Walmex bullish in operations merger

One thing that hasn’t changed though is Walmex’s rapid growth and impressive financials as it continues to spice up the retail market in Central America. The challenge for Scot now, is to keep this Latin American retailing success story on track.

In a country famous for its chilli peppers, it is only fitting that giant Latin American retailer Walmart de Mexico – or Walmex – has been hot on the acquisition trail. In the twelve months to April 2010, Walmex was doing some shopping of its own, acquiring 519 retail stores spread across Costa Rica, El Salvador, Guatemala, Honduras, and Nicaragua, right through Central America. The stores were bought for an estimated $2.6bn – part shares, part cash – from Walmex’s US parent Walmart Stores, which has a 31 percent stake in the Mexican Stock Exchange quoted company.

The 519 Walmart Centroamerica stores added to Walmex’s existing portfolio of over 1,400 store and restaurant outlets, operating under a number of brands, including Walmart, Bodega Aurrera, Superama and Suburbia. It makes the company, now named Walmart de México and Centroamérica, which traces its origins back to the Aurrera stores founded in the late 1950s (subsequently named Cifra, and then Walmex), and is headed up CEO, Scot Rank, one of the largest employers in the region, and the largest  private sector employer in Mexico.

Integration and differentiation
So what was the rationale behind the Centroamerica deal? “We have a long history of continuous profitable growth and we acquired Walmart Central America because we were convinced that there were important profitable growth opportunities in the region, and that we could drive synergies and improve Central America operations, an in this way we could thus drive incremental value for all our shareholders,” says Rank.

“It is worth noting that we have very similar customers across the two regions and that makes it easier to ensure you are giving value to those two customer segments.  And then there are important similarities between the Mexico and Central America operations. The company we bought is a multi-format company, a leader in its market, with a strong management team, and one that operates with negative working capital requirements.

Basically, we bought an attractive asset, that we believe can be improved, and that has significant profitable growth opportunities.

“It is also important to emphasise the opportunities that are there for the interchange of best practice between the two different regions as we integrate the countries.  There is a lot of learning around small formats, for example, which we are bringing to Mexico from Central America, helping us improve the quality of our small format business. So the integration is not just all about the challenges of standardising operating procedures, making sure that people have the same focus and the same outlook towards the business, and so on.”

As Rank points out, the numbers following the acquisition suggest that the integration is going well to date and appear to justify management’s decision to do the deal. Take the results for the first nine months of the year, for example, which were impressive and no doubt made appealing reading to investors. Total income was up by 6.1 percent, gross margin was up by 7.4 percent, and up by 22.2 percent from 21.9 percent year on year. General expenses were a fairly restrained 4.4 percent, against the 6.1 percent increase in sales.  As a result, EBITDA for the first nine months of the year grew 17.2 percent. Thus the story of the integration so far, says Rank, has been one of continued improvement.  

Making sure that the integration of retail operations in Mexico and Central America is a long term success means that Walmex must ensure it differentiates its value proposition and retail offerings from its competitors, while at the same time continuing to meet the needs of its customers across a number of countries.  So far, Walmex appears to have doing a good job meeting this tough challenge.

“Our knowledge of the customer and passion for constantly improving our value proposition is a differentiating factor,” says Rank. “For example, if you look at our multiformat approach, both Mexico and Central America are similar in the sense that they have diverse populations with different income levels. It’s income level that differentiates most customer behaviour. So we have a multiformat strategy that allows us to segment the market with sufficiently different and strong formats that target different income levels, different sizes of population, or different purchasing occasions.  In other words, we have clear and differentiated strategies for the different formats.”

Rank also highlights a number of other areas where he believes Walmart de Mexico and Centroamérica is outmanoeuvring its competitors, differentiating its market offering, and at the same time still meeting customers needs, not least in terms of providing value.

“Take price leadership,” he says. “We have been aggressively and consistently lowering prices. During the year we have increased our price gap versus our competitors, and we continue to grow sales at a faster rate than the rest of the market. Or look at the choice available to customers, through focusing on providing assortment and unique products in all of our different formats. A good example is Walmart Supercenter where we have prepared with a very good assortment for different purchasing occasions related to the Christmas season including at-home entertaining, travel, cold weather, decoration, gifts, Christmas trees and nochebuenas, and festive season dinners.”
Several other factors are also key, says Rank. The organisation is continually searching for ways to evolve and adapt its formats so that it can keep up with the customers’ changing needs. It is also important to deliver a consistent value proposition and strategy throughout the country and across territories and formats. And the store format needs to be kept fresh and updated, maintaining the level of shopping experience, which means an ongoing programme of store refurbishment, indeed store remodelling was up 21 percent in 2010 on the previous year.

Good housekeeping
Detailed attention to the customer value proposition is essential. But it has to be backed up with sound financial management, especially in a business operating on the scale that Walmex is. Rank is quick to stress the company’s solid financial position.

“We have a strong balance sheet with no debt, as of September 2010 our cash position amounted to $15.3bn pesos, that’s equivalent to $1.2bn dollars. That cash is generated from our operations, it is based on good close management of inventories to make sure we have negative networking capital, good management of our accounts payables, being very careful to make sure our investments have the highest possible return – all of our new business have higher returns than our base business – and an every day focus on not making decisions that are bad for the financial results of the company,” says Rank.

“And that cash our business is continuously generating allows us to have an aggressive pricing strategy, and to invest in new stores, remodel existing ones, invest in distribution, pay dividends and buy back shares – all at the same time. And we will continue investing because we are confident on the medium and long term prospects for the region.”

The recent growth figures underpin Rank’s bullish view. Installed capacity increased by 12 percent in self-service formats in Mexico, 11 percent for total Mexico and 3.5 percent in Central America. A new distribution centre opened in Villahermosa, Tabasco, and an existing distribution centre in Mexico City was automated.  Store refitting was up 21 percent. The company made an investment in 2010 to September of some $2.3bn pesos in buying back shares. The price differential between Walmex and the competition increased. And, on top of all this, Walmex paid a dividend of $5.7bn pesos, as part of its policy to pay 35 percent of the previous year’s earnings.

Delivering year-on-year sales growth and robust financials to date in 2010 is impressive given the difficult economic climate that Walmex has been operating in. It is true that while Mexico’s economy contracted by 6.5 percent in 2009 during its deepest recession in many years, there has been a stronger than expected rebound of the economy in 2010, and this encouraging bounce back has, no doubt, helped to support Walmex’s business. However, there is more than a recovering economy behind Walmex’s growth story.

“It is partly some of things I have mentioned already – focusing on the customer, a relentless search to improve our value proposition, price sensitivity, especially given that our customers now have less money to spend and are a lot more price-conscious,” says Rank. “Our Every Day Low Prices strategy, based on having the lowest cost structure in the market, allows us to consistently lower prices.  We compare prices every week, store by store and against the most relevant competitors. As a result, our price gap versus our competitors, as measured using AC Nielsen data, increased in 2010 compared to last year.”

It is an approach that has been well received by Walmex’s customers, as evidenced by sales that continue to grow at a faster rate than the market, both at comparable stores and for total stores. That’s on top of strong growth in 2009. So for the first nine months of the year comparable store sales for self-service formats grew by 2.9 percent, more than double the rate of growth of the industry as measured by Asociacion Nacional de Tiendas de Autoservicio y Departamentales (ANTAD – National Association of Supermarkets and Department Stores), which increased by 1.2 percent, excluding Walmex. And in terms of total stores, self-service formats in Mexico grew by 9.9 percent, which compares very favourably with the 5.8 percent growth of ANTAD members, excluding Walmex.

Looking to the future
With many successful organisations, one of their biggest challenges is maintaining that success over the long term. The same is true for Walmex. So far the business has managed to combine rapid growth and investment, with increasing return on investment at the same time. That’s not easy, and continuing to provide financial results that satisfy the investors may well be a tough task.

Inevitably, there will be a focus on continuing to excel at things that the business already does well. The focus on the results is aided, for example, by an approach that encourages the store associates to link their everyday actions to the broader business performance. Each store is measured against a business plan, and the company pays a cash bonus depending on whether certain targets are met or results exceeded. Then, on a weekly basis, the performance against the business plan is shared with all associates, as well as explaining exactly what needs to be done not only to meet that business plan, but to outperform it. Stock options aslo helps to increase the employees’ focus on and commitment to long term success.

The search for synergies between the Mexico and Central America operation will continue. At the moment the organisation is working on improvements in a number of areas including procurement, assortment, the value proposition of different formats, inventory efficiencies, logistics, and other areas of operations best practice.
Rank has some very clear ideas, though, about how the organisation will keep on improving its performance, where Walmart in Mexico and Central America goes from here, and what the future looks like.

To start with, he notes, there are opportunities to grow off of the existing base business, and to leverage the company’s leadership position and even extend its lead in the marketplace.

“We can leverage the advantage we have versus the rest of the market, we have a great financial position, we are investing more than other companies in the market, have been doing so over the last twelve months, and will continue to do so moving forward. We have a cost advantage with the lowest operating costs in the market. And then there are the multiple formats which allow us to grow more quickly than some of our competitors. So just growing the base business, by leveraging the advantage that we have versus the rest of the market, is key,” says Rank.

“Also we have comparatively low retail penetration at the moment. In Mexico, for example, in an estimated $241bn dollars market, 60 percent of that it represented by the informal market – so that’s a large part of the retail market here. As a formal retailer we have an opportunity to take market share from the informal retailers.”

The retail market in the region will also be growing substantially over the next decade, points out Rank.

There is a demographic bonus for Walmex. With a comparatively young population in Mexico and Central America, as that population ages over the next 15 years, it will bring an additional 25 million new customers into the market. So the demographics are very positive.

And it is worth remembering, notes Rank, that after the latest acquisitions Walmex is an international company trading in six countries, and every one of those countries offers strong growth potential.

“So, for example, there are still a lot of cities where we don’t have a presence. Today we operate in about 380 cities across the six countries, but in addition to that there are 300 towns and cities that we have identified where we could introduce at least one of our formats over the next few years. So that’s 300 cities where we can expand our operations as well,” says Rank.

“The future is about making the most of a combination of opportunities: the opportunity to grow the base business in cities where we are already operating, currently; and also the opportunity to take advantage of a retail market that will continue to grow substantially over the next ten to fifteen years.”

It sounds as if there are still exciting things in store for Walmex and its investors.