Wal-Mart Argentina:

Taking Everyday Low Prices Below the

Equator
Luciene De Paulo
Gabriel Szulik
Jennifer Pogue
Esther Montiel
Andy Martin

Agenda
Wal-Marts 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 International
Strategic focus on international expansion
Stable economies:

Attractive markets:

Canada
Mexico

Argentina
Brazil
China

Exploring
opportunities in
Europe

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-Marts 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

Cost of Capital

30%
0.9

Exchange rate (Peso / USD)

Capex
Terminal grow th
-$400

10%
2

25

15
3%
-$250

9%
-$100

$50

Valuation

$200

$350

$500

Q&A

Wal-Mart Base Scenario

Cost of Capital 30%

10%
3%

Terminal grow th

9%

Capex

25

Exchange rate (Peso / USD)

-$300

-$150

$0

15
0.9
$150

Valuation

$300

$450

$600