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

Equator

Luciene De Paulo

Gabriel Szulik

Jennifer Pogue

Esther Montiel

Andy Martin

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 InternationalStrategic focus on international expansion

• Stable economies:– Canada

– Mexico

– Exploring opportunities in Europe

• Attractive markets:– Argentina

– Brazil

– China

– Higher expected returns, yet highly 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

10%

0.9

15

3%

30%

2

25

9%

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

Cost of Capital

Exchange rate (Peso / USD)

Capex

Terminal grow th

Valuation

Q&A

Wal-Mart Base Scenario

10%

3%

15

0.9

30%

9%

25

2

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

Cost of Capital

Terminal grow th

Capex

Exchange rate (Peso / USD)

Valuation