After folding its hand in Germany and South Korea, Wal-Mart Stores Inc. appears to be ready to raise the ante on China.
The retailer’s reported $1 billion deal to buy the Taiwanese supermarket and appliance chain Trust-Mart pleased financial analysts who see China, which has the world’s fastest-growing economy with an expanding manufacturing base and middle class, as a crucial market for growth.
“It’s a great move,” said Ulysses Yannas, who follows retail stocks for Buckman, Buckman & Reid. “They can now do in China what they couldn’t do in Germany or [South] Korea, which is to bulk up so their distribution costs go down.”
If Wal-Mart were able to develop a 30 percent market share in China — similar to what it holds now in U.S. grocery sales — the country eventually might eclipse U.S. sales because China’s economy has been growing about 10 percent annually over several years, Yannas said.
Wal-Mart declined to comment on published reports about the acquisition, which would require the approval of authorities in China.
The Bentonville, Ark.-based retailer, which reported $312 billion in sales in the year ended Jan. 31, operates 66 stores in China that ring up volume of about $1 billion annually. Adding an estimated 100 Trust-Mart stores would allow Wal-Mart to more than double its base and compete more effectively with global rivals such as France’s Carrefour, China’s largest foreign retailer, which is said to have plans to open 100 superstores in the country this year, raising its total to more than 300.
Richard Hastings, an analyst with Bernard Sands, said Wal-Mart’s low-price model will continue to be well received in China, particularly in smaller cities where manufacturing is flourishing and consumer culture is its infancy.
“They will face competition from Carrefour and others, but nothing as severe as what they discovered in Western Europe and Japan,” he said. “The supercenter value-retailing model is still very positive in China.”
In addition to the withdrawal this year from Germany and South Korea, the deal would come as Wal-Mart faces opposition in the U.S. to expansion in urban areas and lackluster sales gains in its flagship U.S. division, which accounts for 67 percent of revenues, or about $210 billion.
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John Lawrence, analyst with Morgan Keegan & Co., said Wal-Mart has spent more than a decade learning how to integrate acquisitions globally. In the last two years, the company took majority control of Japanese retailer Seiyu, purchased Sonae and Bompreco in Brazil and snapped up CARHCO, a Central American retail conglomerate.
“The investments are beginning to pay off in some of these markets,” he said. “We’re seeing operating income growth beginning to accelerate, at least ahead of sales.”
Wal-Mart International generates $62 billion annually, about 20 percent of sales.
At least one analyst, who asked for anonymity, questioned the timing of the news, coming before the retailer’s annual analyst conference that is to start in New York on Monday. Along with sluggish sales, Wal-Mart’s stock has been relatively flat the past two years.
“They are still trying to prove they are a growth story, so this gives them something to talk about,” the analyst said.