Give Wal-Mart (NYSE:WMT) credit for one thing, at least; the company is patient. It purchased an initial 6% interest in the Japanese grocery and department store operator Seiyu back in March 2002, and gradually upped its stake to 42% earlier this summer, with little in the way of financial return to show for it. Seiyu is on track to lose money for the fourth straight year, and sales declined 5.4% in the first half of 2005. Yet the news coming out of Japan today is that Wal-Mart is upping its investment in Seiyu even further, purchasing a majority stake.
It's an interesting move by Wal-Mart, one that could be interpreted as either throwing good money after bad or presciently investing in a turnaround play on the cheap. Whatever the case, there are still many obstacles for the company to climb in Japan. Ito-Yokado and AEON are both strong and established competitors that already have a lock on a number of prime locations. While Americans may drive a bit out of their way in order to save money on "everyday low price" bulk items, the shopping habits of Japanese consumers are quite different, especially since Japanese homes do not have the storage room available to load up in bulk.
Back in the U.S., Wal-Mart faces a different battlefield, with Target (NYSE:TGT) on one side and warehouse clubs such as Motley Fool Stock Advisor pick Costco (NASDAQ:COST) on the other. Stateside, Wal-Mart has been able to dominate, largely because of its excellent supply chain distribution systems. While such a strategy isn't impossible in Japan, it is more difficult, primarily because stores are smaller and more numerous in Japan, and most goods are locked into a distribution chain controlled by an entrenched network of middlemen.
Regardless of the outcome in Japan, Wal-Mart's total investment in Seiyu is relatively small (a fraction of Wal-Mart's free cash flow in a single year). Furthermore, its efforts in China, which may be of more importance in the long run, appear to be bearing fruit. Let's not forget that Wal-Mart's stock is historically cheap, currently trading at only 15.6 times forward earnings estimates. It's even caught the eye of a number of value fund managers, including those working at Motley Fool Champion Funds picks Oakmark and Dodge & Cox. So while I find it difficult to envision Wal-Mart's investment in Japan working out any time soon, I find it equally difficult to bet against Wal-Mart itself.
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Nathan Parmelee lived in Japan for nearly three years, but quirky retailer Don Quijote was the best bet in his neighborhood for goods on the cheap. He owns shares of Costco, but no other company mentioned. The Motley Fool has an ironclad disclosure policy.
