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Wal-Mart Argentina: Taking “Everyday Low Prices” Below the Equator

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

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Wal-Mart Argentina: Taking “Everyday Low Prices” Below the Equator

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  1. Wal-Mart Argentina:Taking “Everyday Low Prices” Below the Equator Luciene De Paulo Gabriel Szulik Jennifer Pogue Esther Montiel Andy Martin

  2. 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?

  3. 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

  4. Stable economies: Canada Mexico Exploring opportunities in Europe Attractive markets: Argentina Brazil China Higher expected returns, yet highly volatile Wal-Mart InternationalStrategic focus on international expansion

  5. Argentina: the target • Economic Outlook • Retail Market • Methods of Entry

  6. Economic Outlook Positive • Open economy • Law of Convertibility • Increasing consumption and GDP levels • Inflation controlled

  7. Argentine GDP

  8. Argentine Inflation

  9. Argentine Market Openness

  10. 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

  11. 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…

  12. Methods of Entry • Wal-Mart entering on its own, building stores from scratch • Acquisition of a local retailer • Joint Venture

  13. 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

  14. Evaluation of risks • Political • Import controls • Democracy level • Corruption • Taxes • Economic • Exchange rate • Inflation

  15. Evaluation of risks (cont.) • Financial • Interest rates • Banking system • Industry risks • Consumer default risk

  16. 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

  17. Adjustments to C.O.C.

  18. 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

  19. 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

  20. 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

  21. Our base scenario

  22. Q&A

  23. Wal-Mart Base Scenario

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