Wal-Mart Offers Growth Sequence

Over One-Third of All Wal-Marts Now Outside the United States

Brent Felgner, June 20, 2005

New York —Wal-Mart's quest for global domination — in retailing and much more — is leading it to find new ways to grab and integrate international acquisitions, hitting operational and profit goals much sooner than most retailers would ever think possible.

Sequencing may hold the key.

“We have very aggressive organic growth plans at Wal-Mart International,” John Menzer, president of Wal-Mart International, told investors at Credit Suisse First Boston's Retail Conference last week. “But we also believe that the continual look at acquisitions and successful integration is an important part of that growth plan.”

Indeed, 40 percent of the international business' sales growth over the past five years has come from acquired retailers. In its 14th year in business, Wal-Mart International last year recorded more than $56 billion in sales. By comparison, Wal-Mart Stores posted $4.7 billion after its 14th year, Menzer noted.

More than 2,000 of Wal-Mart's 5,700 stores are now located outside the United States. Of the 500 stores Wal-Mart will open across all divisions this year, about a third will be international.

“Sure, we're getting great leverage from Wal-Mart Stores, but we're growing substantially faster than Wal-Mart ever did,” he said. “Seventy-one percent of (all) retail sales are outside the United States, so we have a long way to go.”

Wal-Mart's self-defined role as a learning organization has led over the last 12 months to the development of flexible integration processes that the company can leverage as a competitive advantage in world markets. Integration, Menzer explained, involves a multitude of steps ranging from financial controls and change management, to human resources and training to, of course, store operations and merchandising.

“But our learning has shown us the real key is in sequencing,” he said. “And the sequencing depends on the characteristics of the acquired company and Wal-Mart's position (in the marketplace) — how you address major deficiencies and develop that learning platform the earliest.

“We now have a process that we think is adaptable to virtually any acquired company. Recognizing the uniqueness of each company in how you do post-merger integration is very important.”

It is not a cookie-cutter approach. The amount of change introduced at any one time is based on the unique needs of the acquired company and whether Wal-Mart already has a position in the market, among other considerations. But accounting for those factors, Wal-Mart can now predict how and when it may begin to expect operating synergies, Menzer said. “As opposed to just slamming Wal-Mart systems into the new business.”

For example, the acquisition of the U.K.'s ASDA represented a highly sophisticated retailer in a new market for Wal-Mart, while the purchase of Puerto Rico's Amigo marked an unsophisticated retailer in a strong existing market. The needs and timing must be different, he said.

Menzer said that sequencing links the business and the acquisition-strategy objectives into the integration plan. It is flexible and acknowledges individual risks and tries to understand the target retailer, he added.

“When we're looking at an acquisition, we're already building in a process of what integration will look like to make sure we achieve the values we're looking for,” he explained.

Market outlook

Menzer reported that while Latin America markets are generally strong for Wal-Mart, Europe continues to be weak. Germany has made vast strides, last year producing its first positive return on investment, but its top-line growth remains challenged. This, despite lower inventories, higher margins and lower expenses.

China is where the action is. The company opened its 46th store — a 200,000-square-foot supercenter in Beijing — just a few weeks ago.

“China has been our star performer this year,” Menzer stated. “We've been pleasantly surprised by the continued improvement in comp sales.”

But, he added, “It's a real bet on an emerging economy — an emerging middle class — and it's starting to happen. We've seen the increases come out of the (general merchandise) side, which are very strong.”

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