Wal-Mart Looks to Expand Outward and Inward

Stephen DeAngelis

January 28, 2011

Because of the impact Wal-Mart has in the marketplace, reporters and analysts watch its activities closely. Over the past few months, the company has been making headlines for its expansion plans. Wal-Mart’s international business accounts for nearly a fourth of the company’s $405 billion in annual revenue. Perhaps the most closely watched plans have been those involving its dealings with a South African retail chain called Massmart [“Wal-Mart Checks Out a New Continent,” by Robb M. Stewart, Wall Street Journal, 26 October 2010]. Massmart was founded in 1990 and now owns a series of chains including: Game general-merchandise stores, Makro warehouse-club stores, and Builders Warehouse for construction and home improvement. Stewart reported:

“Wal-Mart Stores Inc. is considering making a 32 billion rand ($4.63 billion) bid for Massmart, which operates warehouse-sized stores that sell goods ranging from food and liquor to clothing, gym equipment and home furnishings. Wal-Mart is now in its fifth week of conducting due diligence on Massmart. Executives are inspecting each of Massmart’s 288 stores, which are located in 14 African countries, though mostly in South Africa. If the company proceeds with a formal offer, the acquisition would be the Bentonville, Ark., retailer’s biggest in more than a decade. It would also give Wal-Mart a head start in sub-Saharan Africa over European rivals Carrefour SA and Tesco PLC, which don’t have any stores in the region.”

Not everyone in South Africa was thrilled to hear that Wal-Mart might be coming to town. The most open critics of the plan, however, were labor unions [“Union Opposes Wal-Mart Purchase,” by Robb M. Stewart, Wall Street Journal, 29 September 2010]. Stewart reported:

“The Western Cape provincial arm of the Congress of South African Trade Unions said Tuesday it was alarmed that Massmart is considering an offer from the Bentonville, Ark., retail giant to take over one of the country’s ‘key strategic national companies.’ ‘We will oppose the setting up of any Wal-Mart stores in the Western Cape,’ said the group, known as Cosatu. ‘These companies are notoriously antiunion and antiworkers’ rights.'”

Wal-Mart executives hoped to convince union members that their perceptions are untrue. Stewart continues:

“Doug McMillon, president and chief executive of Wal-Mart International, said the company would work with the unions representing workers at Massmart’s operations. ‘We respect and honor pre-existing union relationships and are committed to abiding by South African labor laws,’ Mr. McMillon said. A Wal-Mart spokesman said the company has successful [union] relationships in more than half the countries in which it operates. In China, nearly 70% of the work force is represented by a labor union.”

Stewart explained that the reason Wal-Mart is interested in South Africa as a portal country for the African continent is because “South Africa has embraced shopping malls. They dot cities, suburbs and, increasingly, the townships where a new and increasingly affluent black middle class has emerged over the past decade. In townships like Soweto, in southern Johannesburg, megamalls have largely displaced street traders.” Just when it looked like its Massmart acquisition was progressing nicely, news emerged that Wal-Mart was re-thinking its plans [“Wal-Mart Reassesses Massmart Bid,” by Robb M. Stewart, Wall Street Journal, 29 October 2010]. Stewart explained why Wal-Mart was reconsidering it offer:

“Rather than seeking a full takeover, Wal-Mart Stores Inc. may make an offer for control of Massmart Holdings Ltd. to preserve the South African wholesaler’s Johannesburg listing. In a statement Thursday, Massmart said that Wal-Mart is now weighing a partial offer for more than 50% of the company after meeting with major Massmart shareholders and key South African stakeholders about its proposal to buy the African retailer for 32 billion rand ($4.53 billion). The Bentonville, Ark.-based retail giant is investigating the merits of retaining Massmart’s listing on the Johannesburg Stock Exchange, Massmart said. The indicated cash-offer price remains 148 rand a share, it added.”

A Financial Times report concerning Wal-Mart’s new position stated that “some major shareholders had told Walmart they would insist on retaining reduced stakes in Massmart, to ‘reap the benefits’ of anticipated faster growth following the takeover” [“Walmart rethinks $4.6bn Massmart deal,” by Simon Mundy, 28 October 2010]. Mundy reported that Wal-Mart’s Mexican subsidiary provides a precedent for this new position (Wal-Mart only owns 68% of Walmart de Mexico). He continued:

“The Arkansas-based retailer is keen to pursue further growth in emerging markets, having expanded aggressively in China and Latin America. Massmart has a particular focus on Nigeria, although 93 per cent of its revenue is generated in South Africa, where it has 290 stores. Most of Massmart’s listed equity is held by international investors, but big domestic shareholders include the state pension fund. ‘The government would be delighted if Massmart remains listed,’ [Syd Vianello, analyst at Nedcor Securities], said. A partial takeover could limit Walmart’s financial support for Massmart, as well as anticipated procurement savings.”

After considerable negotiation, the Wal-Mart/Massmart deal was concluded in late November 2009 [“Wal-Mart Sets African Offer,” by Robb M. Stewart, Wall Street Journal, 30 November 2010]. Stewart reported that “Wal-Mart Stores Inc. offered 16.5 billion rand ($2.32 billion) to buy 51% of South Africa’s Massmart Holdings Ltd., marking the U.S.-based retailer’s first foray into sub-Saharan Africa’s growing retail market.” In the article by Robb Stewart first cited in this post, Stewart notes that “Wal-Mart hasn’t always managed to get its expansion into new markets right.” He explains:

“In 2006, it had to abandon its German operation after spending eight years trying to crack one of Europe’s most competitive discount-retailing environments. Last decade, it pulled out of South Korea. Wal-Mart opened its first store in mainland China in 1996. In a country mired in bureaucracy, it has had to navigate a commercial environment that favors local companies and a distribution system closed to foreign firms. The retailer has also stumbled on its own, with failed efforts in its early days to sell extension ladders and a year’s supply of soy sauce to customers living in tiny apartments. In India, where it plans to use its discount, big-store model to capture a slice of a retail market that has annual sales of more than $350 billion, Wal-Mart has been waiting for years for the government to ease restrictions on foreign investment in the retail sector. There, it must also compete in an industry made up of small merchants.”

Undoubtedly, Wal-Mart executives have been frustrated by India’s bureaucracy. In “a rare high-profile plea to the Indian government,” Mike Duke, the chief executive of Walmart, asked that the country’s retail sector be opened to direct foreign investment.” [“Walmart urges India to open up retail sector,” by Jonathan Birchall and Girija Shivakumar, Financial Times, 26 October 2010] Birchall and Shivakumar continue:

“Mr Duke told a meeting of the Federation of Indian Chambers of Commerce and Industry in New Delhi that Walmart, the world’s largest retailer, understands the government’s ‘calibrated approach’ to the opening of the sector. But he repeated the argument that allowing international retailers to own and operate their own stores would bring a range of benefits to India, including the modernisation of food distribution and the growth of small and medium supplier businesses. Currently, foreign investment is restricted to 51 per cent in single-brand retail and is barred entirely from multi-brand retail.”

Wal-Mart’s arguments have received some support from within the government. Birchall and Shivakumar explain:

“An Indian government discussion paper published this year said that allowing greater foreign investment in retail would lower prices and benefit farmers. Mr Duke said Walmart estimated that ‘certain increases in direct foreign investment are likely to reduce India’s inflation rate 50 to 70 basis points’, from more efficient logistics and reduced waste. Walmart’s presence in India is currently limited to four ‘cash and carry’ Best Price stores it has operated in a joint venture with Bharti Enterprises, a local business group, opening the first store last year. Mr Duke said the joint venture planned to have between 10 and 15 stores open over the next two years, although Rajan Bharti Mittal, managing director of Bharti Enterprises, said his company could roll out 15 new stores ‘ahead of time’ by the end of next year. As part of the retailer’s efforts to win political support in India, Mr Duke highlighted plans to source fresh fruit, vegetables and meat for the stores directly from 35,000 small farmers.”

With organized retail accounting for only 5 percent of the total retail business in India, one can easily understand why Wal-Mart sees opportunity knocking there. In addition, “AT Kearney, the US management consultants, forecast that India’s growing middle class among a 1.2bn population would help push retail sales up by 35 per cent over the next three years.” The growing middle classes in India, China, South Africa and other emerging market countries are behind Wal-Mart’s push to get into those countries [“Walmart’s S African ambitions show need for foreign growth,” by Jonathan Birchall, Financial Times, 28 September 2010]. Birchall explains:

“For the world’s largest retailer the proposed expansion … underlines an increasing focus on pursuing international growth that has become increasingly important over the past few years, as growth in its home market has slowed. With total sales last year of just over $400bn, Walmart has seen its international store footprint grow faster than in the US since 2007, as the recession and an increasingly saturated home market slow the expansion of its US super-centre stores. It already has stores in 14 countries around the world, and its international revenues account for just over 25 per cent of its total sales, up from just over 20 per cent five years ago. Asda remains its largest and most profitable international business, while its business in Japan continues to struggle. But after pulling out of South Korea and Germany in 2007, the retailer has increasingly focused on growth in emerging markets.”

Birchall goes on to note that as Wal-Mart expands internationally it is looking “to unify its global supply chain to improve operating performance of its international stores, which are less profitable than its US business.” Wal-Mart will have to focus on more than just its global supply chain. If, for example, it obtains its desired foothold in India and follows through on promises to source fresh fruits and vegetables from local growers, the company will have to focus on regional and local supply chains as well. Wal-Mart now operates in 14 countries outside of the United States.

 

In other expansion efforts, Wal-Mart is reportedly looking for expansion opportunities in Japan [“Wal-Mart Bargain Shops for Japanese Stores to Buy,” by Mariko Sanchanta, Wall Street Journal, 14 November 2010] and Canada [“Wal-Mart’s New Hot Spot: Canada,” by Stuart Weinberg and Phred Dvorak, Wall Street Journal, 27 January 2011]. It also continues to increase its presence in China and “will have around 300 stores [there] when it completes its takeover of the Trustmart chain.” The company also “entered the country’s e-commerce business” by launching www.samsclub.cn, which is “linked to the handful of Sam’s Club discount warehouses that it operates in southern China.” [“Walmart finds online ally in China,” by Jonathan Birchall, Financial Times, 27 December 2010]. It is also trying a “small strategy” in China that has worked elsewhere [“Walmart slims down stores for China,” by Jonathan Birchall, Financial Times, 1 December 2010]. Birchall reports:

“Walmart, the world’s largest retailer by sales, is launching a push to reach lower-income and rural consumers in China with a new ‘compact hypermarket’ format originally developed in its Latin American markets. Doug McMillon, chief executive of Walmart’s international business, told the Financial Times that the US retailer had opened what is expected to be the first of a series of new stores in China using the low-cost, bare-bones model of its Bodega Aurrera stores in Mexico, and its Changomas chain in Argentina.”

In addition to expanding outward (i.e., globally), Wal-Mart is also looking to expand inward in the United States. Plans to do this involve creating small city stores — a big change from the suburban super stores for which Wal-Mart is best known [“Wal-Mart Sees Small Stores in Big Cities,” by Miguel Bustillo, Wall Street Journal, 13 October 2010]. Bustillo reports:

“Wal-Mart Stores Inc. is planning to open dozens of small stores in the nation’s cities, in an effort to push back against the dollar chains and other competitors nibbling at its customers. The prospect of Wal-Mart stores dotting America’s biggest cities would change the urban landscape and the profile of the world’s largest retailer, known for its blocky suburban edifices stocked with low-cost goods. The new stores, roughly a quarter to a third the size of a supercenter, largely will sell groceries. Bill Simon, head of Wal-Mart’s U.S. stores business, said Wal-Mart envisions opening in the next few years 30,000- to 60,000-square-foot Neighborhood Market groceries and new, smaller outlets modeled on the bodegas it operates in Latin America. Its supercenters average 185,000 square feet. Mr. Simon said he believes there is room for ‘hundreds’ of small Wal-Mart stores in the U.S., offering food and consumer staples. The retailer first will test their urban appeal with 30 to 40 stores over the next few years before a full-scale launch.”

In what should be good news for some cities, Wal-Mart is looking “at taking over existing buildings” according to Garrick Brown, a vice-president of research at Colliers International [“Walmart lines up sites across US to roll out smaller format stores,” by Jonathan Birchall, Financial Times, 20 September 2010]. According to Brown, real estate brokers are saying that Wal-Mart is “looking for scores of sites across the US. ‘It is going to be huge,’ he said.” According to Birchall, “Walmart’s small-format ambitions will open a new competitive front in its battle with the traditional supermarkets such as Kroger and Safeway.” To learn more about competition in the grocery sector, see my post entitled Supermarket Wars.

 

The advent of hundreds of new small, urban s stores will require Wal-Mart to re-wicker parts of its logistics system. In addition, the company is partnering with FedEx in an experiment to see if it can increase urban sales by permitting customers to buy merchandise online and have it delivered to FedEx retail locations [“Wal-Mart Uses FedEx to Expand Urban Push,” by Miguel Bustillo, Wall Street Journal, 20 September 2010]. Bustillo reports:

“Wal-Mart Stores Inc. is experimenting with allowing customers to buy merchandise online and have it delivered free to urban FedEx Corp. locations, a bid to boost sales in big cities where the retailer has little to no store presence. The tests, which started this summer in Los Angeles and Boston, allow customers to direct purchases made on Walmart.com to FedEx Office outlets at no cost, mimicking a Wal-Mart offering called Site to Store that lets online buyers send items to the retailer’s stores free.”

According to Bustillo, customer response to the program has been positive, but Wal-Mart has not announced plans to expand the program. Bustillo continues:

“Some retail experts said it seemed like an inevitable next step for the Bentonville, Ark. retailer, which has struggled to expand into America’s largest cities amid political opposition from labor unions. Wal-Mart sales have declined for five consecutive quarters at U.S. stores open at least a year, and the company is searching for new ways to spark domestic growth. ‘This is Wal-mart trying to extend its footprint without investing capital in real estate,’ said Leon Nicholas, a Massachusetts-based director of retail research at Kantar Retail. He said Wal-Mart also is pursuing younger urban shoppers, who don’t think twice about making big purchases online. ‘They don’t want to be the next Montgomery Ward, so they have to go after the Millennials where they are,’ he said, referring to the chain that went out business in 2001 and whose brand was later revived as an Internet retailer.”

Bustillo notes that consumers still have the option have online purchases shipped directly to specified locations using either FedEx or United Parcel Service, Inc. He continues:

“The partnership could allow FedEx to capitalize on its locations near college campuses it inherited when it acquired Kinkos in 2004. In L.A., Wal-Mart has been promoting the pickup program with direct mail to students at the University of Southern California and mobile billboards around Westwood, home of the University of California, Los Angeles. Wal-Mart and FedEx officials declined to reveal the financial details of the partnership. ‘We fully expect other large retailers to take advantage of this,’ said Randy Scarborough, vice president of marketing for FedEx Office. He said the shipping giant recently began a new store-pickup service from FedEx Ground that previously had been available only on faster shipments from FedEx Express. FedEx has 1,800 U.S. locations that can serve as pickup spots. He declined to name other retailers. ‘We are planning our physical network to accommodate this because we do anticipate additional demand.'”

Wal-Mart’s outward and inward expansion is likely to send ripples through a number of supply chains. The largest impact, however, is likely to affect supply chains that service emerging and growth markets. With markets mostly saturated in developed countries, rising middle classes in emerging and growth market countries represent real opportunities for retailers as well as the manufacturers who supply them their goods.