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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