Walmart Takes a Breather
Walmart Has Shut its Office in Russia, but Experts Predict the Retail Giant Will Soon Be Back
Tai Adelaja | Russia Profile | Dec. 14, 2010 | JRL 2010-230-29
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The world's largest retailer Walmart Stores announced on Monday that it would close down its Moscow office, which opened last year, after failed attempts to enter the booming Russian retail market by clinching attractive acquisition deals. However, the American retailer's temporary hiatus may be a ploy by the company to buy time to regain its strength and sort out its financial resources, overstretched this year after a number of mergers and acquisition deals, analysts say.
"The Russian market is a compelling retail opportunity and we believe that Russian consumers could benefit from Walmart's value proposition," Doug McMillon, CEO of Walmart International, said in a statement on Monday. "Since we have decided to enter the market through acquisition, not greenfield development, and since there is no clear acquisition partner in the near term, there is not a business reason to continue our Moscow representative office. We will continue to pursue market entry opportunities."
Walmart Stores, which operates 8,692 retail units under 59 different names in 15 countries, opened its office in Russia a year ago, as the global financial crisis ebbed and Russian consumers started spending again. The giant retailer reportedly held talks with residential property developer PIK Group in June for the purchase of commercial property for the smaller stores it plans to open in residential areas, which suggested it was considering a greenfield project. At the same time, the St. Petersburg-based hypermarket chain Lenta, which has an annual turnover of roughly $1.8 billion, was being touted as a potential acquisition target for Walmart. In September, the Moscow Times cited one of the company's shareholders as saying that these rumors were baseless. Some media reports have suggested that Walmart was becoming increasingly frustrated with botched efforts to reach an agreement to buy Russia's low-end discounter Kopeika, which was recently acquired for $1.65 billion by X5, the country's biggest food retailer in terms of sales. Business daily Vedomosti reported in October that Walmart was locked in a takeover battle with X5, to buy the low-end discounter.
However, as late as June this year Walmart appeared undecided on whether to open stores or buy a chain to enter the Russian market, Bloomberg reported, citing Kevin Gardner, the company's chief of international mergers and acquisitions. Walmart may have decided against the more straightforward option of greenfield development in the first place because of peculiar investment problems facing foreign investors in the Russian market, analysts say. "Acquisition is the logical way to go, since Walmart has no experience in the local retail market and probably only a few specialists with strong local connections," Alfa Bank analyst Alexandra Melnikova said. "It is also a less risky strategy in the light of periodic complications faced by other foreign companies, like the Swedish firm IKEA. Making an acquisition could insulate against both managerial and organizational problems." Carrefour, Walmart's French rival, withdrew from Russia last year after opening just two of its large-format hypermarkets. Sweden's IKEA, with 12 shopping centers in Russia, has complained of pervasive corruption and dismissed two senior managers this year for allowing a supplier to pay bribes to secure power for a shopping center in St. Petersburg.
Natasha Zagvozdina, a commodities analyst at Renaissance Capital, said that many big retailers like X5, Magnit, Germany's Metro and France's Auchan have successfully developed greenfield projects in Russia, and there should be no reason why Walmart could not do the same. "I believe Walmart considered the possibility of having a greenfield project in Russia, but must have decided against it after discussing it with suppliers and real estate developers and discovering that the process is long and protracted in Russia," Zagvozdina said. "The real reason for Walmart's decision," she said, "is that the company's financial resources are overstretched after a series of mergers and acquisition deals, including a $2.3 billion bid for Massmart, a South African retailer, in November and a $1.13 billion deal in May to buy 193 small supermarkets in the UK from Denmark's Netto. The temporary hiatus will enable the company to sort out its commitments before returning to the Russian market."
Analysts also dismissed talks of failed efforts to acquire Kopeika as the likely reason for Walmart's decision to quit. "While Walmart did hold talks about acquiring Kopeika, it looks pretty unlikely the U.S. giant retailer was aiming to acquire it," Melnikova said. Kopeika is a discounter with lots of small retail shops, while big companies like Walmart entering the Russian market always start off with a hypermarket format, which gives them a strong presence." Such talks, if they took place, were perhaps more beneficial to Kopeika, as it will enable it to raise its market value in bidding with other companies. Walmart was more likely to opt for the hypermarket format as it allows it to be more competitive by offering a wide range of products, while also controlling bigger space at the expense of many small shopping outlets such as Kopeikas, Melnikova said.
Moving away from Russia may also suggest moving closer to home for Walmart Stores, as the company makes renewed efforts to enter New York City, after retreating twice because of community opposition. The New York Times reported on Monday that the discount giant is actively talking with construction unions in New York City to open stores there. Walmart Stores' attempt to set up shop in New York City and its decision to close its Moscow office are both good moves, according to analysts cited by Associated Press. In addition to the home turf, the company is also focusing attention on other emerging countries like India, China and Brazil. McMillon said on Monday that the company continues "to be excited about [its] international business, including markets where we already operate, such as Brazil, China and India, where we have a tremendous growth opportunity." The company's strategy, he said, "remains focused on delivering growth, leverage and returns, and on making a difference for our customers and generating returns for our shareholders."
But the company may have to contend with stiffer competition in the Russian retail sector when it eventually decides to deliver on its lofty goals in the future, analysts said. "While the Russian retail market continues to provide ample opportunities for growth and investment, such opportunities are shrinking for foreign investors, because local players are expanding their operations and becoming more competitive," Melnikova said. "Foreign companies with a strong foothold in the market such as Auchan and Metro are also beefing up market share, and that means new entrants would need to redouble efforts to enter the market."
This is unlikely to deter Walmart, however, as the Russian retail sector continues to grow "at a phenomenal rate in real terms," Zagvozdina said. "There is more consolidation in the sector, which is why X5 is buying Kopeika and Magnit, increasing its investment to $1.5 billion by 2011 and could control up to ten percent of the market share over the next ten years," Zagvozdina said. "So I am sure that Walmart will be back. The Russian retail sector is simply too attractive to be ignored."
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