The euro will introduce American-style shopping to Europe. One chain is already betting on it

By THOMAS K. GROSE /LONDON

op quiz: name one European hypermarket operator with a brand name that's instantly recognizable across the Continent. Britain's Tesco? Not really. France's Carrefour? Not close. Holland's Royal Ahold? It's huge--and growing--but it's not yet everywhere. The answer for the moment is that not a single European chain has the kind of pan-Continental recognition that Wal-Mart enjoys in the U.S. But that brand gap will close. And soon.

European Economic and Monetary Union will transform shopping. As disjointed, national markets become one, Europe's bloated retail sector will be further shaken by the intense competition that's already begun. Dealers are battling to become the biggest, most efficient purveyors of goods and services. The few hypermarket and department store chains that survive and thrive will be household names across Europe. Most of the also-rans--particularly small independent shops--will simply disappear. This brutal consolidation will leave many losers in its wake. But the winners will be consumers, who will find lower prices and greater choice.

The opportunities offered by a vast, new market have begun to lure American retailers to euroland. Last December, Wal-Mart Stores Inc. stunned the industry when it bought the Wertkauf chain of 21 hypermarkets in Germany, establishing its first beachhead in Europe. Analysts had believed that the Western European market was too mature, with margins too thin, sales too sluggish (predicted overall annual growth of about 1% over the next few years) and space too limited to entice Wal-Mart. After all, it had become the world's largest retailer by being a high-volume operation that made its fortune on boosting service and cutting prices. Not at all, insists Bob L. Martin, chief executive of Wal-Mart International. "It's a good time to be in Europe, just when it creates a large, seamless market." Wal-Mart, he adds, is used to operating in highly developed, very competitive markets. And coming out on top.

EMU will hit the world of retailing long before the euro reaches punters' pockets in 2002. As retailers become pan-European, they'll look beyond their borders for the best, most price-effective suppliers. With prices shown in euros next year, it will be easier to find the best deals. "EMU will make it difficult for the coziness that's existed between national suppliers and national retailers to remain intact," says Michael Poyner, retail director of Renaissance Worldwide, a London retailing consultant. In the past, these internal supplier-retailer cabals--some dating back generations--kept prices inflated and resisted competition.

To be sure, the euro won't lead instantly to retailing Nirvana. "It will bring both pain and gain," Wal-Mart's Martin admits. Stores will have to retrain staff, reprogram registers and computers and change accounting methods. Eurocommerce, a European retailing association, predicts that this break-in period could shave 1.3% to 2.6% off retailers' revenues. Moreover, during the initial launch, stores will have to trade in both euros and their outgoing currencies. Pricing will be a nightmare; making change an ordeal. Confusion will certainly reign during the euro's early days. But Ceu Pereira, Eurocommerce euro analyst, promises that, in the long term, EMU "will drive prices down."

Consolidation was already a fact of life in Europe's retailing sector. But EMU is reinforcing the trend. Few E.U. countries have room for more hypermarkets. France, Germany, Belgium and Holland have tight land restrictions. "In these countries, the chances of opening a new store are practically nil," says Rowan Morgan, a retailing analyst at Nikko Securities.

With most domestic markets saturated and land scarce, growth-minded European retailers can either branch into other sectors--some now offer such non-core products as banking and insurance services, and motor fuel--or look beyond their borders. The first option, Poyner says, "is slightly more risky, because it involves getting into areas [retailers] don't know as well, where their track records aren't brilliant." That's why such retailers as Carrefour, Royal Ahold, Britain's Marks & Spencer and France's Promodes have instead been on buying sprees across the Continent. And in some cases beyond.

Some recent acquisition activity included the purchase by Metro--Europe's largest and most diverse retailer--of the Allkauf hypermarket chain in Germany for an undisclosed sum. Late last year German retailer Metro also bought the cash-and-carry Dutch chain, Makro. Promodes, a French firm, paid $293 million for a nearly 28% stake in Belgium's largest food chain, GB. And M&S says it has $489 million to spend on European acquisitions over the coming two years. Some analysts think even a mega-merger between Carrefour and Metro, which already have some joint holdings, is possible.

Wal-Mart, which is based in Bentonville, Ark., and already operates 2,864 stores in the U.S. and 600 elsewhere, has been on a tear. It has rung up sales through May of this year of $41.1 billion, up 18% from the same period last year. So furious is Wal-Mart's rate of growth in the U.S. "that it can't sustain that pace forever," says Linda Kristiansen, retailing analyst at Schroder & Co. in New York. That means its overseas operations will gain importance when U.S. growth ebbs.

Many analysts had expected Wal-Mart to eschew Western Europe for the more wide-open pastures of Asia, Latin America and Eastern Europe. But when it did decide to target the E.U., Germany was a logical choice. Why? Puny rivals. "In Germany, department stores are in a dismal state--they look like British department stores of 35 years ago," says Nikko's Morgan. "They're shabby and have no sense of layout." Adds retailing consultant George Wallace of Management Horizons Europe: "Mass merchandising in Germany is weak. Wal-Mart will have a tougher time in France and the U.K., where it will face better organized competition." Because Wal-Mart's German move is so new, it's too soon for competitors to react much beyond keeping a watchful eye on things. Some analysts speculate that Metro bought Allkauf as a response to Wal-Mart's foray. The company denies it. "We are not doing anything because of Wal-Mart," says spokesman Dierk Kowalke.

To attain the economies of scale necessary to keep prices low, Wal-Mart will need more than 21 stores, a fact it acknowledges. "We will be looking for the right opportunities to expand across Europe, not just in Germany," says Martin. Moreover, he boasts that the company's strategy "is to be the dominant player, wherever we are." Wal-Mart won't divulge what it paid for Wertkauf, but the German chain had sales of $114 billion last year and is profitable.

So far, changes are being instituted gradually as Wal-Mart takes time to study the German retailing industry and its consumers. "We see an opportunity to take a lot of cost out of the distribution channel," Martin says. Customer services are, of course, a priority. "I don't like seeing long lines," Martin says. To help ingrain the Wal-Mart methods among Wertkauf employees, 30 managers and associates spent a week in Bentonville this month to work in stores and meet company officials.

Some observers sneer that European shoppers are too sophisticated to be wooed by Wal-Mart's American-style, "Have-a-nice-day" approach to shoppers. Martin scoffs at that: "Customers will know if service attitude is genuine or not. There is no place in the world where customers don't respond well if you make them most important." Germans at least appreciate low prices. "Germans have always been price-conscious," Poyner says. No-frills chains Aldi and Lidl pioneered "limited assortment discounting," where choice and service are of little consequence. So basic are their 2,000 stores that only recently have some installed scanners. But no one has combined service, price and selection in retail yet, and Wal-Mart believes it can.

When Wal-Mart boosts efficiency and service at its Wertkauf stores, probably next year, they will be rebranded as Wal-Marts. So the possibility exists--albeit a few years down the road--that one of the retailers in Europe with the kind of name recognition Wal-Mart commands in the U.S. may be...Wal-Mart.