March 9, 2012

Walmart ante portas

Juan Roig, CEO Mercadona (photo: Mercadona)
Mercadona CEO Juan Roig: Is he being courted by Walmart? (photo: Mercadona)
Sometimes it is hard to believe one’s own research or what informants are telling you: Walmart would seem to be actively negotiating a return to Western Europe.

According to reliable and independent sources, the world’s largest retailer by sales is in talks with Spain’s leading retailer Mercadona as well as with Italy’s foremost hypermarket operator Esselunga.

One also hesitates to print, when Mercadona's head office denies the same: "You're barking up the wrong tree.", Walmart, as usual, refuses to comment, and no answer has been received from Esselunga to date.

As, furthermore, our newspaper’s sources do not wish to be named, it is only possible to assess how probable the above story might, or might not be, and to explore the potential logic behind any such discussions.
Boring, old Europe
At first blush, there would seem to be none at all. Having stabilised its US business in 2011/12 for the second quarter in a row, Walmart is now in an excellent position to grow sales in global growth hotspots.

These include S.E. Asia, Latin America and Africa, where annual revenues are increasing at 15 per cent – ten times faster than on Walmart's home market in the USA.

Why then bother with Western Europe whose saturated markets offer low growth and pose a big question mark regarding financial stability?

Although the managers who were then responsible have long since left the stage, one only has to recall what happened when Walmart last tried its luck in Europe.

Between 1997 and 2006, Walmart was only able to purchase two small regional hypermarket chains (Wertkauf and Interspar) and lost an estimated €3bn of shareholder money before it finally exited the country with egg on its face.

One must also ask why Walmart would want to go through the hassle of negotiating with such staunchly independent characters as Juan Roig and Bernardo Caprotti, the owners of Mercadona and Esselunga?

Metro and/or Carrefour?

Surely the Americans would be better off negotiating with Metro Group in Germany and/or Carrefour in France? After all, the big guys could provide Walmart with what it craves, i.e., scale.

Until very recently, Metro Group tried to sell its “real,-“ hypermarket chain for years without success.

Also, after five (!) profit warnings and a 40 per cent collapse in the share price last year, Carrefour currently finds itself in the most precarious situation it has ever experienced in its 53-year history.

It is impossible for an outsider to know the truth, although it is considered likely that, despite statements to the contrary, Metro Group has held at least talks with Walmart in the past.

What logic could be used to corroborate the claims made by our sources?

Spain and Mercadona

Firstly, crisis-ridden Spain would be a relatively cheap point of entry into Europe for the Americans. After the UK, where Walmart already owns no. 2 food retailer Asda, Spain would be the one country in Europe where Walmart would have the most cultural affinity.

The US retail giant has many Hispanic customers in the south-west of the Union and also possesses considerable experience of retailing in Latin America.

Walmart could therefore easily draw on a pool of Spanish and Portuguese-speaking management talent should it decide to enter the Iberian peninsular.

With 1,300 supermarkets and neighbourhood stores creating annual sales of around €16.4bn, the purchase of Mercadona would automatically make Walmart the no. 1 player in Spanish food retailing.

With an ebitda margin of around 5.7 per cent, the family-run company is also highly profitable. Surprisingly, there are many similarities between the two corporate cultures.

Like Walmart, Mercadona is a leading IT & logistics operator, pursues an EDLP strategy (“siempre precios bajos”), allows its full-time employees to participate in profits, and calls the customer “el jefe” (the boss).

Proud Esselunga

Although Esselunga is only the no. 5 player in Italy, its 143 superstores and hypermarkets sited in the north of the peninsular make it the largest force in its segment.

Apart from the motives of wounded pride, Walmart, like many US-American corporations, tends to regard Europe as one single market. Within the terms of its own logic, it could roll up Europe as well from Spain or Italy as from Germany or France.

Retail analysts still remember from road shows in the 90’s how Walmart once spoke of wanting to achieve annual revenues of $50bn medium-term in Europe.

At the time, major international brand manufacturers told Lebensmittel Zeitung that Walmart considered it important “to be in all the world’s major economic blocs as our major brand customers are”.

Russia and X5
Looking at Europe as a whole, obviously the sheer size and dynamism of Russia would have far more attraction for Walmart than any Western European country. However, despite recently headhunting Lev Khasis, CEO of Russia’s leading food retailer X5, Walmart closed its “Emerging Markets – East” office in Moscow in December 2010.

“We had planned to jointly develop greenfield sites with Migros Ticaret and Ikea, and the contracts for the purchase of X5 were virtually on the table ready for signature, when Rob Walton rang from head-office in Bentonville, 9,000 kilometres away, to say that the deal was off.”

This story is vehemently denied by X5. However, the same anonymous source, who claims to have been part of Walmart’s extended M&A team in Russia, also believes that Rob Walton had good reasons for getting cold feet.

The eldest son of founder Sam Walton, whose family owns an estimated 48 per cent of Walmart shares valued at around $100bn, was worried about the insecurity of any investment in Russia.

Although Walmart still claims that it believes the Russian market “has promise” and is still watching for "the right market entry opportunity", the withdrawal of its M&A teams from the country speaks a different language.

Cheesewright at Heathrow

More significantly still, Walmart opened an office at London’s Heathrow airport in 2011 which reports to David Cheesewright, President & CEO of Walmart's new regional management team responsible for business development in Europe, the Middle East, Africa and Canada.

Apparently, the twelve-man office has nothing to do with Asda in the UK, but a lot to do with the creation of a new keyhole on Western Europe.

Despite all the above, one can only speculate what the motivation could be for Juan Roig and Bernardo Caprotti to sell their life’s work.

Bernardo Caprotti, who has not always seen eye-to-eye with his three sons, is now 86 and hasn’t made his succession clear – at least to the outside world.

Juan Roig is only 63, but Spain’s financial crisis may have made even the country's food retail market leader reflect on the need for a strong international partner.

At the end of the day, however, it is almost irrelevant whether Walmart manages to master the doubtless tortuous negotiations with Roig and Caprotti.

With annual revenues of $444bn and a free cash flow of $10.9bn, if Walmart wants to return to Western Europe, it most certainly will.

Lebensmittel Zeitung with its online sisters (photo: LZ)
Lebensmittel Zeitung with its online sisters
Read in German: 'Titel' by international editor Mike Dawson on page x of Lebensmittel Zeitung, no. 9, 02.03.2012

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