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Are global food retail heavyweights hitting the right nerves in international markets with the "one size fits all" - knock down prices, warehouse-style superstructures - approach? Appealing to discount-hooked customers may garner high yields in rookie mass markets but does always not guarantee success in a competitive economy. The trick for food retailers lies increasingly in zeroing in on non-price differentiators. As Wal-Mart could discover, if India's home-grown giants cash in on first-mover advantages.

After eight long, unprofitable years, Wal-Mart Stores, Inc. is finally prepared to admit defeat on one of the world's most lucrative – and punishing – retail battlegrounds - Germany. The US goliath announced on July 28 that it had agreed to sell its stores there to the German retail group Metro AG. The move, along with the decision in May this year to exit South Korea, throws up questions on the viability of transferring regionally successful concepts to a world audience with equally satisfying payoffs.

The world's largest retailer is leaving Germany by selling its 85 stores to Metro AG at an estimated $1 billion loss. Metro, one of the largest German retail conglomerates, will fold the hypermarkets into its chain, Real, which is bigger than Wal-Mart (550 stores) but is also ailing. Wal-Mart's German stores employ 11,000 people and generate €2 billion, or $2.5 billion a year in sales, according
to Metro.

By adding those stores to Real's 550 supermarkets and hypermarkets, Metro said it could fortify its purchasing power in what is the world's third-largest retail market. The company said it was committed to hypermarkets.

“The locations of Wal-Mart outfits fit very well into our network and we will have great synergies in logistics, marketing, sourcing and other parts,” says Juergen Homeyer, an official spokesperson at Metro AG.

“We plan to convert the Wal-Mart stores into Real stores. Both are hypermarkets and their concepts are in many ways not fundamentally different.”

The decision to sell out to the Metro Group came two months after Wal-Mart sold its 16 stores in South Korea to Shinsegae Co. for US$ 882 million and amounts to a rare retreat by the world's largest retailer from its breakneck global expansion.

The Germany debacle has not surprised many. In fact, even as early as September 2000, Commerzbank Securities analyst Jurgen Eliers wrote in one of Europe's leading food retail magazines Elsevier Food International: “The retail giant's initial optimism on entering the German market has waned, and its managers now have a much more realistic view of the time required to achieve a proper return on capital employed.”

Analysts say Wal-Mart never really got a grip on a market characterised by gruelling price competition, well-entrenched discounters and the cultural resistance of German shoppers to hypermarkets.

“Both South Korea and Germany are similar markets – they are isolated (either geographically or by language) and limited in growth due to stable populations. In both cases, Wal-Mart never got any traction. I think they judged that the rewards of eventually gaining a dominant market share were going to simply be too costly in both cases,” says Stephen Hoch, Chair, Marketing Dept., Wharton School of Business, USA.

Figures Love Goel, CEO, Growth Ventures Group, a US-based investment firm, “Germany's retail markets are among the most competitive in the world with well-dug in discounters; Wal-Mart did not have the same scale advantages in Germany when it comes to distribution and advertising that it has in the US. Despite the tough outlook, Wal-Mart must have felt it was imperative to be in Germany because of its size.”

However, on the upside, backing away from troublesome markets allows Wal-Mart to pursue other opportunities globally as well as defend its position domestically.

“Even a huge company like Wal-Mart can't afford to have a loss making operation bleeding so much that it hurts the other foreign operations. I therefore view its decision to divest its German operation is a radical cure to refocus on other operations, e.g. China and if the government adjusts the legislation for foreign ownership India,” says Pascal Kuipers, chief editor of Netherlands' Elsevier Food International magazine.

Some of Wal-Mart's troubles stem from the way it broke into the German market in 1998.

Tactically

In 1997, Wal-Mart acquired 21 Wertkauf hypermarkets for an estimated price of Euro 1.23 billion for operations with an annual turnover of Euro 1.22 billion (including real estate). Prior to the acquisition, Wertkauf was profitable but looking to be heading for trouble – sales floor area productivity was falling and pre-tax returns on sales margins were under pressure. In the eight years leading up to its sale, the retailer had not expanded; insufficient economies of scale now prevented them from offering competitive prices at retail.

A year later, Wal-Mart bought over 74 poorly-managed Interspar hypermarkets, operated by Spar Handels AG (a subsidiary of French company Intermarché) for Euro 562 million (excluding real estate). Not only were the Interspar stores decaying physically and manned by sub-standard staff, Wal-Mart took them in on sub-tenant basis (Spar remained major tenant). This meant that the renovation of the outlets could not go through before Wal-mart remoulded its contracts with the landlords, something that took until the beginning of 2001 to implement.

Although analysts believe that acquisition rather than organic growth would have been the only way for Wal-Mart to make any impact in Germany, the retailer simply chose the wrong ones to acquire and also underestimated the complexities of German real estate laws and labour legislations.
By acquiring the outlets of Wertkauf and Interspar, it wound up with a ragbag of stores, geographically dispersed and often in inconvenient locations.

As endorses Dr. Bernd Hallier, president, EuroShop: “One was a profitable hypermarket-company and the other merely passed on its ailing outlets. With this skewed assortment-mix, customers of the first one missed their regional flavour while the other outlets anyway had been only trouble-makers.”

“Wal-Mart was keen to expand beyond the US in the late 1990s and it chose Germany for obvious reasons – it was the largest grocery market in Europe. However it chose the wrong retailers to take over as they did not have critical mass and many of their stores were in secondary locations,” adds Nick Gladding, a senior retail analyst at Verdict PLC, a unit of Datamonitor, UK.