Wal-Mart's Exit From Germany -- Stock Implications

Jul.31.06 | About: Wal-Mart Stores, (WMT)

Excerpt from our One Page Annotated Wall Street Journal Summary (receive it by email every morning by signing up here):

With Profits Elusive, Wal-Mart to Exit Germany

  • Summary: Wal-Mart announced Thursday that it will sell its German operations to German retailer Metro AG. "After eight years of trying, Wal-Mart said it couldn't turn around its 85 German stores, which have lost money. Terms of the sale were not disclosed, but Wal-Mart said it expects to incur a pretax loss of $1 billion on the deal." This is the second time in recent months that Wal-Mart has exited a non-US market: in May it announced that it would sell its 16 stores in South Korea. Wal-Mart retreated from Germany because "hard discounter" Aldi, which sells a small selection of aggressively-priced own-brand products, consistently undercut Wal-Mart on prices. About 80% of German consumers live within 20 minutes of an Aldi store, and German consumers are prepared to shop around for the cheapest items from multiple stores instead of concentrating their purchases in a single store. That undermines Wal-Mart's strategy to become the one-stop-shop for an increasing array of products. Wal-Mart also lacked economies of scale in Germany, and the tepid outlook for German consumer spending also hindered its potential in that country. However, withdrawing from German will make it harder for Wal-Mart to increase pricing leverage with European suppliers for its Asda stores in the UK, and makes expansion into Eastern Europe less likely. Wal-Mart is now focusing its international expansion plans on China, India and South America. However, both those countries present challenges. India doesn't allow foreign companies to set up stores unless they sell only a single brand, and on Saturday Wal-Mart employees in Quanzhou, China established the company's first trades union.
  • Comment on related stocks/ETFs: Wal-Mart's international operations account for 20% of its total sales and are its fastest growing. CSFB expects Wal-Mart's international sales to rise from $63 billion in 2006 to $78 billion in 2007. As such, any setback in Wal-Mart's global expansion is disproportionately significant for the stock (NYSE:WMT). George Gutowski asks "Is Walmart unable to compete unless they have a complete monopoly?", but incorrectly assumes that Germany was a lucrative market for Wal-Mart with healthy consumer spending. Perhaps also there's a fundamental difference between European and American retailing: European consumers prefer to shop locally instead of driving to "superstores", and European cities are often better designed for users of public transport and pedestrians. And significantly higher taxes on gasoline further discourage the "drive to the superstore" so common in the US.