In Germany, Wal-Mart is struggling
-- THE AMERICAN RETAILER'S formula--low prices combined with friendly service--isn't playing well in Europe's biggest market, where shoppers are accustomed to poor selection and gruff clerks at existing discount stores.
BERLIN--Middle America met urban Germany when Wal-Mart reopened its downtown Berlin supercenter Aug. 8 after a $2.6 million renovation.
A retiree with U.S. flags pinned to his blue coat and blue top hat waved in shoppers. Workers bagged purchases and guided customers along eight-foot-wide aisles displaying everything from soccer balls to digital cameras.
In the basement, shoppers found a store within a store: a 55,000-square-foot food market. Throughout the building, red, yellow, and black balloons in the colors of the German flag ringed signs that promised Immer Niedrig Preise, or Everyday Low Prices.
For all the biculturalism, not everything at the Berlin store was working as advertised. An 18-ounce loaf of bread selling for $1.13 could be had for just 34 cents across the street at discount grocer Aldi. After most of the press had left, harried clerks stopped bagging and let customers do the work instead. Hanno Kaeschel, 72, the pensioner who'd been greeting customers, went home. He'd been hired only for the day.
As it enters its fourth year in Europe, Wal-Mart is stymied in Germany. Although it has acquired 95 stores, the retailer hasn't managed to build a single one from the ground up.
Renovations are taking longer and costing more than planned. Wal-Mart can't even use loss leaders to attract customers. On Sept. 8, Germany's Cartel Office forced it and two German competitors to raise prices on such items as butter and milk, saying they had been selling them below cost.
Losses in Germany
Juergen Elfers, an analyst at Commerzbank Securities in London, estimates Wal-Mart has amassed $113 million in losses in Germany since December 1997.
The figure itself means little. In 1999, the Bentonville, Ark.-based retailer--the world's biggest--earned a profit of $5.4 billion on sales of $165 billion. But Wal-Mart's losses in Europe's biggest economy are an early warning signal.
Wal-Mart aims to generate a third of its profit outside the U.S. by 2005, according to Lehman Brothers analyst Jeffrey Feiner. That would be up from 8.1 percent of operating income for the fiscal year that ended Jan. 31.
To reach its goals, Wal-Mart needs to succeed in Europe, especially Germany. The country accounts for 15 percent of the region's $2-trillion-a-year retail market. Wal-Mart Chief Executive Lee Scott said losses in Germany have been greater than planned and that progress has been slower than expected.
"We bought something in Germany that we thought we could make work and still could work," Scott told analysts on an Oct. 2 conference call, during which he announced plans to open as many as 400 stores next year, including 110 outside the U.S. "But we knew going in that it was not going to be a picnic."
In September, Wal-Mart appointed its third European chief executive in three years. Dave Ferguson, 55, arrived at European headquarters in Leeds, England, after managing to reverse two years of losses at Wal-Mart's 166-store business in Canada.
Ferguson's job is to repeat the turnaround in a market in which the Wal-Mart formula--cheap, friendly service combined with sufficient market share to demand rock-bottom terms from suppliers--is not working.
"Germany has been quite challenging and disappointing," said Daniel Binder, an analyst at Buckingham Research Group in New York. "Wal-Mart isn't making progress. Last year and this year are below plan. It makes me wonder if next year will be too."
Wal-Mart won't disclose its German sales and profit goals, but its filings with the U.S. Securities and Exchange Commission provide an outline of its overall international plan. The company entered Mexico in 1991.
Since then, with 3,000 stores in the U.S., Wal-Mart has built a network of 1,004 stores in eight countries and Puerto Rico, according to the company's latest SEC filing.
Wal-Mart Europe Chief Financial Officer Tony DeNunzio, 40, said the company will overcome its slow start. He won't confirm previous Wal-Mart forecasts that the retailer would break even in Germany by the end of 2001. "The formula has worked in every other country that Wal-Mart has been in, including China," DeNunzio said.
DeNunzio said Wal-Mart is doing well in Britain after spending $10.8 billion in June 1999 to buy No. 3 food retailer Asda Group. Asda already had a customer-friendly, low-price approach similar to Wal-Mart's. Wal-Mart has said Asda's sales and profits have increased since Wal-Mart acquired it--but won't disclose by how much.
Wal-Mart is fine-tuning its formula to suit British tastes. At the Asda/Wal-Mart supercenter in Bristol, customer-service associate Hilary Jaap, 55, wheels by on a scooter to help shoppers. She likes riding the kickboard but is too embarrassed to tell her granddaughter.
Finding a greeter
"The biggest problem we've had is finding someone to be a greeter," said Elaine Pollock, 37, Wal-Mart's U.K. hypermarket manager. "As you know, we British can be reserved."
U.S. investors tend to write off Wal-Mart's difficulties in Germany as teething problems. German sales amount to just 1.8 percent of Wal-Mart's global revenue. "You have to remember that Wal-Mart lost money when it entered Canada, Argentina and Brazil," said Ulysses Yannas, an analyst at Buckman, Buckman & Reid in New York. Wal-Mart needed three years to make a profit in Brazil and Canada, and four in Argentina.
Across the Atlantic, others aren't so sure. "Wal-Mart made a big mistake coming to Germany," said Herbert Sturm, 42, head of retail research at DG Asset Management in Frankfurt. "I could definitely see them pulling out. At this rate, it will take them 20 years to reach their goal of becoming market leader."
In Germany, Wal-Mart is fighting something new: entrenched discounters whose customers expect little or no service. From Hamburg to Munich, shoppers frequently face gruff clerks, long lines and poor choice. What they focus on are low prices.
Spartan grocery
The spartan, poorly lit Aldi grocery 200 feet from the reopened Wal-Mart supercenter on Berlin's Karl-Marx-Strasse meets those needs. Groceries, vegetables and liquor bulge from cardboard boxes stacked along three narrow aisles. A lone clerk rings purchases by hand.
More than any retailer, Aldi has defined Germany's consumer culture since 1960, when founders Karl and Theo Albrecht launched their no-frills format. London researcher Retail Intelligence estimates Aldi had sales of $16 billion in 1999. Last year, Forbes magazine ranked the Albrechts--whose wealth it estimated to be $13.6 billion--ninth on its global billionaires list.
The bare-bones Aldi emporium pales compared with the bright, brassy Wal-Mart across the street in Berlin. Wal-Mart has aisles of imported wine from France, Italy, Austria and Australia; racks of magazines and newspapers; and a reading area with wooden benches. Aldi has none of those things, and that doesn't matter to Aldi shopper Hermann Obst, 35. "All I care about are the prices," said Obst.
In the United States, Wal-Mart built its way to dominance by colonizing rural America with stores offering jobs, tax revenue and cheap prices for hard-working folks. In densely populated Germany, where discounters and hypermarkets abound, that's impossible.
Local competitors are making growth through acquisition a struggle. Building stores is tricky. Take the $17.4 million, 178,000-square-foot supercenter Wal-Mart is constructing in a sugar beet field in Pattensen, a town of 14,000, south of Hanover.
Scheduled to open next year, the store will be Wal-Mart's first to be built in Germany since its arrival in December 1997. By contrast, Wal-Mart opened 280 superstores in the U.S. in the two years ended Jan. 31, according to SEC filings.
Local opposition
Pattensen Mayor Guenther Griebe said the supercenter will bring 200 jobs and millions of deutsche marks in tax revenue to his village. That is, if neighbors in nearby Laatzen agree. In August, the town sued to stop the Pattensen store, saying regional land-use plans called for a smaller store. In Germany, neighboring municipalities can block or delay for years stores larger than 55,000 square feet.
"We just don't believe in the huge shopping-mall development you have in the United States," said Laatzen Mayor Hauke Jagau.
Wal-Mart executives say they knew costs would be high when the company entered Germany in December 1997 with its purchase of the 21-store Wert-Kauf chain, which then had 4.3 percent of the hypermarket sector, according to Commerzbank Securities.
Wal-Mart paid $1.04 billion for Wert-Kauf, Elfers at Commerzbank Securities estimated. The chain had a 3 percent pretax profit margin, Elfers said. The margin is triple the average in Germany, although still trailing Wal-Mart's 5.5 percent in the U.S.
The company tapped Ron Tiarks, then 38, a Wal-Mart senior vice president who spoke no German, to head Wal-Mart Germany. Tiarks had supervised 200 U.S. supercenters from Bentonville. Following a familiar script, Wal-Mart within a month cut prices on 1,000 items. It couldn't cut costs as fast, however, and profit margins shrank.
Within 14 months, Wert-Kauf's top three German managers had left, replaced by Americans sent from Arkansas. "The first thing they did was change the official language to English," said a former Wert-Kauf manager. "That created a major problem, because our English was not that good."
Competitors are reveling in Wal-Mart's woes.
"Wal-Mart is not an international retailer," said Hans-Joachim Koerber, 54, chief executive of Metro, which owns 260 hypermarkets. "Wal-Mart is an American retailer with international operations. That's a big difference."
Koerber, forced to streamline Metro's management in September amid losses at Real and its Extra supermarkets, is right on one thing: In Germany, Wal-Mart has had to play by German rules. That means tolerating unions, which claim a quarter of Wal-Mart's 18,200 German employees as members.
It means paying for six weeks of vacation for clerks who work 15 hours a week. And it means obeying laws that forbid 24-hour operation, two-for-one promotions and business on Sundays.
That cuts into profit. In the U.S., Wal-Mart pumped out $3.1 million in operating income on average from each of 2,985 stores during fiscal 2000, which ended Jan. 31, according to the company's latest 10-K annual report. At its 1,004 stores in Mexico, Canada, Germany, Argentina, China, Britain, South Korea, Brazil and Puerto Rico, income averaged just $813,745 per store.
"Have you ever seen a 2-year-old who could speak perfectly?" asked Wal-Mart Germany Chief Operating Officer Volker Barth, who spent 20 years at Metro and Spar Handels before joining Wal-Mart. "I'm tired of analysts saying we must be big to be successful. There are a lot of companies that stay small and make good profit."
The question facing Wal-Mart is whether the retailer will be forced to make so many concessions to German laws, regulations and tastes that it cannot impose its formula.
"I'm certain that Wal-Mart seriously underestimated the difficulties of the German market," said Bernhard Huber, chief executive of Kraft Foods Deutschland. "But I'm also equally certain that the people in Bentonville won't carry losses for 20 years."
Small retailers under pressure
Wal-Mart's price cutting--and countermoves by German competitors--are pressuring small retailers. Horst Faber, owner of two Edeka grocery stores in Berlin with a combined $2.6 million in annual sales, had to fire 10 percent of his workers during the past year to keep up with price cuts. "We're seeing prices we haven't seen since 1970," said Faber. "It's brutal out there."
So brutal that last spring, after retailers complained, Germany's Cartel Office investigated. Comparing prices on milk, sugar, butter, flour, rice and cooking oil, the regulator invoked an unused law on the books since the 1950s to sanction Wal-Mart, Aldi and Lidl, a discount grocer owned by Lidl & Schwarz.
While it is legal in the U.S. and the U.K., selling below purchase price is illegal in Germany.
German regulators levied no fine, and Wal-Mart agreed to raise prices on the disputed items.