Monday morning Walmart Inc. announced that it will sell its British unit Asda to UK’s J Sainsbury. The announced deal values Asda at about $10.1 billion and would leave Walmart with a minority stake position of 42%. Walmart will also receive roughly $4.1 billion in cash and will be able to focus its efforts elsewhere. The deal represents the second-largest and third-largest players in the UK grocery market joining forces. Sainsbury CEO Michael Coupe will be the chairman and CEO while Asda’s CEO will join its board. The combined companies would operate under their current, respective brands as they serve different customers with Sainsbury being more up-scale.
Walmart selling Asda is a key strategy of consolidation and joint venture formations. Over the past few years, Walmart has been scaling back its international businesses. Tougher competition in the retail market and the shift towards e-commerce has been stagnating and capping Walmart’s business growth. There are links to Walmart selling a controlling interest of its Brazilian operations to private equity firm Advent International—Advent taking on as much as 80% equity. In 2016, Walmart sold its e-commerce venture Yihaodian to JD.com Inc. for a stake in the Chinese e-commerce company. Furthermore, Walmart formed a joint venture with Japan’s largest online retailer, Rakuten Inc. earlier this year. This strategy of scaling back international operations is part of Walmart’s plans to take on more competitive markets by forming joint ventures with major local players to grow quickly rather than organically. Organic growth has stagnated in these operations with stiff competition from Amazon Inc. and other local companies. Moreover, this will allow the retail giant and its executives to focus on investments that will provide growth—more specifically, in India. Walmart is in final stages to acquire Flipkart, India’s largest e-commerce business. India is projected to be a fast-growing, highly-lucrative market, and Walmart’s successful acquisition of this company would have huge, long-term impact in terms of growth.
Walmart and Sainsbury’s combined entity will command about 27% of the UK grocery market, in which 60% is controlled by four major players. This consolidation will create the largest company in the UK grocery market, but it is merely just a subset of Walmart’s plan to globalization. Globalization is an organization’s process to start or to increase it’s global/international scale and presence. Globalization is often very costly and capital intensive because it is very competitive. Unfamiliar territories yield different markets in which consumer preferences vary, and marketing and operation strategies must often be evolved accordingly. Barriers to entry are high as local consumers are typically more loyal and trustworthy toward local brands, and the local businesses have a better grasp of the market. Therefore, organic growth is often very difficult for multinational corporations. This could resort to these multinational corporations such as Walmart to buy up the local companies, so it can focus its efforts elsewhere.