Last Updated May 27, 2010 6:33 PM EDT
Walmart (WMT) may be in denial about its ability to achieve even more U.S. growth with small stores, but that doesn't mean it's afraid to take that concept on the road -â€" specifically to the U.K. Asda, Walmart's British arm, is set to buy 193 U.K. stores of the Denmark's Netto chain, a move that will give the behemoth the tiny footprint it craves in crowded urban markets.
But what makes Walmart/Asda think it can tiptoe through London's tulips -- er, tight zoning regulations-- and not lose its shirt in this Â£778 million ($1.12 billion) transaction?
On one hand, Walmart's got a testing ground under development in Mexico with its bodega-style store concepts. The Bodega Aurrera Express (the smallest at 4,000 square feet) stores could succeed selling lower priced items but a higher volume of transactions. Lower margins could be offset by the plentiful selection of Walmart's private label merchandise.
But where Walmart's Mexican stores are mostly competing with unbranded independent pharmacies, Netto's U.K. stores are already up against the small stores of well-established rivals Tesco, Sainsbury's, and Marks & Spencer. And the Netto stores are located in less central and busy locations than the competition. Let's not forget the last time Walmart tried to push its way into an urban European market, Aldi sent it packing. The world's largest retailer pulled out of Germany in 2006.
Worse still, while its Danish parent said Netto UK was profitable, it admitted future growth was limited by zoning laws and the high cost of real estate in Britain.
Walmart's U.S. track record fighting zoning laws doesn't suggest anyone should be popping the champagne yet. Between trying to get local officials to rezone and anti-chain hostility from residents, the retailer's efforts to shoehorn themselves into urban areas haven't proved successful. Take its 39,000 square foot Neighborhood Market groceries. Opened more than a decade ago, they continue to have lower ROIs than supercenters and consequently, never became a growth vehicle. Only about 175 are open for business now.
Perhaps having $8.5 billion on the balance sheet (and the mystifying ability to continue driving profits) is making the folks in Bentonville cocky. Or maybe Asda CEO Andy Clarke was given free rein to conduct a costly, real-time experiment. Time will tell.
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