Prof AD749 Rambow 4-4-2010 Final Exam Wal-Mart Goes South 1. How has the implementation of NAFTA affected Wal-Mar t's success in Mexico? NAFTA's implementation affected Wal-Mar t's success in Mexico positively. We have to consider that NAFTA's implementation reduced tariffs that people had to pay on goods that were originated in America from 10% to 3%, which allowed them to increase their bargaining power easily. Another aspect that benefited Wal-Mar t's success in Mexico is the fact that the NAFTA encourages the improvement of the t ransportation network and the infrastructure, solving all Wal-Mar t's problems with logistics, supplies and warehouses. Another aspect in which NAFTA helped Wal-Mar t's success is the decrease in the regulations and restrictions on foreign direct investment, which allowed Wal-Mar t to bring their foreign suppliers, so they can build manufacturing plants, improving Wal-Mar t's efficiency, not only in Mexico, but in the whole NAFTA region. Huerta-Goldman (2010) explains that NAFTA changed international Trade between Mexico and other count ries by li tigating it, and also that before NAFTA, with the GATT and the WTO foreign retailers such as Wal-Mart had more t rouble accessing the Mexican Market. The implementation, affected positively the t rade on U.S. border retailers, as Ford (2009) mentions in his article, but also remarks that the retailers are vulnerable to the exchange rate f luctuations and Wal-Mar t is no exemption to it. Therefore, what
Wal-Mart did as soon as they had access to the Mexican market is to build suppliers factories in order to avoid currency exchange r isks.
2. How much of Wal-Mar t's success is due to NAFTA, and how much is due to WalMart's inherent competitive strategy? In other words, could any other North American retailer have the same success in Mexico post-NAFTA, or is it Wal-Mar t a special case?
I t is important to remark that the NAFTA was not implemented just to favor WalMart, and that all the competitors of Wal-Mar t benefit the same privileges and advantages that NAFTA gives Wal-Mar t. The main difference is that Wal-Mart can use their volume of purchases, their sheer size and their "economies of scale" to decrease the prices to very low levels, challenging smaller competitors and making their actions more difficult. Javorcik, Keller and Tybout (2008), state that NAFTA and the GATT main effect was to induce Wal-Mar t's entering into the Mexican market. Wal-Mar t's strategy also includes working actively with the suppliers to improve the inventory levels, as well as using competent and advanced information systems to manage the supply chain, so the suppliers know when additional products are needed, which decreases the time needed until the products are resupplied and improves the production planning for both the supplier and WalMart. Another important strategy that Wal-Mart uses is that they don't keep the accrued cost-savings, they use them to reduce their prices even more, increasing
sales and driving competitors out of business, which also increases Wal-Mar t's sales even more. Finally, it is also curious that any retailer who wants to compete with Wal-Mart can only do it through lower prices or by different market segment, maybe becoming part of a niche market, which proves to be very difficult. So I think that not all the North American retailers are in such an advantageous situation as Wal-Mart, so I think that i t's a special case. As Ar t Carden (2009) states in his article, "there are three primary barriers to WalMart's fur ther expansion in Mexico: first, competitors can modernise and imitate Wal-Mart's best practices. Second, pervasive inequality in Mexico limits Wal-Mart's customer base. Finally, consumers have reverted to the informal sector in the face of 'repeated economic crises and stagnation"
3. What has Comerci done in i ts attempt to remain competitive? What are the advantages and challenges of such a strategy, and how effective do you think i t will be?
In order to remain competitive, Comerci has attempted to lower i ts prices. I t is important that in order to lower i ts prices, the retailer has to negotiate with the supplier, and in the case of Comerci, the negotiating power was lower than the suppliers' power because they could supply the competitor for a better price. After seeing that the price reduction was not as easy as expected, Comerci joined with other two Mexican retailers, Soriana and Gigante. From the union, a purchasing
consortium was formed, with the name of Sinergia, which means synergy in English, and that increased the negotiating power of the three retailers by allowing to them negotiate prices as a single entity, which gave them better bulk prices. A good point that Sinergia has is that it may actually expand and obtain support from the other big Mexican retailers, Chedraui and HEB, as Di Gregorio, Thomas and Castilla (2008) say in their article.
The main problem that Sinergia is facing is that the CoFeCo wants them to present regular reports concerning the purchasing agreements and to sign confidentiality agreements with the retailing chains that participate in the reports, in order to avoid price fixing and to start having a monopolistic position.
The strategy of using Sinergia has some challenges because it is a representative body only, without any assets, so their purchases are limi ted to the local suppliers, which makes its future very uncertain considering our globalized economy. The problem is that if Sinergia's target is just to reduce costs, then i t's sufficient, but as soon as they want to have some product or store differentiation, it is not enough because of the local limitations.
As Durand (2007) explains in his article, the arr ival of foreign fi rms will accelerate the modernization by reducing the local fi rms' performance, but in exchange, the
strongest local fi rms may t ry to expand to the U.S. considering the currency change rates and the positive local support.
4. What else do you think Comercial Mexicana S.A. should do, given the competitive position of Wal-Mart?
Considering Wal-Mar t's successful strategy, Comercial Mexicana S.A. has three options: -Remain independent: In order to be able to compete, a new strategy should be developed -Merge with local retail chain: Something like Sinergia, but with access to resources and assets -Merge with foreign retail chain: Maybe other retailers like Carrefour or Tesco would be interested in lending a hand to Comercial Mexicana in exchange of the access to the Southern and Central American market.
To find out which one is the best option, Comercial Mexicana should do a market analysis in order to find out how to acquire advantage over Wal-Mart, maybe through differentiation or by serving a higher income level branch. A proper market analysis should also consider the survival chances of Comercial Mexicana considering that Wal-Mar t is going to keep expanding and decreasing prices. The analysis should point out all the possible market opportunities thanks to the
NAFTA. Lee Scott, CEO of Wal-Mart declared in an interview in 2006 that the r ise of hard discounters are like competitors to Wal-Mart and that they reproduce too fast , causing a threat to Wal-Mar t, so another option is to counter-attack Wal-Mar t by using the power of the small shops and their lower prices.
Another option that Tilly and Galvan (2006) explain for the Mexican retail sector, is to expand their business to South America and more specifically to Brazil because of i ts growth potential, which is a very good idea considering the global situation nowadays.
Javorcik, B., Keller, W., & Tybout, J.. (2008). Openness and Industrial Response in a Wal-Mart World: A Case Study of Mexican Soaps, Detergents and Surfactant Producers. The World Economy, 31(12), 1558. Retrieved April 4, 2010, from ABI/INFORM Global. Carden, Art. (2009). Wal-Mar t: The face of 21st century capitalism Economic Affairs. Institute of Economic Affairs. Doi: 10.1111/j.1468-0270.2009.01964_4.x Retrieved April 4, 2010, from ABI/INFORM Global. Huerta-Goldman, J.. (2010). Mexico in the WTO and NAFTA in a Nutshell: Li t igating In ternational Trade Disputes. Journal of World Trade, 44(1), 173202. Retrieved April 4, 2010, from ABI/INFORM Global. Ford, T., Logan, B., & Logan, J.. (2009). NAFTA or Nada? Trade's Impact on U.S. Border Retailers. Growth and Change, 40(2), 260. Retrieved April 4, 2010, from ABI/INFORM Global Di Gregorio, D., Thomas, D., & de Castilla, F.. (2008). Competition between Emerging Market and Multinational Fi rms: Wal-Mar t and Mexican Retailers. International Journal of Management, 25(3), 532-545,593. Retrieved April 4, 2010, from ABI/INFORM Global.
Cdric Durand. (2007). Externalities from foreign direct investment in the Mexican retailing sector. Cambridge Journal of Economics, 31(3), 393-411. Retrieved April 4, 2010, from ABI/INFORM Global Tilly, C., & Galvn, J.. (2006). Lousy Jobs, Invisible Unions: The Mexican Retail Sector in the Age of Globalization. International Labor and Working Class History, 70(1), 61-85. Retrieved April 4, 2010, from ABI/INFORM Global Lee Scott. (2006). Wal-Mart: L iving up to new expectations. International Commerce Review : ECR Journal, 6(1), 9-18. Retrieved April 4, 2010, from ABI/INFORM Global.