First the Berlin Wall, now this...
Wal-Mart cannot rely solely on everyday low price strategies, it has to also adapt to local environments

(column by Angshuman Paul)

The Bentonville behemoth is surely blinking now. Just like the South Koreans, the Germans too have proved to be misfits in the wall (read plans) of Wal-Mart. The big daddy of retail announced on July 28 that it was shutting down its 85-Supercenter Chain in Germany and selling them off to arch rival Metro AG at a humongous loss of $1 billion. Wal-Mart’s penchant for ‘everyday low prices’ and ‘one-stopshop’ failed to attract price-focused consumers. The exit has left analysts pondering if the magical run of Wal-Mart is drawing to a close.

Wal-Mart stamped its exit as a ‘forward-looking statement’. Michael Duke, Vice-Chairman of Wal-Mart Stores, stated, “We focus our efforts where we can have the greatest impact on our growth and return on investment strategies”. What Wal-Mart, then, needs to remember is that ever since it kicked-off its operations in Germany in 1997, it was unable to catch the pulse of price-sensitive Germans, who prefer driving to multiple stores in the hunt of the cheapest deal, instead of traveling outside urban areas – where the retail giant had plopped its stores. More importantly, Wal-Mart’s ‘Everyday low price’ promise failed terribly because local “hard discounters” like Lidl GmbH & Aldi Einkauf GmbH succeeded in undercutting Wal-Mart heavily on prices.

The exit will hammer the pricing leverage that Wal-Mart enjoys from its European suppliers due to its large scale German operations. This tantamounts to a significant rise in prices of Wal-Mart’s products in the EU and hence, a slug for its largest overseas venture Asda stores in UK – which is still far away from shaking the local big daddy Tesco. In 2005, Tesco gained 1.2 % market share in UK, as compared to just 0.1% by Wal-Mart. This means the company’s European operations would come under pressure.

Wal-Mart currently operates in 14 countries outside US. But it has much of its operations in US. As per the first quarter results of 2006, overseas contribution to total sales was just 20% whereas Wal-Mart aims to take it to over 30%, which now looks tough. Sadly, Asia hasn’t been a bed of roses either. In May this year, Wal-Mart sold its South Korean arm to retail chaebol Shinsegae Co. for $882 million. With India out of bounds due to the FDI blockade, China seems to be the only saving grace. The firm presently operates with 55 Wal-Marts and three Sam’s Clubs in China. However, the lessons remain the same. If the company doesn’t adapt to local cultures, low price strategy alone will not rescue it from losing out in other world markets either. And Wal-Mart cannot afford mayhem in Asia as well.

(End of Angshuman Paul column)

The legal potion
Kindler faces an uphill challenge

(column by Romsha Singh)

For Hank McKinnell, whose greatest passions have been race tracks (participated in four mini-triathlons in Greenwich) and handling the reins of Pfizer, the world’s largest research-based pharmaceutical company, this was definitely not a finish he would have ever wanted. Pfizer’s board, on July 28, paved the way for Jeffrey Kindler, a top lawyer credited for providing still water to the rocky Pfizer boat by bringing a major legal victory (the patent protection case vs Indian firm Ranbaxy for blockbuster drug ‘Lipitor’ in December, 2005), to take over as the new CEO. And for McKinnell, it was a premature exit, as he was supposed to stay on as CEO till February 2008. However, he remains Chairman till February 2007.

McKinnell, 63, a Stanford Graduate joined Pfizer in 1971 and won a reputation of a ‘dealmaker’ after he helped Pfizer acquire Warner-Lambert & Pharmacia to make Pfizer the industry leader. Aft er three decades of wearing various hats at Pfizer, McKinnell became the CEO in 2001 – with a vision to push Pfizer to even greater heights. But McKinnell faced several daunting challenges – the first being pricing issues in the pharma industry and second, which continues to hit Pfizer, patent expirations for several blockbuster drugs. McKinnell, with all his considerable executive, political & leadership skills couldn’t do much. The last couple of years did not prove to be too pleasant for him. Investors relentlessly condemned McKinnell for his petulant nature and the huge compensations that he continued to draw during the worst of times for Pfizer – when it was struggling to somehow apply the brakes to its plummeting stock prices (which have dropped by almost 40% since 2001). Realising the need of the hour, the Pfizer board was compelled to replace McKinnell. Publicly, McKinnell did applaud Kindler when he said, “It is time to transition to new leadership to accelerate the company’s transformation. And Kindler inspires confidence and offers vision and a fresh perspective.”

Kindler, 51, a Harvard law school graduate, is associated with Pfizer since 2002 and plays a vital role in Pfizer’s worldwide legal affairs. No doubts, the success in the Lipitor case is his major claim to fame till date. And perhaps, it explains why he was elected as the CEO even though his experience in the pharma sector doesn’t really account for much.

So, Kindler is the new guy on the watch… from courtrooms to boardrooms, from analysts & investors to the press, Pfizer has a new face. But is this drive going to be smooth, at a juncture when Pfizer seems all but set to nail its coffin? Currently, Pfizer is going through a stagnated growth period and it has become problematic for the company to improve its financials (see table). And that’s not all, the bleak situation has worsened – its key drugs like Zoloft and Lipitor are facing patent expiry. The company was also asked by the FDA to remove its popular arthritis drug Bextra from the market, which affected Celebrex sales as well.

The legal beagle would surely need all the tricks up his sleeve to protect Pfizer from charged up competitors in the courtrooms. Kindler would also do well to use some of McKinnell’s acquisition skills that helped Pfizer achieve dizzying heights. And above all, Kindler has to accomplish what even McKinnell couldn’t; rescuing an ailing Pfizer from its stupor by bringing in new block buster drugs to the market faster than they move out of the patent protection umbrella. Surely, both McKinnell and Kindler have a lot to brood over in the coming time...

(End of Romsha Singh column)

The Famous Five!
Expansion should be the top strategic move for oil companies

(column by Devdeep Singh)

What happens to companies that make their customers sob and wail? They simply flourish! Surprised? Well, take a look at the congregate of ‘well-oiled’ corporate Cyclops and you would believe it. The top five oil companies (including ExxonMobil, British Petroleum, ConocoPhillips, Chevron & Royal Dutch Shell) reported a staggering 36% rise in profits (reaching $34.6 billion) for the quarter ending June 2006 over the corresponding period last year. Jim Mulwa, CEO and Chairman, ConcoPhillips thumped, “We are pleased with the earnings.” But shockingly, the raison d’être that caused this merry-making is where the real danger signals lie!

Undoubtedly, greater margins through soaring oil-prices have been responsible for igniting this industry-wide blaze. But not to forget that the OECD has warned that growth in supply would ultimately outrun the growth in demand, as more expansion of operations takes place. The report also cautioned that oil prices, which are currently hovering at their all time highs, would stabilise at a lowly $40 per barrel. And here lies the catch – the companies should expand more and more to champion the cause of economies of scale, as the costs of operation otherwise would not lower on their own. In the past couple of years, the cost of employing a drilling rig in water-bodies has increased from $200,000 per day to $500,000 per day! As Sarah Hunt, Analyst, Capital Management Associates also agrees, “… what is important is to elevate production volumes, so that the oil companies are safe even if the oil prices fall down to the $35- $40 per barrel range and cost inflation is taken care of.” Hence, with the impending decrease in the prices of oil, the profit margins lie in great danger even for the Cyclops of the oil industry.

Therefore, the oil giants have to ensure that capital spending must yield higher outputs and that Return on Gross Invested Capital (ROGIC) should be raised from the current level of 2% to industry standard of 5-6%. Oil companies need to understand that the situation, however bright it appears at the moment, will definitely depreciate in the near future and for that, all the companies in the industry have to collectively gear up!

Miles to go before I sleep...
The Mercury deal is spot on, but HP must keep the momentum going

One would hardly associate a big ticket acquisition with a term like charity. On July 25, however, when IT giant HP gobbled up business management software maker Mercury Interactive for a whopping $4.5 billion, it seemed to have benevolence written all over it. For Mercury is going through a turbulent period – be it the accountancy scandal, SEC investigations, resignation of its CEO, being delisted from NASDAQ or delayed financial results. Who would have predicted that HP would pay a 33% premium for Mercury Interactive? Clarifies Mark Hurd, “We believe the issues to be limited and we are comfortable the issues will be resolved soon.” Other than the price and culture issues, even the analysts seem to be supporting him. Points out Richard Ptak, Chief Analyst at Ptak Noel and Associates, “The transaction brings together the strengths of HP open view systems, network and IT service management soft ware with Mercury’s strength in application delivery, IT governance and service oriented architecture governance.” HP expects its soft ware business to generate annual revenue of $2 billion (from the present $1 billion) and growth rates of 10%-15% by 2008. Also, the deal gives HP a chance to become an end-to-end solution provider, a berth that was once restricted to IBM. Big Blue isn’t resting though; as if in response, it took up asset and service management company MRO Soft ware for $740 million on August 3. HP will do well to continue on the acquisition path to acquire complementary technologies and capabilities in the soft ware arena, and Mercury is just the beginning.

(End of Devdeep Singh column)