Walmart Goes South In 2020, Mexico's top retail chains were trying to figure out how to compete with Walmex, the Walmart of Mexico. With the change from NAFTA to USMCA, things have become even more challenging. Since Walmart's aggressive entry into the Mexican food and staples retail market, local retail chains, such as Comerci, Gigante, and Soriana, have found it increasingly difficult to remain competitive. Walmart's strong operating presence and low prices since NAFTA's lifting of tariffs have put pressure on other retail chains, and now their management must determine how to compete against Walmart. Mexico's retail sector has benefited greatly from the increasing trade liberalization the government has been pushing. After decades of protectionism, Mexico joined GATT in 1986 to help open its economy to new markets. In 1990, with Mexico's economy on the upswing and additional free trade negotiations with the United States and Canada taking place, the founder of Walmart met with the president of Cifra, Mexico's leading retail store. Their meeting resulted in a 50/50 joint venture in the opening in 1991 of Mexico's first Sam's Club, a subsidiary of Walmart, in Mexico City.

It took only a couple of months after the opening to prove the store's successit was breaking all the U.S. records for Sam's Club. The JV evolved to incorporate all new stores, and by 1997, Walmart could purchase enough shares to have a controlling interest in Cifra. In 2000, the name changed to Walmart de Mxico, S.A. de C.V., and the ticker symbol to WALMEX. Prior to 1990, Walmart had never made moves to enter Mexico or any country other than the United States. Once it started growing in Mexico, management created the Walmart International Division in 1993. By 2020, Walmart had expanded to 27 countries outside the United States through new-store construction and acquisitions. With growth stalling in the United States, Walmart is looking to international expansion. It currently has more than 11,300 retail units worldwide, operating under 58 banners in 27 countries, and e-commerce websites in 10 countries. In spite of its challenges in some markets, Walmart has flourished in Canada and, most notably, in Mexico. Walmart's operations in Canada began in 1994 with the acquisition of 122 Woolco stores. It now has more than 400 Walmart stores and enjoys strong partnerships with Canadian suppliers. In Mexico, Walmart operates 2,449 units, including Sam's Clubs, Bodegas (discount stores), Walmart Supercenters, and Superamas (grocery stores), and it has become the largest food and staples retailer in the country, followed by Organizacion Soriana. Given its hit-and-miss success rate on the international scene, it is natural to wonder how much of Walmart's triumph in Canada and Mexico has stemmed from its internal processes, international strategies, and geographic proximity and how much can be attributed to the close economic ties shared by the United States with the two countries through NAFTA.

Walmart's Competitive Advantage Much of Walmart's international success comes from the tested practices on which the U.S. division bases its success. Walmart is known for the slogan "Every Day Low Prices," which is the core of their value proposition. It has expanded that internally to "Every Day Low Costs" to inspire employees to spend company money wisely and work hard to lower costs. Because of its sheer size and volume of purchases, Walmart can negotiate with suppliers to drop prices to agreeable levels. The company also works closely with suppliers on inventory levels using an advanced information system that informs suppliers when purchases have been made and when Walmart will be ordering more merchandise. Suppliers can then plan production runs more accurately, thus reducing production costs, which results in cost savings for Walmart and passes on the savings to the consumer as lower prices. Walmart also has a unique distribution system that reduces expenses. It builds super warehouses known as Distribution Centers (DCs) in central locations that receive most of the merchandise sold in Walmart stores. It sorts and moves the merchandise via a complex system of bar codes, then its inventory information system directs transport to the various stores using its company- owned fleet or a partner. The central distribution center helps Walmart negotiate lower prices with its suppliers because of the large purchasing volumes. These strategies have resulted in great success for the company. And it even uses the second most powerful computer in the worldbehind the Pentagon'sto run its logistics. Walmart in Mexico Prior to the passage of NAFTA, Walmart faced some challenges as it expanded into Mexico. One of the biggest was import charges on many of the goods sold in its stores, which prevented it from being able to offer its "Every Day Low Prices." Unsure of local demand, Walmart stocked its shelves with items like ice skates, fishing tackle, and riding lawnmowersall unpopular items in Mexico. Rather than informing headquarters that they wouldn't need those items, local managers heavily discounted the items, only to have the automatic inventory system reorder them when the first batch sold. Walmart also encountered logistics problems due to poor roads and the scarcity of delivery trucks. Yet another problem was culture clashes between the Arkansas executives and the local Mexican managers. Some of these problems were solved by trial and error, but the emergence of NAFTA in 1994 helped solve most of them. Among other things, NAFTA reduced tariffs on American goods sold to Mexico from 10 to 3 percent. Prior to NAFTA, Walmart was not much of a threat to companies like Comerci, Gigante, and Soriana, Mexico's top retailers at the time. But once the agreement was signed, the barriers fell, and Walmart was on a level playing field with its competitorswhich was all it needed to become number one. However, the retail sector in Mexico is the second most competitive sector of the economy behind auto parts, so Walmart has had its work cut out for it to remain competitive against local Mexican retail chains and other

foreign retailers, such as U.S.-based Costco and French-based Carrefour, which sold its outlets to Mexican competitor Chendrau in 2005. Since the passage of NAFTA, Mexico has invested significantly in public and private infrastructure, which has helped Walmart to improve the efficiencies in its distribution network. The signing of NAFTA also opened the gates wider to foreign investment in the country. Walmart was paying huge import fees on goods shipped to Mexico from areas like Europe and Asia. Foreign companies knew that if they built manufacturing plants in Mexico, they could keep costs low with Mexican labor and ship to NAFTA's free trade zoneMexico, the United States, or Canada. As companies from Japan and China began to build manufacturing plants in Mexico, Walmart could buy their products without paying the high import tariffs. NAFTA resulted in better suppliers due to an increase in competition, competitiveness, and efficiency among companies to gain the trust of their clients. Suppliers have invested in being more productive to be more competitive, while at the same time gaining greater access to better materials and technologies in the region. Better suppliers also increased the variety of products available to consumers with wider price ranges, which allowed Walmart to offer customers better savings and thus increase their purchasing power. NAFTA also helped Mexico achieve greater economic growth and lower rates of inflation, again adding to the purchasing power of consumers. Soriana and other retailers have combated Walmart's tactics by lowering their own prices, and Soriana even has flyers in its stores that compare prices from their stores and Walmart's, but on many items, they can't get the prices as low. Walmart's negotiating power with its suppliers is large enough that it can get the better deal. Also, most of Mexico's retailers have priced goods differently. They were used to putting certain items on sale or at deep discount, a strategy known as "high and low," rather than lowering all prices. Though they have been trying to adjust their pricing structure to match Walmart's, they are still frustrated with Walmart's continued cost cutting. Walmart's Expansion into Central America Walmart also made two significant changes in its operations in Mexico. First, Walmart de Mexico purchased Walmart Centroamerica in 2009, which included Costa Rica, El Salvador, Guatemala, Honduras, and Nicaragua. One thing that facilitated that acquisition was the fact that Mexico, in addition to being a NAFTA member, signed free trade agreements with 49 countries around the world, including several in Central America. This meant that they could gain access to even more products and suppliers. Walmart worked with thousands of suppliers throughout Mexico and Central America, with more than 60 percent of their supplier base in Mexico composed of SMEs (small- and medium-sized entities). They were also able to better coordinate the network of 14 distribution centers in Mexico and Central America. As a result, Walmart de Mexico (also known as WALMEX) changed its name to Walmart Mexico & Central America (or Walmart de Mexico y Centroamrica). Second, Walmart established a multi-format operations approach in the region to address different consumer segments. This occurred not only in Mexico but also in Central America

through Bodegas and discount stores, hypermarkets, clubs, and supermarkets. Two different store concepts it established are Bodega Aurrera and Superama, both supermarket stores aimed at different demographics. In addition, Walmart has entered the eCommerce area aggressively. It also learned things in Mexico to help target the Hispanic community in the United States by opening a Latin-themed warehouse store in Houston, Texas, called Ms, a spinoff of Sam's Club. In addition, Walmart imported products from Mexico for its stores in the United States for the Hispanic community. Impact of USMCA on the Future of Walmart To help boost the manufacturing wages in Mexico, at least 40 percent of the regional content must come from workers earning at least $16 per hour, a significant increase in Mexican wages. On the one hand, that will increase the earning power of manufacturing workers, but on the other, there may be pressure on other companies like Walmart to raise wages as well. Another impact has to do with digital trade. The agreement strengthens the protection of intellectual property and digital trade, including the ability to transfer data across borders and to limit civil liability on internet platforms. Given Walmart's strong integrated supply chain and its growth in e-commerce, this new provision in USMCA should be a big boost to business.

Questions 1.How much of Walmart's success is due to NAFTA, and how much is due to Walmart's inherent competitive strategy? 2.In other words, could any other U.S. retailer have the same success in Mexico post-NAFTA, or is Walmart a special case? 3.What can local Mexican retailers do to compete against Walmart? 4.How do you think the passage of USMCA will impact Walmart's strategy in Mexico?