In the decade since Wal-Mart Stores Inc. (WMT) began its international exploits with a joint venture in Mexico, its record abroad has been full of merchandising missteps and management upheaval. Such blunders explain why German shopper Claudia Gittel grouses about the meat selection at the Wal-Mart in Esslingen and how the prices were lower when local chain Interspar ran the store. And why rival retailers from Brazil to South Korea scoff at Wal-Mart's product choices and "cookie-cutter" outlets. "We don't see Wal-Mart as a threat anymore," sniffs Hong Sun Sang, assistant manager for E-Mart, a 35-store chain in South Korea.
But with its persistence and deep pockets, it would be a mistake to underestimate the world's largest retailer. Just look at the U.S. grocery business, where Wal-Mart is a leader after early stumbles with its huge "supercenters." Likewise, the Bentonville (Ark.) chain has learned some painful lessons about consumers, regulators, and suppliers around the world. Through trial and error, the company has quietly built a powerful force outside the U.S. It's now the biggest retailer in Canada and Mexico. Its $32 billion international business equaled 17% of its $191 billion in sales last year, with more than 1,100 stores in nine countries. And its operating profit abroad rose 36% last year, to $1.1 billion, about 12% of total profits. The trend continued in the first half of this year, with international sales rising 9.6% and operating profit jumping 39%.
Wal-Mart finally started getting its international act together two years ago after it put then-chief financial officer John B. Menzer in charge of the International Div. The low-key Menzer was credited with tightening financial discipline and boosting return on assets for the parent company. Now he's bringing a similar focus to Wal-Mart's sprawling operations abroad, where he's pushing more authority into the field, working to develop a corps of top managers, and spreading "best practices" from the U.S. and elsewhere around the world. And for the first time, Wal-Mart is building a global sourcing operation to use its huge sales volumes to command better deals, higher quality, and more innovation from both U.S. and foreign suppliers.
The company is backing these efforts with big bucks. Lehman Brothers Inc. estimates that Wal-Mart will devote 26% of its $9 billion in capital expenditures this year to operations abroad, adding about 120 stores. "As a global organization, they've become more savvy," says Ira Kalish, director of global retail intelligence at PricewaterhouseCoopers.
Wal-Mart believes that it has no choice but to expand rapidly abroad. Its culture and stock price are built on the expectation of double-digit sales and profit gains year after year. Analysts figure that the company's expanding chain of U.S. supercenters will carry the burden for at least four to eight years. But "someday the U.S. will slow down, and international will be the growth vehicle for the company," says Menzer.
Still, to get there Menzer must clear some high hurdles. The biggest one is Germany, where Wal-Mart bought the 21-store Wertkauf hypermarket chain in 1997 and then 74 unprofitable and often decrepit Interspar stores in 1998. Problems in integrating and upgrading the stores resulted in at least $200 million in losses last year, on roughly $3 billion in sales, estimates analyst Robert Buchanan of A.G. Edwards & Sons Inc. Wal-Mart has stopped predicting when it might make money in Germany. Some analysts believe that it won't break even until at least 2003. "There was a steep learning curve that wasn't expected," says Jim Leach, portfolio manager at shareholder Strong Capital Management.
Many of the wounds were self-inflicted. Wal-Mart failed to understand Germany's retail culture, the regulations that can add five years or more to the launch of a new hypermarket, and the stiff competition among some 14 hypermarket chains in a stagnant market. German managers who had been running the Wertkauf and Interspar stores for years didn't always take kindly to American "mentors" who were telling them how to do things when they didn't even speak German. Vendors balked at switching to a new supply system; when Wal-Mart tried to force them to supply its new centralized warehouses, it often found itself with empty shelves.
Then, last September, the German Cartel Office compelled Wal-Mart and some rivals to raise prices on milk, butter, and some other staples that they were found to be selling below cost. Wal-Mart denies that but admits it underestimated the difficulties it would face. "We just walked in and said, `We're going to lower prices, we're going to add people to the stores, we're going to remodel the stores because inherently that's correct,' and it wasn't," says Wal-Mart CEO H. Lee Scott Jr. "We didn't have the infrastructure to support the kind of things we were doing."
FOOD STUFF. Wal-Mart still needs a bigger presence in Germany to compete effectively, many analysts and suppliers contend. They point especially to food, where its market share is put at less than 2%. But Wal-Mart executives insist that they don't need more stores to make the German operation a success. "We have the scale; we just have to operate better," says Menzer.
To fix those operational problems, Wal-Mart recently hired a new country head, poaching him from a German tobacco-and-food supplier. Instead of the expensive renovations completed on 24 stores last year, Wal-Mart is carrying out more modest face-lifts on 35 outlets this year. And this year it will open its first two new stores since the acquisitions. Wal-Mart is also working more closely with suppliers to boost its centralized distribution effort. About 50% of the products Wal-Mart has targeted for the program now move through central warehouses. Says Menzer: "We set ourselves back a few years, and now we're rebounding."
Wal-Mart executives say the German experience helped when they bought the British chain ASDA in 1999. Wal-Mart acquired a strong chain and gave local managers the freedom to run the business. While ASDA is still No. 3 in the grocery market, its share grew from 7.4% in 1995 to 9.6% last year, according to Verdict Research. Wal-Mart gave ASDA better technology for tracking store sales and inventories. And it pulled ASDA into its global buying effort, led by a 40-person unit in Bentonville that helps negotiate prices for products that can be sold in different markets. This enabled ASDA to cut prices on fans and air conditioners, for example, by 50%, boosting sales threefold.
Perhaps most important, says ASDA President Paul Mason, "this is still essentially a British business in the way it's run day-to-day." Indeed, one of Menzer's main priorities is to push operational authority to the country chiefs and closer to customers. That has meant cutting the international staff in Bentonville from 450 to 137. Now, Menzer focuses on enforcing certain core Wal-Mart principles, such as "every day low pricing," recently rolled out in Mexico and Argentina. But country managers handle their own buying, logistics, building design, and other operational decisions. "I have the autonomy to do what I need to do to run Wal-Mart Canada," says Mario Pilozzi, president of that business. In contrast, when Wal-Mart entered Canada in 1994, its blueprint specified what to sell and where to sell it--including liquid detergent and Kathie Lee clothing that flopped there. In the past, says CEO Scott, "we could get very specific on what should be on an end cap [a store display at the end of an aisle]....I think we've matured."
Still, critics believe that the company retains a headquarters-knows-best mind-set. That raises the question, is Wal-Mart truly a global company, or just a U.S. company with a foreign division? Vijay Govindarajan, a professor of international business at Dartmouth College's Tuck School of Business, says Wal-Mart has few top managers who aren't American and few who speak more than one language and have been posted in several spots abroad. That might be one reason why some competitors scoff at Wal-Mart's claim that it's now sensitive to local tastes. "I get the impression that Wal-Mart is insisting on the American-style layouts and business approach," says Seol Do Won, marketing director at Samsung Tesco Co. in South Korea, which runs seven Home Plus stores. "It's good to introduce global standards, but you also need to adapt to local practice," he says.
Menzer insists he's doing just that, and that the lessons are flowing back to Bentonville, too. The U.S. stores and distribution centers, for instance, are now adopting ASDA's system for replenishing fresh food more quickly and in the right quantities. And ASDA's popular line of George brand clothing is being rolled out in the women's department of all U.S. stores this Christmas season. Thomas M. Coughlin, president of the Wal-Mart Stores Div., even removed all the chairs from the room where his managers hold their weekly meeting after he saw ASDA's "air-traffic controllers" room in Leeds. There, managers meet every morning around a high table with no chairs--to keep meetings short and to encourage action--as they pore over figures charted on the walls. As Menzer and Scott have made clear, there's no turning back in Wal-Mart's plan to conquer the world. By Wendy Zellner in Bentonville, Ark., with Katharine A. Schmidt in Esslingen, Germany, Moon Ihlwan in Seoul, and Heidi Dawley in London