Wal-Mart Is In Denial

Implications: Wal-Mart delays its inevitable departure from the Japanese market as it completes the buyout of Seiyu.  Here is why Lee Scott continues to invest shareholders money in a Japanese venture that is all but doomed to failure.

Analysis: If Napoleon had his Waterloo, Lee Scott has Seiyu.  According to Wal-Mart, the company has “completed its tender offer for the outstanding shares of Seiyu”, the chain of stores it operates in Japan.  According to a spokes person, Wal-Mart now has 95.1% of the company.  Seiyu has continuously lost money in Japan since Wal-Mart first invested in it. 

The company has never made money and continued that trend in February reporting a net loss of $219 million.  Despite Chairman Scott’s assurances that acquiring full control of Seiyu was critical to turning the business around, it doubtful Wal-Mart’s increased control of the company will do anything to stem the losses.  The company’s problem in the world’s second largest market has more to do with Wal-Mart’s management style and the relevance of its traditional product offer than politics in the boardroom.  Add to that, Seiyu was an unsuccessful brand in the Japanese market before they were acquired and you have a recipe for failure.

The fact is Wal-Mart’s International division hasn’t demonstrated much skill in penetrating many key overseas markets in Europe and Asia.  Wal-Mart vacated Germany and most recently South Korea.  Clearly they haven’t learned much from those bad experiences.  Lee Scott knows a failure in Japan would jeopardize the company’s plans to invest more money in China and India, markets where they face many of the same problems and even more competition.  He has staked much of the company’s future on succeeding in those markets, while growth has slowed in the US.  Scott surely knows shareholders would lose confidence in his leadership and his plan if Wal-Mart vacated Japan now.

Today, Wal-Mart may be benefiting from America’s economic slowdown.  It has stressed its original low cost position in the marketplace.  Sales in cheap prescription drugs and groceries have accelerated, but that has shifted the company’s sales to the lowest margin products in the mix.  Just whether the company can cut costs further to profitably sustain that kind of sales growth remains to be seen.

Meanwhile, it problematic whether the company will achieve higher margin apparel and home product sales growth in this economy or as the economy turns around if history is to be the measure.  It is even more problematic that it can turn the Japanese business around which should worry investors even more.