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The Anglo File: Wal-Mart Makes U.K. Consumers Smile, but Retail Investors Wince

Asda supermarkets, recently bought by Wal-Mart, have fired the first shot in a price war.

British journalist Simon Hoggart once observed that "

Americans have shops the way lesser countries have statues." Now, U.S. discount retailer


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, the new owner of the U.K.'s third-largest supermarket operator,


, is playing a leading role in putting the British consumer on a pedestal.

On Monday, the new entrant set off a price war, one Britain's long-suffering consumers no doubt are happy to see waged. Prices on 600 items from turkey breasts to veggie burgers will fall by a total of $50 million, pressuring competitors to follow suit.

Coupled with a government proposal to fine retailers up to 10% of their annual turnover if they are caught fixing prices, the new retail environment developing in the U.K. appears in general to translate into a situation that is good for consumers but bad for investors.

They Had It Coming

Of course, British consumers aren't complaining and retailers are unlikely to get any sympathy from the public, who feel that for too long they have been cheated at the checkout counter. A recent survey by the research group


, which described Wal-Mart's $10.8 billion purchase of Asda in June as "the worst nightmare of Europe's retailers," found that less than one in five consumers believe the cost of living in the U.K. is as good as in other countries.

A fund manager for a major London bank agreed margin erosion in the U.K.'s retail sector will hurt the overall investment climate, but he stressed that each part of the retail sector will experience its own peculiar problems and therefore will suffer to varying degrees.

Apparel Is Off the Rack

"Take clothing and apparel," says the fund manager, who asked that neither he nor his institution be named. He says that he and his firm "haven't even looked at that for three years now and I have no intention of looking at it any time soon."

The spectacular fall from grace of the venerable

Marks & Spencer

offers an extreme example of just how bad this part of the retail sector is faring. The announcement in May that M&S' pretax profits fell 42% in the fiscal year ended March 31 pushed its shares under 350 pence, almost half their level at the end of 1997. At the close of trading Monday, its shares were up 1.1% at 374 pence.

After an almost 2% year-on-year decline in U.K. clothing sales in the last quarter of 1998, the first such fall in seven years, some had hoped the market had hit bottom and the second half of this year would see an improvement in sales.

Yet margins are still contracting and unless one is a niche player or a very large player (that would exclude names such as

British Homes Stores





), there is unlikely to be significant improvement in this segment of the retail market.

Food for Thought

Asda's first strike confirmed what many analysts had anticipated when Wal-Mart bought the supermarket chain. Its move will put further pressure on its two larger rivals




to endure another round of price cuts.

While this price war may put the industry in a better light in the eyes of the

Competition Commission

, which is currently investigating the pricing policies of the supermarkets, it supports

Deutsche Bank's

remaining underweight the entire food sector.

"The only reason to buy the sector now would be in anticipation of the possibility of further corporate activity," Deutsche Bank wrote in a report.

As it happens, Wal-Mart's acquisition of Asda is expected to do just that. The U.S. retailer's purchases in the U.K. and Germany clearly signal a move away from emerging markets toward developed markets. While it digests these recent purchases, the pressure is on retailers such as France's


and the Netherland's


to buy up the best partners in Europe before Wal-Mart does.

The one bright spot for British retailing are those selling electronic goods, such as

Dixons Group

. Although the margins in this area are also falling, increasing sales volume is helping to mitigate this. Dixons is currently the only retailer in the U.K. to be trading at a premium to the rest of its sector, although this may have as much to do with its Internet business,


, (FREEV:Nasdaq) than with optimism over its retail business.

When Verdict proclaimed that Wal-Mart's arrival on these shores meant that "no one's market share is safe," you could almost hear the general sigh of relief from the public. The noise coming from investors, however, will likely be a groan.