Wal Mart Exiting Germany

In the end, Germany was an expensive exercise for Wal-Mart that will cost the retailer $1
billion to exit.
The Bentonville, Ark.-based company's decision to pull out of the German market after
eight years of trying to get things right indicates the challenges the world's largest retailer
faces in expanding into overseas markets, particularly developed countries. But analysts
stressed that Wal-Mart's retreat from Germany is not a sign of deeper troubles in the
company's international operations.
Wal-Mart on Friday said it had agreed to sell its ailing German retail business to Metro AG.
In the second quarter, Wal-Mart expects to take a $1 billion pretax loss related to the
transaction. The terms of the deal were not disclosed. The stores generated $2.5 billion in
sales last year.
Wall Street signaled its approval of the development by sending the price of Wal-Mart stock
up 93 cents to close at $44.46, a 2.14 percent increase, on the New York Stock Exchange.
"It's a good thing," said Robert Buchanan, a retail analyst at A.G. Edwards. "You can't win
everywhere. You really have to pick your spots on the international stage."
Retail experts said while Wal-Mart failed in Germany, it has been successful in markets
such as Canada, Mexico and Brazil.
Still, the international division, which accounts for about 20 percent of sales, has lagged the
U.S. in profitability, said David Strasser, a retail analyst at Bank of America.
Wal-Mart had high hopes for Germany - the world's third-largest retail market after the U.S.
and Japan - when it entered the country in 1997, buying local chains Wertkauf and Interspar
for $1.6 billion. Things were rocky from the start and did not improve. Wal-Mart never
made a profit during its eight-year stay in the country.
Wal-Mart's challenges included restrictive building codes and the scarcity of available land
for new stores. There was also the persistently sluggish economy. Too few stores made it
difficult to leverage advertising costs. With just 85 units, Wal-Mart captured only 2 to 3
percent of the market. "It didn't make an impact on the Germans," said retail consultant
Walter Loeb.
Wal-Mart didn't do a good job of catering to local German tastes. The "store of the
community" program, which in the U.S. ensures that stores in ethnic neighborhoods are
stocked with the right products, wasn't effective in Germany.

But the biggest problem, perhaps, was the fact that Wal-Mart underestimated its
competition. "That segment is so violently competitive," said Loeb, noting that German
retailers such as Aldi, Tengelmann and Metro have some of the lowest prices in the world."
Even when Wal-Mart beat another retailer's price, the differences were often too small to
motivate consumers to travel to a far-flung Supercenter, a format that never won favor from
German consumers, who prefer smaller stores.
The corporate culture of Wal-Mart rubbed employees the wrong way. Edicts, including the
tradition of starting each workday with a morning cheer, were ridiculed in the press. The
company's ethical guidelines, such as rules forbidding romantic relationships between an
employee and his or her supervisor, were deemed essentially void and invalid by a German
court.
The German sale, which follows Wal-Mart's recent decision to exit South Korea, may not
be the company's last.
"I wouldn't be surprised to see one or two more" divestitures elsewhere, Buchanan said.
"Argentina has 11 Supercenters. For a company that's doing $312 billion in sales, 11 units
doesn't make sense."
ASDA in the U.K. has been struggling lately; some stores are having trouble posting sales
increases, experts said, in the face of stiff competition from the likes of Tesco plc. However,
there are no signs Wal-Mart is about to pull out of the U.K.
But retail analysts warned not to read too much into Wal-Mart's travails in Germany. Brazil,
where Wal-Mart operates about 295 units, has been successful. Canada, with some 278
stores, will get its first three Supercenters in the fall. Wal-Mart has also done well in
Mexico, where it has about 774 stores.
"Europe is the toughest part of the world for them to enter," said Loeb. "Established
businesses have a stranglehold on those countries. Eventually, they will have an opportunity
in Russia. Their purchasing in India is very strong, and in the future they could partner with
someone else."
The international sector is becoming increasingly important to Wal-Mart as it nears
saturation in rural areas of the U.S. and faces opposition in some big cities where it's trying
to expand. "Wal-Mart ultimately intends for international [business] to account for 25
percent to 30 percent of sales and profits," said Marybrett Whitfield, a senior vice president
at Retail Forward. In addition to growing the international business, Whitfield said, WalMart is developing new, smaller formats.

"There is still some runway left for the Supercenter concept, but they've been
experimenting and laying the foundation for the day when they can't expand Supercenters,"
Whitfield said.
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By Sharon Edelson and Melissa Drier