Retailing giant Wal-Mart is lowering prices in its German stores. While international growth has come easy for the company, Germany has, so far, been a trouble spot. The company said these price cuts are “lasting” and attributes them to its ability to pay less to its suppliers. For a company like Wal-Mart, lowered costs and prices represent greater operating efficiency and should result in higher sales. It looks like the retailer may be on the road to righting its German wrongs after all.
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Wal-Mart's German invasion
Wal-Mart first moved into Germany back in 1997, and it expanded its presence in 1998. The company currently operates about 95 stores in Germany. One of the company's first moves upon purchasing the 21-store Wertkauf chain as its entryway to Germany was to cut prices on about 1,000 items.
Wal-Mart said the new price cuts will be "lasting cuts." The company attributed its ability to drop prices to the lower costs it has managed to secure with its suppliers. It's impressive that the retailer has been able to negotiate so effectively overseas, and this speaks to the strength of the company's model.
Low prices are better
With a company like Wal-Mart, value is driven by selling low-cost goods at high rates of volume, so the cheaper the company can sell its wares, the better. This strategy appears to translate well across international lines. After all, who doesn't like a bargain? Thrift knows no boundaries.
Wal-Mart's quick international growth
International sales for Wal-Mart are accounting for an increasingly higher percentage of overall revenues. For fiscal 2000, international sales racked up 13.7% of total sales, compared to 8.9% for fiscal 1999. In the company's most recently reported quarter, international sales were $7.4 billion, up 101% from the year before.
But Germany has been troubling for Wal-Mart. Things haven't gone according to plan, and lax execution has led to excess inventory. Store remodeling have happened at a slower-than-expected rate, and transition expenses -- the company has bought other chains' stores and converted them -- have been high. On the positive side, though, sales momentum has been good with same-store sales for the second quarter increasing in the remodeled German stores by 20%, and increasing overall by 10%.
Some good first steps
The news that Wal-Mart is cutting prices in its German stores is one early confidence builder that the retailer may be starting to get its act together. It's managed to lower its costs, so it's becoming more operationally efficient. The cheaper prices should help clear out that excess inventory, and entice more customers into its stores. The company hasn't ironed out all its difficulties in Germany, but lowering costs and cutting prices are two steps in the right direction.
Your Turn:
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Related Links:
Motley Fool Stock Research, Wal-Mart
Practical Thinking on Wal-Mart, Fool on the Hill, 8/22/00
Albertson's in Wal-Mart's Crosshairs? Fool Plate Special, 8/24/00
Carrefour, Promodes Gird for Wal-Mart, Fool News, 8/30/99
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