Wal-Mart Goes For the Gold In China

Last October, we posted an analysis of Wal-Mart discussions with Trustmart called Wal-Mart is Going For the Gold. At the time, it was all rumor and speculation. According to the WSJ , Marketwatch, and others though, it is no longer speculation… it is a done deal.

Wal-Mart, according to the article will be taking up a 35% stake in the Taiwanese operation, to become a minority shareholder in China’s largest hypermarket chain.

Michael Duke of Wal-Mart says the acquisition

is an important step in bringing additional scale to our China retail business and enabling us to do what we do best — serving our customers with improved service, high quality and innovative products, and lower prices,”

Of course, only time will tell if he is right, however I have a couple of questions:

1) Why only a minority stake? Wal-Mart has some of the deepest pockets around… if they believe in Trustmart to dump a billion dollars into it, why not invest another 500 million to get a majority share?

2) What are the benefits for Wal-Mart in this deal? With a minority share, they will not get signage or branding, all decisions will come down to Trustmart as majority holder, and I am not sure Wal-Mart could possibly use this to benefit their supply chain.

3) Whose next? Wal-Mart is obviously only willing to stick a big toe in the water, but Carrefour already has 100% wholly owned network of 70+ stores. How long will it take for Lianhua and/ or other regional powerhouses to become targets of Carrefour which not only has done well in china, but surely is looking to reinvest some of their China based profits.

4) At 1 billion USD for 35%, they are paying a huge amount of money. Much more than what it would cost to build their own stores (estimate 3-5 million USD per store). Even if at 5 million a store, they could still build 200 stores..

As with many deals in China, only time will tell. Retail is an industry that no longer requires partners and I find the 35% for 1 billion of 100 stores (only 30 ahead of largest competitor) to be a very interesting package.

I hope that more on this deal comes out, and I welcome any insights you may have… especially on the numbers vs. share figures.

Comments

[Amit Chokshi:]

There seem to be conflicting reports on the $1bn number, Marketwatch said it was $1bn for the stake and Reuters said "Financial terms were not disclosed, but a source familiar with the deal said Wal-Mart would eventually pay $1 billion for all of Bounteous, which operates 101 hypermarkets in 34 Chinese cities." So to me that means that their 35% stake is valued at just $350mm and eventually they hope to own all of Bounteous/Trust-Mart and will do so for a $1bn total.

That's not unusual for WMT, they entered Central America by buying a small stake in Royal Ahold's subsidiary down there before taking majority control within a few years.

I don't know that I agree with you about retail not requiring a partner. Previous failures by WMT and Carrefour in other foreign markets show that having a partner makes sense. The stakes in China and India are high and more importantly the regulation/legislation landscape is probably difficult to navigate. In India WMT is teaming up with Bharti Enterprises, India's largest telecom while other competitors like Carrefour and Tesco are expected to team up with Wadia and the Tata Group respectively.

2007 Feb 28 10:24 AM

[All Roads L...:]

Amit,

There does seem to be some confusion on the numbers, and I think the reported numbers/ figures are a mix of original report in November stating a billion (percentages were not mentioned then) and then this recent report.

When I mentioned that WMT does not need a partner, I was speaking from the legal side, not the strategy side. Carrefour, B&Q, and others are all running wholly owned operations, and are doing so successfully.

With regards to importance of China & India, there is no doubt that will be the major push for a lot of industries. Fortunately for WMT it has deep pockets and can make big moves if they see an opportunity.

There are a number of firms who are not so fortunate.

2007 Feb 28 10:08 PM