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CAMPO GRANDE, Brazil – When Wal-Mart Stores Inc. first expanded into Brazil’s midwestern farm-belt city of Campo Grande seven years ago, the economy was booming and executives were eager to open stores even just in sub-prime locations on one-way streets venturing out of town.
It didn’t last. At the end of December, the U.S. retailer closed both of its Maxxi brand cash-and-carry stores in Campo Grande included in a restructuring that shuttered 60 locations across Brazil, including some Supercenters. Shoppers said the stores could not compete on assortment, price or location.
“It was never clear who Maxxi was for. It wasn’t cheap enough for the poor. But there wasn’t any appeal for the middle class,” said Ordecy Gossler, 40, a public accountant filling his cart with cleaning utility caddy and toilet tissue at Atacad?o, a rival chain run by France’s Carrefour.
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“When they announced in December that both Maxxis were closing, nobody in my office knew where they were.”
Today, Wal-Mart has just one Supercenter left in this city of 850,000 people, whose demographic of thrifty shoppers had once seemed suitable for the earth’s largest retailer. It shuttered the city’s other one at the end of the entire year, as traffic dwindled in the shopping mall it was designed to anchor.
The retreat from Campo Grande is emblematic of Wal-Mart’s broader issues in Brazil, a once-red-hot destination for foreign retailers and other companies that has turned stone cold. And also the lackluster performance in Latin America’s largest economy shows how tactics that helped Wal-Mart build success in the U.S. sometimes get badly lost in translation overseas.
International results have been anemic, despite US$22 billion in capital investment in the last five years. Wal-Mart this past year generated a 4.5 per cent operating profit margin from international markets, well underneath the 7.4 percent return posted from the U.S.
Seeking higher returns, Wal-Mart CEO Doug McMillon in October announced a strategic overview of the business’s global assets. Some securities analysts have speculated Wal-Mart could exit Brazil, along with other markets in Latin America where it is already closing one more 55 stores.
The pullback in Brazil also has some worrying echoes of previous Wal-Mart debacles overseas, including South Korea and Germany, two markets it abandoned in 2006.
In Brazil, it has been dogged by poor locations, inefficient operations, labour troubles and uncompetitive prices – with a few of the problems baked in throughout an aggressive, decade-long growth surge – according to interviews having a dozen former and current Wal-Mart executives, as well as analysts, shoppers and store employees.
Wal-Mart wouldn’t comment on financial is a result of Brazil ahead of the company’s quarterly earnings on Feb. 18. People familiar with the numbers told Reuters that Wal-Mart has posted operating losses in Brazil for each of history seven years.
Jo Newbould, a spokeswoman for that retailer, said the store closures were part of its efforts to “actively manage” its global assets and that it has been working to lower costs in Brazil.
David Cheesewright, head of Wal-Mart’s international operations, said within an interview it doesn’t have intends to quit Brazil.
He pointed towards the company’s decision to invest in completing an integration of legacy computer systems in to the wider Wal-Mart platform as evidence of dedication towards the market. “That’s not the act of someone who is packing up the firm for other purposes,” he said.
Cheesewright expressed optimism about a turnaround. “It’s an industry that has been at the top of potential, but is a roller-coaster ride in terms of its performance,” he explained. “It happens to be on a downturn right now, and i am sure it will do what it always has done, which is improve.”
Wal-Mart first entered Brazil in 1995 and grew in measured steps for nearly ten years. That changed in 2004-2005, when it spent about US$1 billion to buy two retailers, Bompre?o S.A. Supermercados do Nordeste and Sonae Distribui??o Brasil S.A.
The deals expanded Wal-Mart’s operations in to the northeast and south of Brazil, and marked the beginning of a spending spree targeted at building a national footprint. Using the takeovers came a range of brands: Wal-Mart currently operates under nine different store banners in Brazil.
At the peak of the expansion, former Wal-Mart executives said, a land rush mentality became predominant.
Brazil’s thriving economy in those years convinced executives the largest risk lay in moving too slowly. In reaction, they approved new store sites according to increasingly rosy forecasts of future sales.
“Most executives didn’t have the voice to say, ‘Don’t open this store; let’s not approve more stores,'” a former finance executive recalled. “Why not? Because Brazil was the new country. We wanted to put investment in before others do.”
In a six-year stretch through the fiscal year ending January 2013, Wal-Mart doubled its locations, reaching nearly 560 at its peak.
The rapid expansion strained Wal-Mart’s logistics – traditionally one of its strong points within the U.S. but a continue performance in Brazil.
In some cases, delivery trucks drove days to reach distant stores from located warehouses. Executives from headquarters bickered with those running some types of stores about who should bear the distribution costs, the previous finance executive said.
Amid the main focus on growth, executives never fully integrated the legacy information systems from Bompre?o and Sonae. Disruptions in communication between headquarters and also the a variety of store types allowed inefficiencies to take root. Buyers, for example, found themselves using three laptops, one each for that two legacy systems and the other for the Wal-Mart platform, people familiar with the matter said.
Cheesewright said he had put a priority on systems and would complete the integration by the middle of 2016. He said that will allow Brazil to profit fully from system and process advancements produced in the U.S., helping it to lower costs.
He also said Wal-Mart was obtaining a grip on Brazil’s complex tax system and litigious labour market, problems that have dogged it for a long time. In January 2014 Wal-Mart disclosed that unforeseen Brazil tax assessments and employment claims associated with a cost-cutting drive would slice 2 per cent off its annual earnings globally. Labour claims in Brazil also hurt its leads to the third quarter from the financial year which has just ended.
Cheesewright said it was implementing an agenda, including putting advanced time-keeping equipment in shops and becoming workers to formally clock in, which should lower the chance of worker lawsuits.
“A lot of the stuff in Brazil is just the basic stuff: do people properly clock out for his or her lunch breaks, would you manage overtime correctly, have they got the right breaks between shifts?” he explained. “It’s lots of basic blocking and tackling.”
Wal-Mart, whose sales at existing stores in the united states edged down 0.6 per cent in the August-October quarter, isn’t the only retailer hurting in Brazil.
With the economy in a deepening recession, market leader GPA , controlled by France’s Casino, suffered a 2.3 per cent sales drop at existing stores within the October-December quarter and it has said hello would slash investments in 2016.
Carrefour bucked the popularity, posting 8.5 percent growth in sales at existing stores, because of investments in hypermarkets and growth at Atacad?o, the nation’s biggest cash-and-carry chain.
It’s an industry that has always been high on potential, but has been a roller-coaster ride in terms of its performance
The cash-and-carry format, which features bulk sales of food and other items paid for in cash and completed by the customers themselves, has emerged as an uncommon bright spot in Brazilian retail.
Cheesewright said Maxxi was now one of Wal-Mart’s most effective formats after it had narrowed its focus to small business owners, abandoning competing head-to-head with the larger warehouses of Atacad?o, which caters to both business shoppers as well as an increasing number of thrifty families.
But after paring to 44 locations, Maxxi gives Wal-Mart much less exposure to the cash-and-carry business than Atacad?o and GPA’s Assai, which have 123 and 95 stores, respectively. Some analysts and former executives say one of Wal-Mart’s biggest missteps was losing a bidding match for Atacad?o to Carrefour, which paid US$1.1 billion for it in 2007.
Cheesewright said Wal-Mart was piloting a larger version of its Todo Dia discount format in part as a way to attract some of the family shoppers now using rival cash-and-carry stores. Other plans include renovating supermarkets with a a bit smaller assortment along with a focus on fresh food.
The task of making everything happen falls to Flavio Cotini, who was promoted this month from chief financial officer to head the Brazilian operations. The reshuffle marked the fourth leadership change in Brazil since 2008 – deficiencies in continuity at the top that has exacerbated problems, including hindering efforts to integrate operations, former executives said.
“When you develop a castle you build the foundation first. Wal-Mart made it happen backwards in Brazil,” an old senior executive in the international business said. “It is really difficult to build a national chain whenever your system backbone is not in position.”
? Thomson Reuters 2016
