Wal-Mart Stores, the American retailing colossus, seemed anxious on Monday to impress upon us that we shouldn’t read too much into its recommended £6.7bn takeover bid for Asda which, at a 25 per cent premium to Kingfisher’s bid, effectively kicked the proposed UK tie-up into touch.
Don Soderquist, senior vice-chairman at Wal-Mart, acted as spokesman and he rattled on about “another stepping stone in a growth programme we’ve identified over the next five years”, about how Wal-Mart wants “one-third of our growth to be coming from the international arena” and how the two chains share a culture of “everyday low pricing”.
All of which, I have no doubt, is true. But it’s like Alex Ferguson saying he wants to buy Juventus because they play football too. I hesitate to compare Asda with one of the slickest teams in the world, but to talk of such acquisitions only in the context of operating similarities is to miss the point.
Wal-Mart is just as much about international domination as is Manchester United. A crucial difference being that Wal-Mart is in an industry that will allow global consolidation Â- horizontal and vertical -Â while Man U is more strictly required to compete with its international rivals, for obvious reasons.
I mention vertical integration not because the soccer team of this analogy isn’t allowed to be owned by its industrial facilitator, BSkyB, but because this is the sort of equivalent opportunity for which Wal-Mart will be looking. And this is where I believe that, behind the prosaic statements about putting “our numbers together”, the real value of Wal-Mart’s growth strategy lies.
To see the bigger picture for Wal-Mart, one need look no further than that other domestic UK retailer which is providing the other great retail story of the moment. I mean Dixons and its proposed flotation of its Internet service provider, Freeserve. And, yes, in one bound we’re back into the debate over whether the Internet is the market of the new millennium, or whether it’s an increasingly overstretched and transparent balloon just waiting to pop.
In short, share prices have been grossly inflated by dangerous talking-up of the market, yet it’s fair to say the Internet itself has created a retail quantum leap that will change markets forever. For this reason, there are some issues that are pertinent to the Wal-Mart play for Asda.
The first point is that Wal-Mart is setting up a significant sourcing and distribution challenge for itself. In this context, it is worth noting that Wal-Mart Â the world’s largest retailer with annual sales of more than $137bn (£86bn) and a market capitalisation of $190m (£119bn) Â has already developed an acquisitions programme in Germany.
I can’t be alone in assuming that Wal-Mart has an eye to developing a pan-European retail presence. The German connection puts it in a good position to take advantage of attractive and developing East European retail markets. And with Asda, it will have a strong East/West European axis.
This European presence will deliver the per capita expansion that retailers need in order to provide earnings growth Â that’s the message that was doggedly being delivered by Wal-Mart on Monday. But it also begins to add significant clout at the wholesale end of the equation too. Where and for how much Wal-Mart is sourcing its European lines will become a major commercial issue for the company.
It’s a gift of an opportunity for an Internet-based business and adds further evidence to the fact that, while penetration of consumer markets by the Internet remains overblown and speculative, the business-to-business market for information technology is already real and tangible.
According to analysts at investment bank Granville, it’s the consumer Internet operators, such as Amazon and eBay, that have attracted Wall Street’s attention and inflated the Internet value bubble. European Internet technology, on the other hand, has been adopted more quickly by the larger and less glamorous business-to-business sector.
Last year, 65 per cent of the Internet market was business-to-business, with the balance business-to-consumer. The gap is expected to widen by 2002 with an estimated 78 per cent of Internet activity being accounted for by business-to-business, with just 22 per cent consumer-driven. This is a trend to which Wal- Mart can expect to be contributing, as it develops its pan-European wholesale business.
But it will also have an interest in developing consumer technology, which is my second point. Asda was looking forward to the capital muscle of a merger with Kingfisher, in part to develop home-delivery to 2 million households around London. In this regard, Asda lags behind Tesco, which claims about 200,000 subscribers to its Internet home-delivery service and collects and fulfils its customers’ orders from its stores.
There will be an unparalleled opportunity for Asda to develop this kind of consumer market with the access to capital that Wal-Mart can provide, not to mention the sort of wholesale econo-mies of scale that it will be able to bring to bear.
There are those who claim that a £1.5bn price-tag on the forthcoming flotation of Dixons’ ISP is absurd. But it could be that what Wal-Mart has to do with the Internet in Europe in the next few years will make this sort of valuation look conservative.
George Pitcher is a partner of issue management consultancy Luther Pendragon