Last May, Michael Bergdahl, former director of human resources at Wal-Mart, told the First Global Forum on Customer Service in Santiago, Chile, “Our strategy of low prices has become a competitive advantage for us. So long as our competition focuses on how much they can get for their products, we focus on how little we can get for ours.” According to Bergdahl, this strategy generated revenues of about $13 billion in 2007, and in 2008, “we open a new store each day, and each week, 176 million customers buy from our stores.”
This year, disruptions from the global financial crisis have forced retailers to discard their earnings forecasts and alter their plans for investment and expansion. Nevertheless, Wal-Mart has emerged unscathed, and has even continued to grow. In February, the company announced its results for 2008, during which it registered $13.4 billion in income -- an increase of 5.2 percent from 2007. That’s quite an achievement in times like these.
CONQUERING LATIN AMERICA
Taking advantage of its strong performance in Brazil and Mexico, Wal-Mart has now undertaken the massive task of conquering the rest of Latin America. The company announced that this year, it will open stores in Argentina, Brazil, Costa Rica, El Salvador, Guatemala, Honduras, Nicaragua, Chile and Puerto Rico.
For Claudio Aqueveque, a professor at the business school of Adolfo Ibáñez University in Chile, the current recession represents an opportunity for Wal-Mart. “The problems our region is facing this year will lead to major changes in the behavior of consumers, associated with a greater sensitivity to price; and this means tuning in to [Wal-Mart’s] low-price strategy.”
Nevertheless, Jagmohan S. Raju, a professor of marketing at Wharton, warns that “Wal-Mart will have to face competition from local retailers who can operate on smaller margins and provide more personalized services than the U.S. retailer can offer.”
Alvaro Escobar, professor of economics and management at the University of Concepción in Chile, adds that Wal-Mart also could face barriers of a cultural and economic nature while expanding in Latin America. “Each country is a completely different market, with very dissimilar economic realities. So the great challenge for the multinational will be to figure out how to deal with the recession in each nation.”
According to Pablo Naranjo, a professor of business at the Adolfo Ibáñez University, income distribution in Latin America has deteriorated a great deal in recent years. “If the current crisis is affecting every layer of society, the most disadvantaged segments of the population are looking for more access to credit in order to stay afloat, especially when it comes to food.”
Naranjo adds, “Wal-Mart can be an attractive alternative for the population because of its leadership in [low] costs. But it will have to accompany its supply [of low-cost products] with options for credit, as it has done in Chile, for example.” He notes that when Wal-Mart recently bought D&S -- an important regional player that owns the Líder supermarket chain -- it set up a credit card known as the Presto Card, which can be used not only by consumers in Lider supermarkets but in other areas of business such as pharmacies, banking and travel agencies. “This approach would appear to be a good way to get closer to the reality of the country,” Naranjo says.
According to Aqueveque, Wal-Mart can take advantage of other opportunities related to the anticipated economic growth of the region. “Projections call for higher growth in developing countries [as a whole]. In fact, Wal-Mart’s financial results in Latin America in 2008 -- especially in Brazil and Mexico -- were quite positive compared with its operations in the rest of the world, so it seems to be a sure bet that the company will deepen its presence in the region.”
Nevertheless, Naranjo warns that in coming months Wal-Mart will have to overcome significant economic barriers. “With the economic outlook deteriorating, there will be less demand for products and services, and there are clear signs of rising unemployment, which affects consumers’ income. So, Wal-Mart will have to fight to maintain its plan [for expansion]. Along parallel lines, it will have to compete vigorously with other retailers that are already established in each country, and who are facing [their own] battle to survive these days.”
David J. Reibstein, professor of marketing at Wharton, agrees: “Although Wal-Mart is well-known for guaranteeing the lowest price on the market, it will face a tough competitive environment in Latin American countries because, in each one of them, it will have to create sufficient critical demand to justify a high volume and rotation of its products.” Given the current economic conditions, it will be very hard to achieve that, Reibstein notes.
According to Escobar, one of the most attractive opportunities for Wal-Mart is to grow by acquiring supermarket chains at competitive prices, as the retailer has done in Chile. In January, Wal-Mart bought 58.2 percent of the shares of D&S. “In the rest of Latin America, [Wal-Mart] will have to repeat the same strategy, or at least try to do so,” Escobar says.
Raju notes that “the crisis seems to be helping Wal-Mart but taking a toll on its competitors.” Naranjo agrees. “Without doubt, [Wal-Mart] has a great opportunity to take advantage of the credit-market collapse that other competitors have suffered from, and it can go on to make mergers and acquisitions, incorporating the financing solutions that those companies have already developed.”
Nevertheless, Naranjo says, this game involves some very tough practical challenges, such as managing a new company in a foreign language, installing more up-to-date business software, and maintaining the credit portfolios of local customers “who may be paying their bills later and later as a result of [rising] job losses in the middle and lower classes.”
Naranjo adds that if Wal-Mart manages to maintain the supply of credit offered by its “recently acquired competitors,” its strategy could work. “Credit generates forced loyalty; since the Latin American consumer today is not in a position to pay off his entire bill, he pays off only as much as he can. He continues to buy using credit; he continues to increase his debt, and he is forced to use credit again and again. In short, this source of credit is, in many cases, the only source [of credit] that people can currently obtain.”
ECONOMIES OF SCALE
Aqueveque notes that Wal-Mart also has in its favor the relative cultural homogeneity of the countries in questions. “This can be a positive thing for taking advantage of some product sectors and categories, and for generating regional economies of scale.”
Naranjo disagrees with that assessment, however. In his opinion, each country has its own pattern of consumption, and this will present an important challenge for the U.S. giant. “My impression is that Wal-Mart is still struggling to understand the Latin American consumer and his various ways of buying, which are constantly changing and depend a great deal on the economic instability of each country, which is exacerbated today by the global economic slowdown.”
For Wal-Mart to succeed in the region, “It must recognize the differences between consumers in each country, and stop thinking about Latin American culture as a single entity,” Naranjo says. “To achieve that, it will have to rely on the experience of its business partners in each country.”
POWER OF LOGISTICS
During the Chilean forum, Bergdahl said that logistics management has been a key factor behind Wal-Mart’s strong performance. This includes its modern distribution centers, its rapid turnover of inventory and its fleet of 7,000 trucks. “Our trucks arrived at New Orleans days before the U.S. government did, during the disastrous Katrina hurricane,” which battered the southern United States in August 2005, he noted.
Escobar agrees that Wal-Mart’s mastery of logistics is an important source of strength for the company. However, he argues that the retailer will need to pay even more attention to logistical elements if it wants to increase its presence in the Latin American market.
“The retailer’s business model, supported by its almost perfect logistics, will be difficult to emulate in our region,” Naranjo says. “Having a large number of shops and outlets [in Latin America] means facing a gigantic task in terms of managing assets.” One challenge he alludes to in particular is the delay in infrastructure development that characterizes Latin American countries.
Aqueveque sees other opportunities for Wal-Mart’s growth. The giant retailer has successfully developed a multi-format strategy in its shops in Brazil and Mexico that it can replicate in other countries. This strategy involves moving into the supermarket business, shopping malls, department stores and financial services. In addition, “[Wal-Mart] can move into the pharmaceutical sector, as it has in the United States,” he says.
All that, says Naranjo, will mean significant costs for the retailer in terms of financing and human resources. However, Wal-Mart could compensate for that by achieving a high return on its investment while balancing the risks described above.
Bergdahl added during his Chilean forum presentation that “Wal-Mart manages to save its customers $2.5 billion in food costs each year, compared with other retailers.” Time will tell if the company will be able to provide the same benefit to its customers in Latin America.
Republished with permission from http://www.knowledge.wharton.upenn.edu -- the online research and business analysis journal of the Wharton School of the University of Pennsylvania.