Wal-Mexico: Wal-Mart's biggest success

Knight Ridder
01/25/2006

By Jane Bussey

SAN JUAN TEOTIHUACAN, Mexico - Protesters still smart over the local Wal-Mart store's proximity to Mexico's most famous pyramids, suppliers groan about the retailer's relentless drive to cut prices and family-owned bodegas are buckling under the competition. But those everyday low prices are what keep shopper Miguel Ramirez coming back.

"I heard something about that protest," said Ramirez, who traveled with his wife by bus from nearby San Martin de las Piramides to shop at Wal-Mart Mexico's Bodega Aurrera, in Teotihuacan. "But we like the prices. Even paying for bus fare, the prices are better."

In the United States, Wal-Mart, the world's biggest retailer, has become a lightning rod for criticism over low wages, inadequate benefits and sex discrimination.

But while U.S. sales growth slumps, the Mexican subsidiary is growing at lightning speed, outpacing its Mexican competitors and outperforming its parent company. Wal-Mart Mexico, sometimes called Walmex, has become Mexico's No. 1 private employer, as big as its next three competitors put together.

Building on its success in Mexico and taking advantage of opportunity, Wal-Mart recently closed on the purchase of 33 percent of Central American Retail Holding Co., from Dutch retailer Royal Ahold. The chain operates 360 supermarkets in Costa Rica, El Salvador, Guatemala, Honduras and Nicaragua.

As in most of its international acquisitions, Wal-Mart has no immediate plans to replace the local names with the Wal-Mart nameplate, allowing the stores to retain their local identity.

"Mexico and Latin America are going to be critical to Wal-Mart's international and total corporate results because Wal-Mart is literally hitting the proverbial wall in the United States - with the possible exception of Florida and the Gulf Coast states," said Burt P. Flickinger III, managing director of Strategic Resource Group of New York.

If the company wants to maintain its sales growth, analysts agree, it must continue its international expansion. But Wal-Mart's other global ventures pale when compared to the inroads it has made in Mexico. Since entering the market in 1991, its Mexican operations have grown to 783 supermarkets, Supercenters, Sam's Club, restaurants and department stores.

In Argentina Wal-Mart has only 11 stores after a decade. In Brazil, South America's most populous country, Wal-Mart has added only 30 of its namesake stores since 1995, but tried a new strategy by turning to acquisitions, buying 118 BompreCo stores in March 2004 and 140 Sonae stores in December.

Although Wal-Mart is the second largest grocer in Britain, analysts say that Wal-Mart's acquisitions in Japan and Germany are struggling. In China, where Wal-Mart has 8,000 supply factories, the global retailer has only 60 stores.

International expansion comes with its own set of challenges and Wal-Mart has made some missteps.

"As big as Wal-Mart is, sometimes it just fails to do its homework and can make some stupid merchandising mistakes," Flickinger said. In one blooper, Flickinger said, Wal-Mart managers decided since Brazilians were so keen on football, they would send Dallas Cowboys merchandise. But the goods just took up shelf space. Brazilians are enamored of soccer, known as futebol, not American football.

"You can pick an isolated case or two of poor decision-making, but for the most part in Brazil, we've made the right decisions," said Bill Wertz, Wal-Mart spokesman at the company's home base in Bentonville, Ark.

But in its 15 years in Mexico, the company that Sam Walton built has ridden out more ups than downs.

Wal-Mart's move into Mexico and its acquisition of the domestic retail chain, Grupo Cifra, was taken in steps. In 1991, even before the North American Free Trade Agreement, it opened one joint venture with Cifra. The acquisition was completed in 1997 when Wal-Mart bought the controlling interest in the retail group.

Grupo Cifra was already operating the strongest retail chain in the country before Wal-Mart stepped in with its expertise and financial clout and added Supercenters and Sam's Clubs to Cifra's existing operations.

The Cifra strategy has been to target different socioeconomic groups with its diverse chains. Its Bodega Aurrera supermarkets, for example, serve lower-income areas; the more upscale Superama supermarkets offer items such as imported teas along with every-day produce. Wal-Mart also acquired Cifra's Suburbia department stores for the mid-brow and a restaurant chain led by the Denny's-like VIPS restaurants. Wal-Mart has deepened the strategy and added more price discipline.

"It's been spectacularly successful," said Neil Stern, a partner with McMillan Doolittle, a retail consultancy in Chicago that does not advise Wal-Mart.

"What they are finding so far internationally, is that when they have gone into a country and acquired or partnered with a successful established retailer they have done very well," Stern said.

What Wal-Mart brought to its Mexico acquisition was innovative merchandising, distribution, warehousing, logistics and data management.

Still, the company garnered unwanted headlines in late 2004 as it prepared to open its Big Box store near the Pyramids of the Sun and the Moon, which were completed by the Toltec civilization from 200 A.D. to 250 A.D. Authorities briefly suspended construction in Teotihuacan before deciding the site - located several miles from the pyramids amid other hotels and stores - was not archaeologically significant.

In late 2004, Wal-Mart opened its Bodega Aurrera in the community, which is about 30 miles northeast of Mexico City.

A year later, the store - nestled behind a row of pines about a five-minute drive from the archaeological zone - displays only a small sign and had only scattered shoppers during a recent visit.

Wal-Mart officials insist that the protests were driven by local vendors who - much like the mom-and-pop stores in the United States that feel pressure from Wal-Mart - were trying to protect their turf under the guise of culture.

"The people there in the town wanted the store," said Claudia Algorri Guzman, a Wal-Mart spokeswoman in Mexico City.

"A lot of the people in the movement were vendors and their economic interests may have been mixed in," conceded Emanuel D'Herrera, a leader of the protests who staged a 43-day hunger strike against the opening.

"That is not my case," said D'Herrera, a English and French teacher from nearby Axapusco. "This is an area that the government declared an archaeological zone in 1986. We have to consider it a jewel in danger."

Although Wal-Mart, increasingly a symbol of American market might, was an easy target in Mexico, some who joined the protests deny that the complaints were driven by concerns over U.S. dominance. "I am not opposed to Wal-Mart itself," said Homero Aridjis, Mexican poet, novelist and environmental activist. "But Teotihuacan is a symbol of Mexican culture."

With the dust settled on that protest, Walmex has continued to perform.

This month, the Mexican subsidiary announced its same-store sales rose 5 percent in December - more than double the disappointing 2.2 percent increase in U.S. same-store sales.

Total sales in Mexico grew nearly 14 percent in 2005 to $15.5 billion - still just a fraction of Wal-Mart's $285 billion total business, but steadily increasing in importance as Wal-Mart's international sales growth outpaces its domestic rhythm.

The Mexican subsidiary also opened 93 new outlets in 2005, beating its original plan of opening 70 stores.

"We have been reinvesting our earnings for five years," said Raul Arguelles, vice president of corporate affairs at Wal-Mart Mexico.

The Teotihuacan store is emblematic of Walmex's strategy of creating demand by opening stores in areas currently served by informal street markets rather than formal retail outlets. Even with its low prices, a retail chain like Wal-Mart faces its stiffest competition in Mexico from the informal economy.

Many Mexicans say the cheap food and clothing they buy on the street are still the only goods they can afford.

"For all our competitors and for us, it is a huge challenge," Arguelles said. "In many cases, the informal commerce has merchandise of dubious origin. They don't pay taxes and they don't contribute to social security. This is not healthy for the country."

In complaints that sound much like those tossed around in the United States, Mexican suppliers grumble about Wal-Mart's demands for lower prices.

"Hey could you ask Wal-Mart to go a little easier on us," said Miguel A. Martin, a toy maker in Mexico.

In 2002, supplier complaints grew so loud, the Mexican Commission on Competitiveness, in charge of anti-trust issues, opened an investigation of Wal-Mart Mexico's alleged monopoly practices. The case was closed, but suppliers complained Wal-Mart threatened to remove their products from the shelves or withhold contracts if they didn't lower prices. Wal-Mart never took an official stance since the case was dismissed.

But Julio E. Moreno, a professor at the University of San Francisco, sees some advantage to the price competition. "The company's genuine commitment to lower prices ... gave Mexico a shot of "consumer democracy," he wrote in an article in Foreign Affairs en Espanol.