Perhaps in a quest for transparency following Mexico-gate, last week Walmart shed some light on the financial performance of their international operations. For the first time, we got detailed comp, traffic and ticket info which is like gold dust to us retail analysts.
What I found most astounding was the very clear divergence between average ticket and traffic. In other words, people are buying more at Walmart (a good thing) but visiting less (not such a good thing).
This was most prominent in China which, despite being one of Walmart’s key growth markets, has been a headache for the retailer in recent times. Walmart has been guilty of land grabbing in China in the pursuit of rapid growth. As a result, they have settled for a host of inappropriate sites – too many floors, awkward layouts – which is resulting in shoppers visiting the stores less frequently. Although I fully agree that it makes sense to take a pause and come up for air (they are halving square footage growth this year), the challenge will be finding large enough sites, particularly in Tier II and III cities, that fit an American style big-box. We have revised our forecasts down quite considerably.
In Brazil, you have to admit that a 6.5% rise in average ticket is promising and, despite what we may hearing from suppliers, perhaps a sign that EDLP is beginning to work in that market after all. That said, transitioning to EDLP is not cheap. Despite reducing advertising costs (no flyers needed for EDLP!) during the quarter, Walmart Brazil is still operating at a “slight” loss. Like China, we have revised down our forecasts to reflect the slower store growth. Walmart needs to get pricing and profitability right in both of these markets before re-embarking on an expansion strategy.
But this brings us to another point. Although there is still plenty of physical room available in both China and Brazil, there will be less of a need to expand with big-box formats in emerging economies as had been done in developed markets over the past fifty years. China is expected to overtake the US as the world’s largest e-commerce market within the next few years, and the Brazilian e-commerce market is also booming. Rather than replicating growth patterns in developed markets which has now left the multi-nationals with a glut of below-optimum stores, Walmart would be better off to approach such emerging economies with a cautious but solid multi-channel strategy.