mart's Toda Dia and Maxxi formats that cater to the country's growing class of low-income consumers. These formats are to receive 60% of new space allocations in the country, according to PlanetRetail.

Such growth is a justification of Wal-Mart's methodical development in the country that began slowly in 1994 as a joint venture with Lojas Americanos and the opening of a handful of Wal-Mart-branded outlets.

Once established and backed by an improving Brazilian economy, Wal-Mart accelerated its expansion through the purchase of Bompreco and its 118 hypermarkets and supermarkets in 2004, and the Sonae Brazilian operation in 2005.


Aiding market growth is its multi-format strategy that is enabling it to open smaller stores in rural markets and for in-filling in larger urban areas. Wal-Mart's success in Brazil may be hurting Carrefour. Once Carrefour's most profitable market, business in Brazil now shows a loss for the retailer.

According to IGD, Wal-Mart now has an 11% share of the “formal” market compared with Carrefour at 12% and France-based Casino Groupe-owned CBD at 16%.

Japan

The entry of Wal-Mart into Japan through the acquisition (via various options) of the 400-store Seiyu business has been nothing but a headache for the retailer. The country represents Wal-Mart's fourth-largest market with $4.3 billion in sales.

The problems include the back-end infrastructure, which involve Wal-Mart dealing with Japan's multi-tier wholesalers rather than through a centralized warehouse model that it utilizes in other markets. “It is trying to introduce as many back-office systems and IT tools as possible, but culturally it is difficult as manufacturers don't like dealing with retailers,” said Miller.

Japanese consumers' preference for high-quality produce with high-low pricing policies promoted through fliers delivered to homes each week further complicates Wal-Mart business in Japan.

But because Japan is the world's second-largest economy, Wal-Mart is clearly committed to staying in the market, as was evident by its decision in late 2007 to take up the option on the remaining shares in Seiyu that it did not own. It has also injected new management into the company in an effort to turn the business around.

However, Wal-Mart is not without its critics. Rogers said Wal-Mart should dump the business. “It's doomed. Japanese consumers are small-store-oriented and don't have the home storage for hypermarket buying. It was a mistake to buy out Seiyu as it simply maximizes the disaster. It is similar to Germany as they [Wal-Mart] have not understood consumers.”

China

A key element of the strategy within China is to target third-tier cities and towns where other global retailers have chosen not to venture, having instead focused purely on the very large and increasingly competitive tier-one areas such as Shanghai and Beijing.

However, this does not in any way diminish the opportunity in China, as IGD calculates 400 cities have populations of more than 1 million. “These are still very big places where the local retailers are very inefficient, many having previously been state-owned. We are therefore very bullish about China and expect double-digit growth there,” said Miller.

Since entering the country in 1996, growth has been mainly organic, through the building of Supercenters, although Wal-Mart acquired a 35% stake in Trust-Mart in February 2007 that doubled its portfolio to 200 stores.

The appointment of new COO Rob Cissell from U.K.-based hardware retailer Robert Dyas is seen as a move to improve the nonfood proposition, because Wal-Mart's offering in the region is viewed as weaker than that of Carrefour.

In a move to open up the retail market — in part to help improve the quality and safety of fresh produce — the Chinese government in 2004 removed the requirement that international companies form a joint venture with a local operator before being allowed to invest in the country, and Rogers believes Wal-Mart should be insulated from any future restrictive legislation being introduced to curb overseas businesses growth.

“China does well from Wal-Mart because of the reciprocal trade. It is a big exporter of Chinese produced goods. With $11 billion of goods bought each year, you don't want to upset them. They are on their way to a good position in China.”

India

Wal-Mart management does not intend to make the same mistake in India as it did in China, where it lost first-mover advantage to rival Carrefour and, according to Miller, is still playing catch-up.

To avoid this fate, it beat off Tesco to set up a joint venture in August 2007 with leading India-based business Bharti Enterprises to operate Wal-Mart-branded cash-and-carry stores.

This overcomes legislation that blocks foreign-owned multi-brand retailers in the country. The model for these outlets is the Maxxi format in Brazil that came into the Wal-Mart portfolio through the acquisition of a group of stores from Ahold. In addition, Bharti will be setting up its own outlets that will have the back-end outsourced to Wal-Mart.

Indicative of the potential for this market is the forecast from Rajan Bharti Mittal, managing director of Bharti Enterprises, who suggests Wal-Mart India could account for as much as $10 billion in sales within the next five to seven years.