Wal-Mart Alters Course in Latin America

The company's Walmex subsidiary could open 35 stores in Central America this year to offset sluggish growth in the region.

MEXICO CITY — Wal-Mart Stores Inc.’s Walmex subsidiary could open 35 stores in Central America this year to offset sluggish growth in Mexico, where a 2012 bribing scandal stalled a breakneck expansion.

This story first appeared in the April 21, 2014 issue of WWD.  Subscribe Today.

Walmex, as the Mexican and Central American unit of the world’s largest retailer is known, will invest $1.1 billion to bolster its Central American retail space by nearly 7 percent compared with 5 percent in Mexico — a reversal from previous years when growth had been more strongly focused on Mexico.

“We could very well open 30 to 35 stores, but the number will depend on the permits we are able to get in each country,” Aquileo Sánchez Viquez, Walmex’s regional corporate affairs director, revealed to WWD.

He said Guatemala and Costa Rica, where the discounter operates seven and six stores, respectively, could see the establishment of new Wal-Mart superstores, with the format possibly making a long-planned arrival in Nicaragua as well.

According to Sánchez, Walmex will assess each country’s potential with a view to rolling out megastores in the five countries encompassing the region, including Honduras and El Salvador, which have one and three Wal-Marts, respectively. A Panama foray is not in the cards, Sanchez said, adding that Walmex will concentrate on strengthening its lead in Central America, where it has 20 hypermarkets.

Walmex sells a range of private and multibranded unisex and children’s clothing brands such as Simply Basics, Carter’s, Oshkosh and Children’s Place. It operates 670 stores in the region, 40 percent of which are hypermarkets and 60 percent smaller foodstuff and discount retailers.

Sanchez denied analysts’ views that the Mexican bribing ordeal is forcing Walmex to look further south as new store permits are becoming more difficult and taking longer to procure in Mexico. He stressed “building and store permits have always been challenging to obtain, before and after the media [bribing] scandal.”

That said, few would argue Walmex’s life has been easy since the ordeal, which began in spring 2012 when reports surfaced that Wal-Mart U.S. and Mexican executives paid Mexican officials to hasten permit approvals that eventually helped the retailer storm into Mexico. From 2005 to 2011, for example, Walmex opened 900 stores in Latin America’s second-largest economy, where it now operates more than 2,200.

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After shares plunged on the Mexican bolsa, Walmex said it would curb its expansion, so much so that this year it plans to open around 200 stores across the region, down from more than 400 in 2011, analysts said. In 2013, the company opened 235 stores after investing $1 billion.

Without the scandal, Walmex would have pressed ahead with plans to open 300 to 400 stores a year in the region, analysts noted.

“Basically, they have lost a 30 percent potential revenue increase,” said a Mexico City-based senior retail analyst, who requested anonymity. “In the last analyst presentation, they talked about increasing retail space 5 percent this year. In past years, however, they would talk about an 8 to 10 percent expansion.

“They showed us maps about where the stores would be, but this year there were no maps.”

The company is not only suffering on the top line. Net operating profits (earnings before interest and taxes) were flat at 31 billion pesos ($2.4 billion) in 2013, while earnings before interest, taxes, depreciation and amortization inched up 0.9 percent to 40.2 billion pesos. Net profits declined 2.4 percent to 22.7 billion pesos on revenues up 3 percent to 420.5 billion pesos.

Mexican retailers were hurt by a weakening economy in 2013, but Walmex could have done better, particularly with it Sam’s Club discount chain, where sales fell amid falling consumption and poor pricing and promotional strategies, analysts said. Leading department stores such as Liverpool and El Palacio de Hierro performed much better, helped by flexible store card promotions allowing shoppers to pay over longer time periods, a game Walmex has struggled to play well, experts said.

Ana Hernández, analyst at Invex brokerage, said Walmex’s fortunes could improve this year if consumer spending rebounds in the second half on the back of a series of structural reforms expected to boost economic growth.

Net operating profits could jump 1.5 percent, while same-store sales on a group level could rise 1 percent after falling by an equal percentage last year.

In Mexico, Wal-Mart operates 243 megastores as well as Suburbia, mainly a mass-market clothing chain, and Bodega Aurrerá supermarkets.

Walmex has said this year’s capex will go toward improving logistics, bolstering operating efficiencies and growing e-commerce sales.

Hernández said the company should focus more on boosting discounts and promotions and less on e-commerce because key rivals can compete on price. Crucially, Walmex must increase same-store operating margins, which have fallen to midsingle digits from low double digits in recent years.

Like other analysts, Hernández recently cut Walmex’s objective stock price to 31 pesos from 35.

Marisol Huerta, an analyst with Banorte bank, added Walmex must streamline management or lose its market lead to competitors.

Alejandra Marcos of Intercam brokerage added, “Clearly their strategy is not working. If you don’t have same-store sales growth in a growing economy, that’s a problem.”