Wal-Mart may widen Japan base

By Miki Anzai and Ian Messer
Bloomberg News Service

The acquisition of retailer Seiyu Ltd., whose Tokyo headquarters is pictured above, was Wal-Mart's effort to get a foothold in Japan. Now the retailing giant wants a bigger share of that market and is looking for new ways to expand its alliances with corporate Japan. Associated Press

The reported move would be a departure from the three-way alliance Wal-Mart, Sumitomo Corp. and Japan's fifth-largest retailer agreed to in March. In that arrangement, Seiyu was to become the nucleus of Wal-Mart's entry into Japan. Sumitomo is Seiyu's biggest shareholder.

Wal-Mart, the world's biggest retailer, completed its purchase of 6.1 percent of Seiyu for 6 billion yen ($48 million) last month, culminating five years of study of the Japanese market. Wal-Mart may be concluding that Seiyu alone won't be a sufficient vehicle for growth in Japan, an investor said.

"Seiyu is too small," said Edwin Merner, president of Atlantis Investment Research Corp. in Tokyo, which manages $600 million including retail stocks. "You need volume to really have a viable business."

Wal-Mart and Sumitomo will undertake a separate study of Japan's retail market without Seiyu's participation by year's end, the Yomiuri said, citing unnamed people at Sumitomo.

"This is a total surprise to us," said Seiyu spokesman Satoshi Suzuki. "Nothing has changed in our schedule, which is to decide by the end of this year which kind of stores Wal-Mart and Seiyu will open."

Sumitomo issued a statement saying it had no plans to study the retail market without Seiyu's involvement. "Our company will proceed our tie-up plans with Wal-Mart and Seiyu, and there's no strategy change at all," Sumitomo said.

Wal-Mart officials weren't immediately available for comment.

The reported move may jeopardize Wal-Mart's relationship with Seiyu, an analyst said. "For now, Wal-Mart wants to respect Seiyu's wishes, so I think such a move is unlikely," said Mizuho Securities analyst Toshio Takahashi. "Economically, however it makes sense for Japan's retailers to be consolidated."

Additional alliances by Wal-Mart would threaten local store operators, said Shigeki Ubukata, who manages 20 billion yen at Sumisei Global Investment Trust Management Co.

"They will be frightened if Wal-Mart is actually trying to buy other Japanese retailers," because Japanese store owners have already experienced a record five straight years of declining sales, Ubukata said.

Sumitomo wants to take advantage of its partnership with Wal- Mart to boost profits of its own supermarket chains Summit Inc. and 20-percent-owned Mammy Mart Corp., Takahashi said.

Summit operates 69 supermarkets in the Tokyo area and Mammy runs 42 supermarkets in Saitama Prefecture, near Tokyo.

Sumitomo also increased its stake in Seiyu last week to 15.6 percent from 11.8 percent.

The acquisition showed Sumitomo's interest in expanding its retail network, one analyst said. "Wal-Mart, as well as Sumitomo Corp., have greater aspirations in the distribution and retail area than merely Seiyu," Stefan LaBrack, director of equity sales at West LB Securities Pacific Ltd., said.

Wal-Mart has an option to invest as much as $2 billion to increase its Seiyu stake to two-thirds. The Bentonville, Ark.-based retailer said last month it will probably increase its stake to one-third by the end of this year. It also said it will conduct a joint study with Seiyu and Sumitomo of the Japanese market and decide details of store plans by then.

Wal-Mart, which has annual sales of $218 billion compared with Seiyu's $8.9 billion, operates 1,071 stores in nine markets outside the United States, including Mexico, Germany and China. Those stores generated sales of 32 billion yen in the year ended Jan. 31.