FRANKFURT/CHICAGO – Wal-Mart (WMT), the world's biggest retailer, is selling its underperforming German stores to the country's leading retail chain Metro, marking a major retreat that will cost it about $1 billion.
The U.S. retail giant has struggled to capture market share ever since entering the cut-throat German retail arena eight years ago, frustrated by razor-thin margins and tight labor and trade laws in a country still marked by tepid consumer spending.
The exit from Germany marks the second time in two months that Wal-Mart has pulled out of one country to focus on more promising opportunities elsewhere -- such as in China, South and Central America, or India.
"It has become increasingly clear that in Germany's business environment it would be difficult for us to obtain the scale and results we desire," said Wal-Mart's vice chairman Michael Duke.
Wal-Mart, which operates 85 hypermarkets across Germany, said on Friday it would incur a roughly $1 billion pretax loss on the deal in the second quarter of its fiscal 2007 year.
"Wal-Mart just couldn't make it any more," a source close to the deal told Reuters. "They had to get out."
Germany has proved tough for Wal-Mart since day one, and the Bentonville, Arkansas-based group has acknowledged that it misunderstood German regulations, shopping habits and tastes. It has already closed several of its stores in Germany, where it had 2 billion euros ($2.55 billion) in sales last year.
Metro Chief Executive Hans-Joachim Koerber, who has been eager to find ways to boost Metro's underperforming Real food store chain, said Wal-Mart had been "keen" to sell and did so at less than asset value.
Buying Wal-Mart's operation will give Metro a total of over 670 food stores and hypermarkets in Germany's roughly 130-billion euro food market, which is dominated by privately held Rewe, Aldi, Lidl, as well as Metro and others. Metro's Real food division garnered sales of 9.9 billion euros in 2005.
An industry source close to the deal said the U.S. chain had failed to realize that it could not compete on price alone, and anyway did not have the scale in Germany to do so effectively.
"Consumers here are used to having the best price. And price was Wal-Mart's only offer to customers," he said. "At the beginning, they had people who would greet customers, pack their shopping in the bags and the American customer service. The Germans did not buy that."
A REAL MOVE
Koerber said the positive impact on Metro's earnings from the deal was likely to be in the two-digit millions of euros, but declined to be more specific when pressed by reporters. He added that performance at Metro's Real unit was expected to improve over the medium term on the back of the Wal-Mart deal.
Metro's shares rose 2.5 percent to 44.91 euros at 1435 GMT, compared to a slightly weaker German blue-chip index. Wal-Mart shares were up 0.8 percent at $43.91.
"We believe that the acquisition could make sense from a strategic point of view," said Nils Lesser, analyst at Merck Finck, in a note.
Ironically, Wal-Mart CEO Lee Scott, ruminating on the company's difficulties in Germany at a retail conference in 2004, had noted Metro found the going a lot easier.
"We have to take off our hats to Koerber and Metro, because they know how to make money in Germany," he said at the time.
Wal-Mart's exit from Germany comes about two months after it sold its stores in South Korea, where it also failed to gain traction in a notoriously tough market for foreign retailers.
Wal-Mart denied that it had any plans to bail out of Britain, where it acquired supermarket chain Asda with some 320 stores and 140,000 employees in 1999.
"Asda is right on track. We've made some significant changes in Asda over the past year, and we're seeing some positive changes there and positive results," a spokeswoman said.
Wal-Mart has invested heavily in other regions in the past year, buying a majority stake in Japan's Seiyu, completing its acquisition of Sonae in Brazil, and expanding into new markets including Costa Rica, El Salvador and Nicaragua.
The U.S. retailer has plans to open 220 to 230 international stores this year. Its international operations generated $62.7 billion in sales in the fiscal year to end-January, accounting for about 20 percent of the company's total annual sales.
Wal-Mart operates more than 6,600 retail outlets around the globe, with sales of $312 billion last year.
Analysts on average are expecting Wal-Mart to report fiscal second-quarter net earnings of about $2.95 billion, excluding the roughly $1 billion charge, up from $2.8 billion a year ago, according to Reuters Estimates.
The international business has become increasingly important as Wal-Mart faces slowing sales growth and mounting opposition to its expansion at home.