Why Wal-Mart can't find happiness in Japan (pg. 2)

By William J. Holstein, Fortune

Management fit

One basic question is whether Wal-Mart has the right management in place. Most U.S. companies that have succeeded in Japan, such as McDonald's, have installed senior Japanese executives to head up operations and allowed them a measure of autonomy. In contrast, Wal-Mart is relying on a team of outsiders, including Brits and Canadians.

Kolodzieski doesn't speak Japanese. He started his career at Kash n' Karry Food Stores in Florida, working his way up from store manager to senior vice president of operations. As part of an environmental project, he met with Seiyu executives and visited Japan. But there is little in his background to suggest Japanese savvy. After Kash n' Karry, he worked at regional supermarkets in the Mid-Atlantic states. Wal-Mart tapped him in 2000 for his supermarket experience. He clearly clicked in Wal-Mart's culture, because he emerged as chief operating officer of Wal-Mart International.

In his current role he reports to Wal-Mart vice chairman Michael Duke, who heads up Wal-Mart International from headquarters in Bentonville, Ark. Duke, a veteran of 23 years at Federated Department Stores and May Department Stores, also lacks significant international experience, but he seems to call the shots in Japan. According to outsiders and retail analysts, Wal-Mart's decision-making regarding Japan is centralized in Bentonville.

"Wal-Mart's international operations are very centrally controlled," says Craig Johnson, president of Customer Growth Partners, a consultancy in New Canaan, Conn. Retail consultant Suzuki puts it more sharply: "Kolodzieski's job is to do what Bentonville tells him." Wal-Mart declined to make Duke available for comment, but Wan Ling Martello, a vice president of Wal-Mart's international division, insists that the company has "the right team under the right leadership" in Japan.

Not surprisingly, Kolodzieski acknowledges that he has been on a learning curve. In a one-hour interview, he used variations on the word "learn" some 20 times. "In studying the business here in Japan," he says, "we've learned that we have a lot to learn."

Aside from its superstore in Hitachino-Ushiku, Wal-Mart is trying a variety of other formats, such as Livin, a multilevel department store with food on the first floor, and the Mall, a large store surrounded by dozens of specialty shops. Deli counters in Seiyu stores are branded Wakana, which is the word used for small Japanese stores that specialize in food to go. "We don't have a standardized business model," says Kolodzieski. He says management does not dictate by saying, "This is the Wal-Mart model. This is Wal-Mart pricing."

Wal-Mart has been pouring resources into Seiyu on a large scale. More than three-quarters of the 392 stores in Japan now have the Smart System, Wal-Mart's name for its in-store computer system. But that was the relatively simple part. The company also built a U.S.-style distribution center in Misato, which opened last August with about five miles of automated conveyors that can handle all products at all temperatures.

"We can ship frozen; we can ship meat; we can ship produce; we can ship apparel; we can ship dry grocery," says Kolodzieski. The facility is hooked up to Wal-Mart's Retail Link system, which allows headquarters and retailers to "see" what's selling in stores on a real-time basis.

Suzuki says the company's systems have not meshed well with Seiyu's, resulting in many products not being ordered in time and suppliers not being paid on time. Kolodzieski would not comment on technology snafus, saying only, "Anytime you've ever done anything that has never ever been done before, there are always some learnings that go along the way."

But he acknowledges that Wal-Mart is only in the early stages of getting Seiyu connected with the company's global procurement powers. The retailer's systems are set up to scour the world for the cheapest, best-quality source for a product. That may not work in Japan, where consumers have strong preferences for Japanese-made products, particularly food-related ones.

Another major investment has been upgrading Seiyu's aging stores. Wal-Mart remodeled 73 mostly smaller stores last year and has similar plans for 70 more this year, including some larger stores. "That will create some disruption," Kolodzieski says, "but also hopefully a lot of learning."

Crunching the numbers

All the investment is taking place against a backdrop of losses. After many years of poor performance, Seiyu's comparable store sales increased 0.6 percent in fiscal 2006, but the company still lost $479.5 million. (Morgan Stanley says same-store sales have fallen into negative territory in 2007, although the company has not released those figures yet.)

"Is our management model working?" Kolodzieski asks. "If you look at our financials, we're starting to increase in sales. We're starting to improve in profitability. But we really have an opportunity to improve quite a bit. We're not at one of those states where we can say, 'Hey, we've arrived and we've got this business running on all cylinders.' We will be seeking to do a whole lot better than we're doing at the moment."

Retail experts will be watching sales and profit numbers as well as a decision Wal-Mart must make by the end of the year, when it has an option to acquire more Seiyu shares. If Wal-Mart declines to increase its stake, that will be interpreted as a sign of tepid interest. If it ups the ante, the retailer will be sending a signal that it intends to stay the course.

A change in Japanese regulations allowing "triangular mergers" - meaning that Wal-Mart shares could be used to help Seiyu make an acquisition - raises the intriguing possibility that the company could attempt to play the M&A game.

But if Wal-Mart is to be successful, it will have to do so against a drum beat of rumor that it is going to sell out. "One of the messages that comes across in the media that we find ourselves needing to address is whether Wal-Mart is giving up on Japan," Kolodzieski says with obvious frustration. "I've never had one minute's worth of conversation about whether Wal-Mart should leave Japan. If anybody would know whether there has been a discussion about 'Do we want to leave Japan?' I'd think I'd be involved in that."

How long does Kolodzieski have to make Seiyu profitable? "The people I interact with in Bentonville haven't given me a particular time period - one year, two years, five years," he says. "I've heard from [CEO] Lee Scott about his strong commitment about being in Japan. Mike Duke came here earlier this year and spoke to thousands of our associates about why Seiyu is critical to the success of Wal-Mart."

So at least for now Wal-Mart seems likely to continue a slow and expensive learning process in a country where every step is criticized. The company undoubtedly possesses the technological and financial means to stay the course, but the tougher question is one of cultural fit with both employees and customers.

Suzuki says that despite town-hall meetings and all the other American-style measures the company has tried, "employees don't trust Wal-Mart. It's a very serious problem." Adds Johnson of Customer Growth Partners: "Wal-Mart hasn't blown it, but they still need to get things right with the consumer here. It's still a major work in progress."  Top of page

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Market indexes are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer LIBOR Warning: Neither BBA Enterprises Limited, nor the BBA LIBOR Contributor Banks, nor Reuters, can be held liable for any irregularity or inaccuracy of BBA LIBOR. Disclaimer. Morningstar: © 2014 Morningstar, Inc. All Rights Reserved. Disclaimer The Dow Jones IndexesSM are proprietary to and distributed by Dow Jones & Company, Inc. and have been licensed for use. All content of the Dow Jones IndexesSM © 2014 is proprietary to Dow Jones & Company, Inc. Chicago Mercantile Association. The market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. FactSet Research Systems Inc. 2014. All rights reserved. Most stock quote data provided by BATS.