NEW YORK — In the end, Germany was an expensive exercise for Wal-Mart that will cost the retailer $1 billion to exit.
The Bentonville, Ark.-based company’s decision to pull out of the German market after eight years of trying to get things right indicates the challenges the world’s largest retailer faces in expanding into overseas markets, particularly developed countries. But analysts stressed that Wal-Mart’s retreat from Germany is not a sign of deeper troubles in the company’s international operations.
Wal-Mart on Friday said it had agreed to sell its ailing German retail business to Metro AG. In the second quarter, Wal-Mart expects to take a $1 billion pretax loss related to the transaction. The terms of the deal were not disclosed. The stores generated $2.5 billion in sales last year.
Wall Street signaled its approval of the development by sending the price of Wal-Mart stock up 93 cents to close at $44.46, a 2.14 percent increase, on the New York Stock Exchange.
“It’s a good thing,” said Robert Buchanan, a retail analyst at A.G. Edwards. “You can’t win everywhere. You really have to pick your spots on the international stage.”
Retail experts said while Wal-Mart failed in Germany, it has been successful in markets such as Canada, Mexico and Brazil.
Still, the international division, which accounts for about 20 percent of sales, has lagged the U.S. in profitability, said David Strasser, a retail analyst at Bank of America.
Wal-Mart had high hopes for Germany — the world’s third-largest retail market after the U.S. and Japan — when it entered the country in 1997, buying local chains Wertkauf and Interspar for $1.6 billion. Things were rocky from the start and did not improve. Wal-Mart never made a profit during its eight-year stay in the country.
Wal-Mart’s challenges included restrictive building codes and the scarcity of available land for new stores. There was also the persistently sluggish economy. Too few stores made it difficult to leverage advertising costs. With just 85 units, Wal-Mart captured only 2 to 3 percent of the market. “It didn’t make an impact on the Germans,” said retail consultant Walter Loeb.
Wal-Mart didn’t do a good job of catering to local German tastes. The “store of the community” program, which in the U.S. ensures that stores in ethnic neighborhoods are stocked with the right products, wasn’t effective in Germany.
This story first appeared in the July 31, 2006 issue of WWD. Subscribe Today.
But the biggest problem, perhaps, was the fact that Wal-Mart underestimated its competition. “That segment is so violently competitive,” said Loeb, noting that German retailers such as Aldi, Tengelmann and Metro have some of the lowest prices in the world.”
Even when Wal-Mart beat another retailer’s price, the differences were often too small to motivate consumers to travel to a far-flung Supercenter, a format that never won favor from German consumers, who prefer smaller stores.
The corporate culture of Wal-Mart rubbed employees the wrong way. Edicts, including the tradition of starting each workday with a morning cheer, were ridiculed in the press. The company’s ethical guidelines, such as rules forbidding romantic relationships between an employee and his or her supervisor, were deemed essentially void and invalid by a German court.
The German sale, which follows Wal-Mart’s recent decision to exit South Korea, may not be the company’s last.
“I wouldn’t be surprised to see one or two more” divestitures elsewhere, Buchanan said. “Argentina has 11 Supercenters. For a company that’s doing $312 billion in sales, 11 units doesn’t make sense.”
ASDA in the U.K. has been struggling lately; some stores are having trouble posting sales increases, experts said, in the face of stiff competition from the likes of Tesco plc. However, there are no signs Wal-Mart is about to pull out of the U.K.
But retail analysts warned not to read too much into Wal-Mart’s travails in Germany. Brazil, where Wal-Mart operates about 295 units, has been successful. Canada, with some 278 stores, will get its first three Supercenters in the fall. Wal-Mart has also done well in Mexico, where it has about 774 stores.
“Europe is the toughest part of the world for them to enter,” said Loeb. “Established businesses have a stranglehold on those countries. Eventually, they will have an opportunity in Russia. Their purchasing in India is very strong, and in the future they could partner with someone else.”
The international sector is becoming increasingly important to Wal-Mart as it nears saturation in rural areas of the U.S. and faces opposition in some big cities where it’s trying to expand. “Wal-Mart ultimately intends for international [business] to account for 25 percent to 30 percent of sales and profits,” said Marybrett Whitfield, a senior vice president at Retail Forward. In addition to growing the international business, Whitfield said, Wal-Mart is developing new, smaller formats.
“There is still some runway left for the Supercenter concept, but they’ve been experimenting and laying the foundation for the day when they can’t expand Supercenters,” Whitfield said.