Wal-Mart Argentina
Teaching Note
Prepared by:
Luciene De Paulo
Andrew Martin
Esther Montiel
Jennifer Pogue
Gabriel Szulik
Teaching Note
Wal-Mart International
Wal-Mart announced at its 1994 annual shareholders meeting that it would expand its operations
into Brazil and Argentina during 1995. At the time, Latin America did not have a developed
market for the middle class and the two countries were achieving more stable macroeconomic
fundamentals and offered large promising markets. Although Wal-Mart announced it would
enter Brazil through a joint venture with a local chain, Lojas Americanas1, the Company
announced it would enter Argentina independently. Many people speculated that the Company
would be interested in a joint venture in Argentina with a local chain (NORTE, owned by Alberto
Guil) or even in buying a local competitor.
Wal-Mart International opened its first store in Argentina, a Sam’s Club membership warehouse,
August 1, 1995. On November 1, 1995, the Company opened its second store, a Wal-Mart
Supercenter, a 25,000 square meters store that was built at a cost of $18 million. The Supercenter
had 50,000 different items and 36 different departments.
During 1996, Wal-Mart announced its plans to open 75 new locations in the U.S. and 30-35 new
stores in Argentina, Brazil, Canada, China and Puerto Rico. (Interestingly, the Company has only
13 stores in Argentina as of 1999).
Despite its plans, Wal-Mart only expanded in Mexico, Argentina, and China during 1996. It also
had a joint venture with a Thai firm to build stores in China and Hong Kong, but ended the
venture and chose to open stores in China and Indonesia at a cautious pace instead. In Latin
America, expansion plans were slowed down in Mexico due to the peso’s sharp decline in 1995
and supplier problems in Argentina.2 As of August of 1996, Wal-Mart had opened more than 230
stores in developing countries such as Colombia, Mexico, and Brazil as well as in Canada,
Argentina, and Puerto Rico. It was also putting finishing touches on Indonesia and China. “If we
don’t grow beyond the U.S borders, the competition is going to come to us.” Stated Millard
Barron, senior vice president/chief operating officer of Wal-Mart International, in discussing the
development of the retailer’s 2-year-old offshore division. “There is only so much we can do
domestically until the market is saturated.”3
It was rumored that Wal-Mart was losing enormous amounts of money on its investment and that
it was considering exiting both Brazil and Argentina “We wouldn’t invest if we didn’t think it
would be profitable within three years. Argentina and Brazil are the two best markets in South
America.” Said Bob Martin, Wal-Mart International President in Nov 1996. “On an operating
basis we will be profitable in the fourth quarter of this year, but overhead cost, the initial
investment won’t be paid off for about three years. I’m very comfortable that we will see a net
1
The first Brazilian store would be located in Sao Paulo and the first store in Argentina would be in
Buenos Aires. Interestingly, these are the only two markets Wal-Mart has entered in larger cities rather than
smaller areas. Also, in Wal-Mart's joint venture with Lojas Americanas, Wal-Mart would have 60%
ownership.
2
“Wal-Mart taps Lupo as operating chief of overseas division,” Wall Street Journal; New York; October 4,
1996
3
“Wal-Mart Internacional: vendemos por menos (we sell for less)” Discount Merchandiser; Bristol; August
1996; Debby Garbato Stankevich
2
profit by the end of 1998, our third full year.” Also, Martin added that the company needs 6 to 8
stores to see a profit. 4
In October 1996, it looked like Wal-Mart would become profitable in both Brazil and Argentina
within only two years rather than its estimated three. The two Buenos Aires superstores were
grossing $200 million each on an annualized basis. If results continued as expected, Wal-Mart
expected $8 billion to be added to Wal-Mart’s sales from the Argentine market. 5
Market Differences between Argentina and the U.S.
Although Wal-Mart attracted over 10,000 shoppers to its new store in Buenos Aires when it
opened, the Company has had to make many adaptations to better serve the needs of shoppers in
Argentina.
Packaging Differences: Wal-Mart estimates that as South America stabilizes and individual
income rises, demand will increase and customers will start buying larger packs.” Meanwhile, the
company had to break up multi-packs and offer smaller packages.6
Unfamiliar Products: Wal-Mart had to conduct in-store demonstrations and consumer education
on many of its products, which were unfamiliar to consumers in Argentina. This has been a very
important factor in Wal-Marts success in this market.
Local Sales Clerks: Wal-Mart needed local expertise on customer needs and lured sales people
from competitors’ stores. This is an interesting extension of the localized market strategy being
used in the U.S. stores.
Larger Shopping Groups: South Americans shop with extended family – parents, grandparents
and children all shop together. They will leave with two or three shopping carts chained together.
To accommodate these non-nuclear families, Wal-Mart hypermarkets in South America are 1015% larger than those in the US and sport wider aisles.7 This has reduced Wal-Mart’s sales per
square foot compared to its domestic stores. Sales per square foot is a key performance indicator
in the retail market.
Longer store hours: Wal-Mart distinguished itself by offering longer store hours than any other
retailer in the country.
“Wal-Mart’s Martin in Brazil: We’re here for the long run.” Discount Store News; New York; November
18, 1996; Pete Hisey
5
‘Wal-Mart bullish on South America” Discount Store News; New York; October 21, 1996, Pete Hisey
6
“Wal-Mart’s Martin in Brazil: We’re here for the long run.” Discount Store News; New York; November
18, 1996; Pete Hisey
7
“Wal-mart Internacional: vendemos por menos (we sell for less)” Discount Merchandiser; Bristol;
August 1996; Debby Garbato Stankevich
4
3
Competitive Reaction to Entry
Supplier Problems: By August 14, 1995, Wal-Mart’s competitors in Argentina (like Carrefour)
had pressured 11 vendors to stop supplying Wal-Mart’s newly opened store8. During its first few
months of operation in Argentina, vendors, including US based Unilever and P&G, either refused
to ship to Wal-Mart or insisted that the chain post prices at least a penny higher than its main
competitor, Carrefour.9
Price Wars: Well-established local competitors launched a ruthless price war with Wal-Mart,
which is one reason why Wal-Mart posted wider than expected losses. Gross margins are less
than 10%, far below Wal-Mart’s estimated reasonable level of 12%. Shopping carts filled with
merchandise are at the front of stores with price tags on them.10
Competitor Improvements: There was a limited opportunity for Wal-Mart to establish itself in
Latin America before local competitors began to catch up. Supermarkets responded to the
increased competition by trying to become better operators with more efficient logistics, greater
use of technology, and more targeted merchandising. Additionally, the market began to shift
away from small traditional outlets. The self-service segment began to grow, replacing some
traditional outlets like butchers and pharmacies. However, self-service stores had difficulty
competing with supermarkets and hypermarkets that offered more conveniences and had more
negotiating power with suppliers.

Carrefour: Carrefour entered offshore partnerships with Price Costco and other retailers. It
also watched Wal-Mart closely, sending executives to stroll Wal-Mart store aisles. It also
invested in more up-to-date technology and took advantage of global sourcing. Finally, it
decided to build 30 more stores and do leasebacks to raise cash. In one instance, Carrefour
even purchased land adjacent to Wal-Mart at a cost of $20 million and erected a store.11
Carrefour was Wal-Mart's largest competitor in the region. As of November 1995, the French
chain had 12 stores in Argentina, with annual revenues of approximately $1.5 billion.

Casa Tia: Casa Tia’s objective was to be the Wal-Mart of the country’s interior. It
modernized its stores with new fixtures, more checkout counters and changed product mix to
50% non-food items. The company also entered into a partnership agreement with Makro, a
Holland chain that could assist Casa Tia in upsizing its stores.

Ekono: Ekono changed its strategy to being a food provider, with 95% of its product mix in
food. It also modernized its fixtures and added checkout counters.

Disco: In terms of outlet penetration, Disco was the largest retailer in Argentina, operating an
extended network of supermarkets and convenience stores. The company opened no new
outlets in 1995 but remodeled and enlarged three stores in the Buenos Aires area. Total sales
for that year reached US$804.6 million, a 6.5% increase over 1994. In terms of market share,
Disco was the fourth ranked retailer in 1995, having lost the third spot to Coto.
“Wal-Mart stores says 11 Argentine vendors have halted supplies,” Wall Street Journal; New York;
August 14, 1995.
9
“Wal-Mart bullish on South America.” Discount Store News; New York; October 21, 1996, Pete Hisey
10
“Wal-Mart won’t discount its prospects in Brazil, though its losses pile up.” Wall Street Journal; New
York; June 4, 1996; Matt Moffett and Jonathon Friedland
11
“Wal-mart Internacional: vendemos por menos (we sell for less)” Discount Merchandiser; Bristol;
August 1996; Debby Garbato Stankevich
8
4
Evaluation of Country Risks in Argentina
Political Risks
Import Controls – Tariffs were being levied on merchandise trade imports which could affect
Wal-Mart’s inventory costs to obtain certain products. We did not adjust the international cost of
capital to decrease the potential effect of this risk.
Democracy Level – Although the current political regime was democratic and it looked as though
President Menem would be re-elected, there was a long-term risk that either a socialist or a
military regime to take control in the future. Argentina was also very strongly aligned politically
with the U.S. and Europe.
Corruption – The government in Argentina was very corrupt and companies trying to open a
business would have high costs due to the premium that must be paid in order to conduct business
on an ongoing basis. Bribery was extremely common in this market.
Taxes – Although the current administration was enforcing tax collections and was considering
decreasing tax rates, there was no guarantee that taxes would not be increased in the future.
Currently, the VAT was 18% in Argentina, which was levied on all sales of products and
services.
Economic Risks
Exchange Rate Risk – The current convertibility law fixed the peso to the dollar at approximately
a 1:1 ratio. However, the peso was believed to be over-valued and the fixed rate was being
supported by the increased tax revenues. Inflation pressure, reduced tax revenue, or pressure from
either speculators or exporters could force the government to float its currency.
Inflation – Argentina had been steadily decreasing its inflation rate and had brought it down to
international levels. However, even a minimal potential devaluation of the peso could trigger
inflationary pressures.
Financial Risks
Interest Rates – Although Wal-Mart would enter Argentina without significant debt, higher
interest rates could slow down consumer spending.
Banking System – The banking system in Argentina was very fragmented and weak in 1993.
Many banks were not solvent and could not produce cash for customers demanding their deposits.
As a result, the banking system lacked credibility with consumers.
Industry Risks:
Consumer Default Risk – Consumer credit had been increasing to extremely high levels. If this
trend continued, a slow down of the economy could potentially trigger a massive default on
consumer credit card payments among retailers.
5
Project Specific Risks:
Individual Entry
Limited leverage with suppliers – If Wal-Mart entered Argentina individually, it would not have
relationships in place with suppliers and may not have been able to negotiate and obtain its
products at a reasonable price or in time to cover customer demands.
Cultural Differences – Cultural differences may affect which products will be successful in
Argentina and how Wal-Mart can create brand awareness in Argentina. This could result in a
delay in Wal-Mart’s ability to be profitable in Argentina if it enters on its own.
Local Opposition – If Wal-Mart entered Argentina on its own, it may face opposition from
politicians in local areas because they are aligned with local business owners. Small businesses
may lobby against Wal-Mart because they would not be able to compete against such a large
company. Wal-Mart must lobby aggressively to open additional stores. This process can be very
time consuming and costly for the Company.
Acquisition
Buying inefficiencies – By purchasing Disco, Wal-Mart may be acquiring a lot of inefficiencies,
however, these should be priced into the acquisition price if the quality of the information WalMart receives on Disco is high. There is a risk that Wal-Mart receives “bad” information or
makes unrealistic assumptions about Disco and its valuation.
Joint Venture
Partner inability to pay: Wal-Mart’s partner, Disco, may encounter financial difficulties and be
unable to support their portion of the financial requirements for the venture.
Partner reliability: Disco may decide to “back out” of the venture due to management changes,
or if the new venture threatens its position in Argentina.
Conclusion Regarding Market Entry:
In evaluating whether or not to enter Argentina, we felt it was important for Wal-Mart to consider
the stability of currency and government, market size, potential for brand recognition, and
compatibility of the Wal-Mart strategy with Argentine shopper’s needs. Given that the political
risks seemed minimal in 1993 and that economic stability was increasing steadily, the timing
seemed appropriate for entry into Argentina. The market was attractive for a large retailer
because of the growing middle class in the country. (Argentina had the 2nd fastest growing middle
class in Latin America by 1996.) Compatibility with shoppers needs was a greater concern for
Wal-Mart. Shoppers bought in smaller quantities more often and were not familiar with many of
Wal-Mart’s products. Given the cultural challenges in adapting Wal-Mart’s strategy to a local
market, we felt entry would be attractive only through an acquisition or joint venture.
6
Determining Discount Rate
In determining the discount rate for our project valuations, we made the following assumptions.
Assumptions:
Risk free rate in US 10 Year Treasury as of December 1993: 6.348%
US Historical Risk Premium: 8.76%
Anchored to US Cost of Capital
Argentina Credit Rating: 62
Using the International Cost of Capital Calculator, we initially calculated the discount rate as
follows:
Argentina Cost of Equity Capital:
23.1%
Volatility:
26.3%
Correlation to U.S.
.31
Adjustments to Cost of Capital:
To account for Wal-Mart’s exposure to both industry specific and project specific risks in
Argentina, we made adjustments to the credit rating and re-calculated the cost of capital to be
used for discounting to NPV. Using a methodology similar to Wilshire, we assumed a credit score
of 100 would be “risk free” and that Argentina’s score of 62 reflected all of the country risks.
Then we adjusted the rating upward based on our view of which risks were decreased depending
on our three entry scenarios.
We estimate that Wal-Mart is highly exposed to political risk, so no adjustments were made for
this category. In regard to market liquidity, Wal-Mart’s exposure will probably change with each
of the different options. If Wal-Mart chooses a partner, it’s exposure to this risk should decrease.
For these two options, we adjusted the country credit rating up by 2.92. Country development
risks include GDP growth percentage, banks financial conditions, level of education, and GDP
per capital. All of these criteria are improving in Argentina and should affect all three options
equally. However, Wal-Mart is not exposed to all of these risks because it is primarily US banks,
therefore, we adjusted the credit rating up by 1.24 points. Market regulation and legal system
poses more of a risk for Wal-Mart if it enters Argentina without a partner, therefore, we adjusted
the rating upward for partner options by 2.53. Market openness of Argentina refers to the level of
restriction imposed on foreign investors. This is a large risk for Wal-Mart regardless of its method
of entry. Therefore, we made no adjustment for this factor. Settlement proficiency refers to the
markets ability to settle transactions in a timely manner. We made no adjustments for this factor.
Transaction costs refer to costs of trading in specific markets, such as tax rates. Since high tax
rates in Argentina and high levels of corruption maximize transaction costs in this market, we
made no upward adjustments to the credit rating12.
12
Exhibit 1 details the adjustments made to the country credit rating.
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Credit Rating
Adjustment for:
Political Risk
Market Liquidity
Country Development
Market Regulation
Market Openness
Settlement Proficiency
Transaction Costs
Adjusted Rating
Individual Entry
62
Acquisition
62
Joint Venture
62
0
0
1.24
0
0
0
0
63.24
0
2.92
1.24
2.53
0
0
0
68.69
0
2.92
1.24
2.53
0
0
0
68.69
Adjusted Cost of Capital:
Using the adjusted ratings above, we re-calculated the discount rate for each entry alternative as
follows.
Cost of Equity Capital
22.7%
21.3%
21.3%
Individual Entry
Acquisition
Joint Venture
Valuation of Entry Options
We made the following assumptions in our cash flow projections for the three entry alternatives:
Assumptions
Retail Market Size in Argentina (Pesos billions)
Initial Market Share
Cost of Good Sold
SG&A (decreasing % until reaches 15% constant)
Tax Rate
Investment (Pesos millions)
Years to Fully Invest
Capital Expenditure Horizon
Depreciation as % of Sales
Working Capital Investments (Decreasing %)
Individual
Acquisition
75,500
75,500
0.20%
1.19%
80%
74%
40%
22%
30%
19%
400
100
5
5
2%
3%
2%
2%
10%
1%
Joint Venture
75,500
0.30%
74%
30%
30%
400
5
2%
2%
10%
Using these assumptions, we projected cash flows for each of the three entry alternatives through
the year 2005. We then discounted the free cash flows using the discount rates referenced above
to do a discounted cash flow valuation.
Individual Entry:
For this option, we assumed that Wal-Mart would enter Argentina debt-free. Sales were estimated
to increase with store additions, stabilizing at 10% growth per annum in 2005. COGS was
assumed to be 80% in the first year and decrease until it reached 70% in 2000. SG&A was
estimated to decrease from 40% to 15%. All other assumptions remained as shown above. Entry
costs were assumed to be a capital expenditure of $400 million.
8
Acquisition of Disco:
We assumed Wal-Mart paid $189.5 million for Disco. This was determined using a discounted
cash flow valuation for Disco assuming the company was debt-free and then adding the
outstanding debt to our acquisition price. We discounted the cash flows using the same discount
rate as we used our acquisition option. As above, we reduced COGS from 74% to 70% by the
year 1998. No other changes were made in the assumptions above.
Joint Venture:
We assumed Wal-Mart and Disco would create a new company with Wal-Mart’s ownership at
60% and Disco’s at 40%. The expected capital expenditure total was estimated at $400 million.
Wal-Mart should benefit from choosing a local partner and synergies should result in increased
initial market share and reduced operating expenditures as shown in the assumptions above.
Again, COGS and SG&A were estimated to decrease over time13.
Valuation Results:
NPV (in millions)
$(238.10)
$(79.98)
$(23.33)
Individual Entry
Acquisition of Disco
Joint venture
Conclusion:
Although Argentina was an attractive market for Wal-Mart through either a joint venture or
acquisition, we concluded that Wal-Mart should not enter Argentina. Given the results above,
none of the entry options met Wal-Mart’s stringent investment criteria and all projects had a
negative net present value.
From a more qualitative standpoint, Disco was not an ideal partner for Wal-Mart. The company’s
strategy was not similar to Wal-Mart’s and a partnership did not offer many potential synergies
for either company.
Based on our research, we estimate that Wal-Mart used a discount rate of approximately 12-13%
rather than 21-22%. If a discount rate of 12% is used to calculate the NPV of the projects with the
assumptions outlined above, the outcome is as follows:
Option
Individual Entry
Acquisition
Joint Venture
NPV (in millions)
$172.44
$(79.98)
$357.08
These results indicate that Wal-Mart would have chosen to enter Argentina through a joint
venture. However, Wal-Mart entered the market without a partner. Wal-Mart could have chosen
to enter the market alone simply because there was not a suitable partner in Argentina at the time
they were considering entry. It may also be the case that Wal-Mart projected higher revenues or
expected to be able to achieve lower costs than we estimated.
13
Exhibits 2,3,4 and 5 detail our valuation calculations.
9