Golden Touches Turned to Lead

American investments by many foreign firms become losers

Not since the days of Columbus. Cortes and Cartier has America had such allure for fortune seekers from abroad. Throughout the turbulent 1970s more and more Europeans. Japanese and even Arabs looked to the U.S. as a haven of political stability and the world’s biggest, most lucrative marketplace. A cheap dollar in relation to their strong currencies made American ventures all the more attractive. Foreign investment in U.S. firms has surged from $13.2 billion in 1970 to $65.5 bill ion last year.

The success stories that inspired the flood of capital are legion and legendary. France’s Baron Marcel Bich, for example, bought the Waterman Pen Corp. in 1958 for $2.5 million and built it into the flourishing Bic Pen Corp. with annual sales of $200 million.

But many foreigners are learning that America’s streets of gold can also be pitted with peril. Says Herbert Jacobi, a partner in West Germany’s Berliner Handels und Frankfurter Bank: “Many Europeans do not realize that America is the land of economic Darwinism. Some of them are going to fall flat on their faces.”

Foreign investors have indeed suffered a string of spectacular flops to match their successes. In many cases they bought unprofitable, badly managed U.S. companies at giveaway prices with blithe confidence that their European ways would make the problems disappear. Such familiar firms as A & P and Korvette’s lost millions for their European owners.

The failures are concentrated in retail trade. Explains Stephen Sahlein, contributing editor of the Investment/U.S.A. newsletter: “U.S. investments generally pay off when the foreign company brings in technical expertise and leaves the marketing to Americans. The investments that did not work were aimed directly at the American consumer.” Foreign businessmen are unaccustomed to the ethnic diversity in the U.S., where blacks, Hispanics and Chinese are as ubiquitous as the Irish and Italians. Overseas investors are often unprepared for the competitiveness of the American market, in which promotion and image are crucial. European companies have acquired 21 major U.S. retailers since 1973, but only two of these foreign firms have earned large U.S. profits: Belgium’s Delhaize-Le Lion group. which owns Food Town grocery stores, and Britain’s Cavenham, which bought the Grand Union supermarket chain.

The Tengelmann group. West Germany’s largest grocery chain, was less fortunate. Two years ago it bought control of the once proud Great Atlantic and Pacific Tea Co. and has so far lost $75 million on its investment. The American chain had been limping along for years mainly because it had gained a reputation for selling low-priced and low-quality merchandise. But the new German owners made matters worse. They converted many A & P outlets into so-called box stores, which are small, streamlined operations stocked usually with heavily discounted products from A & P’s own factories rather than bestselling national brands. This strategy had worked well at Tengelmann stores in West Germany, but in the U.S. the company found its golden touch turned to lead.

James Wood, A & P’s new chairman, now admits that the box stores were a mistake.

Tengelmann hired Wood, an Englishman, away from profitable Grand Union chain. Says he: “The mistake we foreigners oftenmake is to judge the U.S. on the basis of what we know about Europe.Americans want a fuller range of products from a supermarket thanpeople on the other side of the water.”

Miscalculation of the American consumer tastes was also costly forBertelsmann Corp., the huge West German publishing conglomerate headedby Reinhard Mohn. In 1979 the the firm launched an American version of its glossy Geo, a magazine similar to National Geographic but with a more downbeat style. Instead of sprightly features on seals, Geo printed stories of bloody dogfights and deprivation in Poland. After losing $35 million. Bertelsmann sold Geo to Los Angeles-based Knapp Communications two months ago. It will reappear as a frothy travel magazine.

French-owned Korvette’s, a once thriving New York City-area department store chain, is now bankrupt. Korvette’s was bought three years ago by the four Willot brothers, who also own the giant Au Bon Marche department store in Paris and the Christian Dior fashion business. The Willots installed as Korvette’s president an autocratic French manager named Alain Mathieu, who made poor marketing decisions. Korvette’s clothes, for instance, were too expensive for discount shoppers and too pedestrian for the fashion-minded. The Willots’ total loss: $120 million.

In one case, a U.S. investment drove a parent European company into bankruptcy. In 1976 Dunbee-Combex-Marx. a British toymaker, bought Louis Marx & Co., a troubled American counterpart, from Quaker Oats for $15 million. Overwhelmed by $110 million in debts run up by Marx, Dunbee collapsed last year.

Despite the perils of investing in the U.S., the inflow of foreign capital remains a torrent. Foreign executives fear for the safety of investments in their home countries. Europeans, in particular, are leery of Soviet expansionism and strong tendencies for ever more state control or union domination of business in France, The Netherlands and other nations.

Hugo Mann, a wealthy West German retailer, is typical. Since 1975 he has invested almost $110 million in FedMart, a lackluster variety-store chain in the Southwest. Mann looks upon his acquisition as vital insurance. Says he: “America is the land of enterprise. If ever I can’t goon in Germany, I’ll just buy a ticket to the U.S.”

—By Charles Alexander. Reported by Frederick Ungeheuer/New York