A partnership for the long haul - Wal-Mart's involvement in Mexico

Discount Store News, Oct, 1999

Mexico is home to Wal-Mart's oldest, most extensive and only truly diverse array of international operations.

Wal-Mart's first association with Mexican retailing began in 1981 when it took a 49% ownership in Futurama, a Mexican food and general merchandise combo chain.

The first joint venture store, which bore the Futurama name, opened near Juarez, Mexico, in 1982. The venture with Futurama was a harbinger of things to come for Wal-Mart in Mexico and in other international markets.

However, Wal-Mart didn't really begin to enter the Mexican retail market in a big way until the early 1990s with its joint venture agreement with Cifra.

Wal-Mart currently operates seven different retail formats in Mexico, due largely to the 1997 acquisition of a controlling interest in Cifra, its long-time joint venture partner. Wal-Mart wound up with a 51% interest in Cifra through the merging from a joint venture into a single unit and a tender offer for Cifra stock. Cifra is Mexico's dominate retail conglomerate. The remaining 49% of Cifra remains publicly traded on the Mexican stock exchange.

The Cifra/Wal-Mart relationship began in 1991 with an agreement to operate warehouse clubs, which were patterned after Sam's Club, under the Club Aurrera name in Mexico City. The joint venture was widened in 1992 to include all of Cifra's new store stores in various formats, including hypermarkets, warehouse clubs and supermarkets.

Wal-Mart developed supercenters in Mexico under its own banner. The first Mexican Wal-Mart supercenters opened in Mexico City and Monterrey in 1993. Due to differences in shopping habits, those early Mexican supercenters units emphasized food to a greater extent than did the supercenters in the United States at the time. The first Mexian supercenters were a 50-50 mix of food and general merchandise compared with a 60-40 food general merchandise mix in the U.S. at the time. The Mexican supercenters carried 80,000 skus of food, 70% of which was sourced within Mexico.

The Wal-Mart/Cifra combination has worked well, weathering the devaluation of the peso and the ensuing financial problems that struck Mexico in the mid1990s. For its part, Cifra is one of the most profitable of all of Mexico's retailers, according to a report by Lehman Brothers.

An emphasis on productivity has helped Cifra to survive the sharp downturns in the Mexican economy. The defining moment of Mexico's recent economic history came in 1995 with the devaluation of the peso. The resulting economic crisis had a major impact on the nation's retail environment in general and Wal-Mart in particular. Mexico's retail market shrank to $72.5 billion in 1995, from $112.2 billion in 1994, according to Euromonitor and Lehman Brothers estimates.

The Mexican economic melt-down of 1995 socked Wal-Mart hard, setting back its expansion plans with Cifra by about two years.

Prior to the peso crash, a confident Mexican middle class and the passage of the North American Free Trade Agreement had emboldened the chain to stock its shelves with a high percentage of American-made goods. When the crash hit in 1995, American products, which consisted of up to one-third of the merchandise mix, became too pricey.

Re-engineering the merchandise mix was a big job that caused the chain additional turmoil. But the productivity gains combined with reductions in operating expenses improved operating efficiency, and its association with Wal-Mart has helped Cifra compete against other foreign retailers that have also entered the Mexican market. Wal-Mart has publicly stated that it believes its experiences in Mexico and its partnership with Cifra will help it expand in other areas of the globe.

Mexico's high inflation was "a valuable learning experience for Wal-Mart as we learn how to manage our business in such an environment," according to the company's 1998 annual report.

In the first quarter of the fiscal year ending in January 2000, Wal-Mart's division in Mexico experienced good earnings growth during the first quarter led by cost control throughout the company. Inventory levels continue to be carefully managed in all formats, despite the soft but stable economy.

Overall, Mexico remains an attractive market for Wal-Mart because of its enormous potential. The country has gross domestic product in excess of $420 billion and a population of more than 95 million.

Retail sales in Mexico are expected to slowly but steadily recover from the 1995 economic crisis. Mexican retail sales are expected to rise from $88.1 billion in 1999 to $96.3 billion by 2008, according to Euromonitor and Lehman Brothers estimates.

More expansion is also on the horizon for Cifra.

Cifra's expansion plans call for the opening of 39 new units in 1999, including seven Bodegas, three Aurrera stores, three Sam's Clubs, two Superamas, eight Suburbias, two Liquidaciones and 14 restaurants.

Wal-Mart and Cifra face continued competition from the likes of retail conglomerates Controladora Comercial Mexicana (CCM), Mexico's Gigante as well as Organacion Soriana and the ubiquitous Carrefour. Following Cifra, CCM and Gigante are Mexico's second-and third-largest retailers respectively.