Every Day High Expectations
Elsevier Food International, Vol.7, No.3, September 2004 Pascal Kuipers
“Wal-Mart has high expectations to grow sales and shareholder returns,” says John Menzer, President & CEO of Wal-Mart International. Double-digit growth figures for a business that is already large, means every day high expectations. Today, the US accounts for the bulk of the business. It is Menzer’s task to build Wal-Mart’s future growth engine: its international operation.
To assess the importance of Wal-Mart’s international ambitions, John Menzer first looks at Wal-Mart at home. “In the US, Wal-Mart has only an eight per cent market share, which is low when compared to European standards,” he says. “Market leaders in the UK or France have shares in the mid-20 per cent range. In the US, Wal-Mart still has plenty of opportunities. Next year we intend to open an additional number of 230 supercentres and our neighbourhood markets are entering their next level of expansion in the US. Every day we compete with global retailers in our home market. In order to compete with the likes of Costco, Ahold, Delhaize or Aldi, you have to know what is happening globally. We look at best practices worldwide, like global procurement and merchandising. A good example is Great Value, our global private label brand. We also recruit good people who we educate and retain by offering a growth perspective. Indeed, you have to be strong at home to be successful abroad. Wal-Mart wants to be a long-term growth company. One day, growth in the US will slow down. Then a well-managed international operation must be in place in order to pick up the pace of growth.”
How do you quantify Wal-Mart’s growth target? And what adds the company’s international operation?
“We look at total shareholder return, which we try to grow 13 to 15 per cent annually. We do this via earnings increases, dividends and share repurchases. The percentage of annual revenue growth needed to reach this, is over 11 per cent. Wal-Mart’s objective is to be a long-term growth company and one of our core principles is to have high expectations to grow sales and shareholders return. Only 13 years ago we started our international operations which are currently adding to total company growth. In the last five years annual international sales increased from US$12 billion to US$47 billion. Profits grew even faster. Operational profits for the business year ending January 2004 are US$2.4 billion.”
Is Wal-Mart International under pressure to perform in order to comply with the high expectations?
“No. We are committed to become a global company and deliver shareholder value. We don’t do anything for growth only.”
In recent months, both you and Wal-Mart’s CEO Lee Scott hinted at possible acquisitions. Why? Does this not create only unwanted rumours when preparing a takeover? Wal-Mart’s merger and acquisition ambitions and activities are especially scrutinised.
“During the last five years, 40 per cent of our International growth is via acquisitions and 60 per cent organic growth. Many markets have restrictions to open new stores which makes it difficult to do greenfield operations. We therefore look at all acquisition opportunities. Acquisitions can’t be forced or planned. You need to have a motivated seller, the timing must be right and so must the price and the outcome of due diligence. And of course it must be a strategic fit and increase shareholder value. We don’t pay premium prices just because we are Wal-Mart. We have strict criteria for the price we want to pay, because shareholder value is important to us. Yes, we get a lot of attention, but the deals we did, happened correctly without information leaking out. I keep track of all press speculation on what we are going to acquire. In 2002 I counted over 100 speculated deals while none actually happened that year.”
In Fortune of 5 April 2004, Wal-Mart’s former CEO David Glass was quoted as saying that Americans are not very sophisticated in doing business worldwide. “We’re pretty spoilt and expect everyone to speak our language. We don’t travel as easily as other people do. So if it weren’t for the fact that we have all this money to invest, we would be at a disadvantage,” he said. Do you agree?
“Wal-Mart is a US-based company. We are not yet a global company, but we are learning to become one. It takes decades to establish a global mindset. To be a truly global retailer you need not only a strong financial base at home, but also a cultural fit with the countries and companies cross border you work with. We want to integrate the Wal-Mart culture in new markets and adapt it. It should be similar, but not the same as in the US. A common culture works as a glue which holds everything together. In fact, it makes my job easier. The Wal-Mart culture can travel across borders with local adaptations. The best example of such adaptation is Germany, which is the only country where we have no people greeters. German customers are shy. They don’t like it.”
The success of Wal-Mart International comes mainly from the UK, Mexico and Canada. But Wal-Mart is also represented in seven other foreign countries. Is the success of Wal-Mart international therefore not exaggerated?
“Our operations in the UK, Mexico and Canada are successful and also our largest. Some scale is needed for success. In other countries we are still growing. Some of our best performing stores for instance, are Wal-Mart Supercenters in China. There is a lot of potential for the longer term, but for this you need to build sufficient scale. Last March our entire Wal-Mart Board of Directors had a meeting in Shenzen, China. We are committed to create a successful operation in China, where it is still possible to get real estate and grow organically. During the next year we will be opening ten new supercentres in China. In Brazil, we acquired Bompreço last March. This greatly added to our scale in Brazil, where we increased our store base from 24 to 142. In Japan, Seiyu has a share of less than two per cent. Also there are growth opportunities, but in the Japanese market the pace of growth will be much slower.”
Wal-Mart seems to generate more money than it can spend. The company has been buying back shares worth US$9.5 billion since 2002. Is a major acquisition also to be expected when it comes to spending cash?
“We have a strong cash flow. This year we will have capital expenditures of US$11 billion, which we invested in new stores and distribution centers. And still we have money left to spend. Utilising excess cash by buying back shares is a good investment for our shareholders as it increases earnings per share and therefore total shareholder return. As said, we look at all opportunities for acquisitions. We want to grow in existing markets – like China or Brazil – and in new markets. Recently, we installed a feasibility team to study the Russian market. We studied the Japanese market for five years. We talked to all retailers and got to know them. We learned that to succeed in Japan you absolutely need a Japanese management team. The Seiyu acquisition was the right opportunity at the right time. Seiyu was already recovering and we were in a position to add value. Japan is very important. It’s the world’s second largest retail market. With the Seiyu team we designed a five-year recovery plan which finishes in 2007. We have been criticised for not moving fast enough, but time is needed to do this. Converting the stores to the Wal-Mart business takes two years. The third year is needed to convert the distribution system. In a new market, it therefore takes three years to have all the tools in place to start benefiting from Wal-Mart technology. This is now in the beginning stage in Japan, where we still have not started with EDLP, Every Day Low Price, simply because we have not yet achieved EDLC, Every Day Low Cost.”
Will Retail Link also be used in Japan? And what about the agents and other middlemen that are important in Japan. These cannot simply be bypassed as unwanted extra links in the chain. That would not comply with the local business culture in Japan.
“Retail Link is surely a powerful system in Japan which will be accessible directly to suppliers and via agents. We see the added value of agents in the Japanese market as many small retailers require many services. There will always be middlemen. Not only in Japan, also in other markets.”
You said that Wal-Mart takes time to get to know retailers in countries of interest. Australia is speculated to be such a market and a current Wal-Mart board member is known to be a friend and advisor to Roger Corbett, CEO of Australian retailer Woolworth’s. That would be a good option, don’t you think?
“You refer to Jack Shewmaker, yes. Our company policy is not to speculate on new markets.”
Does Wal-Mart have a different relationship with stakeholders abroad, compared to the situation in the US? Relations with the trade unions, for instance?
“In Germany we work very well with Verdi, the German workers council. Whenever I visit a store in Germany, I make sure to meet representatives of Verdi as well. In general, our main stakeholders are our customers, associates, suppliers and shareholders. All these we serve consistently on a global basis. New stores in Germany are a combination of best practices worldwide, with wine departments from our operations in Argentina, shoe departments that we developed in Canada and meat departments from our stores in Brazil. We are also quite successful with joint business planning with our global suppliers. With our 50 top suppliers we share best practices of how suppliers drive sales in their categories around the world. Data sharing is embedded in our system via Retail Link.”
Retail Link is a Wal-Mart system. Does Wal-Mart adapt this to global standards of electronic communication, when these are agreed upon?
“Retail Link is a proprietary system which runs our own sales data. As far as electronic communication is concerned, Wal-Mart is committed to standardisation. We belong to all the standards boards and support one global standard.”
Wal-Mart strongly stimulates the use of RFID-enabled returnable transport items like cases and pallets. It is not used at items level yet, but how does Wal-Mart communicate RFID with its main stakeholders, its customers?
“RFID is in its infancy and, as yet, the customer impact is negligible. We are currently testing it in the US. Yes, it is important to our future strategy but we don’t have enough data yet to assess how this will develop. When it comes to discussing privacy issues with customers I think that the industry at large needs to do more in explaining what RFID is and how it works. Tag readers have a range of two metres at most, so there is no such thing as a massive and deliberate intrusion of privacy. In the US we don’t get that many questions on privacy issues, be we will surely start communicating more to our customers.”
Wal-Mart is a multi-format retailer. Which formats will be the drivers of future growth?
“In fact we have ten formats. In the UK we have the Asda format which is a large food store or a compact supercentre. Then we have our traditional supercentre format, our Sam’s Club format and the neighbourhood store. In Mexico we have the Bodega format, which is a small-sized supercentre aimed at low income groups, the Superama format, a high income grocery store, and Suburbia, a department store concept. In Mexico we also have restaurant formats like VIPS – a family style restaurant – and the Mexican style restaurant El Porton. Finally, in Brazil we have Todo Dia, which is a low-price Bodega style format. The main drivers of growth will be firstly the supercentres and secondly Sam’s.”
As we are in Rome now, how do you think Wal-Mart can escape the historical fate of the ancient Roman Empire? How to avoid the sheer inevitable fall after the rise of the retail empire?
“We try to stay very humble and live by our core beliefs. That’s our culture and that won’t change. We think about one store, one customer and one associate at a time. We are focused on details and every day we reinvent our business. Even after a month of good results, we spend two minutes per hour celebrating and 58 minutes we look at possible improvements.”
Profile
John B. Menzer has been President & CEO of Wal-Mart International since June 1999. Before this date he was Executive Vice President and CFO for Wal-Mart Stores Inc., a position he held since joining Wal-Mart in September 1995. Before joining Wal-Mart, John Menzer was President of Ben Franklin Retail Stores Inc. Menzer is also a member of the Board of Directors of CIES – The Food Business Forum, and a member of its strategic planning committee.
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