Walmart’s Brazil Venture: A Failed Success

This article is a summary of the YouTube video ‘Why Walmart Failed In Brazil?’ by CNBC

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Walmart struggled in Brazil due to misaligned strategies and competition.

Key Insights

  • Walmart is a dominant global retailer, but has struggled to succeed in the Brazilian market.
  • Walmart entered Brazil in 1996 and rapidly expanded through acquisitions.
  • However, Walmart Brazil faced financial difficulties and operated at a loss for seven consecutive years.
  • The company failed to understand the local consumers' needs and shopping habits.
  • Brazilian consumers prefer promotional sales and are price-sensitive, often shopping at multiple stores for the best deals.
  • Walmart's everyday low prices and one-stop-shop model did not resonate with Brazilian shoppers.
  • Cash and carry format stores called "at the Carreiros" became popular in Brazil due to the economic crisis.
  • Walmart's competitors, such as Carrefour and Casino, excelled in the cash and carry format.
  • Walmart closed many of its stores in Brazil, while Carrefour remained successful.
  • Cash and carry stores have lower operating costs, which allows them to offer lower prices.
  • In 2018, Walmart sold 80% of its business in Brazil to Advent International, a private equity firm.
  • The focus now is on rebranding less profitable hypermarkets into the cash and carry format ("Atacadejo").
  • Walmart aims to cut costs, seek new suppliers, and invest in the Atacadejo model for long-term growth.
  • Walmart will retain a 20% stake in the Brazilian market but expects a net loss of $4.5 billion.

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Transcript

Walmart is one of the most dominant retailers in the world. In 2017, Walmart ranked number one in revenue among all major retailers worldwide. Walmart operates over 11,000 locations under 55 banners across 27 countries. You can find a Walmart anywhere from Botswana to the U.K. to Costa Rica.

But despite its success abroad, the brand has struggled to stay afloat in one of the biggest markets in Latin America, Brazil. After years of hyperinflation and the GDP growing 1.5 percent from 1980 to 1993 in Brazil, the country’s economy was on the rise. Brazil introduced economic reforms in the 1990s, and according to The Washington Post, Brazil attempted to move the economy from a period of state-run monopolies to a free market. Brands like Walmart saw this as an opportunity to expand their global reach with an emerging market on the rise.

By 1995, Walmart announced that they would be entering the Brazilian market, and by 1996, the company opened five stores. By 2000, Walmart had 14 stores in Brazil. But it wouldn’t be long until Walmart began rapidly growing in Brazil. In 2004, the company made an acquisition of Bompreço and its 118 stores for 500 million dollars. And in 2005, Walmart finalized a 757 million dollar acquisition of Sonny’s 140 stores across Brazil. Walmart believed that these acquisitions would improve the company’s position as a national retailer in Brazil, operating 295 stores in 17 of Brazil’s 26 states. At the time, Walmart Brazil’s then-president stated, “We are looking forward to getting to know the habits of the local customers and strengthen relationships with the regional suppliers.”

But understanding the habits of the local customers would be something that would end up hurting Walmart’s expansion plans. At its peak, Walmart Brazil had 558 stores across the country. This included Walmart and Sam’s Club, along with local banner brands such as Bompreço and Maxi. But that was in 2013. By 2018, Walmart had closed 120 of its stores in Brazil. Walmart Brazil has been hemorrhaging cash and making very little movement in revenue growth. The company grew too fast, and it wasn’t seeing much of a return on its investments. According to Reuters, Walmart posted operating losses for seven straight years, partly due to trouble with labor, inefficient operations or store locations, and uncompetitive prices. CNBC reached out to Walmart, but the company could not corroborate the report from Reuters.

Through 2014 to 2018, Walmart’s participation in the market share stayed flat at 2.5 percent, while its main competitors, both Carrefour and Casino (French retailers), saw an increase in overall retail market shares. And over the 23 years it’s been in Brazil, it’s failed to reach the local crowd of consumers. The reason? Well, Walmart didn’t adapt to the local consumers’ needs, and the company didn’t capitalize on how Brazilian shoppers spent their money. The local spender was not all that interested in Walmart’s famous “everyday low prices” and its one-stop-shop business model. That’s just not how the typical Brazilian shoppers spent their money. Although it works very well in the U.S. and other countries such as Chile and Mexico, it backfired in Brazil.

Brazilian consumers are very attracted to promotional sales, but promotional sales are only effective in Brazil if they are punctual. So, since prices were low every day, Brazilians didn’t actually perceive value in the promotion. According to McKinsey and Company, they would proactively search for savings, and oftentimes they would even shop at multiple stores to find the best deals available, from discount chains to cash-and-carry format stores.

One type of retailer that Brazilians don’t utilize is e-commerce shopping. In fact, in 2018, Walmart Brazil announced that it would be winding down its first-party e-commerce business in the country. The most popular option for today’s Brazilian consumers are the cash-and-carry format stores known as “atacarejos.” It combines words like “at the gato” which means cash and carry, and “varejista” which means retailer. That’s because these stores are mixed between the two retail formats. The atacarejos’ rise in Brazil is mainly tied to the economic crisis that has affected Brazil in the last couple of years. So, while the atacarejos and the hypermarkets are similar in model, so both have a large array of products, they have big selling spaces, and attractive prices, Brazilian consumers, which were already price-sensitive and with a limited purchasing power, were forced to think strategically about how they did their grocery shopping in the month. From 2017 to 2018, these kinds of stores grew 11 percent and raked in 12.5 billion dollars in sales. In that same time frame, supermarkets and convenience stores only saw small growth of 3.7 percent.

As for Walmart, 60 percent of its stores were closed in 2018 alone. Walmart trails behind companies like Carrefour and Casino, who are leaders in the cash-and-carry format stores, according to Kantar. And Walmart has continued to struggle to find its footing in Brazil, competing against these kinds of format stores. In 2017, Carrefour raked in 16.5 billion dollars, and Walmart made less than half of that, making a little over 6.7 billion dollars.

So, what was its method for success? Well, there are no membership fees like other warehouse stores, which can cost anywhere from 45 dollars to 100 dollars a year. Cash-and-carry stores traditionally have lower operating costs and are able to offer lower prices for products. And according to Euromonitor, between 2012 and 2017, warehouse clubs and cash-and-carry stores in Brazil grew 99 percent. Brands like Carrefour’s Atacadão offer customers low-interest credit cards that can only be used at stores under the Carrefour umbrella. As of 2018, there are 2 million Atacadão credit cards, which leads customers to spend 15 percent more on the cards.

Despite these missteps, Walmart pursued a footprint in Brazil. The company tried to position itself to acquire different banner stores in Brazil to widen its hold on the country. One of its successful banner stores was Maxi, which was a cash-and-carry format store. But since there are only 44 stores in Brazil, it isn’t enough to keep Walmart afloat. In addition to closing down stores across the country, it remodeled 120 stores as leadership fluctuated under four different CEOs in less than a decade.

In June of 2018, Walmart announced that they would be selling 80 percent of their business in Brazil to a private equity firm called Advent International. They want to invest more in the Atacadão model. So, they want to rebrand some of the less profiting hypermarkets into the Atacadão. They are going to cut costs as much as they can, raising different suppliers, seeking new suppliers that would raise Brazilian products into their shelves. In a statement about the deal, Walmart said that they will continue to have a stake in Walmart Brazil and will continue giving the Brazil business the best opportunity for long-term growth. CNBC reached out to Walmart, but the company did not respond to any questions regarding its struggles in Brazil. The deal with Advent would allow Walmart a 20 percent stake in the Brazil market. But the company expects to record a net loss of 4.5 billion dollars. Advent looks to turn things around for Walmart’s remaining 438 stores in Brazil without opening any new stores for now.

This article is a summary of the YouTube video ‘Why Walmart Failed In Brazil?’ by CNBC