Wal-Mart Mexico Probe Threatening Global Growth Success: Retail

Wal-Mart Stores Inc.’s (WMT) global operations were designed to help it become less reliant on its mature U.S. business. Now Wal-Mart is grappling with possible bribery in Mexico, its second-largest foreign market, potentially putting the global strategy in peril.

On April 21, the world’s largest retailer confirmed it had started a probe into its Mexican operations in response to allegations that executives bribed officials to fast-forward expansion. The U.S. Justice Department is also investigating, according to a person familiar with the matter.

Wal-Mart’s house-cleaning is seen to threaten growth in Mexico, which last year generated about 21 percent of foreign sales growth. Meanwhile, Wal-Mart is losing market share in Brazil and China. It has no retail stores in India. And in Canada Wal-Mart is about to clash with Target Corp. (TGT), which next year will open the first of as many as 150 locations there.

“They will probably have to cool international growth,” said Brian Sozzi, chief equity analyst at independent research firm NBG Inc. in New York. “The international business has not lived up to expectations. It’s not what it needs to be to offset what’s happening in the U.S.”

Since opening its first international store in Mexico in 1991, Wal-Mart has had plenty of overseas travails. The company exited Germany in 2006 after being shunned by many consumers. Japan slumped for several years until rebounding in 2008.

Photographer: David Rochkind/Bloomberg

Since opening its first international store in Mexico in 1991, Wal-Mart has had plenty of overseas travails. Close

Since opening its first international store in Mexico in 1991, Wal-Mart has had plenty... Read More

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Photographer: David Rochkind/Bloomberg

Since opening its first international store in Mexico in 1991, Wal-Mart has had plenty of overseas travails.

Emerging Markets

Wal-Mart confronts some of its steepest challenges in emerging markets, where much of the future growth lies. Last October, the Chongqing city government in China shut down 13 Wal-Mart stores for two weeks for mislabeling pork. Before that, the city cited Wal-Mart for selling some perishable items after their expiration dates. Meanwhile, the Indian government caved to populist pressure to keep Wal-Mart out of the retail business and protect local stores.

Now the company has created a new executive position to ensure that Wal-Mart employees around the world are complying with the U.S. Foreign Corrupt Practices Act. Doing so will add a layer of bureaucracy to the company’s overseas efforts.

Kevin Gardner, a spokesman, said Wal-Mart is strong in Mexico, Canada and the U.K. Wal-Mart International is the company’s fastest-growing unit, he said in a phone interview.

On April 23, Wal-Mart de Mexico SAB said in a statement that the company doesn’t believe the bribery probe will have adverse effects on its business, results or cash flow.

It’s not hard to see why Chief Executive Officer Mike Duke is looking beyond the U.S. for growth. At home, online retailers such as Amazon.com Inc. (AMZN) and dollar stores are stealing Wal- Mart’s traditional customers by offering low prices and convenience. In the fiscal year ended Jan. 31, Wal-Mart’s U.S. sales rose 1.5 percent; international sales surged 11 percent.

Star Performer

Wal-Mart de Mexico has been the star performer; operating margin was 7.9 percent last year, compared with an average of 4.9 percent for the global operations as a whole.

While the U.K. is Wal-Mart’s largest foreign market, sales growth there is comparatively tepid: 8 percent on average from 2000 to 2010, compared with 12 percent in Mexico, according to Planet Retail, a London-based research firm. The U.K. is a mature market with limited room for growth.

Elsewhere, the road gets rockier. In China, while sales are growing, they aren’t keeping pace with the market. In part, that’s because a host of local rivals are undercutting Wal-Mart on price even as the retailer’s reputation suffered following the revelations over tainted and expired food.

Wal-Mart DNA

In Brazil, consumers are used to sales and promotional events, which aren’t part of Wal-Mart’s DNA. Selling fresh food also is important, and Wal-Mart is still trying to perfect that business. Plus, French rival Carrefour SA (CA) is a formidable foe, according to Bryan Gildenberg, an analyst with London-based Kantar Retail.

To boost sales in Brazil, the company is gearing up to roll out its Everyday Low Price strategy -- EDLP in Wal-Mart-speak. Featuring the same low prices every day, as opposed to luring buyers with deals on select items, EDLP is core to Wal-Mart’s brand in the U.S. and a key to its success.

In Brazil it faces two hurdles, according to Natalie Berg, a Planet Retail analyst. Wal-Mart is the third-largest retailer in Brazil and as a result, lacks the pricing power it does in the U.S., she said. Second, Wal-Mart has contracts with suppliers with set pricing and will have to renegotiate them to get some items to Everyday Low Prices, she said.

“In markets where they aren’t number one, it’s very hard to transition to EDLP,” Berg said in a phone interview. “It’s not as rosy in Brazil as Wal-Mart makes it out to be.”

China Execution

Doug McMillon, CEO of the international unit, wants to do the same in China next year and get that business to execute better overall, he said at an analyst conference this month.

There, too, EDLP will be a challenge, Berg said. Wal-Mart’s China business doesn’t have the purchasing scale it has in the U.S. and the company has struggled to strike a chord with consumers. Recently, Wal-Mart shut down a small-store experiment in China called Smart Choice, she said.

Facing challenges in all these key markets, Wal-Mart had bet big on Mexico, where it has demonstrated some of its most effective retail innovations. Of Wal-Mart’s 2,138 Mexican stores, 1,250 are relatively small Bodegas Aurrera stores, which appeal to Mexican shoppers because they are low-priced and convenient places to get food and basic consumables. Their success prompted Wal-Mart to use them as the inspiration for its new, small-format locations in the U.S. and Latin America.

In Mexico, Wal-Mart also successfully put several retail concepts on one patch of real estate. Configurations include a large discount store, Sam’s Club, Suburbia apparel store and a Vips restaurant all facing one parking lot.

“Mexico is a cornerstone of their international presence and it has been very successful,” Gildenberg said. “It would be unfortunate if the single biggest memory of Wal-Mart de Mexico is this issue.”

To contact the reporter on this story: David Welch in Detroit at dwelch12@bloomberg.net

To contact the editor responsible for this story: Robin Ajello at rajello@bloomberg.net

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