Mexico's War of the Megastores

Wal-Mart is trouncing Mexican rivals, but they haven't given up

On a recent August evening, hundreds of eager shoppers crowded a spanking-new Soriana hypermarket in the northern Mexican city of Hermosillo. As proud company owners looked on, a Catholic priest strode briskly through the store, splashing holy water on every aisle of the 9,000 sq. meter facility. A mariachi band struck up when the doors swung open to let in families from this working-class neighborhood.

A happy scene from an increasingly prosperous Mexico? Well, sure. But this store opening is something more: It's the latest salvo between local retailers and Wal-Mart de México, the biggest foreign division of the biggest retailer on the planet. And the war is heating up.

Wal-Mart (WMT ), you see, had already opened its latest Hermosillo Supercenter just a month before Soriana opened its site. Soriana, which has $3 billion in annual sales, refuses to cave: It's investing $250 million this year to open 12 new stores in its northern Mexico stronghold. "[Wal-Mart is] formidable, but we aren't afraid of the challenge," says Organización Soriana CEO Ricardo Martín Bringas, 42. The behemoth from Bentonville, Ark., though, is easily outspending Martín: It already has 579 grocery stores, wholesale-club outlets, and restaurants in Mexico, and it has budgeted some $600 million to open 63 new Mexican stores by mid-2003.

Wal-Mart is trouncing the competition south of the border, same as it has at home. While its Mexican rivals have suffered from a 12-month recession that's just ending, Wal-Mart's sales were up 5.4% in the first seven months of 2002. Analysts reckon that the Mexican unit, which racked up a $458 million profit in 2001 on sales of $9.7 billion, will easily top $10 billion in sales this year.

Although Soriana is still quite profitable, the No. 2 and No. 3 supermarket operators, Controladora Comercial Mexicana (Comerci) and Grupo Gigante, are hurting. With its deep pockets, ten superefficient distribution centers, and state-of-the-art technology, Wal-Mart now captures half of all Mexican supermarket sales nationwide, just a decade after entering the country. With inflation finally low in Mexico, it's much easier for consumers to scout out good deals in stores, and Wal-Mart's strategy of offering low prices every day is asserting an ever-more-powerful appeal. Indeed, Mexican officials say Wal-Mart's aggressive discounting has actually helped contain the country's once chronic inflation.

But as the big boy on the block, Wal-Mart is now becoming a magnet for criticism. In October, Mexico's Federal Competition Commission (CFC) will conclude a probe into reports that Wal-Mart exerts undue pressure on suppliers to lower their prices, and sanctions them by removing their products from store shelves if they participate in promotions organized by rivals. Investigators are interviewing other retailers and suppliers to see whether Wal-Mart merits a fine, says a CFC spokesman.

Wal-Mart's leverage with suppliers is such that companies are leery of publicly lodging complaints. One multinational supplier, who asked to remain anonymous, says Wal-Mart buyers in Mexico were "aggressive and abusive," pulling his product off shelves for several months last year when he objected to a deep price cut that would have wiped out his profits. Meanwhile, Danone yogurt disappeared from Wal-Mart's Mexican stores for several months in 2001. Suppliers and retail buyers say the French company had participated in a weekend sales promotion at a competing supermarket, but balked when Wal-Mart buyers demanded the same discount on a permanent basis. Danone has no comment.

Eduardo Castro, president and chief operating officer of Wal-Mart de México, says he cannot comment on specific cases, but he defends his company's tactics down to the last candy bar. "If we stop doing business with a supplier, it's because his costs don't allow him to sell at the prices we've established," Castro says. "The few cases I know about [involve] price increases that they haven't been able to justify." Besides, adds Castro, suppliers benefit from Wal-Mart's robust expansion. "Our sales space is growing double-digit, and we're the only ones growing at that rate," he says. "So we expect to be treated at least as well as the rest of the competitors."

Whether or not Wal-Mart strong-arms its suppliers, there's little question competitors are hurting. Comerci is certainly feeling the heat. The Mexico City-based retailer operates 225 stores and restaurants--including 20 wholesale clubs in a joint venture with U.S.-based Costco--mostly in central Mexico, where Wal-Mart has invested heavily. Comerci's profits plunged 34% in 2001, to $83 million on sales of $3.6 billion. Same-store sales were down 11% in the first six months of this year.

If you can't beat 'em, imitate 'em. Comerci has launched its own version of everyday low prices for staples, computers, and electronics, discarding the sales and contests it once used to lure shoppers. It's a gamble, since the retailer has only three distribution centers handling just 25% of its merchandise, compared with the 10 distribution centers that move 75% of Wal-Mart's products (superefficient distribution is essential to keeping costs down and prices low). And Comerci has less pricing clout with suppliers. CFO Francisco Martínez de la Vega admits the switch will hammer 2002 profits but sees no other way. "Consumers have bought the idea of low everyday prices. Now we have to convince them that our prices are competitive to Wal-Mart's," he says.

Gigante's 445 outlets are also suffering. Gigante's same-store sales fell 2% in the first quarter and 6.7% in the second. Executives blame the drop on high unemployment rates in the northern border states and intensifying competition. "Wal-Mart isn't the only competitor we face," says Cheker Karam, Gigante's director of self-service stores. "But they knew how to position themselves with a very aggressive store-opening schedule."

The best thing that could happen to Comerci or Gigante would be to link up with a deep-pocketed foreign partner. "If we don't have a partner with a lot of resources...Walmex will be 8 to 10 times bigger than us in five years," frets Comerci's Martínez de la Vega. Most international retailers, though, are wary of investing in Latin America right now, says Francisco Chevez, international retail analyst at Salomon Smith Barney in New York. In the mid-1990s, French retailers Auchan and Carrefour had brief alliances with family-run Comerci and Gigante respectively, but they never panned out.

Meantime, the competition is intensifying in the desert cities of the north. When a Wal-Mart store in Monterrey was fined by the Federal Consumer Protection Agency because a shelf price didn't match the price on the checkout receipt, Soriana's Martín took out full-page ads in national newspapers thanking authorities for sanctioning "foreign supermarkets" that confuse consumers by using "misleading information." In an interview, Martín even produces a Soriana receipt he says Wal-Mart displayed in its Torreon store to prove that Wal-Mart's prices were lower. Martín says Wal-Mart wrongly altered the receipt. "We're lodging an official complaint," he says. Castro says if any of his managers engage in such practices, they will be dismissed. Of course, that doesn't mean the war between Wal-Mart and everyone else will stop. This is a fight to the finish.

By Geri Smith in Mexico City

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