Wal-Mart Argentina: Taking

1
Wal-Mart ArgentinaTaking Everyday Low Prices
Below the Equator

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

2
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?

3
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

4
Wal-Mart InternationalStrategic focus on
international expansion

• Attractive markets
• Argentina
• Brazil
• China
• Higher expected returns, yet highly volatile

• Stable economies
• Canada
• Mexico
• Exploring opportunities in Europe

5
Argentina the target

• Economic Outlook
• Retail Market
• Methods of Entry

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Economic Outlook Positive

• Open economy
• Law of Convertibility
• Increasing consumption and GDP levels
• Inflation controlled

7
Argentine GDP
8
Argentine Inflation
9
Argentine Market Openness
10
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
• US8.6 billion among supermarkets and
  hypermarkets
• Low distribution and technological capabilities

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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

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Methods of Entry

1. Wal-Mart entering on its own, building stores
   from scratch
2. Acquisition of a local retailer
3. Joint Venture

13
Disco S.A. A Possible Partner

• Largest retailer 57 branches
• 4th retailer in sales revenue US805 MM in 1993
• Outstanding geographic locations
• Highly competitive prices
• Strong financials, profitable local established
  retailer
• Smaller stores than a typical Wal-Mart
  Supercenter

14
Evaluation of risks

• Political
• Import controls
• Democracy level
• Corruption
• Taxes
• Economic
• Exchange rate
• Inflation

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Evaluation of risks (cont.)

• Financial
• Interest rates
• Banking system
• Industry risks
• Consumer default risk

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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

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Adjustments to C.O.C.
Cost of Capital
Individual Entry 22.7
Acquisition 21.3
Joint Venture 21.3
18
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

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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

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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

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Our base scenario
22
QA
23
Wal-Mart Base Scenario