After exiting South Korea, Wal-Mart is hit in the wallet as the retail giant retreats with a US$1-billion loss from selling its German stores.
Generating some US$325 billion in revenues during fiscal 2006, Wal-Mart has grown to become the world's largest retailer. From an international trade perspective, this global behemoth still has a lot to learn.
Many are surprised that Wal-Mart's operations have contributed to America's growing deficit. One has to consider that very few of Wal-Mart's products are made in the United States. In fact, Wal-Mart imports more foreign-produced goods into America than any other single company. As the U.S. dollar weakens, more money flows out to pay for foreign products thus worsening America's trade imbalance.
Some 60% of Wal-Mart products are imported from such countries as fast-growing South Korea, Philippines, Malaysia, Cambodia, Thailand and Vietnam. The company's biggest trading partner is China. In 2004, the company's trade with China accounted for about 10 percent of the total U.S. trade deficit with the Asian economic powerhouse.
Not that Wal-Mart hasn't been aggressively trying to boost cash inflows from global operations. International sales are now responsible for some 20 percent of total company revenues. And sales from stores outside the U.S. are growing faster than Wal-Mart's American retail operations which include walmart.com online stores. Leading the way is Wal-Mart's U.K. subsidiary ASDA, a supermarket chain that generated some 42% of international sales in fiscal 2006.
The rub? Wal-Mart has been launching American-style stores into some foreign markets with incompatible retail traditions and cultures. For example, the company had toiled for 8 years struggling to make its South Korean and German stores compete against strong, established local retailers.
On May 22, 2006, the American retailer withdrew from the South Korean market when it agreed to sell all 16 of its Wal-Mart Korea stores to Shinsegae, South Korea's top discount chain. The deal was for $882 million. Wal-Mart Korea had lost $10 million on sales of some $800 million in 2005. Wal-Mart's "warehouse-style" environment proved unfriendly to the needs of Korean shoppers. In particular, housewives were dissatisfied with food and beverage offerings.
In July 2006, Wal-Mart announced its withdrawal of operations from Germany because the firm was losing some $250 million per year on sales of $2.5 billion. Wal-Mart's 85 big-box stores were sold to German company METRO AG, a much bigger player with 550 stores in Germany. Commentators blamed competitive prices from national discounters as well as German consumer rejection of American-style signature features such as stores outside of town centers, employees required to smile and heartily greet customers, and baggers at checkouts.
And The Winner Is...
The sale of Wal-Mart's 85 German stores resulted in a $1-billion pretax loss, which caused some short-term pain. But by packing up and leaving an underperforming market, Wal-Mart's management is showing its shareholders that it has learned that global growth must be profitable.
Key to the Arkansas-based company's success is everyday low prices. Analysts project that competitive prices can only be achieved in markets where Wal-Mart opens at least 100 profitable stores. Thus Wal-Mart had no business operating 16 stores in South Korea and 85 money-losing stores in Germany. Next on the chopping block might be the 11 stores that Wal-Mart owns in Argentina.
Wal-Mart still holds high hopes for China due to the vast size of the Chinese market and profit potential. Currently Wal-Mart is a small fish among China's retailers as its strategy of everyday low prices has not yet been successful against Chinese mom-and-pop shops that are used to cutthroat pricing.
Wal-Mart's stock would seem to be a long-term buy at or below $44. Certainly the company's retreat from South Korea and Germany signal that Wal-Mart is sharply focused on return on investment rather than international growth at all costs.
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Sources: www.walmartstores.com, Associated Press
