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Walmart admits defeat in UK but eyes bigger prize as online

May 7, 2018

 

Changes have been coming thick and fast at Walmart, the American retail giant that started life when Sam Walton opened a five and dime store in Bentonville, Arkansas, in 1950.

 

The past few months have seen the company snap up high-end online businesses as it aims to take on upstart rival Amazon in the US. Now Walmart is overhauling its overseas operations as it tries to pick winners in the international market. Part of this strategy has seen Walmart sell off Asda, a company it has owned for 20 years.

 

The company’s first international foray dates back to 1991 when it opened a store in Mexico City and, at the last count, the corporate behemoth had a presence in 27 countries.

 

However, the appointment of Judith McKenna to oversee its international operations has paved the way for a radical change of direction and it is this that has underpinned the sale of Asda to Sainsbury’s. The deal, which will give Walmart £3 billion (Dh14.93 billion) in cash and a 41 per cent stake in the combined business, surprised some in the US.

 

“When I first saw the headlines over the weekend I thought Walmart was buying Sainsbury’s,” says Neil Stern, of retail consultants McMillanDoolittle.


“Then I reread the headlines and realised Walmart was selling Asda, which was the biggest acquisition it ever made.

 

“I think, looking at it from the point of the global chessboard, the UK market was very competitive. It was impossible to grow Asda. It had settled to being a very unhappy number three in that marketplace.”

 

Quite simply, Walmart believes that the money it will receive for Asda can be better spent elsewhere. It is looking to increase its footprint in India, where it is battling Amazon for a majority stake in the country’s leading online retailer Flipkart.

 

 The American chain also has its eyes firmly set on China. “It seems to me that Walmart is looking for growth, and the markets in the UK and Brazil have not been very attractive in this respect,” says Rajiv Lal, a professor in retail at Harvard Business School.

 

The Asda deal is not the first time that Walmart has discovered the formula that works so well in the US is not always easy to transplant.

 

In 2006 it admitted defeat in Germany, selling its 85 stores to a local retailer and, according to the New York Times, taking a billion-dollar hit in the process. The consensus among analysts is that the UK, like Germany, was difficult to crack.

 

 “The problem with the UK market is that it was very competitive, and Asda never really gained much market share,” says Brian Yarbrough, research analyst with Edward Jones.

 

Walmart, of course, is a venerable institution. For decades it was a story of inexorable growth and success as the company spread rapidly across the US to such an extent that it was estimated that around half the population lived within five miles of one of its stores.

 

But a formula that worked in the Sixties and Seventies was hardly appropriate in the age of the internet, especially once Amazon — a company operating on wafer-thin margins — came on the scene.

 

“One of the issues is that it is a very big business — a lot of its parts are very mature,” says Neil Saunders, managing director and retail analyst at GlobalData Retail.

 

“It is not as nimble as Amazon, but it has done a very good job in adapting.” Much of the credit should go to Doug McMillon, Walmart’s chief executive since 2014. He started with the company in 1984, as an hourly paid “associate” in one of its distribution centres.

 

In an interview last December he made clear that it had to embrace change: “I think Walmart deserves to be part of the future and has a culture that enables us to get there.”

 

Under McMillon, Walmart has taken the fight to Amazon. In 2016 it bought Jet.com, an e-commerce start-up, for $3.3bn (pounds 2.4bn).

 

It proved to be a masterstroke as Walmart’s e-commerce sales soared. The company poached Denise Incandela, who previously worked at upmarket companies like Ralph Lauren and Saks Fifth Avenue.

 

Men’s fashion retailer Bonobos was bought for $300m and a deal has also been struck with Lord & Taylor, another premium brand, as Walmart tries to attract younger customers and make the company an online fashion destination.

 

Walmart is also investigating a move into the health market, reportedly in talks to acquire leading health insurer Humana. Should the deal come off, it will add 14.2m policyholders to its customer base. At $37.5bn, this would be the largest purchase in the company’s history.

It is a move that would open another front in the war with Amazon, which is also moving into the sector.

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