Wal-Mart Gets Ahead of Recession with Chilean Acquisition

With its tender offer for Chile's Distribucion y Servicio, a 185-store supermarket chain, Wal-Mart is making an acquisition that will put it into an even stronger position when the global economy stirs again.

Internationalization is an ongoing theme at Wal-Mart. Its executive suite will soon feature Mike Duke, who will succeed Lee Scott as president and CEO on Feb. 1, 2009, as well as Eduardo Castro-Wright, who recently was appointed vice chairman of Wal-Mart Stores. Both of them have been heavily involved in Wal-Mart's international operations.

The international influence at Wal-Mart has played out in several ways. Wal-Mart applied experience it gained in markets such as Mexico to create new, smaller store formats in the United States, most recently Marketside, which began offering fresh and prepared food in four Phoenix, Ariz., locations earlier this year. It also transplanted an apparel program developed in Britain, called George, to Canada, then launched it in the United States several years ago. Global growth has been a priority for Wal-Mart, but around 2006, Wal-Mart shifted its energies, withdrawing from Germany and putting more effort into South and Central America and Asia. Its priority markets are Brazil and Mexico in the Americas, while China and India are critical markets in Asia.

In Chile, Wal-Mart will acquire a portion of D&S shares from its controlling stockholders, the Ibanez family. Plans call for the controlling family shareholders to strike a long-term agreement with Wal-Mart to operate D&S with existing leadership. How that will work out remains to be seen. A clash between Wal-Mart executives and store management in Germany complicated the company's ultimately failed expansion into that market.

Yet there were other reasons Wal-Mart's German initiative faltered. For one, Wal-Mart didn't enter with enough market share to take a dominant position among the country's retailers; it operated only about 85 stores at the time it exited Germany. The D&S acquisition automatically makes it a big player in Chile with a 32 percent market share, says Citigroup analyst Deborah Weinswig, who rated the move a "positive" for the U.S. retailer.

Wal-Mart's interest in South and Central America is obvious given that it already operates stores in Argentina, Costa Rica, El Salvador, Guatemala, Honduras, Nicaragua and Puerto Rico, in addition to Brazil and Mexico. So it is likely to be in Chile for the long haul. Until the recession went global, the region had experienced strong economic growth, partially driven by the expansion of energy production. Its emerging middle class is looking for alternatives to the typically pricey goods found at local retailers. Craig Herkert, president and CEO of Wal-Mart Americas, promised the new D&S executive team will maintain a "laser focus" on prices.

Chile also represents another learning lab for Wal-Mart, and its experience there may influence more than just results back in the U.S. but operations, too, as the U.S retailer has proven adept at taking what what it experiences in one market and translating it, as with the Marketside and George initiatives, to others.