Welcome to Wal-World

Wal-Mart's inexhaustible march to conquer the globe

by Andy Rowell

Multinational Monitor magazine, October 2003

 

"Country by country, the world is discovering the great value of shopping at Wal-Mart," says John Menzer, president of the international division of Wal-Mart, the world's largest retailer. Menzer's vision is one where WalMart becomes a global brand, just like McDonald's or CocaCola, monopolizing the global retail market.

People in the United States may be used to the sight of Wal-Mart in their communities, but not so the rest of the world. But all that is about to change.

Wal-Mart is already a huge player-by far the world's largest retailer, standing 3.5 times as big as the second largest retailer, Carrefour. Now the company is employing an aggressive policy to expand its international operations and to dominate the markets where it operates.

Wal-Mart has over 300,000 workers outside the United States. Seventeen percent of the company's sales of some $41 billion now comes from international operations. This year, the company plans to open or expand 115 international stores in seven countries, with an additional 113 next year.

Why the international push? "We need to be the growth of Wal-Mart some day when the United States slows down," says Menzer. "The United States is 37 percent of the world's economy, which leaves 63 percent for international. If we do our job, international operations should someday be twice as large as the United States. That's a big challenge, but that is the opportunity in front of us."

The trouble for Wal-Mart is that its U.S. operations are slowing down, as the market slowly becomes saturated. The company has no choice but to expand rapidly abroad. As Business Week explains: "Its culture and stock price are built on the expectation of double-digit sales and profit gains year after year." Although there is still room for expansion in the United States, it is getting increasingly hard for the company to record double digit returns. In the United States, although the company opens a new store every 42 hours, it is also suffering from soft sales, rising inventories and languishing sales at its famous Sam's Club division.

SPRAWLING OVERSEAS

Wal-Mart moved abroad in the early nineties. First came strategic countries in the Americas: Mexico in November 1991, then Puerto Rico nine months later. Canada came next in November 1994 and Argentina and Brazil a year later, in November 1995.

By August 1996, Wal-Mart had moved into Jakarta, through a licensing agreement, though the company left Indonesia within two years, following the Asian financial crisis. Also in 1996, Wal-Mart moved into China. Later, in 1998, the company moved into the European market in Germany. South Korea came next in July 1998 and then the UK in July 1999. Three years later, it bought its way into the Japanese market too. By July 2003, Wal-Mart International had over 1,300 units abroad.

Wal-Mart's first international expansion was the opening of Club Aurrera, a smaller version of Sam's Club, in the suburbs of Mexico City as a joint venture between Wal-Mart and Mexico's leading retailer, Cifra. Wal-Mart later acquired the controlling interest, and in February 2000 Ciftra changed its name to WalMart de Mexico.

One person who has watched Walmart's march to global domination is Al Norman, the founder of Sprawl-Busters who has been described by CBS's "60 Minutes" as the guru of the anti-Wal-Mart movement. "What Wal-Mart did in Mexico was very instructive," says Norman. "Mexico was the testing ground for the method of operation. They basically acquired existing stores. They moved into Mexico and that became the theme in other countries, like the UK, Germany and Japan. They would buy into an existing operation, rather than start from scratch."

The strategy of corporate takeover puts the company at an advantage when it enters into a new market. First, a large competitor is eliminated, and second, Wal-Mart gains real estate and employees, and a massive presence in its targeted location. More importantly, by taking over existing stores rather than new ones, it avoids the community opposition that it faces in the United States in one of its three new stores -led by the likes of Al Norman. What opposition the company has faced overseas has been from unions over low pay, regulators over predatory pricing and small businesses that face financial ruin.

Although in the United States sprawl has become synonymous with Wal-Mart, this is not so overseas, because Wal-Mart by and large has taken over existing supermarkets rather than opened up new stores. However, looks can be deceptive. The nature of Wal-Mart's business is such that sprawl and out-of-town development is an inevitable consequence. Wal-Mart's "pile it high, stack it cheap" mentality works best where the store is big, so there is lots to sell. The bigger the store, the more likely that it will be on the edge of town, driving development outwards.

When Wal-Mart opened its first superstore in the UK, it was on the outskirts of Bristol, with a parking lot to fit 1,000 cars. As only four buses a day go to the store, the majority of people are forced to drive. "Everything will change now," says Binal Patel, who ran a small community grocery and post office, just down the road from the new store. "I have lived in the U.S., so I've seen what happens. Everyone starts driving to do their shopping, increasing the amount of traffic on the roads. In a few years time, the intense competition will have caused all the local shops to close down."

So a spiral of sprawl begins. The out-of-town supermarket closes the local in-town stores, so more people drive out-of-town, forcing more in-town shops to close. The more successful out-of-town shops are, the more others shops want to relocate out of town, too. Indeed, UK government research has shown that out-of-town supermarkets have a serious impact on up to 50 percent of in-town shops. Other research suggests that just one supermarket costs on average 276 local jobs.

Wal-Mart also threatens small shops in countries it does not even operate in. In 1998, the Irish government adopted a cap on the size of stores. But companies like Swedish furniture retailer IKEA and Wal-Mart are believed to be pressuring government officials to lift the cap. The only place that such large stores would be built would be out of town, creating sprawl. "Any country that has predominantly smaller stores will be shocked by the superstore format," argues Al Norman.

Just as Wal-Mart exports sprawl, it exports its bad labor practices. Uni-Commerce, the global trade union for commercial workers, characterizes Wal-Mart as "an obsessively anti-union company at home and abroad." The company "builds its competitive advantage on low wages, poor benefits and a squeeze on producers. Through predatory pricing, it can force both large and small competitors out of business," according to Uni-Commerce. "Worldwide, Wal-Mart is the most serious threat to employment, wages and working conditions in commerce."

The problem with low pay and unions is one of the main obstacles the company faces in its international expansion plans. The rift between unions and Wal-Mart is said by financial analysts Fallstreet.com, to be "intensifying with each global step the company makes."

The fight is likely to get worse as Wal-Mart dominates more and more markets. What Wal-Mart did in Mexico should serve as a warning to other countries, argues Norman. "Wal-Mart today controls 50 percent of the grocery sales in Mexico, which is just staggering. The idea that a foreign company would control half of the grocery sales in Mexico must be a source of enormous frustration to local retailers. Someone's been hurt, of course you have a lot of casualties. "

At the end of 2002, Wal-Mart was operating some 608 units in Mexico under a variety of names: Bodegas, Suburbias, Superamas and VIPS. The company also had 62 Supercenters, and 46 Sam's Clubs. Such power was worrying the authorities. Last year, the Mexican Federal Competition Commission became concerned that Wal-Mart was using its market share to pressure its suppliers to lower their prices to the retail chain. In March 2003, the agency insisted that Wal-Mart agree to a new "code of conduct" for dealing with its suppliers. The country's biggest three competitors in Mexico have now joined forces to try and fight Wal-Mart, but even combined they are still considerably smaller than Wal-Mart.

FINDING ITS FOOTING

After Mexico, Wal-Mart's next move was into Puerto Rico in 1992, where the government tried to block WalMart's purchase of a local supermarket chain, arguing that it violated antitrust laws. "The local retailers are complaining that Wal-Mart has a stranglehold," says Norman, who has visited the country twice, having been invited by a union of small businesses to assist in their fight against Wal-Mart. In 2002, Wal-Mart purchased 35 Supermercado Amigo supermarkets. "There was a fight to prevent them acquiring Amigos, but the Wal-Mart/Amigo combination gives them a very strong hold there in terms of market share," says Norman.

The next major strategic advance by the company was into Canada in 1994. Wal-Mart entered by buying 122 ailing Woolco stores. Since then, Wal-Mart's Canadian stores have experienced eight years of consecutive growth of both sales and profit. By 2003, the company was operating some 200 stores. In January, Wal-Mart announced that it was going to introduce its warehouse "Sam's Club" concept to Canada, in what is seen as a shake-up of the retailing landscape in Canada. Eventually, there could be as many as 60 Sam's Clubs in Canada, and even the introduction of WalMart super stores.

Wal-Mart surprised the retail industry by buying the 21-unit Wertkauf chain in 1998 in Germany, its next big move. It was seen as defying analysts' predictions that the German market was too mature, with thin margins and sluggish sales and space too limited to entice the company, especially compared with what was seen as the greater revenue potential of the emerging Asian markets.

The German market has not been easy for Wal-Mart. Business analysts from the Institute of World Economics and International Management at the University of Bremen call Wal-Mart's German entrance strategy "nothing short of a fiasco" that leaves the company with a "bleak" future in Germany. Business Week says that "many of the wounds were self-inflicted" as "Wal-Mart failed to understand Germany's retail culture, the regulations that can add five years or more to the launch of a new hypermarket, and the stiff competition among some 14 hypermarket chains in a stagnant market."

In 1999, Wal-Mart's losses were estimated at 400 million German marks or almost $200 million, twice that expected The company also fell afoul of the regulators in 2000 when the company's "Always Low Prices" were found to be too low by the German Cartel Office. The Cartel Office found that Wal-Mart-along with other supermarket chains- were selling staples such as milk, butter, flour and cooking oil below cost on a regular basis, an illegal practice. "To me, it'. more about seeing that independent companies are no pushed out through the unjust pricing strategy of big companies with superior market strength," said Ulf Boege, president of the Cartel Office.

The company is also in trouble with the German unions. In July 2000, Wal-Mart workers in Germany went on strike to force the company to join the collective agreement for commerce. Union action including strikes continued, and in the summer of 2002, Germany's largest trade union, the Unified Service Sector Union, known as Verdi, once again warned the company that it would not give up before a collective agreement has been signed. Finally in November 2002, in what was seen as a major success for the union, WalMart announced that it would recognize and apply the German collective agreements for commerce.

In Germany, the company's expansion plans have also run into trouble. The company had declared that it wanted to add another 50 hypermarkets to its German store network. But an attempt to lay its hands on Metro's Real hypermarket chain failed when the major shareholders refused to sell.

GOBBLING THE UK

The German experience did not stop the company from 1 moving into another major European market, the UK. The strategy was the same-to buy an established player. In the UK, Wal-Mart took over Asda in June 1999 and now has some 259 stores and 19 depots across the UK.

Insiders say that the two companies were a perfect match. In fact, Wal-Mart is now importing Asda's clothing line. George, into its U.S. stores. "The Asda culture was modeled on Wal-Mart," says one ex-employee. When two UK businessmen, Archie Norman and Alan Leighton, took over the company in the late eighties, they visited Wal-Mart in the United States and took the model back to the UK. "The best parts of the Wal-Mart culture were stolen and existed within Asda before Wal-Mart came along" the former employee continues. "The worst parts have been brought in after wards."

In the UK, Wal-Mart has announced plans for 10 to 12 new stores per year, with the company hoping "to create in excess of half a million square feet of new retail floor space per annum for the foreseeable future."

Friends of the Earth criticized the company in July 2003 for planning to put 40 mezzanine floor extensions around the country. These are internal second floors that are suspended above the existing floor, giving added floor space, without the need for planning permission. "The scope for uncontrolled expansion is considerable and could make a mockery of national planning guidance which seeks to protect town center shops, local communities and the local environment," argues Friends of the Earth's Tony Juniper.

Privately, Wal-Mart plans to become the biggest food retailer in England by 2005, surpassing current market leader, Tesco's. This goal cannot be met by growth alone, so it means acquisitions. Asda is in the bidding to buy Safeway -currently the fourth largest food retailer. If this effort fails, many believe Asda will bid for the rival company Somerfield -currently number six on the list. "Safeway makes sense for us," says one Wal-Mart insider. "It's all about being able to expand in parts of the UK where our model is not yet available."

Asda, whose vans have just been resprayed to say "part of the Wal-Mart family," makes much of its commitment to communities, its workforce and to the environment. Former employees say the slogan is a sham. "I expected to find an organization that valued its colleagues and I didn't," says a former manager at Asda's head office.

"I found an organization that valued the greenback above anything," the manager continues. "It's not a good employer if you look at the number of people at Asda House who leave. They have a very high turn-around of staff, as they don't look after people. They talk massively of the concept of a 'work-life balance,' but when you actually want to take a bit of life out of your work, you are told you are not allowed to do it. The policies are all in place, but the whole thing is PR-driven."

The manager also believes that Asda's pledges on the environment and on being committed to UK agriculture to be "cynical and hollow. It was about the PR that came with the pledges, not the delivery. It's nauseating. They are destroying local shops as they go. We know this. You can't replace local shops with a little bit of local sourcing. " Despite these concerns, Wal-Mart looks set to dominate the UK market.

ONWARD TO CHINA

In Asia, the company also looks set for further expansion, despite setbacks in South Korea. A joint U.S./Korean academic study of Wal-Mart's operations found that shoppers were not "impressed" with the company. "Wal-Mart's South Korean operation has chosen bad locations, set prices too high and had a poor selection of merchandise," the study found. Asia Times also noticed how the company "failed to realize that no matter how cheap Wal-Mart products are, South Korean housewives do not go a long distance to shop or purchase food lacking freshness."

But difficulties in South Korea have not stopped WalMart's Asian expansion. In March 2002, Wal-Mart announced a draft agreement to purchase 6.1 percent of the stock of Seiyu, a Japanese retail chain. This followed an unsuccessful attempt to acquire an even larger retailer, Mycal. Seiyu operates 400 stores located throughout the country; Wal-Mart is entitled to increase its ownership to 66.7 percent over time.

In China, the company opened its first outlet in the southern city of Shenzhen in 1966. But its important move came in July 2003, when the company opened its first store in Beijing, having already opened some 22 stores in other parts of the country. Analysts have noted that Wal-Mart, which is already the single largest buyer of Chinese products (if Wal-Mart were a nation, it would be China's eighth-largest export destination), is set to rapidly become one of the biggest sellers to Chinese, too.

"I think we'll do well," says Wal-Mart President for Asia Joe Hatfield. Indeed, the company is already said to be changing consumer patterns. People are changing from a daily trip to the local market where local fresh food is sold to a weekly visit to the Wal-Mart store to buy packaged goods.

So Wal-Mart's inexhaustible march goes on. In July 2003, Wal-Mart was said to be interested in buying the Brazilian, Argentine and Peruvian units of Dutch retailer Ahold. Analysts believe that Wal-Mart's next target market will be Australia, followed by further investment in Asia and China.

When Wal-Mart executives look at the globe, they only see expansion. "The future ain't what it used to be," WalMart Chairman David Glass told shareholders in June 2003, "It'll be a lot better."

This troubles Al Norman deeply. "In five or six years, you could be talking about 5,000 to 6,000 Wal-Mart stores outside of the United States," says Norman. "Wal-Mart is Americanizing retailing around the world. It is a really undesirable outcome both culturally and economically for a U.S. company to be exercising so much power."

 

Andy Rowell is a UK-based freelance writer. He is the author of, most recently, Don't Worry-It's Safe to Eat (Earthscan).


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