Money: No need to be freaked by Wal-Mart
THE LATEST NEWS FROM THE MOTLEY FOOL
Sunday 20 June 1999
Was it really such a short time ago that American retail giant Wal-Mart denied it had any plans to enter the UK market? What a surprise it must have been when the agreed pounds 6.7bn takeover of Asda was announced last week.
The all-cash deal, a full 15 per cent higher than Kingfisher's previous "agreed" offer for the company, is a sweet one for Asda shareholders, but caused shares in a few other retail groups to fall as people sold their shares in a blind panic.
Matalan, whose high-volume, low-margin approach to selling clothes is seen as similar to Wal-Mart's, was the biggest loser, though shares in Tesco, J Sainsbury and Boots also fell, along with Kingfisher.
So, is it all bad news for people who hold shares in supermarkets, and should everyone sell out quick now that the Americans are in town? At the Motley Fool, we never advocate speedy emotional responses to news or in our buying and selling decisions. It is important to look calmly at the new Wal-Mart presence.
The first fear is that Wal-Mart will now be able to roll out its American formula of selling almost everything imaginable, and selling it cheap. The reality, however, is that Asda stores are limited in terms of space. Asda's supermarket stores are generally larger then those of rivals, but even the company's 20 hypermarkets are only about 60,000 square feet each, which is pretty small when compared with Wal-Mart's supercentres, ranging from around 100,000 to over 200,000 square feet. Asda stores will simply not be able to carry the same range of goods that Wal-Mart carries in the USA. If they want to stock washing machines, electrical goods and all the rest, then they'll have to clear out some of the food. Expansion by building new stores is tightly regulated in the UK, too (although press reports suggest this is under review) so that is not an easy option.
Putting the fear of immediate total domination aside, how can Wal-Mart make an impact? Even if it cannot expand the amount of store space available, it can make better use of it. Asda stores typically use only 55 per cent of their floor space for selling, while Wal-Mart is aiming at 88 per cent in the US, so there is room for improvement.
Pricing, of course, is the most obvious area for competition, and we can surely expect to see some price-cutting. The scope may not be as large as we might think, as Asda's prices are already about 5 per cent below those of the high street supermarkets. But the new Asda can score by utilising the cost savings that Wal-Mart can achieve with its greater buying power.
But if a fear of price-cutting is now being factored into the share prices of our high-street supermarkets, let us not forget that some of that effect should have been there, without the Wal-Mart venture. This is because UK supermarkets are under investigation by the UK Competition Commission, amid fears of lack of competition and resulting high prices. So there was some downwards pressure on pricing just over the horizon.
We must also not forget just how close the two companies are in culture. In fact, Asda makes no secret of the fact that it has borrowed from Wal- Mart's ideas over the years, so any further assimilation following the takeover will be minimal.
So what should investors be doing? Foolish investors always like to act on the facts, not on rumours and emotion, so any who are thinking of putting money into supermarkets might consider it sensible to wait a little and see what Wal-Mart and Asda believe the future cost savings and business direction might be.
What about anyone considering selling? Bear in mind that excellent advice given by the Hitchhiker's Guide to the Galaxy. Don't panic.
Motley Fool, www.fool.co.uk
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