Wal-Mart's Japan choice: Bulk up or pull out http://www.reuters.com/article/reutersEdge/idUST10749520070323
Thu Mar 22, 2007
By Sachi Izumi and Nicole Maestri - Analysis
TOKYO/NEW YORK (Reuters) - Almost five years since Wal-Mart Stores Inc. (WMT.N: Quote, Profile, Research) landed in Japan, the world's largest retailer has yet to find itself on steady ground.
Its 53 percent-owned local unit Seiyu Ltd. (8268.T: Quote, Profile, Research) has posted five straight years of losses, has not paid a dividend for a decade, and has lost three quarters of its stock market value since Wal-Mart first invested in the Japanese supermarket chain.
The U.S. retailer quit South Korea and Germany last year to focus on China and other promising areas, prompting speculation it would also desert Japan in the manner of France's Carrefour (CARR.PA: Quote, Profile, Research), which sold its stores to Aeon (8267.T: Quote, Profile, Research) in 2005.
Some analysts say Wal-Mart should either give up on Japan, where it has invested a total of more than $1 billion, or buy the whole of Seiyu to speed up an overhaul.
Others say Japan's $1.1 trillion retail market -- the world's second largest after the United States -- is too big to pass up for Wal-Mart's international expansion dream.
"I believe that Wal-Mart believes they're in Japan for the long haul and right now, that looks like the right bet," said Darrell Rigby, head of the global retail practice at consultants Bain & Co.
Overseas expansion is key to Wal-Mart's future. International business now generates more than one-fifth of sales and is growing fast. Sales overseas rose 30 percent while revenues at its U.S. division increased 8 percent in the year ended January 2007. Seiyu makes up 12 percent of its international sales, according to Citigroup.
Many foreign retailers have struggled in the Japanese market, hampered by fickle consumer taste, fierce competition and prolonged depression in consumer spending. Besides Carrefour, retailers like Britain's Alliance Boots (AB.L: Quote, Profile, Research) and French cosmetics chain Sephora have pulled out of the market in the past.
Japanese consumers, whose refrigerators are typically about two-thirds the size of the average U.S. model, tend to buy groceries more often and in smaller amounts.
SLOW PROGRESS
Wal-Mart's strategy initially did not agree with Japanese customers, who tend to associate discount prices with low quality, and the U.S. retailer's systems did not work well in Japan's complicated retail networks.
Result: Seiyu has bled red ink since Wal-Mart marched in, while local rivals such as Seven & I Holdings (3382.T: Quote, Profile, Research) and Aeon took advantage of the country's economic recovery and started to gain more buying power via acquisitions.
Wal-Mart Japan also is hampered by poor locations and a lack of services such as finance and specialty stores that have been growth drivers for rivals, said Citigroup analyst Deborah Weinswig in New York.
"We believe Wal-Mart will have to improve merchandising, its appeal to the Japanese consumer and the in-store shopping experience in order to turn sales around," Weinswig said in a report to clients.
Seiyu, which operates around 400 stores, has said it aims to return to profit this year, but analysts see another year in red. Wal-Mart defends the Seiyu results, saying it has only had majority control at the retailer for a year.
"We're very pleased with the progress that Seiyu has made in the past year, and we continue to see great opportunities in the country and in Seiyu itself," said spokeswoman Beth Keck.
SIZE MATTERS
Merrill Lynch analyst Hidehiko Aoki in Tokyo is a believer. Seiyu's efficiency has been improving with a new distribution center, and it is close to installing Wal-Mart's management system in all group firms, he said. Remodeling of existing stores and 24-hour outlets are also pushing up sales.
Still, Seiyu needs to bulk up to better compete with rivals and cut costs. Seiyu's 961 billion yen of sales are less than one-fifth the total of Aeon and Daiei (8263.T: Quote, Profile, Research) -- the two companies that are creating the country's biggest retail group.
The industry has seen a wave of acquisitions as too many players fight for a share of the pie in the mature market. Wal-Mart tried to invest in Daiei but lost the chance to Aeon.
"They know they need greater market share to achieve their goals, and in terms of new stores, Wal-Mart will stay very open to opportunities for both acquisitions and organic growth," Bain & Co.'s Rigby said.
If Wal-Mart wants to stay in Japan, it should hike its stake in Seiyu, said Arun Daniel, senior consumer analyst at ING Investment Management in New York.
"It really comes down to how critical is it for you to play there long term," he said. "And their view right now is yes, it is" critical.
Wal-Mart took a small stake in Seiyu in 2002, gradually lifting it to 53 percent, and has an option to raise its holding to two-thirds by the end of this year. Wal-Mart's Keck declined to comment beyond saying that having majority stakes has worked well for the retailer in many countries. Investor patience is wearing thin, though.
"Another year from now...with the capex that they are putting there, if we don't see returns to that and they are continuing to (report same-store sales that are) flat to negative, then that to me would be a problem," ING's Daniel said.
($1=117.46 Yen)
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