IT’S A WAL-MART WORLD: COLOSSUS SEES $200B THROUGH GLOBAL GROWTH
Byline: Valerie Seckler
NEW YORK — Wal-Mart’s international business is one of the two growth engines that the world’s largest retailer hopes will propel it to its latest lofty goal: sales of $200 billion annually.
What’s more, retail observers expect the $5 billion international unit to generate as much as 35 percent of Wal-Mart’s business by 2007. A 35 percent contribution to the $105 billion giant’s volume in 1996, for example, would have amounted to an eye-opening $37 billion.
Some see sales abroad eventually kicking in half of Wal-Mart’s volume.
As it builds critical mass in new markets, Wal-Mart’s scale, along with its efficient distribution, enables it to dominate a wide array of price-driven businesses. The behemoth has built up its sales apparel and soft home goods to 25 percent of its annual volume, or about $26 billion, equaling the share produced by its hard lines.
It has done so, in part, by building a stable of licensed apparel brands that includes White Stag sportswear, Catalina activewear, Kathie Lee Gifford sportswear, Faded Glory jeans and Russ sportswear. As a result, it has extended its apparel business far beyond the commodities most often associated with discounters, such as T-shirts, intimate apparel and legwear.
Wal-Mart’s Kathie Lee Gifford line, for instance, produces sales of more than $500 million annually, according to company officials, who believe the label could do $1 billion someday.
However, Wal-Mart will be casting beyond the U.S. for much of the company’s growth as it runs out of places to put new stores. The lion’s share of its expansion in America will come as Wal-Mart replaces about half of its 1,960 discount stores here with Wal-Mart Supercenters.
“Over 90 percent of all U.S. consumers shopped in a Wal-Mart store or a Sam’s Club in 1996,” noted John B. Menzer, executive vice president and chief financial officer of Wal-Mart Stores, underscoring the need for the company to grow globally as it saturates the American market.
“In five to 15 years, Wal-Mart could double in size based on the Asia market alone,” Menzer projected, during a presentation at a global retailing conference held here by Goldman Sachs earlier this month.
“Asia contains more than half the world’s population, and half of those citizens are less than 25 years old,” Menzer said of the nation’s burgeoning consumer population.
Wal-Mart entered Asia just last year, launching two Wal-Mart Supercenters in Indonesia and a supercenter and a Sam’s Club in China. A second supercenter is slated to open next month in the Guangdong province of China, which is situated just north of Hong Kong.
In 1998, Wal-Mart plans to open between six and eight stores in China and Indonesia. Menzer did not specify the locations, citing Wal-Mart’s practice of detailing growth plans for the coming year each October.
Currently, the muscle in Wal-Mart’s offshore operation is in Canada, where double-digit comparable-store sales growth is stoking profits at the discount chain that will number 145 stores by yearend. Indeed, Wal-Mart Canada has won some market share formerly held by Zellers, conceded Bill Fields, chairman and chief executive officer of Hudson’s Bay Corp., Zellers’ parent, during another session at Goldman’s conference.
Menzer described the international division as Wal-Mart’s “second biggest growth vehicle” after its supercenter, a 188,000-square-foot unit that combines general merchandise and supermarket formats under one roof.
As for the premier growth vehicle, Menzer forecast the supercenters will eventually produce half of Wal-Mart’s profit. Within five years, the megastores will account for one-third of the chain’s real estate, he added.
Wal-Mart’s international volume of $5 billion last year marked an 18 percent surge over sales of $4.27 billion in 1995, bringing the unit to a full-year operating profit of $24 million. The profit came just two years after the international business made its first significant mark on the map with its 1994 acquisition of 123 former Woolco stores in Canada.
The earnings followed operating losses of $16 million in 1995 and $18 million in 1994.
“They thought they’d break even in three years,” said Wayne Hood, retail analyst at Prudential Securities Inc. “They’re doing much better than that.”
By the end of 1996, the Bentonville, Ark.-based company operated 208 units abroad, a figure that will balloon to 405 stores by Dec. 31.
The big leap reflects Wal-Mart’s recent purchase of a majority stake in Mexico-based Cifra, its former joint-venture partner. Of those stores, 243 will be in a Wal-Mart format; the balance will take shape in Cifra concepts, including 34 Aurreras; 59 Bodegas; 36 Superamas; 33 Suburbias, and 148 VIPs.
Hood estimated Wal-Mart’s volume abroad this year will soar 29 percent to $6.5 billion, catapulting operating profits to $136 million, a fivefold jump over earnings in 1996. Next year, Hood sees operating profit more than doubling to $335 million as sales jump 15 percent to $7.5 billion.
“Wal-Mart is facing two fairly stark choices,” said Mark Husson, retail analyst at J.P. Morgan Securities. “They can use the cash flow from their U.S. business to buy back stock and pay down debt or they can populate the rest of the world with Wal-Mart.
“It looks like they’re doing a bit of both.”
In fact, Menzer pointed out that Wal-Mart is “ahead of schedule” in its $2 billion stock buyback plan for the next 12 to 18 months. “We’ve already bought over $1 billion worth of stock, and we’ve implemented a 29 percent dividend increase,” he said.
Meanwhile, Mark Schmidt, vice president of development for Wal-Mart’s international division, said next year the company is scheduled to launch:
Eight to 10 units in Canada, where comparable-store sales are growing by double digits and there is “lots of room for new and comp-store growth.”
Ten to 20 stores in Mexico, where Sam’s Club comps are climbing in the double digits. Wal-Mart plans to accelerate store openings in Cifra formats.
Six to 10 locations in both Brazil and Argentina.
Two or three units in Puerto Rico, where its 12-store chain is “approaching saturation,” and comps are rising by single digits.
Eventually, Wal-Mart’s global initiative will take it to Europe, Japan and India, but according to Schmidt, none of those regions are on the company’s near-term horizon. “We’d probably enter developed countries through an acquisition or a partnership,” Schmidt noted, citing the scarcity of real estate in such markets.
Wal-Mart owns some of its offshore stores and has set up joint-venture partnerships to establish other locations. It operates in Brazil through a venture with Lojas Americanas, and in China via ventures with Shenzhen International Trust & Investment Co. and Shenzhen Economic Zone Development Co. Wal-Mart’s stores in Indonesia are operated under franchise agreements.
The company owns the rest of its stores abroad, including the controlling stake in Cifra, Wal-Mart’s former joint-venture partner in Mexico.
“If struggling companies are languishing in good real estate abroad, an acquisition by Wal-Mart would be a win-win situation,” observed Arnold Aronson, managing director of retail strategies at Kurt Salmon Associates.
“There are some ripe takeover targets out there, and Wal-Mart needs to build critical mass,” said Husson, who expects the giant to grow abroad both by opening its own stores and making acquisitions such as Woolco and Cifra.
Husson cited South America’s Jumbo superstore chain, and Makro, with stores in Asia and South America, as potential takeover targets. “Makro is a cash-and-carry chain with great real estate, and it’s similar to club membership stores,” the analyst said. “If Wal-Mart were to pick up this type of business someday, it would probably put the Sam’s Club name over the doors,” Husson speculated.
“Lately the rumor mill has been turning because few companies are growing globally like we are,” acknowledged a spokesman for Wal-Mart International who is based at corporate headquarters in Bentonville, Ark. “We’re just keeping our eyes open.”
Wal-Mart’s most recent offshore launch was the opening of a supercenter in Ribeirao Preto, Brazil, on Sept. 4. Earlier this year in Baru, Brazil, the company opened a smaller supercenter that occupies 136,000 square feet and has become its vehicle for entering smaller regions of South America.
A spokesman for Wal-Mart International who is based in Buenos Aires said, “Next year, we anticipate opening stores in interior states of Brazil and Argentina, as well as more interior regions of our current markets.”
In addition, Wal-Mart plans to open a 136,000-square-foot supercenter in Bahia Blanca, Argentina, this year, which is roughly a seven-hour drive from Buenos Aires. A 188,000-square-foot supercenter is scheduled to bow by yearend in Santa Fe, Argentina, which also is considered a secondary market.
Wal-Mart’s recently acquired majority stake in Cifra is likely to speed its growth in smaller Mexican markets because of Cifra’s familiarity with those areas. Additionally, Wal-Mart plans to use Cifra’s Bodegas, Aurreras and VIP concepts as launch pads into new markets in South America.
J.P. Morgan’s Husson likes the strategy of building up Cifra’s presence in Latin America. “With the Cifra acquisition, Wal-Mart for the first time will be putting non-Wal-Mart names over their stores,” he said. “I think this is a positive move.
“They’re thinking of expanding laterally instead of going after the American colonization of global retailing by [only] putting rather dull Wal-Mart stores abroad,” Husson added.
Wal-Mart has begun to take its merchandising to the next level as well, tailoring assortments to better fit local populations, according to company executives and industry members. “For the time being, they’re letting their buyers work locally from market to market,” said a major branded vendor of Wal-Mart’s who asked not to be named.
“Early on, we were too U.S.-driven in our stores abroad,” Schmidt admitted. “Our buy-national programs, local sourcing and micromerchandising have helped to localize assortments.”
The quality of apparel typically found at Wal-Mart’s competition in South America is “not very good,” said Wal-Mart’s spokesman in Buenos Aires.
“It’s the kind of apparel usually found in supermarkets,” he continued. “We’ll continue to provide the best-quality clothes possible in more of a department store format.”
“Our apparel here is somewhat different from the clothing we market in the U.S.,” the spokesman added. American assortments feature a heavier proportion of higher-priced branded goods such as Russ and White Stag sportswear, Hanes and L’Eggs hosiery, Bonjour jeans and Catalina activewear.
According to Prudential Securities’ Hood, “Wal-Mart generally has been good in tailoring merchandise to specific markets. They’re learning a lot about how and when consumers shop in various countries.”
While Wal-Mart’s international earnings are being driven by profitable businesses in Canada, Mexico and Puerto Rico, other operations are showing positive signs.
“We’re breaking even in one of our two South American markets,” said Schmidt, declining to specify. “The other one will be there by yearend.
“An aggressive attack on costs,” Hood said, has raised Wal-Mart’s profitability offshore. “They’re getting better at controlling shrinkage and managing payrolls and inventory,” the analyst noted.
Some industry observers estimate Wal-Mart’s international division can produce 25 to 35 percent of the company’s volume by 2007. “If they can get to $130 billion in the U.S. over the next 10 years, it would give them the time to get another $70 billion abroad,” projected Kurt Salmon’s Aronson.
The most critical aspect of Wal-Mart’s international development, in Aronson’s assessment, is for the rapidly growing giant to take a measured approach. “Wal-Mart is so big, they have to afford the time and effort for these new opportunities to come to fruition,” the consultant said.
“While I know they’re aggressive and under demands to produce for Wall Street, I hope they’ll have the patience to make it happen,” Aronson added. “They’re big enough that practice can make perfect.”