Saturday, September 30, 2006

Wal-Mart is in Trouble in UK too!



A month ago I had posted a blog on why Wal-Mart had to exit Germany after series of losses. In September 30th issue of ‘The Economist’ has published that ASDA - a subsidiary of Wal-Mart is struggling in UK. This news follows the spate of bad news for Bentonville based Wal-Mart. Wal-Mart withdrew from Germany, South Korea and is making loses in China & Japan.

As stated in my earlier blog, troubles for Wal-Mart mainly stems from its cultural insensitivity to local culture - in terms of store layout & store merchandise.

ASDA in UK

ASDA is a Wal-Mart subsidiary in the UK. Wal-Mart acquired ASDA and replicated its big storeformat in the UK. In the initial years, this proved to be successful and ASDA grew. In 2003 ASDA became the second largest retailer in the UK. But by 2006, growth had slowed down and problems started became visible.

In case of ASDA, the problem is different - Wal-Mart does not enjoy any price advantage over its chief competitor TESCO.

Unlike in the USA where Wal-Mart enjoys a significant price advantage over its competitors, TESCO, Sainburys have managed to match ASDA in prices and also have a better merchandise mix. According to ‘The Economist’, a basket of 100 common items purchased at ASDA costs just £0.74 less than at TESCO. This difference is too small for shoppers to notice.

ASDA competes in grocery segment and in this segment ASDA has got it wrong. ASDA stores are modeled after a big store format. I visited ASDA today at Burnt Oak and the greens were a bit old & withered. The fresh ready-to-eat sandwiches were placed far away from the cash counter - making it unattractive for a casual customer. The merchandize is no way near the range & quality that as in the US.

Food subsidy is eating away ASDA’s advantage

If ASDA wants to compete with others in grocery segment, then it needs to change is positioning statement - "Always low prices" is no longer applicable in the grocery segment in the UK. In UK, the general market is shifting rapidly towards organic foods and people are willing to pay a premium for it. In addition governments are providing increased farm subsidy - which is reducing the cost of food products. This subsidy has two major impacts on ASDA’s strategy:


  1. Cost of food products is going down rapidly - thus the cost advantage of ASDA is diminishing rapidly. Even the price difference between organic foods and regular foods is dropping.
  2. Lower food prices means grocery spending as % of household expenditure is falling. Thus selling grocery alone means reduces reduced incomes.

May be Wal-Mart should change ASDA’s merchandise mix - and concentrate on garments - where ASDA has a good range, have more house furnishings and in general have more of nonperishable items - just like most of the Wal-Mart superstores in the US.

Cultural Differences from the US

UK has a long history of superstores - the shopping culture in UK is quite similar to that of US. This has led to success of superstores in UK. But there are few small but important cultural differences between UK & US customers. UK customers like the convenience of small stores on the high street. TESCO has capitalized on this by having TESCO Express - a small convenience stores in the high street. But ASDA has not.

A significant number of UK customers use public transport - particularly in London and other big cities. This implies that these shoppers would shop in little quantities but shop often - and mostly from the stores near the public transport facilities. ASDA’s big superstores are away from public transport facilities - which turns off customers who rely on public transport facilities.

British customers are also more aware of environment issues than the Americans. The concept of "Green Business is Good Business" is more prevalent in UK/Europe than in the US. As a result people are shifting towards Organic foods, public transport systems and eco-friendly products. ASDA’s American image is not helping when it comes to selling "green" products.

Closing Thoughts

The idea of a global standard is not applicable when it comes to retail products. Wal-Mart’s successful model in the US cannot be applied uniformly in other countries - even in UK which is culturally very similar to that of US. Global markets are attractive - but will need a large scale localization. It may help Wal-Mart to look deeply at McDonald’s and see how they have customised to meet the local demands and learn about localization to succeed in other countries - especially if Wal-Mart has to succeed in China and India.

Also see:

Trans-cultural Business Failure: Wal-Mart Exits Germany

1 comment:

Mattea McClean said...

Hi there,

Great post with many interesting points. Do you have any other references other than the 'Supermarkets: A long, long way from Bentonville' article in The Economist, September 30th 2006 edition?

Kind regards,

Mattea