Wal-Mart's Woes
Sep 1, 2006 12:00 PM, Elaine Misonzhnik
To all the retailers that compete with Wal-Mart the news that it is giving up on its eight-year struggle to conquer the German market may induce a bit of a schadenfreude; Sometimes even the behemoth of Bentonville can't stroll into town and pick up all the marbles. Savor the moment, advise retail experts, but don't think this means that Wal-Mart has lost its touch.
What happened in Germany — and in South Korea, where Wal-Mart sounded the retreat in May — is about uncharacteristic execution errors and cultural miscues, they say.
On July 28, Wal-Mart announced that it will abandon Germany and sell its 85 stores there to rival discounter Metro AG. In May, the company sold its 16 South Korean stores to a local operator. Meanwhile, its 322-store United Kingdom-based subsidiary Asda is falling short of profit expectations, Wal-Mart executives admitted.
Overall, the loss of Germany and Korea is a road bump for the $312.4 billion company — Wal-Mart did not disclose terms of the sale to Metro, but says it will take a $863 million charge related to the deal. Germany provided just 0.8 percent of revenue last year. The moves, however, were enough of a blow to lead to Wal-Mart's first drop in quarterly profits in a decade. Net income fell to $2.1 billion, or 50 cents a share, in the second quarter ending July 31, mainly because of the Metro sale. That compares with $2.8 billion, or 67 cents a share, a year earlier.
“It proves they are vulnerable, but on the other hand, Germany is not China and the market potential in Germany is not that significant as it is in some other countries,” says Cynthia R. Cohen, president of Miami-based Strategic Mindshare, a retail consulting firm. “So it's not a bad financial decision to reallocate your international resources into markets that are much larger.” Still, the company has emphasized the need for international expansion. Same-store sales in the U.S. for July were up just 2.4 percent over last year.
The company's stated goal is to make international business account for about 33 percent of its revenues, or roughly $103 billion. But though the retailer has been able to succeed in close-to-home markets like Canada and Mexico, its Asian and European ventures are proving decidedly more difficult: Its international division currently brings in about $63 billion in sales.
With strong local competition, notably the Aldi and Lidl chains, Wal-Mart had a hard time winning over German consumers. Strict local restrictions on store operating hours and employee protections also prevented the chain from getting U.S.-size margins.
“There were a number of obstacles in Germany and some of them were self-inflicted,” says Ken Perkins, president of Retail Metrics. “They really didn't do enough research. In parts of Europe, there is significant distaste for things Americana and for Wal-Mart in particular.”
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