February 23, 2012

What Walmart didn't say at the AGM

Mike Duke, President & CEO Walmart (photo: Walmart)
Mike Duke: "Every segment of our business is stronger than it was a year ago" (photo: Walmart)
This Tuesday in Bentonville/Arkansas, President & CEO Mike Duke and his chummy management team obviously didn't want to set off any firecrackers. In fact, there were no surprise announcements to make regarding Walmart's annual results for 2011/12.

As expected, we heard all the usual superlatives, but with surprisingly little corporate gush. Even the word "great", almost irresistible for American businessmen, fell less frequently than in the past.

True to form, the top dogs at the US retail behemoth said everything they were legally and ethically obliged to.

They certainly met SEC regulations and, despite a temporary 4 per cent decline in the share price, probably also most analyst expectations.

There were even perfunctory updates on sustainability and other politically-correct topics.

But what Duke didn't mention in his folksy, southern drawl is what interests us today.

Company of superlatives

In the business year to January 31, 2012, the 10,130 outlets of the global giant achieved mind-boggling net revenues of $444bn (€334bn).

Foreign operations alone now count for $126bn (€95bn) in revenues – more than the annual sales of top German food retailers Edeka and Rewe combined. And, international rivals take note, Walmart International is growing at over 15 per cent a year – ten times more than in the US (excluding Sams Clubs).

Here, we were dutifully informed that Massmart, the new South African subsidiary, would continue to be integrated with a view to expanding activities in Sub-Saharan Africa. We were also told that international expansion would focus on Brazil, Mexico and China.

Russian gap on the global map

Nothing, however, was said about filling in the two glaring white gaps on Walmart's global map: Russia and Continental Europe.

Recently, a reader contacted German Retail Blog claiming to work or to have worked for Walmart's London Heathrow-based European observation unit, which apparently reports to David Cheesewright, President & CEO of a new regional management team created in late September 2011.

The informant also stated that the Walmart team actually had the documents for the purchase of leading Russian food retailer X5 ready for signature when founder-son Rob Walton called off the deal by phone from head office in Bentonville/Arkansas. Apparently, the Chairman and shareholder wasn't happy with the general legal situation for foreign investors in Russia.

This may or may not be true, but it is at least plausible. Walmart has already recruited Lev Khasis, the former CEO of X5, onto its international team last September. A press release as late as December confirmed in, albeit vague words, that the company "remains interested in the Russia retail market" and "will continue to evaluate market-entry opportunities".

The same source stressed that the Heathrow airport-based office has nothing to do with Walmart's UK subsidiary Asda or the recent integration of the "Netto" hard discount stores purchased from Dansk Supermarked last year.

The Metro Group dossier

Instead, now that Russia is off the table, Walmart is said to be looking at Western Europe again! Given the global giant's costly escapade in Germany from 1997 and 2006, which lead to total losses estimated at €3.2bn ($4.3bn), this makes one wonder whether our caller likes to add LSD to his or her coffee.

Admittedly, there have always been rumours in the trade about a gentleman's agreement between Walmart and Metro Group. These go back to 2006 when the former sold its hypermarkets to Metro Group for an advantageous price.

The transaction stimulated some trade talk at the time that Walmart had negotiated a first option on any future sale of Metro's "real,-" hypermarkets. However, the story has always been denied by both parties. Also, until very recently, when it gave up trying to find a buyer, Metro Group had been touting "real,-" like sour beer for years.

Whatever the truth behind this yarn, a quote from a recent interview with former Asda Chairman Andy Bond gives some insight into the way the Americans look at prospective acquisitions: "If I were still at Walmart and I was viewing the Metro Group dossier, I would first want to understand the exposure that its formats gave me to at least some of the (emerging) markets in which I was very interested. One of the wonderful things about the Metro business, and Metro Cash & Carry in particular, is that it is very global."


Carrefour for sale?

What else could Walmart be interested in? After five (!) profit warnings, and with a hapless CEO who is due to walk the plank in June, French retail giant
Carrefour is in poor sorts at the moment.

Majority shareholders Bernard Arnault and Colony Capital are now sitting on a book loss of around 40 per cent for the stake they took in 2007. Even billionaires don't like losing money. Could Arnault and Colony be tempted to sell at a premium? Walmart certainly has pockets as deep as a Texan oil well.

All this is, of course, pure speculation. However, after having failed in Germany with two small hypermarket chains which lacked market share in the late 90s, the Americans will presumably not want to repeat their costly mistake mistake; if they return to Europe, they will do so big.

With an annual free cash flow of $10.7bn (€8bn) and a huge war chest, Walmart, like Scrooge McDuck, could buy Carrefour and/or Metro virtually out of the petty cash. Of course, this doesn't mean that it will.

Esselunga and Mercadona

Meanwhile, a further source claims that Walmart is currently negotiating with Esselunga (didn't owner Bernardo Caprotti once say that, if he sold his life's work, then it would only be to Rewe?), in Italy and with Juan Roig, owner of supermarket retailer Mercadona, in Spain. Prima facie this seems at least credible because both countries would provide a relatively inexpensive entry point for the Americans into Europe.

Although US shareholders at Walmart are surely wary about any investment in the eurozone, big American corporates have always seen Europe as one market. The belief that they can roll up the whole continent from any direction has often proved fatal, but they go on believing just the same.

Apart from the UK, where Walmart is already represented via Asda, Spain would be the one country in Europe with which the Americans possess cultural affinity. After all, they have a strong Hispanic cultural element in their South-West as well as years of experience in Latin America. However, Mercadona's press office immediately poured cold water on the idea: "You are barking up the wrong tree."

This would not necessarily conflict with the statement obtained from a further person claiming to be close to the negotiations that "the likelihood of a deal actually materialising is still less than 10 per cent".

No convincing online recipe

Finally, Mike Duke and his team didn't elaborate on how recent online investments continue to reduce overall ROI and free cash flow. True, investments in relatively new technology need to ripen, but the big boys from Arkansas clearly haven't found a breakthrough online or clicks & mortar model to rival Amazon yet.

So perhaps they were wise to keep it bland and pally as usual.


Lebensmittel Zeitung with its online sisters (photo: LZ)
Lebensmittel Zeitung with its online sisters
Read in German: 'Text' by international editor Mike Dawson & retail news editor Manuela Ohs in 
Lebensmittel Zeitung, no. 8, 24.02.2012

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