Wal-Mart Mexico-2005

Douglas E. Thomas and Fernan Gonzalez University of New Mexico

www.walmartmexico.com.mx In mid-2005, Wal-Mart Mexico's Eduardo Solorzano's enthusiasm as new president and CEO was easily overshadowed by concerns that his company's reputation and image were suffering due to some U.S.-style bad press. The company's decision to locate a store near a world historic site, the pyramids of Teotihuacan, has elicited global disapproval from activist groups and is a public relations disaster drawing large local protests. For many, it is just another example of Wal-Mart's lack of sensitivity to community and humanity. Wal-Mart executives and employees wonder if the critics are mainly competitor firms' legions. Wal-Mart Mexico has enjoyed a positive reputation in Mexico as a good corporate citizen, having received prestigious awards for its actions. In addition, it is by far the leader in the Mexican retail industry after less than a decade and a half of operations there providing low-price goods to everyone. Wal-Mart is Mexico's largest private employer, with 109,057 employees in valuable jobs in many local communities. With 55 percent of the Mexican retail market and having brought competition that is forcing competitors to lower prices, Wal-Mart Mexico's three largest competitors are Comercial Mexicana, Soriana, and Gigante. These three rival firms brought an unsuccessful antitrust lawsuit against Wal-Mart Mexico for its purchasing practices. Having lost the lawsuit, the three competitors are now purchasing in volume through a cooperative, Sinergia, which they hope will allow them to lower costs and prices to counter Wal-Mart's dominance. Eduardo SolOrzano and his team of Wal-Mart Mexico executives (see Exhibit 1) clearly need a clear strategic plan for the future.

History
Wal-Mart entered Mexico in 1991 through a joint venture with Grupo Cifra, the largest retailer in Mexico at that time. Its goal was to operate Sam's Club warehouse stores throughout the country. In 1997, Wal-Mart acquired Grupo Cifra, immediately establishing a leadership position in the Mexican retail industry. Grupo Cifra was launched by the Arango family, Spanish immigrants to Mexico, who opened the first Aurerra store in Mexico City in 1958. The company received outside investment from a Chicago-based retailer, Jewel Cos. Inc., which allowed it to open new Aurerra stores. In 1985, the name Cifra was adopted and the Jewel Cos. stake was repurchased. After Wal-Mart purchased Cifra, it converted all of the Aurerra stores to the WalMart Supercenter format or the Bodega (large market) format. Foreseeing the further integration of the U.S. and Mexican markets and increased opportunities for outside investment in Mexico with the passage of the North American Free Trade Agreement (NAFTA), Wal-Mart made its entry into Mexico in 1991 at the perfect time. Today, 62 percent of Wal-Mart Mexico's shares are owned by the U.S.-based

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parent, Wal-Mart Stores. Wal-Mart Mexico is the largest foreign subsidiary of WalMart Stores and provides approximately 25 percent of the parent's foreign sales.

Internal Factors
Social Responsibility Wal-Mart Mexico publishes an annual social responsibility report, highlighting its activities as a corporate citizen in Mexico. Wal-Mart Mexico's vision is to "contribute to improve the quality of life for Mexican families. Thus, we invest to be near and offer them the best products at Every Day Low Prices." In contrast to perceptions of its socially responsible activities in the U.S. economy, Wal-Mart Mexico has been certified as a "Socially Responsible Enterprise" since 2001, one of only a handful of companies in Mexico to receive such an honor. Wal-Mart argues that its first contribution as a corporate citizen is its employment of more than 109,000 people throughout the country and the extensive training programs (4.2 million hours in 2004) it provides for those employees. The firm highlights its diversity since 48 percent of its employees are female. Wal-Mart Mexico's environmental performance includes investing over $8 million in 2003 and 2004 to open 73 water treatment plants and a variety of recycling, energy conservation, and pollution-reduction activities. It also emphasizes that more than 90 percent of the products sold in its stores are supplied in Mexico. The firm is a responsible corporate citizen because it sources from local suppliers. Wal-Mart Mexico also is involved in a number of philanthropic activities, including programs focused on education, nutrition, homelessness, and health. In 2004, it sponsored a National WalMart Mexico Volunteer Day, and 2,476 of its associates participated. Finance Exhibits 2 and 3 provide detailed information on Wal-Mart Mexico's financial performance. The firm's net income has increased dramatically from 2002 to 2004, from $485 million to $702 million. Exhibit 4 indicates that total square meters of space

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EXHIBIT 2

Income Statement, Wal-Mart Mexico

(MILLIONS OF U.S. DOLLARS) 2004 2003 2002

Net Sales

$12,547

$11,350

$10,382

% of Growth Other Income % of Growth Total Revenues % of Growth Gross Profit A) of Profit Margin Operating Expenses As Percentage of Total Revenues Operating Income As Percentage of Total Revenues % of Growth EBITDA As Percentage of Total Revenues Comprehensive Financing Income Income Before Tax Income Tax and Employees' Profit Sharing Income Before Extraordinary Items % of Growth
Net Income

11 54 108 12,601 11 2,650 21 1,794 14.2 856 6.8 23 1,090 8.6 92 928 226 702 36
702

9 26 (46) 11,376 9 2,360 20.7 1,663 14.6 697 6.1 12 914 8 79 760 245 515 6
515

13 48 14 10,430 13 2,163 20.7 1,543 14.8 620 5.9 17 817 7.8 93 698 213 485 12
485

% of Growth Cash Generated

36 $1,162

6 $1,001

12 $887

Source: Wal-Mart Mexico 2004 Annual Report, www.walmartmexico.com.mx

EXHIBIT 3

Balance Sheet, Wal-Mart Mexico

(MILLIONS OF U.S. DOLLARS) 2004 2003 2002

FINANCIAL POSITION

Cash Inventories Other Assets Fixed Assets Total Assets Suppliers Other Liabilities Shareholders' Equity Total Liabilities and Shareholders' Equity Other Information at the End of the Year Number of Units Number of Associates

$1,063 1,074 206 4,105

6,448

$1,110 1,013 217 3,855

6,195

$958 1,057 226 3,618

5,859

1,437 799 4,212 $6,448 694 109,057

1,405 837 3,953 $6,195 641 99,881

1,362 778 3,719 $5,859 595 92,708

Source: Wal-Mart Mexico 2004 Annual Report, www.walmartmexico.com.mx

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E X H I B I T 4 Wal-Mart Mexico, Sales and Net Income per

Square Meter
YEAR TOTAL SALES AREA SQUARE METERS SALES PER SQUARE METER US$ NET INCOME PER SQUARE METER US$

2004 2003 2002 2001

2,360,874.00 2,090,288.00 2,017,557.00 1,849,927.00

$5,359.90 $5,092.26 $5,042.56 $5,202.36

$298.84
$231.04 $235.58 $246.42

Source: Wal-Mart Mexico 2004 Annual Report, www.walmartmexico.com.mx

have increased between 2001 and 2004, as have sales per square meter and net income per square meter.

Divisions Wal-Mart Mexico's size and geographic coverage dwarf those of its competition. It operates 694 stores (Bodega Aurerra, Wal-Mart Supercenter, Sam's Club, Superama, Suburbia, Vips) in 73 Mexican cities. Although 360 of these stores are self-service (the others are restaurants [Nips] and department stores [Suburbia]), Wal-Mart Mexico has 55 percent of the Mexican retail market. The three major formats (Aurerra, 30 percent; Wal-Mart Supercenter, 27 percent; and Sam's Club, 29 percent) together provide more than 86 percent of its revenues. The Aurerra format (162 stores) is targeted at lower- to lower-middle income classes; these Bodega stores offer 48,000 SKUs. Sam's Club (61 stores) offers a much more limited variety of products (4,000 SKUs) and targets consumers and businesses buying in volume. The Wal-Mart Supercenter stores (89 units) offer the widest variety of goods (80,000 SKUs). Superama (48 stores) contributes only 3 percent of the company's sales; these stores offer a variety of goods (35,000 SKUs) but are located in residential areas for convenience. Wal-Mart Mexico's Suburbia 50 department stores target the middle class, offering fashionable apparel at reasonable prices; these stores contribute 6 percent of the company's sales. The Vip's chain of restaurants (284 locations) represents 3 percent of the company's sales. As Exhibit 5 indicates, the vast majority of
E X H I B I T 5 Wal-Mart Mexico, Retail Formats
# IN 25 MOST IMPORTANT URBAN AREAS % IN 25 MOST IMPORTANT URBAN AREAS

FORMAT

NAME

# OF STORES

Warehouse Supermarket Hypermarket Savings Club Restaurant Apparel

Total

Bodega Aurerra Superama Supercenter Sam's Club Vips El Porton Suburbia

161 50 86 61 209 46 53
666

117 50 74 42 190 42 53
568

73% 100% 86% 68% 91% 91% 100%

85%

Source: Wal-Mart Mexico 2004 Annual Report, www.walmartmexico.com.mx

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EXHIBIT 6

The 25 Largest Mexican Cities

AS A % OF MEXICO'S TOTAL POPULATION

MAP KEY

CITY/METRO AREA

POPULATION

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

Mexico City Metro Area Guadalajara Metro Area Monterrey Metro Area Puebla Metro Area Toluca Metro Area Tijuana Metro Area Ciudad Juarez Leon de los Aldama Torreon Metro Area San Luis Potosi Metro Area Queretaro Metro Area Cuernavaca Metro Area Merida Metro Area Aguascalientes Metro Area Tampico Metro Area Chihuahua Saltillo Metro Area Villahermosa Metro Area Acapulco de Juarez Mexicali Morelia Veracruz Metro Area Hermosillo Culiacan Rosales Tuxtla Gutierrez Metro Area
Total

19,073,915 3,921,329 3,542,979 2,016,956 1,450,552 1,437,729 1,365,038 1,118,137 1,082,616 895,602 877,837 861,745 852,457 766,312 721,666 697,440 676,639 648,819 642,628 609,714 605,323 603,562 594,299 584,280 545,105
46,192,679

18.3% 3.8% 3.4% 1.9% 1.4% 1.4% 1.3% 1.1% 1.0% 0.9% 0.8% 0.8% 0.8% 0.7% 0.7% 0.7% 0.6% 0.6% 0.6% 0.6% 0.6% 0.6% 0.6% 0.6% 0.5%
44.0%

Note: See Exhibit 7 for exact locations. Source: www.conapo.gob.mx/publicaciones/2003/2003.htm

Wal-Mart Mexico's stores are located in the 25 most important metro areas in

the country. As shown in Exhibit 6, 44 percent of the entire country's population is concentrated in 25 cities/metro areas. A bit more than 18 percent live in the capital city's metro area. Mexico city is the largest city in the world with about 19 million people. Exhibit 7 shows the location of these urban areas in the country. Mexico's rural population accounts for about 34 million or about 33 percent of the country's total population. The retail industry does not have a single outlet in these rural concentrations, which leaves the market to neighborhood stores, public markets, or street vendors, which, as individual businesses, do not have a significant presence in the market as a whole.

Competitors
Chedraui (www.chedraui.com) bolstered its position in 2005 through purchase of the French retailer Carrefour's operations in Mexico (29 hypermarkets) concentrated in the southern part of the country. It operates 64 grocery stores, 17 bakeries, and
Chedraui

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E X H I B I T 7 Map of Key Mexican Cities

Note: See Exhibit 6 for population data. Source. www.walmartmexico.com.mx

19 convenience stores, as well as a transportation unit. It also maintains operations abroad, having opened its first store in the Los Angeles area in 1997 and now having five stores there. A privately held company, Chedraui does not produce annual reports nor publicize financial information. Chedraui competes as a provider of low-cost goods. Its corporate logo indicates "Chedraui: It Costs Less." Its mission is simply "to provide the products that customers want at the best price."
Comercial Mexicana Comercial Mexicana (CM) (www.comerci.com.mx), which has 181 stores throughout Mexico (in five different formats) has slipped to third in terms of market share in the Mexican retail sector. Like Gigante, it was founded (in 1957) by a Spanish immigrant to Mexico. CM opened its first self-service store in 1962 in Mexico City. It also owns and operates 58 California restaurants throughout Mexico. In addition, CM operates Costco stores (since 1991) in Mexico through a 50-50 joint venture. Total selling space for CM is 13 million square feet. Its operations dominate the Mexico City market. Exhibit 8 provides details on CM's financial performance. Grupo Gigante Grupo Gigante (www.gigante.com.mx) operates 263 self-service and general merchandise stores throughout Mexico. In addition, it successfully is penetrating foreign markets. It operates 8 stores of similar format in the Los Angeles area in the United States. Through a 50-50 joint venture with Office Depot (in existence since 1994), it operates 92 Office Depot stores in Mexico and 9 in Central America. Through

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E X H I B I T 8 Financial Data, Comercial Mexicana

(MILLIONS OF U.S. DOLLARS) 2004 2003 Net Sales $3,331 $3,409

Cost of Goods Sold Operating Expenses Operating Profit Gross Profit

Net Profit

2,657 517 157 675

96

2,726 545 137 682

161

Total Assets Total Liabilities Food Sales/Total Sales Nonfood Sales/Total Sales Sales per Square Meter Sales per Retail Employee Total Employees
Total Retail Employees

2,546 1,202 68.90% 31.10% 3,127 139 33,763

28,343

2,508 1,231 66.30% 33.70% 3,174 135 33,557

28,518

Source: Comercial Mexicana 2004 Annual Report, www.comerci.com.mx

a 51-49 joint venture with Radio Shack, Gigante runs 98 Radio Shack stores throughout Mexico. In addition, Gigante is in the restaurant business; it owns a chain of 47 Toks restaurants. It currently has 13 percent market share in the Mexican retail industry. Because of the diverse economic and social classes in Mexico, Grupo Gigante operates four different retail store formats: (1) Gigante supermarkets (hypermarkets), (2) Bodega Gigante, (3) Super Gigante, and (4) SuperPrecio discount. Exhibit 9 provides details on Grupo Gigante's financial performance.
Soriano

Soriana (www.soriana.com.mx), whose principal shareholders are members of two families (together they own $1.7 billion of its stock), has been involved in retail sales since 1908 but began its modern, incorporated operation in 1968. Headquartered in Monterrey, Mexico, it operates 144 stores throughout the country. Several years ago,
EXHIBIT 9

Financial Data, Grupo Gigante

(MILLIONS OF U.S. DOLLARS) 2004 2003

Total Revenues Cost of Sales

$2,811

$3,032

Operating Expenses Total Costs and Expenses Income from Operations

Consolidated Net Income

2,183 545 2,728 83 1,975 824 11.286 35,381

36

2,392 563 2,954 77 2,176 971 10.789 36,526

31

Total Assets Total Liabilities Exchange Rate Used for Conversion # of Employees
Total Square Meters

1,258,963

1,217,000

Source: Grupo Gigante's Annual Report, www.gigante.com.mx

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EXHIBIT 10

Financial Data, Soriana

(MILLIONS OF U.S. DOLLARS) 2004 2003

Net Revenues

$3,759

$3,185

Gross Profit Operating Expenses Operating Profit

Net Income

806 553 253

$234

742 530 212

$145

Total Liabilities Total Assets Market Cap

Total Square Feet

1,132 2,802 2,154

1,323,600

1,036 2,324 1,329

1,171,900

# of Employees

46,600

43,800

Source: Soriana 2004 Annual Report, www.soriana.com.mx

analysts predicted that Soriana would fold because of increased competition in the Mexican retail industry; instead, it has emerged as Wal-Mart Mexico's toughest competitor, with an operating margin of 6.1 percent in the third quarter of 2004, equal to that of the larger U.S.-based firm. Publicly traded since 1987, Soriana's sales have grown at an annual rate of 17 percent since 1994, and it has no debt. It has launched a chain of price clubs named CityClub to counter the success of Sam's Club in the Mexican market. Soriana is successful because it better understands the Mexican customer and tailors each store to the local communities in which it operates. Its bright, high-ceiling stores appeal to female middle-class consumers who enjoy the social shopping experience that Soriana provides: discount specials, loyalty card programs, big-ticket item raffles and contests (e.g., a BMW X5 automobile), outgoing employees, and mariachi band entertainment. In addition to its presence in Mexico' s larger cities, Soriana is successful in midsize towns (populations of 100,000 or less) with a smaller supermarket format. One competitive weakness for Soriana is that it does not operate in the important Mexico City market; however, it is currently in the process of opening stores in the Mexican capital. Exhibit 10 provides an overview of Soriana's financial situation.

External Issues
The Mexican Retail Trade Association The Asociacion Nacional de Tiendas de Autoservicio y Departamentales (ANTAD) is the trade association that represents the retail industry in Mexico. ANTAD exists to promote free competition among retail stores. Wal-Mart left ANTAD in October 2002 because the association's new ethics code explicitly stated that members should not publish any type of promotions stating another member's prices. Wal-Mart saw this as a barrier to free competition, aside from being one of its most important marketing strategies, and decided to leave. Since Wal-Mart is not a member of ANTAD, all ANTAD members now publish their lower prices compared to Wal-Mart's, when they have them.
Sinergia Because of Wal-Mart's huge purchasing power, three other retailersComercial Mexicana, Gigante, and Sorianahave formed a purchasing cooperative. This

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EXHIBIT 1 1 Selected Economic Variables for Mexico

VARIABLE GDP (Growth, %) 2004
4.2

2003 1.3 4

2002

2001

2000 6.6 9

Annual Inflation (%) Peso Devaluation (%) Exchange Rate (Peso/Dollar)

1.2
11.1

5.2 6.8

11.3

8.7
6.2

13.3
10.4 7.1

0.7 5.7

4.8
9.2

0.1 4.4 11.4

Average Interest Rate (28 Day %)

9.6 15.3

1.3

Source: Wal-Mart Mexico 2004 Annual Report, www.walmartmexico.com.mx

cooperative, Sinergia, first introduced in 2002 when these companies realized that traditional ways of purchasing would not be enough to compete against Wal-Mart, was submitted to the Mexican antitrust authorities in 2003 and was finally approved in 2004. The cooperative was first thought of as a competitive-directed measure for purchasing imported goods, mainly electronics, where Wal-Mart has been enormously successful, but it now has been extended to such other types of merchandise as groceries and packaged food. Specialized Retailers The Mexican retail sector is fragmented; there are a wide variety of retail formats, many of which are informal. Because many shoppers in Mexico do not have access to automobiles, may earn daily wages (rather than weekly or monthly wages), and may not have large refrigeration space to store perishables, very small independent grocery stores have thrived for decades throughout Mexico. These corner stores, public markets, and street vendors constitute a significant share of the Mexican retail economy. The convenience store business is relatively new in Mexico. The concept was imported into Mexico from the successful U.S. model (24x7, high prices, limited variety) during the 1990s. This business is controlled by the two Mexican beer makers, Cerveceria Modelo, with the Extra stores and 7-Eleven; and Cerveceria Cuauhtemoc Moctezuma, with Oxxo (about 3,000 stores). The concept is beginning to include gas stations, and many small entrepreneurs have a limited regional presence. Major national chains exist in the department, pharmacy, and electronics
store formats.

The Mexican Economy

The Mexican economy is very volatile; the retail sector is subject to this volatility. After the peso was devalued in December 1994, GDP decreased by 6.2 percent; in 1997, it increased by 6.8 percent. Throughout the latter half of the 1990s, inflation and interest rates still annually averaged well over 10 percent. The peso continues to decline in value relative to the dollar. The economic volatility has a negative impact on consumers and business alike. Mexican consumers are very price sensitive because

of the economic challenges that the country faces. Exhibit 11 provides an overview of the Mexican economy since 2000.

The Future

As Wal-Mart Mexico moves towards 20 years in the country, much of the enthusiasm in consumers that first accompanied its arrival is beginning to wear off. Competitors are learning to respond to Wal-Mart's size, efficiency, and success. Despite extensive social responsibility activities and its record as the largest private employer in the

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country, the potential for criticism of its purchasing practices and supplier and employee relations, as well as its impact on local small businesses and communities, loom as a significant threat.

Questions
1. What are the possible future scenarios for the Mexican retail industry? 2. Which markets have not been exploited by Wal-Mart Mexico? How could it do so? 3. Why (or why not) should Wal-Mart Mexico continue to operate several different retail formats, as well as a department store and a restaurant chain? 4. To what degree is Wal-Mart Mexico's reputation in the Mexican market similar to or different from its reputation in the U.S. market? 5. Will Mexican retail perfectly resemble U.S. retail in the future, or will differences persist? 6. How can retailers protect themselves from economic volatility? 7. How can domestic players compete against Wal-Mart?

References

Malkin, Elisabeth. "Mexican Retailers Unite Against Wal-Mart," New York Times, July 9, 2004. "Mexico Food and Drink Report: Retail Forecast," www.businessmonitor.com Partida, Virgilio. "Situation Demografica Nacional 2003," www.conapo.gob.mx/publicaciones/2003/2003.htm www.chedraui.com www.comerci.com.mx www.gigante.com.mx www.hoovers.com www.inegi.gob.mx www.soriana.com.mx www.walmartmexico.com.mx