CONTENTS

PRINT THIS STORY:

CHANGE TEXT SIZE:

Wal-Mart offers lessons, challenges to European retail

By Susan Thorne

Now that Wal-Mart has one foot firmly planted abroad, European retailers are watching apprehensively to see what will happen next.

In January, Wal-Mart purchased 74 Interspar hypermarket stores from Spar Handels AG, a leading German retail and wholesale company. The stores, which have combined sales of about $1.7 billion and an average unit size of 73,000 square feet, are very close in size to the average U.S. Wal-Mart store, according to a company press release.

The investment, along with Wal-Mart's acquisition of the entire 21-unit Wertkauf hypermarket chain in December 1997, gives the Bentonville, Ark., discounter a total of 95 stores in Germany -- a significant start on the way to gaining critical mass in that market.

The hypermarket format means that Wal-Mart's merchandise offerings in its Continental stores will include both food and nonfood items, and that puts the company in competition with such hypermarket and grocery giants as France's Carrefour; England's Tesco and Sainsbury's; and Holland's Ahold.

With the world's largest retailer now at their doorstep, many European rivals and potential competitors are understandably uneasy. Within Germany, retailers are worried about trying to compete on price with Wal-Mart when their own profits are already slim, said Peter Fuhrmann, President of SCC Shopping Center Consulting, Düsseldorf, Germany.

"Retailers here are frightened by Wal-Mart's everyday-low-pricing policy because margins in Germany are much much lower than in the U.S.," he said. "The markup is much less: You'll see in annual reports [of retail companies] that the year's profit is only .01% to 1% of the total. Instead of offering better customer service, retailers offer low prices here."

Reducing prices further is out of the question for many retailers, Fuhrmann said, because they are already in a tight squeeze. "The German market is very difficult; that's why a lot of foreign retailers don't come to Germany," he said.

German supermarkets in particular are already feeling the heat, said Rosemarie Baumeister, managing director of the Tengelmann Operations Group, Mülheim an der Ruhr, Germany. Tengelmann is a broad-based retailer that owns (among others) the OBI do-it-yourself (DIY) stores; Kaiser's and Tengelmann supermarkets; PLUS convenience stores; and Grosso and Magnet superstores, as well as a controlling interest in A&P in the United States.

"Wal-Mart's entry into the German market is significantly intensifying competition on price," she said. "Supermarket operators in particular are coming under pressure from this move to set themselves apart in a double-edged competition between successful superstore concepts on the one hand and discounters on the other."

Retailers from throughout Europe attended a conference in London in October in which speakers discussed implications of Wal-Mart's move to the Continent and ways to compete with the retail giant. Michael Poynor, director and retail consultant with the CREDO consulting group, London, who spoke at the gathering, said executives attending the conference were generally there for two reasons.

"There's genuine anxiety over Wal-Mart's arrival, and the immediate impact of one of the biggest retailers in the world. Retailers also want to know why it is that Wal-Mart is so successful," he said.

Wal-Mart's size -- enormous relative to European companies -- is a great advantage, said Poyner. The U.S. retailer is now twice as big in terms of capitalization as its four closest European rivals combined, he explained. Retailers at the conference expressed concerns that Wal-Mart's arrival could trigger consolidatory moves on the part of other companies, he said.

Those consolidations have already started, according to Clive Vaughan, a U.K. retail expert who heads the London consultancy of Retail Intelligence, an affiliate of research organization Corporate Intelligence. Vaughan pointed to the case of Kingfisher, Britain's multifaceted retail company, which owns B&Q do-it-yourself stores and Woolworth's. The London-based firm extended operations onto the Continent with the 1994 purchase of Darty, a French electronics retailer and last year's acquisition of the French Castorama DIY chain. The Wal-Mart threat is very much behind Kingfisher's strategy, Vaughan maintains, adding that Kingfisher has also been investigating other possible purchases, such as Germany's OBI and Hornbach housewares/DIY retailing companies.

Rumors also are flying that Wal-Mart could purchase ASDA, a 210-store English hypermarket chain and Britain's No. 3 player in food sales; that company would be a good fit with the megadiscounter because of store size and merchandise mix, Vaughan said. But the rumor mill also talks of Kingfisher taking over Leeds-based ASDA, a match that would give Kingfisher food-sector coverage and extend ASDA's "George" apparel label into Woolworth stores.

Yankee invaders other than Wal-Mart are seen as definite possibilities, too, Vaughan said. "European retailers are not just worried about Wal-Mart; they're concerned about Home Depot or Sports Authority and electrical category-killing retailers, which are in their sectors."

Acquisitions will probably be the key to superstore supremacy in Europe because tight zoning regulations mean that few new big-box-size sites are made available.

"Costco has been in the U.K. for seven or eight years and has only seven or eight stores, and IKEA only manages to open a new store every 18 months," Vaughan said. "It's not easy to grow organically, especially if you're so big, like a Wal-Mart, that you have the sales of an average small town center [downtown core] -- and planners want to protect the town centers."

Stephen Arnold, professor at the School of Business at Queen's University, Kingston, Canada, has tracked Wal-Mart's worldwide progress and is skeptical about the company's immediate success in Europe. "Once they've digested Germany, where can they go next?" he asked, pointing out the limitations of expansion by acquisition, which would have to proceed country by country or piecemeal at best.

He said he doubts that Wal-Mart's success in Canada -- "their only real acknowledged success outside the U.S.'' -- can be repeated in Europe. Cultural differences are a considerable barrier, particularly in Germany, "the ultimate nonservice culture.''

"Can Wal-Mart take an existing chain of stores with people in them and turn it all around to the Wal-Mart corporate culture, the same one that works in small-town America?'' he asked.

Arnold said he feels that a strong local retail industry, particularly in the U.K., is another factor Wal-Mart didn't have to face in Canada. "Wal-Mart has really met its match in Europe," Arnold concluded. " It's not going to be a pushover."

Yet in the midst of negative reactions, shopping center interests put a more positive spin on Wal-Mart's presence, said Bertrand Courtois-Suffit, chairman of the French Council of Shopping Center Managers, Paris.

"Shopping center marketing companies are very happy to offer their square meters to such a company so that they can provide a different retail mix," he said, referring to other foreign retail arrivals that have brought fresh concepts to France, such as The Gap or Spanish apparel retailer Zara. Courtois-Suffit, who is also a consultant with Kharis Conseil, Paris, a shopping center management consultancy firm, points out that tight land-use regulations in France (and similar restrictions in Spain, Italy and Belgium) oblige most big-box stores to locate on shopping center pads rather than in the geographically separate sites they occupy in many North American locales.

By being adjacent to a shopping center configuration, a retailer such as Wal-Mart will enhance the mall rather than pull traffic away, he said, so mall managers would welcome such a presence.