Behind the Berlin Wal-Mart

BERLIN — On a street named for the antithesis of capitalism, Wal-Mart Stores Inc. fights for a toehold in the land of Aldi.

Across Karl-Marx-Strasse from the two-story, 107,000-SF Wal-Mart Supercenter near the former East Berlin is a tiny Aldi grocery store. These two stores, and the competition between them, is a microcosm of Wal-Mart’s predicament in Germany.

Aldi has in Germany what Wal-Mart has in the United States — leverage to buy goods cheap from suppliers and a low-price reputation with customers. Aldi also has the hometown advantage. Brothers Karl and Theo Albrecht founded Aldi Inc. 40 years ago in Germany.

Wal-Mart’s foray into Germany “is a mistake,” said Herbert Sturm, senior vice president over the retail and consumer goods sector at DG Bank in Frankfurt. He said it would take two decades for Wal-Mart to achieve market dominance in Germany.

“We’re staying, definitely,” Jose Gomez, a spokesman for Wal-Mart’s international division, said concerning speculation that Wal-Mart might give up in Germany. “We continue to see improvement.”

Aldi was Germany’s No. 3 retailer in 1999 (the most recent year for which numbers are available), behind Metro AG and Edeka Zentrale AG. Wal-Mart was No. 16 in Germany for 1999, with less than 1 percent of the retail market. But Wal-Mart’s share has probably increased to 2-3 percent, Sturm said.

Wal-Mart doesn’t release sales figures for separate stores or separate countries, but Sturm estimated that Wal-Mart had sales of about $2 billion in Germany in 1999, or nearly 5 percent of the country’s $50 billion hypermarket sector.

The Bentonville retailer has one store in Berlin, but it’s one of the largest hypermarkets — the European term for “superstore” — in the city, which has a population of 3.4 million. Aldi, on the other hand, seems ubiquitous, with 140 small stores scattered throughout Berlin. Wal-Mart has 95 stores in all of Germany; Aldi has 3,100.

Aldi has the territory covered, but Wal-Mart has the selection. The average Wal-Mart in Germany carries 75,000 different items, including groceries, clothing, liquor and household goods. Aldi stores stock about 700 different items, only groceries and a smattering of household goods.

Although Germany is the only country where analysts believe Wal-Mart is losing money, activity at the Berlin Supercenter may be a sign that things are changing.

Career Opportunities

Sales at the Berlin Wal-Mart increased 20 percent to $65 million in calendar year 2000, said Gerald Funke, regional manager over the store. The store’s increase came despite a remodeling that made shopping at the store somewhat like running an obstacle course. The remodeling was mandated by government regulators, who have been anything but a Welcome Wagon for Wal-Mart’s German adventure.

“We are progressing in everything we are doing here,” said Suzanne Mueller, a spokeswoman for Wal-Mart in Germany. “Logistics are getting better. We have changed more than half the assortment [of items stocked] in the Berlin store in 1999 and 2000.”

Previously, the store stocked items carried by Interspar, the 74-store hypermarket chain that Wal-Mart purchased in December 1998 for $500 million. The Berlin Wal-Mart was home to an Interspar hypermarket for 30 years, and Wal-Mart inherited Interspar’s product mix.

Wal-Mart entered Germany in December 1997 with its purchase of the 21-store Wertkauf hypermarket chain, purchased at a cost estimated between $660 million-$1 billion. The move sent retailers scrambling for property in Germany and raised the value of the Interspar chain that Wal-Mart later purchased.

The first Wal-Mart store to be built in Germany from the ground up is under construction. The $17.4 million store in Pattensen, near Hanover, is scheduled to open next year.

With the largest economy in Europe, Germany accounts for about 15 percent of the continent’s $2 trillion annual retail market.

Retail analyst Management Ventures Inc. of Cambridge, Mass., speculated in 1998 that by invading Germany, Wal-Mart was targeting growth potential in the newly emerging Eastern European nations and trying to establish a presence in the European Monetary Union market before the separate nations become one “trading zone.”

“That all may sound good,” said Jay Allen, vice president of corporate affairs for Wal-Mart at the Bentonville headquarters, “but I can assure you we’re focusing on Germany. … It’s a large economy. We have found that our programs, and even more importantly, our culture, transport well whether it’s in Latin America, Asia or Europe.”

The key to this cultural strategy is to treat customers with respect and to localize the stores, Allen said.

Germany and Argentina are the only countries where Wal-Mart is struggling, Allen said. While the company is not losing money in Argentina, the company has been disappointed there “due to the political situation and the economy,” Gomez said.

Wal-Mart CEO Lee Scott told analysts in a conference call in October that growth in Germany had been slower than expected.

In July, Allen Leighton, then-head of European operations for Wal-Mart, said the company would like to open 50 new locations in Germany during the next three years.

But Gomez, the spokesman for Wal-Mart International, said Leighton’s comment had been tossed out during a casual discussion with reporters and wasn’t a goal set by the company.

“There is no doubt that Germany has been slower than they originally expected,” said John Lawrence, a Wal-Mart analyst with Morgan Keegan & Co. in Memphis. “It has taken longer, that’s no secret. The key factor is, as they study that culture and learn that marketplace, I think history tells you they’ll figure out a way to make that work. … They’re doing that all over the globe, not only in Germany.”

Lawrence said Wal-Mart’s problems upon going into any country are usually internal, having to do with store execution — factors such as culture, logistics and product mix.

“The good news is the customer is behind them all the way, and they’re showing great sales,” Lawrence said. “It appears in all cases that consumer acceptance is there all the way.”

“The image of the Wal-Mart store is positive, there is no question,” Sturm said. “But it’s difficult to get critical mass here.”

Strong unions and difficulty purchasing land also have been obstacles for Wal-Mart.

Sturm said Wal-Mart had two options in Germany: build new hypermarkets in the most land-use-restrictive country in Europe, or buy existing stores from companies that don’t want to sell.

“It’s very difficult to find a [business] partner in Germany,” he said. “Who would sell?”

London Calling

Wal-Mart International sales were up 85.6 percent to $22.7 billion — out of $165 billion in total, worldwide sales — for the year ended Jan. 31, 2000, which Wal-Mart refers to as fiscal 2000.

But that number includes seven months of sales from the 232-store Asda supermarket chain in Great Britain, which Wal-Mart purchased in June 1999 for $10.8 billion.

It appears that Asda sales amounted to 35-40 percent of Wal-Mart’s international sales total for the fiscal year that ended Jan. 31, 2000, said Asma Usmani, a Wal-Mart analyst with Edward D. Jones & Co. of St. Louis. If the estimated Asda sales were subtracted from the total, Wal-Mart’s international sales would have increased about 33 percent to $16 billion for fiscal 2000, still a hefty increase.

Operating profit for Wal-Mart’s international division was up 48.8 percent to $817 million in fiscal 2000.

International sales accounted for 13.8 percent of total Wal-Mart sales in fiscal 2000, compared with 8.9 percent in fiscal 1999.

Last summer, John Menzger, president and CEO of Wal-Mart International, said he hoped a third of the company’s earnings growth would come from profits in the international division by 2005. In 1998, 20-25 percent of the earnings growth came from international operations.

Gomez said the $65 million figure quoted by Funke for the Berlin Supercenter was very healthy, considering that Wal-Mart has only been in Germany since December 1997.

Executive Decision

Dave Ferguson, the former head of Wal-Mart Canada, was recently appointed to oversee Wal-Mart’s operations in Germany and Great Britain, replacing Leighton, who left the company to pursue other business interests. Ferguson is largely credited with Wal-Mart’s turnaround in Canada.

It took Wal-Mart a few years to become the market leader in Canada, Gomez said. Wal-Mart entered that market in November 1994 and is now the No. 1 retailer in Canada.

“Generally, it takes three to five years to become profitable when you go in to a country,” said Allen, Wal-Mart’s spokesman. “Generally, there’s a higher expectation of Wal-Mart. We could have done some things differently, but we’re working on it. Our intention is to stay in Germany and do a better job of serving our customers.”

By Dec. 31, Wal-Mart had 3,079 stores in the United States: 1,722 traditional Wal-Mart discount stores (about 100,000 SF), 868 Supercenters (as large as 200,000 SF), 17 Neighborhood Market stores (40,000 SF), and 472 Sam’s Club warehouse stores. The world’s largest retailer has 885,000 employees in the United States.

Outside the United States, Wal-Mart has 1,068 stores and 255,000 employees. The company has 496 stores in Mexico, 241 in the United Kingdom, 173 in Canada, 95 in Germany, 20 in Brazil, 15 in Puerto Rico, 11 in Argentina, 11 in China and six in Korea.

When the number of stores is divided by annual sales, the total would indicate that the average Wal-Mart store worldwide brings in $40 million in sales. The annual sales number for Supercenters would be considerably higher, but Wal-Mart doesn’t provide separate figures for that sector.

U.S. News & World Report has estimated that Wal-Mart is losing $200 million per year in Germany. That amount is minuscule to a company with $165 billion in annual sales. But the figure is significant since Germany has the largest economy in Europe, and Wal-Mart has succeeded everywhere else it has invaded, except Indonesia, where Wal-Mart pulled out after a joint-venture “test.”

Although Germans seem to appreciate the low prices of Aldi stores, their tone changed when Wal-Mart started a price-slashing war last year.

In September, Germany’s Cartel Office forced Wal-Mart, Aldi and the Lidl discount chain to raise prices on items such as butter and milk, saying that the stores were selling them below cost — down to 1950s prices — and that that could force mom-and-pop stores out of business.

Wal-Mart denied that it was selling some groceries at a loss in its German stores in a bid to undercut rivals.

Clinical Precision

Aldi had sales of $16.6 billion in Germany during 2000, estimates Retail Intelligence, a London research group.

Retail Intelligence, which classifies Aldi as a discount store chain, said the company has 46.2 percent of that market in Germany.

But that’s a different sector from hypermarkets, which sell a much wider variety of goods in some cases.

The leading hypermarket chain in Germany is Metro AG, with 259 Real, Alkaus and Kriegbaum hypermarkets and 75 smaller Metro Cash and Carry stores. Metro AG had sales of $11 billion in Germany in 1999, Sturm said.

Metro AG, which has 3,838 stores throughout Europe, is second on the continent in hypermarket sales only to Carrefour of France, with more than 9,000 stores in 27 countries and sales of $28 billion for the first six months of 2000.

Sturm estimates that Wal-Mart had 5 percent of Germany’s $50 billion annual hypermarket sector in 1999 and less than 1 percent of the country’s total retail market.

Sturm said Wal-Mart would need sales of $10 billion-$15 billion annually in Germany “to become a big player in the sector.” In 1999, Wal-Mart had sales of about $2 billion in Germany, he said.

Aldi International is a “limited-assortment discount retailer specializing in an assortment of private-label, high-quality products,” the company’s Web site says. “We sell them at the lowest possible price.”

After opening its first store in Germany more than 40 years ago, Aldi has since branched out through Europe and the United States. The company has 549 stores in 21 states from Kansas to the Eastern Seaboard, including a store in Fayetteville across the street from the Fiesta Square shopping center, which was home to a Wal-Mart store until 1998.

Aldi said its product line includes “more than 700 of the most needed, most often used products for the average home.”

By contrast, most grocery stores offer more than 25,000 items. According to the Aldi Web page, shoppers can purchase 70 percent of their weekly shopping list at an Aldi store.

“Limited assortment allows us to bring you, the customer, the best overall value,” the company says.

Aldi Inc. is owned by the Albrecht family, the richest family in Europe, with a $13.6 billion private fortune. The family ranked No. 9 on the world’s-richest list, according to Forbes magazine.

Aldi stores have no telephones, but that’s only one of the cost-cutting efforts. The company saves money by hiring few employees, only cashiers and workers putting up stock in cardboard boxes. Customers bag their own groceries.

The Aldi store on Karl-Marx-Strasse receives shipments of goods every Monday, Wednesday and Friday, often after the shelves have been emptied of some items, said Matthias Bolk, a store employee.

Bolk estimated that the store sells $10,000 worth of goods per day.

Lost in the Supermarket

Sales of $65 million would normally not be considered exceptional for a Wal-Mart Supercenter, but for a store that has been branded a problem, the 20 percent increase in sales is significant, one of the best increases in the company, said the store manager, who requested his name not be used for this report.

Bloomberg News reported that, on Aug. 8, the day of its “grand opening” after the $2.6 million renovation, prices were considerably higher at the Supercenter than at the no-frills Aldi store across the street.

An 18-ounce loaf of bread sold for $1.13 at the Wal-Mart, Bloomberg said. The same loaf of bread was “just 34 cents” at the Aldi store. Bloomberg cited other price discrepancies and quoted German shoppers as saying they preferred the low prices of Aldi to the “bright, brassy” shopping experience at the Wal-Mart across Karl-Marx-Strasse.

But it wasn’t that way when a reporter from the Northwest Arkansas Business Journal visited the stores Dec. 27, the first day they were open after the Christmas holiday.

Although most prices were slightly lower at the Aldi store, the selection was very limited. Wal-Mart offered 25, 6-foot-wide aisles on the ground floor and 20 aisles in the basement. The store stocked items normally found at Wal-Mart Supercenters in the United States in addition to a large liquor section.

After Christmas, the cheapest bread at the Aldi store was a 500-gram loaf of Butter Toast brand at 36 cents. The same loaf of bread at the Wal-Mart was 38 cents. The price difference on more expensive bread was more pronounced — 87 cents at Aldi’s for Weissbrot vs. $1.21 at Wal-Mart — but the two stores didn’t carry the same brands so the comparison wasn’t apples to apples.

Two of the three checkout lanes were open at the Aldi store. By noon, all 22 lanes were open for post-Christmas shopping at the Wal-Mart.

The price difference at the Wal-Mart between U.S.- and German-made goods was obvious. A pair of American-made Levi blue jeans, which sells for $35 in the United States, sold for $47.50 at the Wal-Mart in Berlin. A pair of German-made Birkenstock Betula sandals, which would go for about $80 in the United States, was $15 at the Wal-Mart.

The Right Profile

The differences between sales at the two stores on Karl-Marx-Strasse may be one of culture.

Bolk, the employee at the 20-year-old Aldi store on Karl-Marx-Strasse, said only “tourists” shop at the Wal-Mart across the street. Germans shop at the Aldi, he said. The area looks nothing like a tourist attraction.

The Wal-Mart store manager said Bolk was wrong. He said the Aldi store’s clientele consists almost entirely of Turks, a large ethnic minority in German. The two stores are in what is considered a Turkish neighborhood of Berlin.

When asked who shops at the Wal-Mart, the manager said it was a 50-50 split between Germans and Turks.

Mueller, the Wal-Mart spokeswoman in Germany, said the Berlin Wal-Mart has an entire aisle of Turkish food for residents of that section of the city.

“We are often asked if we carry American products more than anything else, and that is not the fact,” she said. “Our assortment is for local people and for Germans.”

Bolk said Aldi’s grocery prices were 10-20 percent cheaper than those at the Wal-Mart.

“There’s more selection at Wal-Mart,” he said. “We have only 800 articles, and they have many thousands. Aldi’s has a good name in Germany, a low-price name.”

Although about 80 percent of Aldi items are generic, such as River Cola instead of Coca-Cola, the quality of those items is good, said Funke and the Wal-Mart store manager.

“They have one very cheap price level,” the manager said. “The prices are good, but they don’t have this many items.”

The comparison between Wal-Mart and Aldi concerning leverage over vendors is obvious.

“They have a lot of power,” the Wal-Mart manager said of Aldi. “A lot of companies depend on them.”

Sturm said Wal-Mart has management problems in Germany, primarily because it sent Americans to run the stores.

“They made the same mistake in South America,” he said. “They sent American managers to Germany. They speak different, and understanding how to do a good service to your customer is different.”

Season’s Greetings

Absent from the entryway to the Berlin Wal-Mart is a “greeter.” Wal-Mart has workers hired at its U.S. stores to greet shoppers when they come in the door.

Bloomberg said Wal-Mart abandoned the idea of store greeters in Germany because German shoppers complained about being approached by strangers.

The store manager said he wasn’t aware of such a policy. He’s still looking for someone to hire as a greeter for the Berlin Supercenter, he said.

“We’re looking for someone, but it’s hard to find the right person,” he said. “I don’t really know why we don’t have a greeter.”