ANALYSTS GIVE WAL-MART OVERSEAS A MIXED REVIEW

ELLIOT ZWIEBACH

COLUMBUS, Ohio -- Wal-Mart Corp. is doing well in the United Kingdom but may have to make additional acquisitions in Germany to move its operations there closer to profitability, retail consultants from PricewaterhouseCoopers here said in an audio forum last week.

The analysts also said Wal-Mart may have to move more aggressively in Asia, particularly through an entry into Japan, to become a truly global player. They also said an acquisition of one of several European chains could indirectly strengthen Wal-Mart's position in South America.

Laura Huff, a principal consultant who tracks Wal-Mart's moves in Europe, said the company's acquisition of Asda in 1999 "has been a clear success story" because of Asda's pre-acquisition strengths, including its everyday-low-pricing program, that reflected the Wal-Mart model.

"Since late last year we've seen Wal-Mart making its mark more strongly by replacing Asda's leadership with managers more willing to toe the Wal-Mart line; more aggressive price rollbacks; and the opening of the first co-branded superstore, called Asda/Wal-Mart, that represents a more classic Wal-Mart mix, with 60% nonfoods and 40% foods, plus the introduction of Wal-Mart private brands.

"I also expect we will see more cost and price reductions at Asda."

In Germany, however, "Wal-Mart has not been able to steamroll the market with the Wal-Mart machine or to achieve profitability or increase market share notably," Huff said, "because unlike Asda, the acquisitions of Wertkauf and Interspar there were made too quickly, both companies lacked a significant market share and each had existing problems to fix -- though when Wal-Mart entered Germany, it emphasized the potential for profitability there, which is tremendous."

Although retailers in Germany "tend to be poor operators, the market is very price-driven," Huff pointed out, with competitors like Aldi and Lidl offering everyday low prices that haven't allowed Wal-Mart to deliver the kind of impact it has had elsewhere. "As a result, Wal-Mart has focused on fixing the asset base, including the stores, the supply chain, employee attitudes and consumer perceptions," Huff said.

Although the German operation continues to lose money, Huff said she expects Wal-Mart to continue efforts to renovate and upgrade stores there, which are producing sales increases of 25% at some locations, to improve margins by featuring nonfood more prominently in the stores and the ads, and to introduce more private brands.

Wal-Mart will open its first new store in Germany later this year, Huff said, "and that will be a good test of whether the Wal-Mart model can capture customer loyalty. But the company can't expand much in Germany without further acquisitions."

While there's been a shortage of available candidates with hypermarkets willing to sell, Huff said, changes in Germany's capital-gains tax laws in 2002 may prompt some companies to consider selling, including Metro, "which has indicated it will make some changes after the tax laws change," she noted.

With a general business slowdown in Europe, "there may be some companies that have been unwilling to sell who become more willing," Huff said.

That could provide an indirect opening for Wal-Mart to grow its presence in South America, according to Ira Kalish, director of PricewaterhouseCoopers' Global Retail Intelligence System.

Wal-Mart has established a presence in Brazil and Argentina, Kalish pointed out, "though not in as big a way as people had expected. Wal-Mart has grown slowly there through organic growth, but it's not a significant player in South America.

"However, if Wal-Mart were to make an acquisition of a large European company with holdings in South America, then it would inherit a large position there -- and that might be what Wal-Mart is anticipating."

Kalish said he expects Wal-Mart to become more aggressive in Asia, with an entry into Japan likely within about two years. "Japanese retailers are not good merchants, and stores there tend to be high-priced because of inefficient distribution," he said.