Wal-Mart International Entry strategy in Argentina

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					ISG BBA PROGRAM                               Spring semester


BUS 470               INTERNATIONAL BUSINESS
Lecture 6       Entry strategies and strategic alliances


Project 1   Wal-Mart Argentina:
      Taking “Everyday Low Prices” Below the
                     Equator


                                   Tuesday, March 6th 2007

Guillaume Sarrat de Tramezaigues              www.gstblog.com
               Wal-Mart Argentina:
      Taking “Everyday Low Prices” Below the
                     Equator
By groups of three to four students:
1. What is the international development strategy of Wal-Mart?
   What is its form?
2. How could you explain the failure of the Wal-Mart
   development attempt failure in Argentina? What could have
   been better strategies?
3. What could be successful renewed strategies for Wal-Mart in
   Argentina?
4. In terms of image, what are Wal-Mart today’s weaknesses?
   Does that have an impact of its international development
   strategy?
                   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                      – Argentina
  – Mexico                      – Brazil
                                – China


  – Exploring                   – Higher expected
    opportunities in              returns, yet highly
    Europe                        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%                                                               10%


Exchange rate (Peso / USD)            0.9                  2

                    Capex        25                  15

           Terminal grow th            3%       9%

                         -$400          -$250             -$100   $50          $200   $350   $500

                                                                   Valuation
Q&A
                          Wal-Mart Base Scenario

            Cost of Capital 30%                                                 10%


           Terminal grow th               3%                                             9%


                    Capex                      25                15


Exchange rate (Peso / USD)                     2           0.9


                         -$300    -$150   $0        $150          $300   $450     $600

                                                     Valuation

				
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