Of Contents
Executive summary
Details of the acquisition
Introduction Wal-Mart
Strategy, resources, history
Introduction Seiyu
New initiatives post investment
Wal-Mart's expansion into foreign markets
M&A's causes and effects
Corporate Strategic Analysis Part I
Environmental Analysis
Market Definition
Market analysis
Market Value
Market Segmentation I
Market Segmentation II
Competitive landscape
Japanese retail landscape analysis
Competition
Supply side
Byers side
Characteristics of consumption
Entry Barriers
Industry analysis; Wal-Mart
Five forces analysis
Barriers to entry
Supplier Power
Buyers Power
Substitutes
Competition
Key Success Factors
Conclusions
Transitional SWOT Analysis
Evaluation of the Strategic choice
The Attractiveness Test
The Cost of Entry test
The Better-off Test
Financial Strategy II
General performance
Market reaction to the investment
Dividend policy analysis
Risk Analysis and Failure Prediction
Ratio analysis
PER
Liquidity
Efficiency
Capital Structure and Cash Flows
Conclusions
Change Management Part III
Introduction
Planned and Emergent Approach
National cultures
Process V Results
Community V Self
Hierarchy V Disarray
Commitment V Wariness
Structural Changes
Leadership Changes
Conclusions
Final remarks
References
Executive Summary
The purpose of the this paper will be to investigate the acquisition of the minority stake holding of Seiyu Ltd by Wal-Mart Inc, while focusing on the question, which asks if it has generated wealth for current or future shareholders. In addition it will recommend if it is rational for Wal-Mart to continue with its investment as outlined in the deal terms.
There could be no one denying the fact that change has been always accelerating, until recently this has been slow enough to enable people to adapt either by making small occasional adjustments or accumulating the need to do so and passing it over to the next generation. In the past because change did not press people greatly, it did not receive much of their attention. Today it presses hard and therefore is attended to. Its current rate is so great that delays in responding to it can be very costly, even disastrous. Adaptation to current rapid changes requires frequent and large adjustments of what we do and how we do it. As the eminent student of management Peter Drucker (1968) put it, "managers must now manage discontinuities". One of the unique characteristics of change brought to our attention by Schon (1971) is that as the rate of change increase, the complexity of the problems also increases the more complex these problems are, the more time it takes to solve them. The more the rate of change increases, the more the problems that face us change and the shorter is the life of the solutions we find to them. Therefore by the time we find solutions to many of the problems that face us, the problems have so changed that our solutions to them are no longer relevant or effective
One of the changes occurring in the business environment is M&A's and their increasing rate brings out considerable difficulties and complexities never faced before. While there is a considerable research in the area it is fragmented, leaving gaps that need to be addressed. In the 1990's the popularity of this type of strategic expansion increased tremendously ( Shimizu et al 2004), but the results do not correspond with their popularity, a recent study by KPMG found approximately that only 17% of cross-border acquisitions created shareholder value, while 53% destroyed it (Economist 1999). It is logical to assume that the principles for change outlined above apply readily for M&A's framed as discontinued occurring changes. The fragmented nature of the academic research accompanying M&A's across disciplines (strategic management, finance, human resource management, international business) suggests that further research and a more intergraded approach is required for solutions to be identified and applied therefore increase their effectiveness and success of them.
In this project such an intergraded approach has been adopted, viewing our acquisition through the lenses of strategic management, finance and change management we will try to accumulate evidence which will help us conclude in our original question.
Details of the acquisition
In 2003 Wal-Mart (WMT) acquired an additional 192.8m shares, equivalent to a 27.9% stake in Seiyu Ltd, Tokyo, Japan, an owner and operator of a chain of supermarkets, at a price of JPY270/share. The acquisition will increase the stake held by WMT from 6.1% to 34%. Under this partnership, it is proceeding towards the adoption of business know-how and improvement of financial structure. (Reuters 2006)
Introduction Wal-Mart
WMT Inc. is the largest retail company in the U.S. and has been ranked number one on the Fortune 500 Index by Fortune Magazine, and larger than any other retail chain in the world. It operates currently over 4,150 retail outlets world-wide. In addition, the company is the dominant retail store in Canada, Mexico, and the U.K. (www.walmart.com). The company is ranked as the second most admired company in the world by Fortune (www.fortune.com) WMT has four parts to their corporate strategy
1. Dominance in the Retail Market
2. Expansion in the U.S. and International Markets
3. Creation of Positive Brand and Company Recognition
4. Branch Out into New Sectors of Retail
WMT provides general merchandise: family apparel, health & beauty aids, household needs, electronics, fabrics, toys, crafts, lawn & garden, jewelry and shoes.(www.walmart.com).
WMT's corporate management strategy is built on selling high quality and brand name products at the lowest price. In order to keep low prices, the company reduces costs by the use of advanced electronic technology and warehousing.? It negotiates also deals for merchandise directly with manufacturers, therefore eliminating the middleman.
Strategy, resources and history
After the end of the 2nd WW, the style of retailing in the US changed into discount merchandising.? It assumed the form of departmentalized retail business. ?A discount retail store such as WMT can provide lower priced goods for consumers at lower prices by allowing for lower margins, while selling greater volume of goods.
The industry during the 70's became highly competitive, but, at the same time the nation's economy became weak due to inflation. WMT grew rapidly during the 80's due to diversification which centered on small-towns first, and then expanded to large cities.? This transpired while other retailers centered on larger city centers.? However, as the economy faced a downturn, consumers required low price stores. In addition, as consumers became mobile, they moved to suburbs and small town and were willing to travel further to purchase low price products.
Through the 80's, local chambers of commerce supported WMT due to the fact that they believed that the company helps a local economy by providing low prices and good quality products. Critics contend that the success of WMT damages the existing local independent traders.
Wal-Mart stores,
super centers,
Sam's Club warehouses and
Neighborhood markets
Its core retail business can be divided into four retail divisions:
It should be noted that most WMT employees do not get paid "generous" wages.? They are part-time workers who are compensated the minimum wage.? The majority of employees are not entitled to any benefits, as it takes a cincinnati #5 white home jersey part-time employee over five years to become eligible for benefits, profit-sharing, or other such compensation.? Therefore there is a high turnover rate among them, which implies most do not reach the requisite level of seniority.? In many cases the minimum wage is far below the poverty line.
Introduction Seiyu
Seiyu Group is a Japanese operator of supermarkets, department stores and shopping centers operating for the last 36 years. It is also the second-largest retailer in the world in terms of stores owned (400), but ranks lower by sales, with more than 34,000 employees it ranks 6th in the Japanese market. In addition to its Japanese operations, Seiyu also has department stores operating under its name in Singapore and Hong Kong. WMT from 2003 is Seiyu's largest shareholder and is working closely with Seiyu to regain its focus on the customer and its core retail operations, as well as on its transition to a low-cost, low price operating structure. (www.YahooFinance.com )
New initiatives post investment
The investment by WMT scopes to increase Seiyu's financial stability, and more importantly, to enable Seiyu to benefit from the superior services and sophisticated expertise of the world's largest retail company. (Seiyu 2003 Annual Report)
For more than six months, Seiyu and WMT conducted surveys and analyses of the present situation at Seiyu and trends in the Japanese market. This information will enable Seiyu to incorporate the expertise of WMT, the world's leading retailer, in areas such as:
store operation,
store development,
logistics,
market analysis
business management, and
to utilize Wal-Mart's global merchandise procurement services.
Furthermore, in Aug 2003, Seiyu plans to introduce a store information system that generates highly efficient and accurate demand forecasts by releasing sales and inventory data to manufacturers and wholesalers. Taking into account the characteristics of the Japanese market and consumer trends, they continue this gradual, step-by-step transformation.
In Jan 2003, Seiyu underwent a structural reorganization in which eleven divisions were streamlined. In Mar, five new directors from WMT were appointed in the board. Under the new organization, the company is working to integrate the expertise of WMT towards becoming the "New Seiyu" in every aspect of their operations, including product lineup, store environment and customer relations. They have also begun "everyday low cost" cost-reduction efforts to offer "everyday low price" products. With the integration of WMT's considerable know-how, these initiatives will try to uplift the company to WMT's standards and create the so much sought added value to its shareholders. (Seiyu Annual Reports 2002-2005)
Wal-Mart's expansion into foreign markets
WMT is expanding into the world marketplace.? The retailer already has approximately 400 European stores, mostly in the UK and Germany (dir.yahoo.com).
Seiyu will introduce WMT on Japanese customs to better prepare the retail giant for possible acceptance by peculiar consumers (biz.yahoo.com).
WMT is not off course the first retailer to try to enter Japan, but it is the first to try and work closely with an established Japanese company and transition itself into the market.? The retail market in Japan is weak but crowed. If WMT adapts fast, it will have a good chance of survival.? On the first day of the alliance, Seiyu's stock shot up 21%, boding well for WMT's entry (biz.yahoo.com). On the other hand. Seiyu's executives have strongly resisted WMT's no-nonsense, cost-cutting strategy, but that is not a surprise, and it is too early to predict this venture a failure. (The Economist2004)
M & A's causes and effects
Liberalization, deregulation and integration of the markets led to globalization and the growing interdependence of them. This internationalization of commercial activities led to an increasing proportion of the world's labour force being engaged in activities linked to international trade. In parallel, M&A's led to the rise of huge global and regional wholesalers and retailers. And yet consolidation had wider repercussions, with retail trade increasingly becoming international in scope as retailers from developed countries expanded in foreign countries, both developed and developing. (International Labour Organization, 2003)
Because national markets had become more saturated in many developed countries (US is considered a mature market) for various reasons, corporations were increasingly looking for new opportunities to expand outside their domestic markets.
Concentration in mature markets encouraged price-based competitive business strategies, whereby eliminated costs which were reinvested back into price-cuts. A price-oriented strategy such as this one, demanded that the sales base be enlarged, and, since this could rarely be accomplished through organic growth in mature markets, M&A's became the only route to increased market share.- a fact that Wal-Mart in experiencing therefore striving to expand globally. (International Labour Organization, 2003)
Looking at our case study the following quotations capture the rationales behind Wall-Mart's diversification strategy into Japan, Mike Duke, WMT's vice-chairman, said, "Seiyu is a valuable addition to Wal-Mart and provides us with a significant presence in the world's second-largest market. (www.Wal-Mart.com)
"To be known as a true global retailer, we must be in Japan, the world's second-largest economy," said Charles Holley, Chief Financial Officer of Wal-Mart International. (www.Wal-Mart.com)
Ed Kolodzieski which will take over the management of the new Japanese unit said "The company makes this investment because it sees a lot of long-term, bright possibility, from our perspective, there is an incredible opportunity. There's clearly a lot of consumption in this country." (www.news.bbc.co.uk)
The discussion above captures some of WMT's strategic rationales behind the diversification and its long term expectations, but in the research conducted, there is no mention of any financial expectations or any quantification of benefits to illustrate enhancement of shareholder value. We do recognize that the cost of the deal is not substantial for a company of the size of WMT, but never the less a company is accountable to its shareholders at all times and adequate rationales and demonstration of added value to any decision should be thoroughly analyzed and reported.( Pike and Neal 2006)
Corporate Strategic Analysis
Environmental analysis
The first step of the analysis towards the answer to our main question will be the usage of the PEST framework (Grant 2005), the checklist below is a synthesis of current issues concerning the two companies wide environment, also considerable attention is given to the industries and their historical context. The influences considered will be depicted mainly from the Japanese and US macro-environment, although some of them can be considered of a global nature. The range of the factors is quite wide, so to attempt to analyze all of them is quite unproductive and undesirable. All of the influences considered will be tracing the cincinnati #5 white home jersey implications along three dimensions, which they reside in the industry environment:
Suppliers
Competitors
Customers
In addition, the analysis will provide critical insights into the threats and opportunities that two companies faced before and after the 2003 increase of the minority stockholding. Effectively this part will reveal actual and potential benefits that WMT derived by its strategic choice thus answering our original question.
Global PEST Framework-Environmental Scanning
Political
Commercial Code regarding M & A's (Japan)
Corporate governance
Zoning rules (Japan)
Economical
M & A's
Oil prices
Energy prices
Rise of the Asia-Pacific markets
Transportation costs
Consumer spending and confidence
Interest rates
Inflation
Employment
Social
Obesity dimension
Population growth and its changing structure
Changes in consumer behaviour patterns
Corporate culture
Technological
Food innovation; new technologies prompting the development of new products
Increasing automation and the importance of information technology.
Internet applications.
The starting point of any industry analysis is what determines its level of profitability. The basic premise which underlies industry analysis is that the level of profitability is neither random nor the result of entirely industry specific influences- it is determined by the systematic influences of the industry's structure. (Grant 2005)
Market Definition
The food retail industry consists of the total revenues generated through food sales from:
supermarkets,
hypermarkets,
cooperatives,
discounters,
convenience stores,
independent grocers,
bakers,
butchers,
fishmongers and
all other retailers of food and drink for off-the-premises consumption.(Global - Food Retail Data monitor May 2006)
Market Analysis
The global food retail-industry has performed well over the past five years and is forecast to continue to expand at rates between 3% and 4%. The industry's growth has mainly attributed to increased sales of luxury and premium items, such as organic food, despite the increasingly low cost of everyday items owing to significant pricing pressure due to high levels of strong competition. The global food retail industry generated total revenues of $2,928.4b in 2005, this representing a compound annual growth rate CAGR of 3.4% for the five-year period spanning 2001-2005.
The main profit source for the retail industry is the supermarkets segment, which has generated total revenues of $1,179.9b in 2005; equal to 40.3% of the overall market value. In contrast, the food-specialists industry was worth $392.1b, which represented 13.4% of the market value-share. The EU is the largest market in the food-retail industry, generating $1,102.3b in 2005, equal to 37.6% of the global industry's value. Although, the Asia-Pacific market is only marginally smaller, generating $1,002.5b or 34.2% of the global food retail industry, and growing at a higher rate than the EU market, predominantly due to the rapid expansion of food retail in India and China.
Looking ahead, the industry is forecast to speed up its current performance, with a forecasted CAGR of 3.9% for the five-year period 2005-2010 expected to raise the industry to a value of $3,546.7b by the end of 2010. The rising trend of organic-food, allied to increasingly wealthy, time-poor consumers, purchasing premium ready-meals, is expected to be a key factor behind the global industry's growth; this in addition to the rapid expansion of the emerging markets of Asia- Pacific.(Datamonitor food retail report 2006)
MARKET VALUE
The global food retail industry grew by 3.8% in 2005 to give a value of $2,928.4b. The CAGR of the industry in the period 2001-2005 was 3.4%.
MARKET SEGMENTATION I
Supermarkets account for 40.3% of the industry's value. Food specialists, such as bakers and fishmongers, generate a further 13.4% of the industry's revenues.
MARKET SEGMENTATION II
Europe generates 37.6% of the global industry's revenues. Asia-Pacific accounts for a further 34.2% of the global industry's value
COMPETITIVE LANDSCAPE
The global food retail sector is becoming increasingly polarized. However, discount retailers are also enjoying a high growth rates in the developed markets, a fact soon to be true for the developing regions of Asia-Pacific, as several supermarket chains pursue aggressive inorganic expansion (see Wal-Mart, Carrefour). Nevertheless, market players still face significant cost pressures. Crude oil prices continue to deduct from margins for food retailers, increasing the costs of energy, transportation and packaging. Disposable income of consumers has also been affected by the rise in the price of gasoline, impacting revenue streams and contracting consumer spending.
Online virtual supermarkets make-up a small portion of the retail landscape. Although the trend is rising, this concept of shopping is still in the process of development. All of the major grocery retailers are developing or have developed web-shopping platforms to attain market share in this expanding sector. In the US, online sales of food amounted to $2.4 billion in 2004, and are expected to reach $6.5b by 2008 equivalent to an annual growth rate of 42%, online shopping is the fastest growing segment in the food retail sector.( Datamonitor Food Retail Report 2005)
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