Wal-Mart's (NYSE:WMT) international operations began way back in 1992 when the company ventured into Mexico, and since then it has spread its network across 26 countries. Its largest overseas markets are Canada, Brazil, Mexico, U.K., and China. In the last 10 years, Wal-Mart's increased its international sales by nearly 2.5 times to a whopping $136 billion. Despite the solid growth trajectory, economic uncertainties and local challenges in different countries have started getting the better of Wal-Mart. Earlier this year, David Cheesewright, chief executive of Wal-Mart International, said, "We're seeing economies under stress pretty much everywhere we operate."
With weak U.S. comps, it's crucial for Wal-Mart to manage affairs outside the U.S. with utmost care if it wants to please its investors. Wal-Mart has nearly 6,200 international stores and around 4,300 in the United States. Let's take a look at some of what Wal-Mart is facing overseas.
In the fiscal year ended January 2014, the international segment reported sales growth of 1.3%, down from 7.4% in the previous year, and 15% in the year before that. Operating income for the international segment fell 18% to $5.45 billion, which in turn pulled down the company's total operating income by 3.1% to $26.87 billion. This has worried investors because though international is only 29% of Wal-Mart's total sales, it's been the primary growth driver for the company. Operations came under pressure in big markets like Mexico, Canada, Brazil, and China. Wal-Mart closed 29 stores in China and 25 in Brazil this year. It has about 400 stores in China and around 550 in Brazil.
The Mexican economy grew just 1.1% in 2013, well below projections of 3.5% growth, while rival Target's entry in Canada put pressure on Wal-Mart stores there. A string of food scandals involving meat, milk, and cooking oil has made buyers suspicious of Western chains in China. This together with deflationary environment in the retail sector took a toll on China comps. In India, Wal-Mart and Bharti Enterprises, its local partner, had to break their six-year alliance last year as the U.S. company was facing protests from mom-and-pop stores and small businesses, together with regulation issues.
Recent Japan hiccup
More recently, Wal-Mart decided to close 30 "underperforming" Seiyu-branded stores in Japan. The company is expected to take the charge for the proposed closures that will negatively impact its fiscal 2015 earnings by approximately $0.03 per share.
A reason for the store closures could be the dismal same-store sales numbers of Japan supermarkets, which fell for the 22nd consecutive year in 2013, according to Japan's trade ministry, as reported by Bloomberg. The country's retail sales forecasts are not great either. According to Statista, Japan's retail sales, which peaked in 2012 to $1.72 trillion, are expected to be down from $1.65 trillion in 2013 to $1.57 trillion in 2014 and could further go down to $1.55 trillion in 2015.
Reuters reported that Wal-Mart in Japan would focus more on its fresh foods segment and remodel 50 of its existing stores by 2015 to improve the quality of its offerings. By closing 30 stores, the company will try to optimize its costs and free up resources that can be deployed to other profitable operations. Wal-Mart has 434 stores in Japan.
It's difficult to gauge local trends
Understanding local buying patterns and habits has been a challenge for Wal-Mart in the past. It failed to catch the imagination of the local customers in Germany, which led to its eventual exit in 2006. Among the many factors cited for Wal-Mart's exit, misjudgment of the shopping habits of Germans by Wal-Mart's management was the primary one.
Wal-Mart's expansion in Asia had come to a screeching halt when it failed to make an impact in the South Korean market and thus exited in 2006. Again, the probable cause of the company's failure was traced to management's misunderstanding of the spending patterns of the population.
There's not much choice
Despite the obstacles, Wal-Mart has decided to invest $4 billion to $4.5 billion in its international business in fiscal year 2015 to spruce up sales. Its three main areas of focus are investing in its "everyday low prices" strategy to improve comps; more investments in e-commerce; and achieving sustainable growth in China. In China, the company has made progress in setting up fresh food and grocery distribution centers in order to enhance supply chain centralization. On the third-quarter conference call, Cheesewright said, "Centralization reduces shipping costs, enhances quality of fresh products, improves inventory management and delivers goods to stores more timely."
The international push is required to counter the weakness in Wal-Mart's core domestic operations. Though U.S. comps increased 0.5% in the recent third quarter -- the first increase in the last seven quarters -- underlying business conditions remain difficult as its low-income customers are still struggling financially. Competitive pressures are mounting, too, on the home front. According to a note by analysts at Wolfe Research, rivals are matching or are close to matching prices for merchandise that make up more than 70% of Wal-Mart's sales.
Investors should keep a close eye on how Wal-Mart handles its overseas business.
ICRA Online and Eshna Basu have no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.