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WAL-MART GROWS IN LATIN AMERICA, BUT IT’S NO WALKOVER

By María Bird Picó

The world’s biggest retailer is surely under no illusions that becoming Latin America’s biggest retailer will take anything less than total dedication.

Wal-Mart Stores has a solid presence in four places in the region — Argentina, Brazil, Mexico and Puerto Rico — and is said to be eyeing Chile and Colombia, among others. At the end of September, the company bought a 33.3 percent stake in Central American Retail Holding Co. from Dutch retailer Ahold.

With a roster of 363 supermarkets and stores in Costa Rica, Guatemala, Honduras, Nicaragua and El Salvador, Central American Retail posted $2 billion in sales last year. Wal-Mart officials say they intend to obtain a majority stake in the company eventually.

“Latin America is a natural market, because it is where consumer spending is growing at a very interesting rate,” said Santiago, Chile-based Renato Figueroa, a partner at FigueroaRoig, a retail consulting firm with offices in Guatemala, Peru, El Salvador and Uruguay. “It’s obvious that Wal-Mart’s natural growth no longer lies in the United States.”

Latin America’s fragmented supermarket sector is ripe for Wal-Mart. Figueroa estimates that small neighborhood stores still ring up about 65 percent of food sales in the region.

No one questions that there are ample opportunities for growth, but the lessons learned in Argentina, Brazil and Mexico are key for Wal-Mart to take off in the region. The main one is that no two markets there are the same. After its success in Mexico, Wal-Mart entered Brazil and Argentina a decade ago to much fanfare, and then tripped. Part of Wal-Mart’s success in Mexico, its first international market, was its 1991 acquisition of a stake in a company well acquainted with the Mexican consumer — Cifra, the country’s largest retailer. By the mid-1990s Wal-Mart had acquired 62 percent of Cifra.

Wal-Mart forged no such partnership in Argentina or Brazil, essentially starting from scratch. Moreover, it faced a formidable competitor in Carrefour, which had been in Brazil since 1975. Wal-Mart also found itself up against Brazil’s largest retailer, Companhia Brasileira de Distribuicão, which has 553 stores and over $3 billion in annual sales.

By 2003 Wal-Mart’s combined sales in Brazil and Argentina were just over $500 million — small change considering the size of those countries, according to Management Ventures, a Cambridge, Mass.-based retail consulting firm.

“The industry needs to analyze if Wal-Mart’s foray into Latin America has been as successful as initially expected,” said Carlos A. Lecueder, a Montevideo, Uruguay-based retail development consultant.

Of course, these are still early days, and Wal-Mart is still growing in the region. But its entry into Argentina and Brazil became a case study for U.S. retailers of how not to enter a Latin American market. It initially used executives, particularly merchandise buyers, who were not fluent in Portuguese or Spanish. It also used its U.S. format, and consumers were disappointed to see the stores did not devote much space to food.

“In South America, particularly Brazil, Wal-Mart based its strategy on its large scale and renowned name, and somehow believed it would give it automatic success,” said Sergio Oliveira, a retail analyst at AT Kearney, in São Paulo, Brazil. “Growth was slower than projected.”

But the retail giant has learned. It now uses native executives to run its overseas stores, and it has doubled the space it devotes to food. In Brazil it has rolled out Wal-Mart Todo Día, smaller neighborhood stores that take after Wal-Mex’s low-priced Bodegas Aurrerá.

Another widely praised move was last year’s purchase of Bompreco, a retail chain in Brazil’s northeast, from Ahold. The acquisition gave Wal-Mart 118 more hypermarkets, supermarkets and minimarkets overnight. The deal made Wal-Mart the northeastern region’s leading supermarket chain and bumped it from No. 6 to No. 3 in sales, says Paul Weeks, a retail analyst at São Paulo-based Cushman & Wakefield Semco. The No.1 and No.2 chains, respectively, are the 185-store Pão de Açúcar (owned by Brasileira de Distribuicão) and Carrefour, which posted a 38 percent jump in sales last year, to $4.5 billion.

Competition among the three is getting keener, says Weeks. French supermarket chain Casino Guichard-Perrachon et Cie recently announced that it would boost its stake in Pão de Açúcar from 27.4 percent to 34.3 percent. And under new management, Carrefour is aggressively targeting the No. 1 slot, having just announced a $461 million investment plan for the next three years. Meanwhile, Wal-Mart has set its sights on the No. 4 seller, Sonae’s supermarkets, owned by the Portuguese Sonae Group, leader in the south, says Weeks. At press time published reports said Wal-Mart had bid $970 million for the Sonae Brazilian chain. Wal-Mart declined to comment.

Business is brisker for Wal-Mart in Mexico, where it operates 722 stores and restaurants. With sales of $12.6 billion last year, the public company, Wal-Mex, was No. 6 on América Economía magazine’s annual ranking of Latin American companies. Wal-Mart sales in Latin America rose 10 percent last year, the magazine said, propelled by a 17 percent increase in Wal-Mex sales. Some of this is due to the increased access the Mexican consumer now has to credit cards. Wal-Mex entered into an agreement two years ago with GE Capital to issue credit, a move retail analysts say has boosted the chain’s sale of electronics, shoes and clothing.

“Wal-Mart is extremely successful in Mexico,” said Mauricio Brocado, a retail analyst at Actinver, a Mexico City-based brokerage house. But even in Mexico, the company got off to a rough start when, after buying into Cifra, it brought in its own executive team before realizing there was no reason to replace a local team that had worked so well, Brocado says.

Wal-Mart has recently stepped up the pace of its expansion in Mexico, announcing in September that it would invest $700 million by the end of this year — much faster than its past rate of about $500 million every 18 months, says Brocado. “It’s an important and symbolic announcement because, for all the talk and hype that surrounds it, Wal-Mart still behaves conservatively,” he said. It intends to open about 90 new retail units in the current year, says Brocado.

In Mexico’s fragmented retail market, smaller retailers, such as Comerci, Gigante and Soriana, are trying to keep up with Wal-Mex’s low-price campaign. In March the Veracruz, Mexico-based Chedraui supermarket chain bought Carrefour’s 29 stores in Mexico plus two others under construction. Before that, Chedraui had only 64 stores in Mexico’s heart and in the southern regions, and no presence whatsoever in Mexico City. It is in Mexico City that Wal-Mex dominates, with a 60 percent share of supermarket sales, according to Banamex-Accival, a Mexico City-based brokerage.

Wal-Mart used a similar strategy of conquest through acquisition in Puerto Rico, which was the second market it entered outside the U.S. mainland. In 2002, a decade after arriving on the island, it bought the Amigo Supermarket chain for $225 million. Wal-Mart is now Puerto Rico’s biggest retailer, reporting sales of $1.2 billion as of 2003. Wal-Mart Puerto Rico operates nine Wal-Mart stores, four Wal-Mart Supercenters, nine Sam’s Clubs and 32 Amigo Supermarkets. José Arroyo, Wal-Mart Puerto Rico’s director of corporate affairs, says the company has plans for more stores in Puerto Rico, but declined to say how many.

Retail experts are not surprised at Wal-Mart’s achievements in Puerto Rico. Puerto Rican consumers took to Wal-Mart right away, having been acquainted with the retailer through stateside relatives and frequent trips to the United States. “In a way, Puerto Rico’s and Mexico’s proximity to the United States provided a cultural bridge to Wal-Mart,” said Oliveira. “That was not the case in Argentina and Brazil.”

“It has cost them a lot to make noise in the Argentinean market,” said Lecueder. “The other giant, Carrefour, has been there much longer and managed to adapt faster to the market.”

Carrefour leads with about one-third of the market, followed by CencoSud’s Disco and Jumbo supermarkets (about 22 percent) and Supermercados Coto (14.2 percent). With 11 stores, Wal-Mart comes in fourth, at about 5 percent of the market. Wal-Mart officials there declined to be interviewed, but observers say they would not be surprised if the company gobbles up one of its competitors in the near future.

In addition to a lack of knowledge of the Argentinean consumer, Wal-Mart failed to seize good locations when it entered the country in 1995. It realized its error when the Argentinean government tightened zoning regulations on the location of big-box retailers, says David Nieves Piazza, president of Buenos Aires-based retail real estate consultant firm InterUrban. “Carrefour lost no time in growing in Argentina, while Wal-Mart took its time,” said Nieves. “It is now paying the price.”

But Actinver’s Brocado says he sees no reason Wal-Mart cannot succeed there, too. “It’s not all Wal-Mart’s fault,” he said. “Argentina went through a very difficult economic period.”

In many countries the key will be to generate a sizable sales volume that makes operations profitable, says Lecueder. But that might be easier said than done, considering the small size of such countries as Bolivia, Ecuador, Paraguay and Uruguay. The more attractive, bigger markets are in Chile, Colombia, Peru and Venezuela. In Chile the word is that Wal-Mart is in talks with D&S, owner of the Lider supermarket chain, which accounts for about one-third of that country’s supermarket sales. “Lider is an ideal fit to Wal-Mart,” said Figueroa. “Its business motto is also everyday low prices.”

Wal-Mart would not comment on specific markets. “We have said, in general, that we’re interested in further growth around the world and believe that Latin America will be one of the growth areas — that would include the markets where we’re already established and new markets as well,” said William C. Wertz, Wal-Mart’s director of international corporate affairs.

One factor that could favor international chains is Mercosur, the economic integration of the region’s countries, says Lecueder. “If Mercosur really operates in a fluid form, and the merchandise traffic was simpler, that would open possibilities,” he said. “To give you an example from Argentina — these retailers could expand to Chile and Uruguay by treating those points of sales as part of the Argentinean market. It will give them operational, logistical and efficiency edges that would ease growth.”

Edges that Wal-Mart would certainly use to speed its Latin American growth.

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