Walmex: Adaptability of the Walmart business model
Have you ever been to a “high-end Walmart” that is known for luxury and quality products? Can Walmart compete on something other than price? More so, can the Walmart business and operating model be adapted for different types of stores? The answer to all this questions is yes; in Mexico Walmex (Walmart Mexico and Central America) has been really successful in adapting its business model to serve different type of customers through several store formats.
Context
Walmex is a publicly traded company (30% trades in the Mexican Stock Exchange and 70% is owned by Walmart Inc.). It entered the Mexican market through a partnerships with Cifra (who Walmart later acquired to form Walmex). Cifra had different formats of supermarkets which gave Walmart a strong retail presence but also the need to adapt their business model to existing stores instead of building all their stores from the ground up. Walmex has been incredibly successful in doing this achieving a 12.4% CAGR in sales and 13.7% growth in EBITDA over the last 10 years.
This analysis will focus on the business and operating model of the supermarkets division that has three main formats in Mexico (85.9% of their business, the rest is in Central America).
The sales of the company in 2014 were mainly driven by their supermarket business:
- Supermarkets (76% of sales)
- Bodega Aurrera (42% of sales)
- Walmart (27% of sales)
- Superama (7% of sales)
- Sam’s Club (20% of sales): Price Club
- Retail Stores (3% of sales): Suburbia (retail store for lower income consumers).
Business Model
Walmex provides a supermarket store for every type of consumer in Mexico, for this Walmex has three distinct supermarket brands each targeted towards consumers of different income. They value differentiating the business models of their three formats to avoid cannibalization and to create and then capture value from every Mexican. The three formats are the following:
Bodega Aurrera: “The champion of low prices”
- Value proposition: price
- It is targeted towards lower income consumers (E and D)1. The business model is to have the lowest priced products in the market even if variety is low; their ads are about “using pocket change to feed your pantry” because a big percentage of their sales comes from consumers in the informal job sector who are paid in cash. Their mascot is Mama Lucha (a Mexican female wrestler mom) that fights for prices.
Walmart: “Everyday low price”.
- Value proposition: Price and variety.
- It is targeted to middle income consumers (D+, C and B). It sells at a great variety of general merchandise and grocery products at everyday low prices.
Superama: “Always thinking of ways to benefit the client. Quality and freshness… every day.”
- Value proposition: quality, convenience and service.
- Targets higher income consumers (C+, B and A) with fresh and high quality products. Stores are convenient and service is key.
Operating Model
Store Layout: The store layout and location is one of the key differentiators of the operating models among the brands. The Bodega Aurrera stores are ugly, low key, full of boxes (even on the aisles) and are located in low income urban neighborhoods. On the other extreme, the Superama stores are always clean, everything is custom made and has a really high-end look. The size of the stores also varies: Walmart focuses on variety so they have big stores (7,700 m2 on average), Bodega Aurrera are smaller (4,240 m2 on average) while Superama is the smallest (1,500 m2 on average) and focuses on convenience.
Inventory Management: The inventory management aligns to the business model of the different stores. Bodega Aurrera has 32k SKUS, Walmart has 90k SKUs and Superama 30k SKUs. The great variety in Walmart is appealing to the consumer while in Superama the smaller number of high quality products makes shopping easier and convenient for professionals.
Distribution network: They have 13 distribution centers in Mexico, 6 of which are located on the Mexico City area where the majority of their stores are located. Their distribution facilities are state of the art with automated sorters that allows them to distribute 4M boxes per day. The number of stores of different formats nearby allows them to lower their cost of transportation by optimizing the trips per truck and clustering deliveries by areas for the smaller stores.
Suppliers Management: Buyers are organized by business units (perishables, pharmacy, etc.) instead of by store format. Since they serve every type of client, this allows them to buy a variety of SKUs from the same supplier (they buy the premium packaging and also the low cost packaging) consolidating volume and achieving a higher bargaining power.
One adaptation they have for the Superama Model is the Local Pride program. Since Superama’s value proposition focuses on the freshness of the product they instituted this program to buy fruits and vegetables from local producers. This program has several advantages for Walmex; buying from local producers achieves shorter lead times and can get quality product faster to the shelves. They also advertise the benefits they have for the local communities for a more socially conscious consumer.
With these differences in the operating models Walmex has been able to capture value from every type of consumer in Mexico.
Sources (in Spanish):
- Mexican socioeconomic definitions by AMAI being A, B,C, C+, D, D+, E (lower income): http://www.inegi.org.mx/rne/docs/Pdfs/Mesa4/20/HeribertoLopez.pdf
- Superama website: http://www.superama.com.mx/superama/quienes-somos.aspx
- Walmex, our business: http://www.walmex.mx/assets/files/Presentaciones/2015/ESP/Walmex-Panorama_ESP_(Sep-10-2015).pdf
- Walmex presentation for investors: http://www.walmex.mx/assets/files/Presentaciones/2015/ING/Walmex-UBS-presentation-(November).pdf
- Walmex 2015 Call for investors: http://edge.media-server.com/m/p/yun9qja2/r/1/lan/es
- Walmex 2014 Annual Report: http://www.walmex.mx/informe/2014/pdf/WALMEX_2014_ESP_completo.pdf
Very interesting post Gaby! I would have never thought that Walmart would be entering a market with a luxury and quality positioning. I was wondering about the other competitors’ reaction to Walmart entering the market. Local Pride program was also very interesting to see and it’s very similar to Unilever’s supplier program. Do you think that buying from the local producers decrease their economies of scale and eventually decrease their profit margin?
It would be interesting to see whether this business model is applicable to other markets that Walmart is present.
Sinem,
Actually the local consumers have recently developed premium stores too. The two biggest competitors of Walmart launched there versions in the last 5 years, this has made the fight for the higher income consumers more competitive.
Regarding the Local Pride program I believe that although it does decrease some of the economies of scale it has a lot of advantages that outweigh this because they can shorten the lead time and get better quality products.
Very interesting to see how a company had to adapt both its business and operating models to be successful in a foreign market. The differences between the three brands mean that they need to over invest in some aspects vs. others (e.g. Walmart stores investing more to manage larger inventories of SKUs, Superama investing more in store layout and decoration). I imagine that intangible investments, such as human capital and culture, also shape this differentiation between outlets.
However, being part of larger group allows them to take advantage of synergies, such as shared transportation, logistics and supplier management. This advantage is even greater because the three formats are fundamentally the same business and share product categories.
In other emerging countries such as Colombia, large retail groups also have a three tiered offering. Because of their significant market share and broad consumer targeting, they are able to have a high bargaining power vs. CPG companies and suppliers.
I wonder how the Local Pride program is transferable to other geographies or mid-market segments.
Nicolas,
Yes, I agree that probably the investments in intangible things must be higher overall than with the usual Walmart model since they need to develop three training programs, etc. As you mentioned, this investments are different per type of store which also allow for more differentiation.
As you mentioned, consolidating this demand is also a great advantage to lower the overall cost of products.
This is incredibly interesting, Gaby – awesome job! I’m very intrigued by the way that Walmart adapted to the Mexican market. It seems that Cifra was a key part of their successful implementation and I’m curious to know if Cifra was similarly branded and had an extensive network like Walmart does in the US. This reminds me a little of Walgreen’s acquisition of Duane Reade in New York and the successful merging and upgrading of that network. While that acquisition 5 years ago has now been dubbed a success story, there was some backlash at the time with customers being nervous about a large company coming in and changing things. Were there any similar responses in areas of Mexico?
Another point that I find fascinating is that Walmex can manage both Superama and Sam’s Club. Looking at a sales percentage, it appears that Sam’s Club has gained a more substantial footprint. Is it possible that while the tiered supermarkets themselves do not cannibalize each other, the higher-end offerings do? While it seems the size and product offerings differ considerably between the two, they are still marketed towards the top-tier of consumers. I’d be curious to see how Walmex differentiates that sub-sect and captures value on that more detailed level.
It’s interesting to see how American companies are able to adapt their business and operating models to satisfy customer in different countries. I wonder which parts of Cifra’s models were rejected and which were adopted during the first phases of the partnership with Walmart. In a macro level, I imagine that the synergy among all sister companies and the ability to reach so many different market creates a pretty high entry barrier for any other competitor in the Mexican market. Good job!