Seminar 6 Walmart Success in Latin America

How Walmart has built Latin Americas largest and most successful retail business. By David Agren and Thierry Ogier MEXICO CITY Taco stand owner Efrain Garca is a happy customer of Walmart in Mexico. The quality of merchandise in Walmart is so much better, says Garca, who shops in both Walmart Supercenter and Bodega Aurrera in suburban Ecatepec, where he buys basics and produce for his business. Customers like Garca have helped catapult U.S.-based Walmart into the largest retailer in Latin America. Walmart de Mexico (Walmex), its top unit in Latin America, last year boosted its revenues by 31.4 percent to $27.2 billion. That made it the third-largest company in Mexico and the tenth-largest firm in Latin America, according to the Latin 500 from Latin Trade and Latin Business Chronicle. Walmex 2010 revenues include Central America. However, Mexico and Central America are not the only Latin America markets where Walmart , the worlds largest retailer, has found success. Walmart Brasil grew 2010 revenues by 18.3 percent to $13.4 billion, ranking it as the 34th-largest company in Latin America on the Latin 500. Walmart also operates a major business in Chile after acquiring local retailer D&S in late 2009, and the company has a presence in Argentina. All in all, Walmart employs more than 341,000 people in Latin America, making it the largest employer in the region, according to a Latin Business Chronicle ranking of the top 100 employers. Just as in the United States, Walmart has played a key role in helping the region reduce inflation, thanks to the sheer volume of products it offers at low prices. Theres no doubt that in Latin America weve had an impact to reduce and control inflation, Walmart Latin America CEO Eduardo Solorzano tells Latin Trade. Our prices grow at a slower rate compared to the market. Solorzano, who assumed his position in January 2010, previously headed up Walmex for five years. Hes credited with launching the successful Everyday Low Prices system in Mexico, while creating Banco Walmart, the worlds first Walmart bank, and the development of successful new formats, such as Bodega Aurrera Express. Walmarts impact on poverty reduction [in La tin America] is even greater in its ability to deliver great savings to struggling families than the wages that it pays, argues John Price, managing director at Americas Market Intelligence and a Latin Trade columnist. He estimates that Walmart offers $60,000 in savings to customers for each $10,000 in wages paid to employees. Behind those low prices is a consistent strategy that includes cost-cutting at all levels. Walmart has an almost puritanical approach to cost-cutting, Price says. I have never met a management team with as large a business to oversee and yet such a humble office environment and minimal operating budget. They are as tough on themselves when it comes to cost-cutting as they are on their suppliers. Walmart goes much further than other retailers in cost-cutting, he points out. Company executives go to their suppliers and help them re-engineer their processes to cut costs and insist that most of that saving be passed on to the clients i.e. neither the suppliers nor Walmart benefits much from the cost cutting, but rather the consumer. As a result, no one can match the pricing of Walmart especially in Mexico, where economies of scale offer other advantages, Price says. Other global retailers, such as Carrefour, have had mixed successes in Latin America and have not stayed the course the way that Walmart has. That also helps explain Walmarts predominance, Price says. Walmart de Mexico CEO Scot Rank says the company attracts a broad customer base with its multiformat structure. MEXICAN SUCCESS Although Walmex is the undisputed retail king in Mexico, it isnt resting on its laurels. We have much respect for our competitors, Walmex CEO Scot Rank tells Latin Trade. Our industry is highly competitive, and we need to constantly revisit the ways we do our job and generate greater efficiencies. Walmex customers benefit from synergies between operations in Mexico and Central America, he adds. For example, Walmex is taking Mexicos 11 -year experience with Everyday Low Prices to Central Am erica, which will translate into savings for its customers. On the other hand, Central America has shared with Mexico its

experience in perishable goods and in programs that purchase directly from farmers. We have a strong focus on results; we constantly search for efficiencies and synergies; we try to rapidly adapt to our customers changing needs; and we take a long-term view when taking our decisions, Rank says.Walmart Stores entered Mexico with a single Sams Club outlet in 1991, opened through a part nership with Mexican retailer Grupo Cifra. The partnership flourished over the next six years, until Walmart purchased a controlling interest in Cifra, then the countrys largest retailer. They were already a very well-run company before Walmart got involved, says Eduardo Garca, publisher of the online financial site Sentido Comn. Through the partnership, Garca adds, [Walmart] learned the business, then became full partners. Walmart continued with its rapid growth, becoming the largest retailer and largest employer in the country, surpassing even the federal government. Walmex now operates more than 1,700 outlets in Mexico, ranging from Sams Club and Walmart stores to high -end Superama supermarkets in chic neighborhoods and lower-end Bodega Aurrera outlets in working-class areas. Walmart has been successful beyond its dreams in Mexico because it entered relatively early and very quickly before the positive buzz about Mexican consumer growth was forming, Price says. They study new entry projects very carefully and look for resurgent consumption growth as a positive timing issue to help them decide when to enter. Walmarts success in Mexico is also due to the fact that beyond its own brand stores, the company also owns other branded retailers, which enables Walmart to play in other segments of the fast-moving consumer good retail space, he adds. Our multiformat structure allows our flexible formats to target different types of consumers and take advantage of different purchasing occasions, Rank says. In some markets, regulators would not allow any one retailer to possess such high market share as Walmart does in Mexico around 50 percent of the formal chain market but it was able to do this by purchasing other branded retailers first and then topping up its market share with its own Greenfield investments, Price says. The company courted some controversy along the way just like in the United States. Some foreign journalists questioned why teenagers bagged groceries for tips in Walmart stores. Protesters, meanwhile, howled when Walmart opened Bodega Aurrera outlets near the culturally sensitive Teotihuacn Pyramids and Lago Ptzcuaro. Neither controversy seemed to generate much popular outrage in Mexico itself. In fact, Walmart sales continued to climb, and customers in San Juan Teotihuacn and Ptzcuaro flocked to the new stores, which were built in areas that had not been served well by supermarkets. Guadalupe San Juan recalls something similar happening in her poor neighborhood on the northern outskirts of suburban Mexico City when a Bodega Aurrera store opened a few years ago: All of the prices immediately dropped, she says. San Juan now shops in newer and larger stores operated by competitors, explaining, The selection of merchandise is bigger. Walmart boasts that 87 percent of its merchandise sold in Mexican stores comes from national suppliers companies such as Guadalajara-based Nopal Industrializado, which sells low-calorie and high-fiber tortillas, tostadas and totopos made from cactus flour under the Seor Cactus label. What Walmart gives you is the ability to expand rapidly, says Nopal CEO Gerardo Ibarra. Walmart also gave Nopal Industrializado whose products Ibarra describes as a bit elitist the chance to reach a moneyed and image-conscious clientele through its Superama supermarkets, which stock everything from fine wines and organic produce to gluten-free cookies and pretzels. The merchandise that Walmart brings in is so much more attractive, says Jorge Barron, a design er who shops all the time at a Superama outlet in Mexico Citys trendy Colonia Condesa. The small outlet near his apartment, he adds, is so much better organized than other nearby supermarkets. Some price-conscious shoppers, though, say better bargains can be found elsewhere. Marisela Cuevas, whose family sells barbacoa (lamb roasted in an earthen pit) on weekends, says she drives past Walmart and Sams Club outlets to the west of Mexico City to shop in a no-frills discount store with rock-bottom prices. Walmart just seems kind of expensive, she says. Walmex plans to grow further.

We see a universe of opportunities for growth in the six countries where we operate, Rank says. The demographics of these countries will increase the demand of goods in which we have an unparalleled price position. In addition, access to goods at low prices continues to be limited to a few, and there are still hundreds of places where we could build a store.

Walmex plans to invest substantially more than the rest of the market to open new stores, improve its logistics network and remodel existing stores, Rank says. Meanwhile, the division plans to increase sales at a faster rate than the market by keeping the lowest cost structure in the market and offering consistently lower prices. It also plans to develop and attract talent into the organization, build a high-performance organization to be ready for future growth, and improve on its commitment to be a socially responsible company, Rank says. Walmex plans to open 445 new stores in Mexico and Central America this year. In Mexico, it is investing 14.1 billion pesos (U.S. $1.2 billion) to open 365 new stores and Price Clubs, generating 20,000 new permanent jobs and 40,000 indirect jobs during the construction of its stores.

In Central America, Walmex plans to invest 4.9 billion pesos (U.S. $417 million) to open 80 news stores this year nearly three times the 30 stores it opened last year.

This investment means thousands of new permanent jobs and new opportunities for suppliers to increase their production and sales, Rank says.

Walmart Brazil, the number-three retailer in the country, recently introduced the Everyday Low Prices policy as part of its strategy to gain market share. BRAZIL: BACK TO BASICS It took some time for Walmart to find its footing in Brazil, but the companys expansion in recent years shows that it now feels at home in one of its key markets outside the United States. The Brazilian subsidiary has recently implemented Everyday Low Prices (EDLP) as a strategy to catch up with the local market leaders, Po de Aucar and Carrefour. It is the strategy that we have to develop the trust and the loyalty of our customers, Walmart Brazil CEO Marcos Samaha tells Latin Trade. This will naturally result in an increase in market share. Walmart, which entered Brazil in 1995 through a short-lived joint venture with the local non-food retailer Lojas Americanas, became the third-largest retailing chain in the fast-growing Brazilian market thanks to two key acquisitions in the middle of the past decade: one in the southern part of the country and the other in the northeast after Portugals Sonae and the Netherlands Royal Ahold decided to sell their Brazilian assets. We have grown to be a very large player, Samaha says. Our geographical presence is very well -balanced between the three most important regions in the country. Walmart operates five formats of stores in Brazil, targeting various segments of the population, as well as an electronic commerce division. Walmart is present in 18 states of the Brazilian federation, yet it is still absent from the northern region, which includes the Amazon forest. Walmart now needs to make a big step forward to take on the competition. Samaha, who was appointed CEO last September, is convinced that EDLP is the answer.

We have been opening and sharing our books with the suppliers, and having the suppliers to trust on this mechanism that allowed us to reduce prices of 10,000 items in the retail market in Brazil so far, he says. While everybody is in the business of making strong offers on one item that are valid for one day that make the customers go to the store to buy potatoes on Wednesdays and go back to store to buy meat on Fridays, or go to the store to buy beer because beer is cheaper on Saturdays we want to build a relationship that is based on trust with our suppliers and with our customers. They can come to the store the day of their own convenience, and not the day we are promoting potatoes or meat or beer. Thats the biggest difference between what we do and what everybody else does. Walmart intends to launch 300 new products of its own brand this year to support its EDLP policy. This compares with only 50 launches last year. Brazil has now definitely become one of Walmarts most important markets for its global growth, says Samaha. OUTLOOK Walmart is expected to continue seeing good growth in Latin America. Solorzano expects that future growth will be driven by Brazil, Mexico and Argentina. I think that Walmart will continue to grow aggressively, although at slower growth percentages than in the past, Price predicts. The lowest -hanging fruit is picked. Going forward, Walmart will rely on organic growth in markets like Mexico and Central America, but the retailer will need to resume acquisitions in South America, where its footprint is far less felt and more significant local competitors exist. I believe that it is the regional Latin American competitors that most threaten Walmart not the global retailers, some of whom are still smarting from losses in Latin America and others who are enamored with China, Price says. However, Walmart faces several challenges beyond competition from rivals. Rising protectionism could damage the companys ability to source from abroad, Price warns. The resource-rich countries all have local manufacturing that cannot compete when their currencies appreciate as fast as they have, he says. They lobby their government for protection, and they are starting to receive it in the form of extraordinary import tariffs, complicated non-tariff regulations, etc. Exporting to these countries will grow more complicated. In the meantime, Walmart continues ringing up sales throughout Latin America, expanding operations and hiring more people, Solorzano says.