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 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 as
part of 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 was no appeal for the middle class," said Ordecy
Gossler, 40, a public accountant filling his cart with cleaning
supplies and toilet paper at Atacadão, a rival chain run by France's
Carrefour <CARR.PA>.
"When they announced in December that both Maxxis were closing, no
one 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 suited to the world's largest retailer. It shuttered the
city’s other one at the end of the year, as traffic dwindled in the
shopping mall it was meant 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 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 $22 billion in
capital investment over the past five years. Wal-Mart last year
generated a 4.5 percent operating profit margin from international
markets, well below the 7.4 percent return posted from the U.S.
Seeking higher returns, Wal-Mart CEO Doug McMillon in October
announced a strategic review of the company’s global assets. Some
securities analysts have speculated Wal-Mart could exit Brazil, as
well as other markets in Latin America where it is already closing
an additional 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.
LABOR PROBLEMS
Brazil in particular has been dogged by poor locations,
inefficient operations, labor troubles and uncompetitive prices --
with some of the problems baked in during an aggressive, decade-long
growth surge, according to interviews with a dozen former and
current Wal-Mart executives, as well as analysts, shoppers and store
employees.
For a graphic showing some of Wal-Mart's Brazil problems, see
http://tmsnrt.rs/1oH9pNu
Wal-Mart would not comment on financial results from 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 the past seven years. Jo Newbould, a
spokeswoman for the 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 in an interview that it has no plans to quit Brazil.
He pointed to the company’s decision to invest in completing an
integration of legacy computer systems into the wider Wal-Mart
platform as evidence of a commitment to 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 a market
that has always been high on potential, but has been a
roller-coaster ride in terms of its performance," he said. "It
happens to be on a downturn at the moment, and I'm sure it will do
what it always has done, which is improve."
RUNAWAY GROWTH
Wal-Mart first entered Brazil in 1995 and grew in measured steps for
nearly a decade. That changed in 2004-2005, when it spent about $1
billion to buy two retailers, Bompreço S.A. Supermercados do
Nordeste and Sonae Distribuição Brasil S.A.
The deals expanded Wal-Mart’s operations into the northeast and
south of Brazil, and marked the beginning of a spending spree aimed
at building a national footprint. With the takeovers came an array
of brands: Wal-Mart currently operates under nine different store
banners in Brazil.
At the height of the expansion, former Wal-Mart executives said, a
land rush mentality took hold. Brazil’s thriving economy in those
years convinced executives the biggest risk lay in moving too
slowly. In response, they approved new store sites based on
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 needed 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 in the U.S. but a drag on performance in
Brazil.
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In some cases, delivery trucks drove days to reach distant stores
from centrally located warehouses. Executives from headquarters
bickered with those running some kinds of stores about who should
bear the distribution costs, the former finance executive said.
Amid the focus on growth, executives never fully integrated the
legacy information systems from Bompreço and Sonae. Disruptions in
communication between headquarters and the many different store
types allowed inefficiencies to take root. Buyers, for instance,
found themselves using three laptops, one each for the two legacy
systems and another for the Wal-Mart platform, people familiar with
the matter said.
TAX ISSUES
Cheesewright said he had put a priority on systems and would
complete the integration by the middle of 2016. He said that would
allow Brazil to benefit fully from system and process advancements
made in the U.S., helping it to lower costs.
He also said Wal-Mart was getting a grip on Brazil's complex tax
system and litigious labor market, problems that have dogged it for
years. In January 2014 Wal-Mart disclosed that unforeseen Brazil tax
assessments and employment claims tied to a cost-cutting drive would
slice 2 percent off its annual earnings globally. Labor claims in
Brazil also hurt its results in the third quarter of the financial
year that has just ended.
Cheesewright said it was implementing a plan, including putting
advanced time-keeping equipment in stores and getting workers to
formally clock in, which should lower the risk of worker lawsuits.
"A lot of the stuff in Brazil is just the basic stuff: do people
properly clock out for their lunch breaks, do you manage overtime
correctly, do they have the right breaks between shifts?" he said.
"It's a lot of basic blocking and tackling."Wal-Mart, whose sales at
existing stores in the country edged down 0.6 percent 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 percent sales drop at
existing stores in the October-December quarter and has said it
would slash investments in 2016.
Carrefour bucked the trend, posting 8.5 percent growth in sales at
existing stores, thanks to investments in hypermarkets and growth at
Atacadão, the country’s biggest cash-and-carry chain.
BEATEN ON ACQUISITION
The cash-and-carry format, which features bulk sales of food and
other items paid for in cash and carried out by the customers
themselves, has emerged as a rare bright spot in Brazilian retail.
Cheesewright said Maxxi was now one of Wal-Mart's best performing
formats after it had narrowed its focus to small business owners,
giving up on competing head-to-head with the larger warehouses of
Atacadão, which caters to both business shoppers and an increasing
number of thrifty families.
But after paring back to 44 locations, Maxxi gives Wal-Mart far less
exposure to the cash-and-carry business than Atacadão 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 Atacadão to Carrefour, which paid $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 slightly smaller assortment and a
focus on fresh food.
The task of making all that 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 -- a lack of continuity at the top that
has exacerbated problems, including hindering efforts to integrate
operations, former executives said."
When you build a castle you build the foundation first. Wal-Mart did
it in reverse in Brazil," a former senior executive in the
international business said. "It is so hard to build a national
chain when your system backbone is not in place."
(reporting by Brad Haynes in Campo Grande and Nathan Layne in
Bentonville; additional reporting by Tatiana Bautzer in São Paulo
and Dominique Vidalon in Paris; Editing by Martin Howell)
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