Wal-Mart takes over British grocery chain

Wal-Mart takes over British grocery chain

Web posted Thursday, August 5, 1999 8:45 a.m. CT

By SUE LEEMAN
The Associated Press

LONDON - Global retailing leader Wal-Mart Stores Inc. has announced its arrival in Britain with the $10.7 billion takeover of Asda Group PLC, the country's third largest supermarket chain.

The deal, which more than doubles Wal-Mart's international sales and consolidates its position in Europe, promises to increase competition in the British retail sector.

"Retailers over here are scared of Wal-Mart," said retail analyst Richard Hyman of the London firm Verdict. "It's of a size that's beyond the experience of everyone else. Things will never be the same again."

Wal-Mart's offer trumps a $9.4 billion deal previously agreed upon between Asda and Britain's Kingfisher PLC.

Asda said it has recommended the Wal-Mart bid to shareholders. Kingfisher said it would not increase its offer.

Separately, Wal-Mart announced that Bob L. Martin, president and chief executive of the company's international division, had resigned to pursue other business interests.

Under Martin's tenure, Wal-Mart's international holdings have grown from an investment in Mexico in 1991 to a division that now operates in eight countries with $12.5 billion in sales last year.

Martin will be replaced by John Menzer, Wal-Mart executive vice president and chief financial officer.

Wal-Mart senior vice president Don Soderquist said discussions with Asda developed in July over several days.

"From time to time in the past we've held talks, but not about an offer," Soderquist said. "The Kingfisher merger created the opportunity to look at it and become serious about it."

Analysts said Wal-Mart will give Asda the muscle to secure better deals from its suppliers, leading to lower prices on the shelves.

But Hyman said research "shows that U.K. consumers are after more than just price . . . Most customers are prepared to pay a premium for a higher specification, higher quality offer."

Founded in the 1950s by the late Sam Walton with the slogan, "We sell for less, always," Wal-Mart launched its drive into Europe last year when it bought the Wertkauf chain of 95 supermarkets in Germany.

Richard Edwards, a retail analyst with Salomon Smith Barney, said Wal-Mart had undercut German retailers by 15-20 percent.

"A consolidation process has started and some companies are in merger talks," he said.

Asda, which grew out of a 1920s farming cooperative, now has 229 stores and annual sales of $12.8 billion.

Asda chief executive Allan Leighton said the two companies are a good fit "from a colleague perspective and a customer perspective."

"The way we operate is based mainly on ideas we pinched from Wal-Mart. So from a colleague point of view this is pretty much the perfect deal", said Leighton.

Wal-Mart, which had $137.6 billion in revenue in 1998 and operates 3,600 stores worldwide, said Asda stores will continue trading under their own name. The Asda board will report directly to Wal-Mart headquarters in Bentonville, Ark.

Source: http://businessjournal.net/stories/080599/ABJ_takes.html

 

 

 

 

 

 

Wal-Mart announces bid for UK retailer Asda June 14, 1999

Deal Summary

On June 14, 1999, Wal-Mart announced a cash bid for UK-based retailer Asda amounting to £6.716 billion (US$10.9 billion). This bid follows an earlier all-paper offer bid made by Kingfisher on April 1999 for £5.8 billion (US$9.4 billion). Kingfisher has indicated that its offer is still open, but has not increased its bid.

• According to Donald Soderquist, Senior Vice Chairman of Wal-Mart Stores, Inc., Wal-Mart only began negotiations with Asda ten days ago, fueled by Kingfisher’s April bid. Soderquist said that Wal-Mart and Asda had already engaged in conversations during the past that were not acquisition related.
• Soderquist outlined Asda’s "strong management team" led by Allan Leighton, as the fundamental reason behind Wal-Mart placing the bid. Meanwhile, Leighton showed his satisfaction in what was described as "pretty much a perfect deal".
• Leighton also mentioned that "the way Asda operates is based on ideas it pinched from Wal-Mart" and "that the culture it has inculcated into the business is modeled a lot on what Wal-Mart has done".
• Asda is the third largest grocery retailer in the UK with 1998 sales of £8,198.3 billion (US$13.3 billion). It has 229 stores and over 78,000 employees.

WMT International Sales

While the Asda bid represents less than 5% of Wal-Mart’s market capitalization, evaluated at US$190 billion, it nearly doubles its international sales, making the UK its largest market outside of the US.

• This acquisition makes Wal-Mart a significant competitor in the highly concentrated UK food market. Asda’s market share ranks 3^rd in the UK, behind Tesco and Sainsbury:

Future Plans

Soderquist briefly stated that:

• Wal-Mart has no plans to re-banner the "Asda" stores into "Wal-Mart" stores
• Asda’s management would remain independent
• While Asda is a "progression to the international portfolio", Wal-Mart has no plans to take Asda into Europe

Acquisition Strengths:

There are a number of factors that make this retailer and market very attractive to Wal-Mart at this time:

Consumer

British consumers feel dramatically overcharged by their supermarkets, and perceive food costs as being far higher in the UK than elsewhere.

• Recent research suggests that 80% of all British consumers feel like they are "ripped off" when they go to the supermarket.

This research, published by Verdict earlier this month, represents a strong argument for Wal-Mart’s UK market entry. Its reputation for driving low price to the consumer should make it a welcome player in the UK market.

Meaningful In-Market Scale

Asda is the 3^rd largest grocer in the UK.

• This scale will allow Wal-Mart to continue trying to drive all the markets in which it operates to its standards.
• The kinds of improvements Wal-Mart typically makes require significant fixed investment (technology, distribution facilities). Asda’s scale allows Wal-Mart to make these investments and generate a significant return.

Market Dynamics

The UK grocers are not aggressively promotional, and Asda’s shoppers have already accepted its EDLP strategy.

• A critical variable for Wal-Mart’s international strategy is how ready the market is for an EDLP retailer (as the UK is) – Wal-Mart wants to stray from this philosophy as little as it can in order to gain meaningful scale.

Strategic Overlap

There is no retailer in the world that has effectively benchmarked Wal-Mart as carefully as Asda. Strategic examples include:

• Assortment – very similar mix of food and non-food to a supercenter
• Consumer positioning – Asda’s position in the UK is firmly at the middle class, and it has not sought the more upmarket shopper as aggressively as its competition (particularly Sainsbury).

 

EDLP

• Tactical examples include:
• In-store greeters
• Volume Producing Items – VPIs – special promotions selected by department managers
• Store employees referred to as associates, not clerks

Rollbacks & "The Smiley" - ASDA

 

 

• There is probably no large scale retailer in the world that Wal-Mart can integrate into its unique culture and operations more quickly.
• Wal-Mart can keep most of Asda’s management team in place – they are eager for the opportunity to learn from Wal-Mart up close! This acquisition will probably resemble more closely an Ahold USA style acquisition – where the face displayed to the consumer remains similar, while most of the initial changes are back-end and invisible to the consumer.

International Stability – Revenue and Profits

Unlike Carrefour, Wal-Mart has clearly positioned its international focus on developed as opposed to developing markets.

• It has managed its portfolio so that developed, stable markets - Canada, Germany and UK - will account for approximately 70% of international sales and nearly all of the international division’s profitability in 1999.
• The need to reduce market-level risk in international portfolios is a developing trend among global retailers. Compare this with:
• Carrefour’s announcement of new markets (Switzerland and Japan balance out Venezuela and Uruguay).
• Ahold’s model, where its largest international market has always been the US. Ahold derives 85% of its company sales, and 85% of its sales outside of its home market, from developed markets.

Acquisition Challenges:

Competition

Wal-Mart’s other developed market entries have been very different than this one will be:

• Wal-Mart entered Canada through the non-food sector, which was not where Canada’s world-class domestic retailer (Loblaw) operated.
• The German retail market, by most observers’ standards, had been underserving the end consumer in terms of value and service when Wal-Mart entered.
• In contrast, in the UK grocery market Wal-Mart goes head to head with one of the world’s best supermarket operators, Tesco. Sainsbury has fallen on challenging times recently, but has a historical connection to the UK consumer and terrific real estate.

Intense Margin Pressure

• In March, Tesco announced its biggest price-cutting initiative since 1993. Tesco's initiative is estimated to cost between £30 million and £60 million. The price cuts target 240 products, with prices slashed by as much as 25%.
• The Office of Fair Trading’s investigation may result in required pricing adjustments that will further intensify margin pressure.

Acquisition Cost

Asda, by conventional benchmarks, is an expensive acquisition. In terms of price paid as a percentage of annual sales, this is one of the highest major retail acquisitions in recent years:

• Even as recently as April, Wal-Mart rejected the possibility of a UK market entry based on this exact problem – the UK grocers, because of their high margins, are expensive acquisition candidates.
• There are good reasons for this expense – Asda is the most profitable of the acquired companies listed above.
• Wal-Mart will need to bring its process expertise to Asda to ensure its margins remain robust in the face of more intense price competition to achieve its benchmark rate of return.

"Europe"

The UK’s geographic and economic connection to Europe are both somewhat distant.

• Geographically, Wal-Mart’s growth strategy has historically relied on contiguous scale to gain store density and economies off of its distribution network. The UK represents limited potential for this, particularly as part of a pan-European strategy.
• Economically, the UK not being part of the EMU hurts Wal-Mart efforts at pan-European scale. Retailers in Europe are increasingly using the EMU to drive suppliers to a common price across Europe – the UK scale does not allow Wal-Mart to leverage its German operations as effectively in this respect.
• This acquisition is by no means Wal-Mart’s complete European strategy.
• John Menzer, the new International Division President (see below) comes from Wal-Mart’s finance office and is an expert in international mergers and acquisitions.
• Wal-Mart will continue to look for other appropriate partners on the European continent.
• This could potentially trigger a wave of industry consolidations in both the UK and continental Europe. Ahold’s CEO Cees van der Hoeven has referred to an event "shaking the tree" of European consolidation – starting a chain reaction as players seek partners. This acquisition may be the catalyst to which van der Hoeven was referring.

For more information on this release or Management Ventures, Inc., please email: Dan O’Connor (dan@mventures.com) Ajay Hemnani (ajay@mventures.com) or Bryan Gildenberg (bryan@mventures.com). For information about Management Ventures, Inc. classes and products, please contact Mark Byrd by phone (757)

Source: http://www.mventures.com/news/Key1999/flash99/walmtasda.asp

 

 

 

 

 

 

 

 

 

 

Wal-mart Stamps its International Passport Once Again
Superstore looks to get bigger will better deals and more buy-up plans
By Craig Ough
for Office.com

Sep. 1, 1999 — Wal-Mart has got big plans. Riding a wave of entrepreneurial fortune since early 1998, Wal-Mart steps up to the gamble one more time. Actually, make that three more times. With a big deal in the United Kingdom leaning in their favor, the construction of more than 100 new supercenters in the U.S., and experimental small markets currently in operation, it's likely they'll be collecting all the chips.

On June 15, Wal-Mart announced its offer of $11 billion to purchase Asda food chain, the third largest retail chain in the United Kingdom. If the deal goes through, this could be the ninth country in which Wal-Mart has successfully established a financial base. Its current list includes Argentina, Brazil, Canada, China, Germany, Korea, Mexico, and Puerto Rico.

The Wal-Mart offer for Asda forced the British retail chain Kingfisher's to withdraw from their attempt to buy Asda, since Wal-Mart's offer was a hefty 29 percent higher. Asda, similar to Wal-Mart in its offering of apparel and a variety of home products and groceries, consists of 229 stores, and its 1998 sales were about $13.2 billion, approximately one-tenth of Wal-Mart's total sales.

Looking Back
Through the '70s and '80s, Wal-Mart waned and waxed in growth. It wasn't until 1990 that it rocketed up to be the nation's largest retailer. People who invested $1,000 into Wal-Mart when it went public in 1970 saw that investment grow to nearly $2 million by 1993. But in 1992, when original owner Sam Walton died, faith dwindled in the company's interests in low-margin food marketing and international development. Annual earnings growth declined sharply, from 24 percent in 1992 to near zero in 1995. In 1996, Wal-Mart announced that, for the first time in 100 quarters, earnings had fallen.

In early 1998, Wal-Mart began to crawl out of its stock-weary lull. Stocks have nearly doubled in the past year, and pushed on during the dilemmas of the Asian market.

It was in this period that Wal-Mart rapidly expanded their international interests. Plans for international growth began in 1991 with Mexico. Starting with the purchase of a restaurant chain, Wal-Mart now controls more than 400 stores, the largest volume of stores in any of their current international affairs. The company later moved into Canada, where it is now the largest retailer in their nation.

Wal-Mart established itself as a company that follows though and can even go the extra step. Their new growth is a culmination of developed Wall Street savvy and keeping a sharp eye on technology.

According to Forbes Magazine, the steps Wal-Mart has taken in the past two years read like a how-to guide for companies eager to get back in the good graces of Wall Street. For starters, Wal-Mart cut costs, holding expenses flat even as it pursued pricey expansion plans. In addition, the company reduced inventory costs on hand by a cool billion in 1997. Not only does this allow the company to devote less retail space to storing goods and more to selling them, it also frees up capital for more productive purposes. Taken together, these developments helped the company's rate of return on investment finally start rising in 1997 after a five-year downswing. A major share-repurchase plan had also impressed Wall Street. Big share buy-backs have been popular with investors throughout the '90s bull market, providing a floor for stocks in down periods as well as a signal that executives think their company is undervalued. The company's decision in 1997 to buy back roughly $2 billion in stock -- the first major repurchase in the company's history -- more than made up for it. Another crowd-pleaser was Wal-Mart's 30 percent dividend increase, although earnings are growing less than half as fast.

Wal-Mart's Overseas Expansion
Wal-Mart's first move into Europe was in December 1997 when they purchased 21 Wertkauf Hypermart stores in Germany. Later they acquired 74 Interspar stores. What Asda potentially offers Wal-Mart in volume is nearly 2.5 times larger than the inventory of both German stores combined.

Sweetening the deal a little more, Asda adds some 78,000 employees to Wal-Mart's labor force, with more than 780,000 associates in the United States and 130,000 internationally. Wal-Mart's work force is already the second largest number in the United States, behind only the government.

Questions still remain as to whether or not Wal-Mart will assume control of the stores in their present condition or if they will be converted to their red, white and blue decor. But, if Germany is any example, the British will soon see the Wal-Mart logo. Wal-Mart allowed its two German chains to keep their names for the year they owned them, but within the next few months, the Wal-Mart brand name appeared on the storefronts.

The super-chain's global expansion plans are not strictly focused on overseas markets - and the outlets are not all superstores. Maher says the offering is unique for each country the company is working in. For example, Wal-Mart currently own 450 stores in Mexico, some of which are restaurants or strictly retail. In many countries it's just the super-centers, Maher says. In others, it's strictly Sam's Club's, the discount membership-based retail centers.

The Domestic Plan
Should Wal-Mart succeed with the Asda deal, then 1999 could be a phenomenally profitable year. In October 1998, Wal-Mart announced its plans to open 150 of their new super-centers in the United States during the next fiscal year. The new super-centers include all the usual stock, and a grocery store. Others include salons, McDonalds and other services. The idea is to make it simple enough for people to throw all that they need into one basket, said a spokesman. The structure allows shoppers to get everything they need in one store, and pay for it at one register.

Development also continues on the company's experimental "Neighborhood Markets." These small markets are a sharp contrast, from color to product emphasis, to their usual marketing schemes. The 40,000 square-foot stores (about half the size of the markets in the supercenters) will unveil a green interior design and offer drive-through pharmacy services. The rest of the planned stock will be approximately 65 percent groceries, and the remainder in general merchandise.

According to a spokesman for Wal-Mart, the Neighborhood Markets are designed specifically with the customer in mind. The drive-through pharmacy, which occupies 40 percent of the space inside the store, and the arrangement of aisles were designed for optimum shopping efficiency. The products, he said, would be chosen by feedback from customers in test sites and cater to their specific needs.

This new venture for Wal-Mart will make them the little kid on the block in the small market industry -- an odd position for the global chain that runs 2,884 discount stores and supercenters worldwide and earned approximately $137.6 billion in sales in 1998. Currently 5 or 6 nationwide chains control 25 percent of the neighborhood market, said a spokesman.

Four of these experimental sites will be built in Arkansas by the end of the year -- the first of which is already open in Bentonville. "Neighborhood Markets are a test -- nothing more, nothing less," Wal-Mart senior vice president Don Cannon says. "We're really looking to see if there's something there."

As if all that wasn't enough, this year, Wal-Mart also hopes to construct three new food distribution centers. The overall plan is to put a food warehouse within 300 miles of any Wal-Mart. And the new Neighborhood Markets, should they be as thickly distributed as their stores, are also sure to be within that 300 mile margin.