230 likes | 359 Views
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
E N D
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
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
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
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 • Wal-Mart entering on its own, building stores from scratch • Acquisition of a local retailer • 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
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