When Bentonville, Ariz.-based Wal-Mart Stores Inc. increased its emphasis on food retailing, retailers in many parts of the world stood up and took notice. In order to compete, they took to cutting prices and increasing productivity.

Wal-Mart’s strongest competitor internationally is Britain’s largest food retailer, Tesco PLC. Dominant in Britain, it is now tackling the U.S. market. As well, Tesco has a considerable and growing presence in emerging markets.

Although the two firms come from different starting points — Wal-Mart began as a general merchandiser and moved increasingly into food, while Tesco moved to merchandising from food — both are innovators and market leaders.

Wal-Mart’s recipe of selling large volumes at low prices has been hugely successful in many countries, including the U.S., Mexico, Canada, Puerto Rico and Brazil. But it has also had its struggles, for example, in Germany and South Korea (from where it has now withdrawn), and it is still hoping it can be successful in Japan. The company is adept at sourcing its products globally and its huge volumes allow it to negotiate big discounts from suppliers, which it then passes on to consumers. Its highly efficient distribution system gets its products into the consumers’ hands.

Tesco was the first food retailer to move into non-food items. It, too, has a very efficient distribution network and has been very innovative in providing convenience and fresh, healthy foods. It was also one of the first to offer its own brand of products.

Tesco’s venture into the U.S. — which starts later this year with 100 small stores in California, Arizona and Nevada focusing on convenience — excites some analysts and worries others. Charles Burbeck, head of global equities at HSBC Halbis Partners in London, thinks the company’s superior operating skills will give the competition a run for its money. But Patricia Fee, money manager at IG International Management Ltd. in Dublin, warns that the players in California are getting better and more aggressive, and that Tesco will face strong competition in that market.

Here’s a look at Tesco and Wal-Mart in more detail:

> Tesco PLC.  Stéphane Champagne, portfolio manager at Signature Advisors, a unit of CI Investments Inc. in Toronto, likes Tesco and its U.S. expansion plans as much as Burbeck does. In July, the London office of UBS Ltd. had a “buy” on Tesco, with a 12-month target price of £5.5 a share. The stock was trading at £4.14 a share on Aug. 10 on the London Stock Exchange. There are 2.6 billion widely held shares outstanding.

In the U.S., Tesco is positioning itself between convenience stores and supermarkets, with a focus on fresh, healthy and convenient foods and its proprietary products. It has studied the U.S. market for 10 years, says Champagne.

JP Morgan Securities Ltd. ’s London office, however, downgraded the stock in late June. JP Morgan’s price target: £4.20 a share. Its report blames the lack of sales momentum in Britain, which “is likely to weigh on the price.” Nevertheless, JP Morgan considers Tesco “the best in class for its sector.”

Like Wal-Mart, Tesco has had some challenges in its international operations, most recently in Hungary, Thailand and Korea. Nevertheless, research analysts believe the company will continue to do well in emerging markets.

In Britain, which accounts for about three-quarters of Tesco’s total sales of £42.6 billion in its fiscal year ended Feb. 24, it continues to roll out its Extra-branded “hypermarkets,” which carry proportionately more non-food items. It has also entered the home-delivery market with Tesco Direct, which was launched in September 2006.

Sanford C. Bernstein & Co. in New York notes that Tesco Direct’s next-day delivery service, with an option for a two-hour delivery window, differentiates it from competitors and addresses a key complaint of consumers. The company also offers financial services, a profitable area.

In April 2006, Tesco announced that over the next five years, it planned to sell off £5 billion of its estimated £25 billion in real estate, reducing the percentage of store locations it owns to around 70% from more than 80%. Already, £1.1 billion of real estate has been sold. UBS said in April that the target for real estate sales has been increased but not quantified. UBS is assuming £6.5 billion is the new target, given that the company’s share buyback program has been raised to £3 billion from £1.5 billion.

@page_break@Net income for the year for fiscal 2007 was £1.9 billion, up from £1.6 billion the year prior. Revenue, excluding taxes, was £42.6 billion, up from £39.5 billion. Long-term borrowings were £4.1 billion at yearend.

> Wal-Mart Stores Inc. Champagne feels the stock is worth considering and UBS’s New York office had a “buy” rating on it in a July 16 report. UBS’s 12-month target price is US$63 a share, vs the US$46 a share at which it was trading on Aug. 10 on the New York Stock Exchange.

However, both Burbeck and Fee are cautious. Burbeck is concerned about the expected slowdown in consumer spending in the U.S., as well as the political backlash toward Wal-Mart in various communities in the U.S. that don’t like the superstore concept.

Still, according to Champagne, Wal-Mart, including its Sam’s Club chain, has a dominant position in its home market. In 2006, its share of U.S. supermarket sales was 18.9%, more than double its next highest competitor, Cincinnati-based Kroeger Co, at 9.5%.

In Champagne’s view, Wal-Mart’s stock isn’t cheap, but it isn’t expensive, either. He expects it to rise as margins expand once expense control and the current restructuring in the U.S. — which includes reorganizing the merchandising and marketing management, as well as the operations structure, and renovating about 1,800 stores — has an impact on costs and sales.

As part of the restructuring, customer segmentation data will be used to tailor product mixes by region and even individual store. There will also be more focus on the quality of products rather than just the price. Part-time labour and inventories are to be increased and the pricing and presentation of its entertainment/electronics offerings improved. There will also a focus on apparel and home décor.

Wal-Mart’s financial picture continues to be strong. Net income was US$5.9 billion in the six months ended July 31 (its fiscal yearned is Jan. 31, 2008), up from US$4.7 billion in the same period a year earlier. First-half revenue was up 8.7% to US$179.4 billion from US$165.1 billion a year earlier. Long-term debt as of April 30 was US$28 billion.

There were 4.1 billion shares on the market as of Mar. 31, of which the family of Wal-Mart founder Sam Walton owns 41%. IE



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