WUPPERTAL, Germany -- It has been a rough ride here for even the largest of retailers -- Wal-Mart, and its $32 billion international business. After three years, however, the Bentonville, Ark., mass merchandiser appears to be getting a handle on the German market.
"Led by new Chief Executive Officer [of Wal-Mart Europe] Dave Ferguson, [German] operations continue to improve," said Jeff Feiner, an analyst with Prudential Securities, New York, in a research note.
Wal-Mart plucked Ferguson from Wal-Mart Canada -- widely regarded as the retailer's strongest international business -- to lead Wal-Mart Europe last September. "Comparable-store sales in remodeled stores increased 10% during fourth quarter 2000. In addition, Wal-Mart Germany reduced expenses, increased gross margin and decreased inventories by 13%," said Feiner in the report.
However, factors ranging from a faulty inventory management system to pricing restrictions have made the German market a difficult one to crack -- even for the world's largest retailer.
What's more, Wal-Mart, which is renowned for its fiercely efficient operating model, purchased chains with outdated technology systems, said Ulysses Yannas, an analyst with Buckman, Buckman & Reid, Red Bank, N.J.
Wal-Mart entered Germany in January 1998 by acquiring 21 Wertkauf supermarket stores. A year later, the company acquired 74 Interspar supermarkets.
To boost performance in Germany, where Wal-Mart operates 95 stores, the retailer has been remodeling stores, trimming inventory and upgrading its distribution system.
"In every new market, we encounter roadblocks," said Maria Rodriguez, a spokeswoman for Wal-Mart International, Bentonville, Ark. "But we are excited about our improvements and the acceptance from our customers," said Rodriguez, who declined to disclose German sales figures.
Wal-Mart has outlined plans to boost its German presence with 50 new stores over the next three years.
"I think they're moving toward profitability in Germany," said Yannas, who said Wal-Mart Germany could turn a profit as soon as next year.
The company said it expects to show a profit there in the next few years.
"In Germany, they had to start from scratch," said Yannas. "They had to install their pricing system, instill employees with the Wal-Mart culture, redo their stores and start setting up their infrastructure."
Indeed, during a conference call late last year, Lee Scott, president and chief executive officer, told analysts, "The more we can get the Wal-Mart culture imbued in the management team in Germany, [the better]."
Also, "Europe is a totally different market from a regulation standpoint -- Germany especially," added Yannas, noting store zoning and square footage restrictions.
But German trade laws have challenged a key ingredient of Wal-Mart's success formula: selling at the lowest possible price.
In September, German antitrust authorities ordered Wal-Mart Germany to increase prices on certain food items. At the time, Susanne Muller, a spokeswoman for Wal-Mart Germany, said that the enforced price increase would not affect home products.
However, recently, a report by MotleyFool.com, Alexandria, Va., suggested that Wal-Mart scored a victory in the pricing battle.
MotleyFool said Wal-Mart will cut prices on 1,000 common items in a move to attract customers.
Although the retailer could not confirm that report, last summer, Wal-Mart announced a similar-sounding price rollback campaign at all German Wal-Mart Supercenters.
Wal-Mart International plans to open 100 to 110 new stores in existing markets outside the United States next year.