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Wal-Mart Maps New Growth

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Investors may fret about its potential for growth in the U.S., but elsewhere in the world, Wal-Mart (NYSE: WMT  ) has some interesting initiatives up its gigantic sleeve.

The discount-retail behemoth has made a preliminary bid to buy Massmart Holdings, a South African retail chain, for about $4.6 billion. Massmart's positioning fits very well with Wal-Mart's, since it's also a discount retailer that pushes tons of inexpensive merchandise to consumers.

Even more appealingly, this would give Wal-Mart the inside track in getting its gigantic toe into Africa, beating out formidable European retail rivals Tesco (Nasdaq: TESO  ) and the world's second-largest retailer, Carrefour. International growth is one of many reasons my Foolish colleague Jim Royal made Wal-Mart his 11 O'Clock stock pick in late August.

Folks may like the stocks of other discount retailers, but chances are they don't have Wal-Mart's wherewithal to delve into new and potentially very lucrative markets. Sears Holdings (Nasdaq: SHLD  ) has enough on its plate duking it out right here in North America, for example. Target (NYSE: TGT  ) is a formidable Wal-Mart rival in the U.S., but it's also a U.S.-only retailer at the moment.

Over the years, Wal-Mart has displayed a good grip on international expansion -- a tricky and risky pursuit, especially when you're one of the first companies moving into a new region.

For Wal-Mart, the deal's $4.6 billion price tag may make this an expensive experiment in international expansion. Nonetheless, shareholders should be gratified that the retail behemoth is trying out new markets for additional growth -- and that it's financially strong enough to take such a gamble in these tough times.

Wal-Mart is a Motley Fool Inside Value recommendation. The Fool owns shares of Wal-Mart. Try any of our Foolish newsletter services free for 30 days.

Alyce Lomax does not owns shares of the companies mentioned in this article. True to its name, The Motley Fool is made up of a motley assortment of writers and analysts, each with a unique perspective; sometimes we agree, sometimes we disagree, but we all believe in the power of learning from each other through our Foolish community. The Fool has a disclosure policy.

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  • Report this Comment On September 28, 2010, at 3:17 AM, DookOfURL wrote:

    Some flags from the new frontline for Wal-Mart:

    1. Massmart is actually several brands, there is no Massmart store. Good luck with re-branding names such as Makro, Game, Builders Warehouse and so on. Just a quick example: Makro is based in Johannesburg, Game is based 600kms away in Durban. Makro is a stand-alone warehouse store. Game is typically (but not always) based in shopping malls. Makro requires you to bring your own bags and load your own trolleys. Game will provide you with plastic shopping bags -- at a price, but still.

    2. What we think of as "big" in South Africa is quite small in Wal-Mart's world. I question just how much economies of scale there are.

    3. Logistics in South Africa are actually already fairly sophisticated. SAP software runs all the biggest retail chains here. I don't know if Wal-Mart runs Oracle, but if it does, you could sell tickets to the future "debate" over systems. There is little if any cost left to be extracted from logistics.

    4. Retailing in South Africa is very different from retailing in the rest of Africa. Wal-Mart will at least recognise the market in South Africa; turn up at a mass retailer in, say, Zambia, and they may well be surprised. Credit and payment systems run very well in South Africa. Cash dominates elsewhere.

    5. Send us a bunch of culturally superior former members of the military to impose Wal-Mart branding, practices and culture and the deal is dead before it starts.

    6. Applied here, absolutely rigid corporate cultures, military-style procedures and company songs will not work but will confirm stereotypes of what Americans are really like.

    7. Is Wal-Mart really prepared for working in an environment where trade unions are strong and the South African Communist Party holds several Cabinet positions? Out here there are no Republican congressmen to fund and lobby for changes in the law to suit you.

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