Wal-Mart's Martin in Brazil: we're here for the long run

Discount Store News, Nov 18, 1996 by Pete Hisey

SAO PAULO, BRAZIL - Wal-Mart International president Bob Martin and newly named coo John Lupo traveled here in late October to set the record straight with local journalists. No, he said, the company is not losing massive amounts of money. No, it is not about to close its Brazil supercenters. No, it is not bailing out of Brazil.

Speaking before a sometimes hostile group of about 30 Brazilian journalists, Martin announced plans to build four new supercenters in Brazil in 1997, bringing the supercenter count there to seven. The chain will also add "one or possibly two" Sam's Clubs to its base of three.

The company will add the same number of units of each type of store in Argentina as well, for a total expenditure of $200 million, evenly divided between the two markets, bringing Wal-mart's total investment in South America's Mercosur region (Argentina, Brazil, Paraguay and Urug-uay) to $600 million.

And for the first time, Wal-mart will test smaller communities, with two Brazilian units due to open in Bauru (population 614,000) and Ribeirau Preto (population 772,000) in Sao Paulo state and two supercenters due for Argentine cities outside Buenos Aires.

Wal-Mart has been embroiled in several controversies since it first opened stores in South America a year ago. Reports from Brazil, for instance, said that the company was losing enormous amounts on its investment, that it was far behind plan and that it was considering withdrawing from both Brazil and Argentina. Early on, major competitors like Carrefour pressured key vendors to refuse to sell to Wal-Mart in Argentina, and most recently, the company has been implicated in an import fraud scheme that had Argentine officials searching a Wal-mart Buenos Aires supercenter for incriminating evidence.

However, Wal-Mart spokesman Gerardo Ruiz noted that the import controversy centered on one supplier, Audio Import, that had provided Wal-Mart, as well as competitors Carrefour and Music-Mundo, with an array of electronics and authentic import documents, allegedly supplied by a corrupt customs officer. The arrest of government employees, and the involvement of always-controversial Wal-mart made the relatively tiny (in dollar value) event front-page news in Argentina.

At the press conference, Martin denied vigorous suggestions that the chain plans to exit either Brazil or Argentina. "Our commitment is long-term," he said in Sao Paulo. "It is very real. We wouldn't invest if we didn't think it would be profitable within three years. Argentina and Brazil are the two best markets in South America."

According to Martin, the company is on plan to become profitable, and most of the negative press reports arise from a misunderstanding of operating profitability and net profitability. "On an operating basis., we will be profitable in the fourth quarter [of this year]," he said. "But overhead cost, the initial investment" won't be paid off for about three years. "I am very comfortable that we will see a [net] prof-it by the end of 1998, our third full year."

Martin added that the company "needs six to eight stores to see a profit," and that figure will be attained by the end of 1997.

On projections of future growth, he remained noncommital, although Wal-Mart executives have said that Argentina has room for 40 supercenters and Brazil considerably more. "In Mexico, we went from two supercenters to four in one year, then to 12 the next year. We had 17 more on line until the peso crisis. So we would have gone from two units to 28 in three years. It's too early to say if we can grow like that in Brazil," he said.

But Latin America will receive the bulk of Wal-Mart's international funding for the foreseeable future, he added. "There are just too many great things happening here; these markets will get the largest share of our investment." (Separately, Wal-Mart spokesman Jay Allen noted that the company will go very slowly in China, were instability is much greater than in Latin America.)

Sam's, Martin conceded, will grow more slowly than at first anticipated The company is scaling back expansion, but Martin expects to see the concept succeed eventually, "as the market settles down over the next 12 to 15 months."

All Sam's Clubs to date have opened adjacent to supercenters in both markets, but the two concepts are expected to go their own way from here on out, with each planning its expansion independently. Sam's, Martin said, "will have to be creative to deliver better value to [its business members primarily operators of small kiosks) so that they feel that they don't have to shop around."

In both Argentina and Brazil, Sam's has had to depart radically from the multipack strategy that is at the heart of the wholesale club concept. Kiosk and small restaurant owners tend to shop only for that day's needs, hunting around for, the best price each day. Consequently, Sam's has had to shift to single-serve packaging, breaking multiunit, packs and offering smaller sizes. But as the economy in South America stabilizes, and individual income starts rising again, "demand will go up, and our members will start buying larger packs," Martin said. "We're already beginning to see a change. This is a great opportunity for Sam's Club."