Wal-Mart Faces Risks If Its Safeway Bid Wins

DEBORAH BALL and ANN ZIMMERMAN / Wall Street Journal 15jan02

[More on Wal-Mart]

Wal-Mart Stores Inc.'s bid to take over United Kingdom grocer Safeway PLC likely represents the last chance for the U.S. retailer to become the market leader in Britain, one of the brighter spots in the company's uneven international division.

But even if it wins the takeover battle, Wal-Mart will face a host of problems that would complicate its strategy in the U.K.

Wal-Mart, the world's largest retailer, Tuesday jumped into a battle for Safeway by announcing plans for an all-cash bid. The move comes days after takeover offers from J Sainsbury PLC and William Morrison Supermarkets PLC for Safeway, the U.K.'s No. 4 food retailer and the final big piece in the consolidation of the U.K. grocery market. Wal-Mart, based in Bentonville, Ark., didn't disclose the terms of its bid, but analysts expect it to top Sainsbury's £3.2 billion ($5.2 billion) cash-and-stock offer and Morrison's £2.6 billion all-equity offer.

Safeway PLC was owned by Safeway Inc. of Pleasanton, Calif., until 1987; the companies now are separate.

Winning Safeway would solidify Wal-Mart's position in the U.K. and bolster the credibility of its international strategy. Asda, the U.K. supermarket chain Wal-Mart acquired in 1999, has proved its most successful business outside North America. Since the takeover, Asda's profits have doubled and it has added about three points to its market share, now at nearly 16%. Analysts expect Asda to overtake Sainsbury as the country's No. 2 retailer this year. While it trails No. 1 Tesco PLC by about 10 percentage points, Asda's sights are set squarely at winning leadership of the U.K. market. Wal-Mart's U.K. sales of $15 billion last year represented about 43% of the company's international revenue and 7% of total sales.

By contrast, other parts of the Wal-Mart empire have disappointed. Argentina and Brazil have been tough. It has bungled its entry into Germany, where Wal-Mart still is showing losses five years after it bought two local chains. In a country that is notoriously price-sensitive, it failed to beat the offerings of Germany's hard discounters, which quickly slashed their prices to undercut Wal-Mart and beefed up their private-label offerings. German shoppers met all-American touches such as bag packers and greeters at the door with skepticism. As a result, Wal-Mart's German market share has eroded, standing at just 1.5% today, say analysts.

Richard Hyman, chairman of U.K. retail consultancy Verdict, describes Wal-Mart's international record as "patchy." He adds: "What is unproven is how scaleable the Wal-Mart model and skill base is in the international arena."

Asda has been a rousing success for Wal-Mart, however, partly because the British chain had a very similar everyday-low-price ethos and large-store format. And it had already started borrowing from Wal-Mart's distinctive culture as part of a relaunch in the mid-1990s. Asda has enthusiastically adopted Wal-Mart hallmarks such as the company cheer ("Give me an A! Give Me an S! ... Who's No. 1? The customer. Always!") All employees, even in the headquarters, wear name tags bearing a cheerful "Happy to Help" slogan.

More important, Wal-Mart has brought its mighty buying power and logistical and merchandising expertise to Asda. Following Wal-Mart's advice, Asda has managed to put 15% more of its George clothing products on display in the same space. Wal-Mart's procurement muscle has cut the cost of buying denim fabric by 60% and enabled Asda to sell jeans at just £6, down from £14.99 in 1999. Wal-Mart has helped Asda double its nonfood sales, which now represent as much as 50% of floor space in some hypermarkets. On the flip side, Wal-Mart, which is expanding aggressively in food, has gained from Asda's expertise in fresh-food and prepared-meal products and has borrowed Asda executives to help resolve problems in Germany and Japan. It also is rolling out the George line in the U.S., Germany, Canada and Mexico.

Wal-Mart is eager to spur on Asda's success through the Safeway acquisition, which could be the last chance for Asda to jump to the No. 1 spot. "Given the difficulty in getting planning permits, it would be difficult to become No. 1 without an acquisition of more stores," says Asda CEO Tony DeNunzio.

However, analysts say Safeway presents a host of problems. Its company culture is markedly different from Wal-Mart's, which could complicate an integration. More important, Safeway's corporate strategy is diametrically opposed to Asda's. It aims at more affluent shoppers who are more interested in convenience and quality than in prices, which are about 15% higher than those at Asda. It also focuses on smaller formats, with an average store size of less than 25,000 square feet. The smaller sizes mean that Safeway has had difficulty adding nonfood items such as bicycles and clothing, which has hurt its growth rate.

While Asda has stores ranging from 8,000 to 100,000 square feet, its average is about 40,000 square feet and its growth has been driven by sales of general merchandise. The risk is that Asda might not be able to convert Safeway shoppers to its value-for-money proposition and could also lose growth momentum due to the difficulty of stocking nonfood products in smaller stores.

Mr. DeNunzio responds that Asda is getting better at exploiting smaller stores. "We have a lot of smaller stores under 30,000 square feet and these stores trade very well" and have incorporated items such as the George line, he says. He wants to combine Safeway's emphasis on quality with Asda's low prices. "We can offer the customers the best of both worlds."

-- Sara Calian and Almut Schoenfeld contributed to this article.