Date of publication: August 1, 2006
Source: Bloomberg News
By Lauren Coleman-Lochner in New York
Aug. 1 (Bloomberg) -- When it comes to selling overseas, the strategies of American retailers don't always translate.
The failed attempt of Wal-Mart Stores Inc., the world's largest retailer, to conquer Germany illustrates the pitfalls of trying to stamp the U.S. model on another culture. Companies from Starbucks Corp. to Toys ``R'' Us Inc. have had to change the formulas that brought them domestic success when they have expanded abroad.
``It is a lot tougher than people think to take a retail concept and go global,'' said Stephen Hoch, chairman of the marketing department at the University of Pennsylvania's Wharton School of Business in Philadelphia. ``You dominate in one market, does that help you dominate in another?''
Wal-Mart said July 28 it would exit Germany after eight years and $1 billion in losses, defeated by Aldi Group and privately-owned Lidl, homegrown discounters which rule the segment in Germany. The Bentonville, Arkansas-based chain is selling its 85 German stores to Metro AG, the country's biggest retailer, for an undisclosed amount.
The German rout follows failure in South Korea. Wal-Mart in May sold its 16 stores there to Seoul-based Shinsegae Co., the country's biggest discounter.
Even in the U.K., where shopping habits and language are similar, the chain is struggling. Its Asda supermarket group trails market leader Tesco Plc, which gained 1.2 percentage points in market share in the past year, compared to just 0.1 percentage point for the folks from Bentonville. Tesco, with 31.5 percent of the British market, has almost twice Asda's 16.6 percent share.
Unfamiliar
A common language and shared values aren't recipes for winning in new regions. Unfamiliar laws, tax codes, and workers' expectations can thwart retailers' plans, said Patricia Edwards, a Seattle-based money manager at Wentworth Hauser & Violich, with $8.2 billion in assets including Wal-Mart shares. ``You're at a disadvantage if you don't know all the tricks of that country,'' Edwards said.
Shoppers in Europe, for example, are generally more loyal to local outlets, said Richard Hastings, an analyst at New York- based Bernard Sands LLC, a retail credit rating service. ``Wal- Mart had the task of trying to convince people to stop shopping elsewhere and switch over,'' he said.
Retailers successful outside their home countries either adapt well to the indigenous culture or have a brand name so strong that shoppers are drawn to their stores regardless of their national affiliation.
Local Help
Gerald Storch, the chief executive officer of Toys ``R'' Us, attributes success outside the U.S. to hiring local managers. That has taught the Wayne, New Jersey-based company to place advertising fliers in Saturday papers in Canada, not Sunday, for instance, and to open earlier in Japan on Sundays, the busiest shopping day, Storch said in a July 28 interview.
Toys ``R'' Us, which was bought for $6.6 billion last July by a group including Kohlberg Kravis Roberts & Co. and Bain Capital Partners LLC, has 52 percent of its 1,235 toy stores in 31 other countries outside the U.S.
Starbucks, based in Seattle, had to change its approach when it added stores in China, Starbucks Chairman Howard Schultz said in November. The chain worked harder than in other countries to persuade a population that favored green tea to try its dark roasted coffee. The ``iconic nature'' of the brand helped, Schultz said.
`Aspirational Brand'
So did the fact that Starbucks stores and menus look pretty much the same everywhere, said Sharon Zackfia, an analyst with William Blair & Co. in Chicago. ``They're a Western aspirational brand and Western aspirational brands do very well'' in developing markets such as China, she said.
The company's penchant for choosing high-profile locations furthered buzz, especially after it became the first Western retailer to open in Beijing's Forbidden City, Zackfia said.
Luxury retailers such as Burberry Group Plc and Louis Vuitton have succeeded in foreign markets because ``you've got something that no one else has,'' Edwards said. ``That's totally different than competing on price.''
Sales of Louis Vuitton handbags boosted second-quarter revenue 12 percent at LVMH Moet Hennessy Louis Vuitton SA, the Paris-based company said last week. The company reported strong sales from new Asian stores in cities such as Taipei and Beijing.
Burberry Expands
Burberry sales at company-owned stores worldwide sparked an 18 percent gain in first-quarter revenue, the company said July 12. The London-based company wants to raise the number of U.S. outlets in coming years to 60 from the current 36 in spots such as Troy, Michigan and Denver.
Luring customers is a tougher task for a discount chain, Edwards said, because it touts price rather than a particular item or image. For such retailers, which sell a wide variety of items, ``it's more difficult,'' Storch agreed. They aren't offering anything unique and have to contend with more local variation in groceries and fashion.
Nonetheless, Wal-Mart aims to generate one-third of sales and earnings growth from the international division. Last year, Wal-Mart's overseas sales growth accounted for 24 percent of total gains. About 20 percent of the company's $312.4 billion in sales came from outside the U.S.
Wal-Mart earned $11.2 billion last year, with sales of groceries and other basics outpacing items such as clothing and electronics. In the past year, shares of Wal-Mart have fallen 11 percent compared to a 13 percent decline in the Standard & Poor's 500 Retailing Index.
Foreign Troubles
Competitors such as Royal Ahold NV have had their own issues in the States, where the Bentonville behemoth reigns as top grocer.
Ahold, based in Amsterdam, had to change layouts and expand areas such as prepared foods at the company's Stop & Shop and Giant supermarket chains, said Hastings of Bernard Sands. Foreign supermarkets have also been squeezed between Wal-Mart's aggressive pricing and upscale rivals such as Whole Foods Market Inc. of Austin, Texas, he said.
Wal-Mart has been able to grow in markets where the whole concept of big-chain retailing is still in development. In Mexico and more recently in China, Wal-Mart has done well because it's entered those markets before other large competitors or partnered with local businesses, Edwards said.
Wal-Mart de Mexico SA, Latin America's largest retailer, said July 10 that second-quarter profit surged the most in five quarters, helped by World Cup merchandise. The Mexico unit, Wal- Mart's first international foray, plays to hire 15,000 new workers this year. It has 807 stores in Mexico.
`Cultural Phenomenon'
In China, Wal-Mart is a ``cultural phenomenon'' Edwards said. The company operates 60 stores there and plans to open 20 more this year, spokeswoman Amy Wyatt said.
China has been an engine of growth for Starbucks as well. Schultz said in February that China may become the company's largest market outside the U.S. It has about 250 stores there now, out of almost 12,000 worldwide.
``We were stunned to see how Chinese customers are using Starbucks stores as an extension of their home or office,'' Schultz said in November. ``It's partly because the stores are bigger than their apartments, and commutes are very long.''