Wal-Mart Argentina:
Taking “Everyday Low Prices” Below the
Equator
Luciene De Paulo
Gabriel Szulik
Jennifer Pogue
Esther Montiel
Andy Martin
Agenda
• Wal-Mart’s Background and International
Expansion
• Argentina: Analysis and Entry options
• DCF and Cost of Capital Discussion
• Recommendation
• Q&A
• Should Wal-Mart enter Argentina? If so, which
entry strategy should it follow?
Wal-Mart: A Successful Story
• Last 20 years:
– Average ROE of 33%
– Average sales growth of 25%
• Everyday Low Price Strategy
• Advanced Technology
• Low Margins and High Volume
Wal-Mart International
Strategic focus on international expansion
• Stable economies:
• Attractive markets:
– Canada
– Mexico
– Argentina
– Brazil
– China
– Exploring
opportunities in
Europe
– Higher expected
returns, yet highly
volatile
Argentina: the target
• Economic Outlook
• Retail Market
• Methods of Entry
Economic Outlook Positive
•
•
•
•
Open economy
Law of Convertibility
Increasing consumption and GDP levels
Inflation controlled
Argentine GDP
Argentine Inflation
Argentine Market Openness
Retail Market Attractive
• Retail market underdeveloped – Only one
hyper market chain (Carrefour)
• Small businesses threatened by big players
• Total retail size in 1993: US$ 67.9 billion
– US$8.6 billion among supermarkets and
hypermarkets
• Low distribution and technological
capabilities
Market Considerations
•
•
•
•
Families shop together
People buy smaller items, more often
Fewer car owners than U.S.
Corrupt local business environment relationships with suppliers and politicians
necessary
Wal-Mart may need a local partner…
Methods of Entry
1. Wal-Mart entering on its own, building
stores from scratch
2. Acquisition of a local retailer
3. Joint Venture
Disco S.A.: A Possible Partner
•
•
•
•
•
Largest retailer: 57 branches
4th retailer in sales revenue: US$805 MM in 1993
Outstanding geographic locations
Highly competitive prices
Strong financials, profitable local established
retailer
• Smaller stores than a typical Wal-Mart
Supercenter
Evaluation of risks
• Political
–
–
–
–
Import controls
Democracy level
Corruption
Taxes
• Economic
– Exchange rate
– Inflation
Evaluation of risks (cont.)
• Financial
– Interest rates
– Banking system
• Industry risks
– Consumer default risk
Specific risks of the project
• Individual entry
– Limited leverage with suppliers
– Cultural differences
– Local opposition
• Acquisition
– Buying inefficiencies
• Joint Venture
– Partner inability to pay
– Partner reliability
Adjustments to C.O.C.
Cost of Capital
Individual Entry
22.7%
Acquisition
21.3%
Joint Venture
21.3%
NPV comparison
• Using a COC of 22.7% and 21.3%:
– Individual entry: ($238.10 million)
– Acquisition: ($79.98 million)
– Joint Venture: ($23.33 million)
• Recommendation: Do Not Enter Argentina
What Happened?
“Everyday Low Profits” Below the Equator
• Wal-Mart Entered Argentina Without a Partner in
1995
• Competitive Reaction was Huge – Price Wars,
Supplier Boycott, Technology Improvements
• Wal-Mart has not been profitable in Argentina
since entry in 1995
• Royal Ahold bought Disco in 1995 and the merger
has been very successful
Wal-Mart’s Analysis
• Using a discount rate of 12%:
– Individual entry: $172.44 million
– Acquisition: ($79.9 million)
– Joint Venture: $357.08 million
• Possibly no suitable partner for Wal-Mart to
consider in 1993
• Only country Wal-Mart entered without a partner
and it has not been profitable
Our base scenario
Cost of Capital
30%
0.9
Exchange rate (Peso / USD)
Capex
Terminal grow th
-$400
10%
2
25
15
3%
-$250
9%
-$100
$50
Valuation
$200
$350
$500
Q&A
Wal-Mart Base Scenario
Cost of Capital 30%
10%
3%
Terminal grow th
9%
Capex
25
Exchange rate (Peso / USD)
2
-$300
-$150
$0
15
0.9
$150
Valuation
$300
$450
$600