International -- International Business: SOUTH AMERICA
WAL-MART UNDERCUTS THE PRICE-CUTTERS (int'l edition)
The U.S. giant is squeezing rivals in Argentina and Brazil
South America, a low-intensity retail battlefront until now, may be on the verge of full-scale hostilities. Wal-Mart Stores Inc., the aggressive U.S. chain, has ratcheted up the discount competition by opening its first outlets in Argentina and Brazil. In Sao Paulo, crowds totaling an estimated 200,000 thronged the openings of two supercenters on Nov. 20. In Argentina, lines of shoppers with bulging carts stretched from 75 cash registers to the rear of the vast Buenos Aires store on the day before Christmas, while another queue zigzagged through the parking lot, waiting to get in.
The free-spending consumers are a welcome boost for the giant retailer as, faced with fierce competition at home, it seeks growth opportunities abroad. But shock waves already are reverberating through retailing in the region under the impact of Wal-Mart's strategy of relentless price competition. In the U.S., such price-cutting built a retail empire of more than 2,800 stores with current annual sales of $93 billion. In Latin America, that strategy is pushing other retailers, including discount chains owned by France's Carrefour and Holland's Makro, to do more volume-based buying and put top priorities on customer service, inventory management, and product mix.
The competition has reason to worry. "Our acceptance here by the customer has been just phenomenal," says Arthur Emmanuel, Wal-Mart senior vice-president and chief operating officer for South America. He sees "as much potential or more" in Argentina and Brazil as in Mexico, where Wal-Mart and a local partner have launched 13 supercenters and 28 Sam's Clubs since 1991. As part of a $218 million investment program, Wal-Mart also has opened two Sam's Clubs--which sell products in bulk to member-customers--in Argentina and three in Brazil. By August, plans call for three more stores in Argentina and one in Brazil, where local retail chain Lojas Americanas took a 40% stake in a joint venture with Wal-Mart.
Multinational rivals are girding to do battle for market share. Carrefour opened 5 new stores in Brazil and 3 in Argentina last year, for a total of 47 in the two countries, while Makro is adding to its 24 in Brazil and 9 in Argentina. At the other end of the scale, convenience stores are sprouting in Argentine filling stations. Mom-and-pop retailers will be squeezed in the middle.
Wal-Mart is heating up the competition with such policies as matching any published price and even posting competitors' prices for comparison. There's room for price-chopping because decades of inflation have left a legacy of fat markups. Margins in the region are still "much richer" than in the U.S. for both retailers and suppliers, says Debra Wang Smith, a retail analyst at J.P. Morgan Securities Inc. in New York. As a result of Wal-Mart's price-cutting, says Franco Martini, Makro's marketing director in Argentina, Makro is having to put its prices "down, down, down--which is good for the consumer but not for us."
WATER FIGHT. At the same time, Wal-Mart is refusing to accept suppliers' price-setting demands and is selling selected items, particularly foods, at a loss. In Brazil, the local subsidiary of Swiss foods manufacturer Nestle complained that Wal-Mart was selling some of its products at 40% below cost. In Argentina, beverage giant Quilmes stopped stocking Wal-Mart's shelves with beer, soft drinks, and water after Wal-Mart sold its first batch of Quilmes beer, the country's most popular, at 50 cents a can. That was below Wal-Mart's cost of 56 cents and the retail price of 62 cents agreed to by Quilmes distributors, who serve 100,000 stores. "We are very worried that Wal-Mart will sell below cost systematically," says Hugo Miguens, president of the Argentine Chamber of Distributors & Self-Service Wholesalers.
Wal-Mart officials scoff at such complaints, saying the market and competition determine its prices. "Yes, we will sell for less," says Steve Furner, director of operations for South America. "That's not to say every item is going to be that way, but your shopping trip [at Wal-Mart] ought to be 5% to 8% lower than at a competitor." Wal-Mart officials say they have worked out their differences with all but a handful of 2,000 Argentine suppliers.
Not all Wal-Mart forays abroad have gotten off to such fast starts. Recently, Wal-Mart broke off a joint venture with a Thai partner to open stores in Hong Kong and China due to disagreements over such issues as store locations. But Argentina and Brazil seem ripe for Wal-Mart's style of megamarketing. Retailers in those countries may have to change their ways fast if they're to survive Wal-Mart's quest for growth.BY LOUISA SHEPARD IN BUENOS AIRES, WITH IAN KATZ IN SaO PAULO