Walmart: will 20 years of Brazil be enough?

I vividly remember when was announced that Walmart would enter in the Brazilian market. In this year of 1995 Carrefour, my employer then, was commemorating 20 glorious years of Brazil. And Walmart did not come along but sided with Jorge Paulo Lemann’s Lojas Americanas, owner of a 40% interest (sold in 1997 with a R$ 9 million loss). The message was clear and public: Walmart would conquer Brazil running over the competition like a steamroller!

At that time I was working at Carrefour’s Brazil HQ. And Carrefour Brasil management reacted correctly to this announce by been prepared to receive the largest retailer in the planet. The decision was for an attack instead of simply playing defense. The expansion plan of the newcomer was mapped and the Carrefour stores located within the influence zone of the “new” competition were reinforced in terms of teams, merchandise (assortment and inventory) and promotional campaigns (pricing and ads). Additionally, was decided to acquire land located side by side with the land where the first Walmart Supercenter would be built. To this store an experienced management team was transferred and was defined that it should not be worried about making money but instead guarantee a reception on a par of a great company. The result was “carnage”. The stores, each one, would invoice, monthly, over US$ 20 million (in 1995!). Walmart due to a team not very familiarized with the modus operandi (processes), lack of adapted systems, a “non-adapted“  assortment, and to a non-anticipated traffic lost a lot of money.

The environment in which Walmart entered Brasil was experiencing transformation in various fronts:

  1. Economy: the Real Plan had, after decades, obtained success in taming inflation;
  2. Competition: Carrefour and Grupo Pão de Açucar, the two major retailers operating large surface stores were both in a good moment. Carrefour, the leader, very lucrative and cash generator and Grupo Pão de Açucar had been through a successful restructuring and had reinforced its Balance Sheet via an IPO. Other players were regional operators, strongly entrenched in their regions and that had “absorbed” the “know how” of the major players via recruiting their key people or by simply copying. And, other sources of competition were arising: (a) the increment in the number of physical and online stores specialized in non-food; (b) the neighborhood supermarket was more professional and competitive in terms of prices; and (c) the cash and carry wholesalers were capturing part of the emerging medium class.
  3. Consumption: important transformations were taking place such as the reduction in the time availability to shop (due to the growth in quantity and importance of the feminine work); a reduction in the size of the families; and a worsening in the traffic increasing the time to make displacements.  
  4. Supply: growth and professionalization of manufacturers; a favorable to import exchange rate.
  5. Infrastructure: important price increase of land.

Retail is, by definition, local. Nevertheless, the phenomenon of globalization is not off (retail). Reasons or motives for a retailer embarking on an internalization expansion are: saturation of the domestic market (expansion engine), opportunity (arbitrage) and international orientation (levered on brand, financial resources, management capabilities and replicable model). And international expansion can take place through: acquisition of an existing business (es); organic (reproducing the existing model in the new country); or via cooperation (licensing brand and know-how).

And why it did not take place as expected? Why until today, 20 years later, Walmart Brazil is a loss making operation?

1)    It opted for entering with two different models – Sam`s and Supercenter – adding complexity and dispersing resources (and demanding a more costly structure);
2)    Standardization-Centralization with low or no flexibility (lack of adaptability reflected in the operation, commercial policy and controls);
3)    Pricing model (Every Day Low Price) that works well in USA given the representation of the operation there but that did not work in a “smaller” operation. In addition to that is a pricing model that punishes margin!
4)    Acquisitions in distant regions – Bompreço in the Northeast (2004) e Sonae in the South (2005) – adding more complexity to the business. Interesting was the fact that both companies were sold to WM by foreign retailers exiting the Brazilian market;
5)    Delay in integrating systems and brands.

The Brazilian management struggles with a few dilemmas, some dogmatic, that should be addressed urgently with the aim of making the business sustainable. These dilemmas are:

  1. (a) Invest on Sam’s in detriment of Supercenter?;
  2. (b) Shut down the Maxxi’s operation?;
  3. (c) Rationalize the Supercenters (size and number*)?;
  4. (d) Invest in a smaller food format such as the “Fresh”?

The problem, however, is that maybe there will be no time or patience from the part of the HQ to wait for the answers. Walmart is facing problems in its larger market, the US, and is taking actions that involve operating improvements (salary increases, hiring and training); further investment on the EDLP strategy that will lead to reduce margins and-or increase pressure over the relationship with suppliers and investing in ecommerce. Besides that the CEO declared to be committed to the two major markets for Walmart: US and China. He also declared that management is open for revision of the portfolio. And Walmart already divested from non-performing operations in important markets such as Germany.

The question then is if Walmart will continue to be operating in Brazil 20 (twenty) years from now or if these first 20 years were enough!?

*) Since the text was written in December 2015, a few stores were closed.

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