Walmart seeks bigger slice of Brazil

When Walmart reports its earnings on Tuesday, the familiar divide between a stagnant US and high-growth emerging markets is likely to be muddied by Brazil, a country where its performance is middling and it is exploring a deal to buck things up.

The US retailer, the world’s biggest by sales, has hired UBS to examine a potential bid for the Brazilian business of Carrefour, the French world number two, according to people familiar with the matter – although Carrefour insists the business is not for sale.

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The move highlights Walmart’s search for higher profits in a fast-growing country where it is yet to find its groove, though it already owns 484 stores serving an expanding middle class that has become a fixture in global investment trends.

The US retailer entered Brazil in 1995, when the country was still emerging from decades of hyper-inflation and economic mismanagement. It opened 25 stores before its first acquisition in 2004 and its experience illustrates the difficulty of converting rising consumer wealth into a good business.

Walmart has refused to comment on rumours of its interest in Carrefour’s Brazilian operations, but when it reported its results for 2010 the company said: “We are disappointed with this year’s results in Brazil.”

The company said it was implementing changes to turn things round, but this June Doug McMillon, head of Walmart’s $109bn international business, told journalists Brazil had not been as profitable as Walmart would like.

The company is Brazil’s third-biggest retailer by sales and Carrefour’s business is number two, but takeover speculation has swirled around it since the French company unearthed accounting and management problems in the country last year.

Last month a proposed merger between Carrefour in Brazil and Grupo Pão de Açúcar, the sector leader, fell apart in the face of opposition from Casino, another French retailer with a stake in Pão de Açúcar.

Carrefour has come under pressure from prominent investors to sell assets as it struggles to boost profits in France – and some analysts suggest the company as a whole is vulnerable to a bid.

For Walmart, the economies of scale from a Brazil acquisition could help to raise its profit margins by letting it plug Carrefour into its ultra-efficient logistics system and pump more goods into it.

Walmart says it is already investing about $775m into upgrading logistics and technology in Brazil as well as in opening 80 stores.

Renato Prado, an analyst at Banco Fator in São Paulo, said: “Margins are very tight in the sector so the cost of logistics makes a big difference … Walmart and Carrefour’s logistics are very similar so it would be easier to find synergies.”

Walmart is an experienced acquirer – its first forays outside the US into Canada and Mexico involved takeovers in the early 1990s – but that does not mean implementation has got any easier.

Its stores in Brazil include 118 acquired when it bought Bompreço in the country’s north-east, and 140 taken on when it bought Sonae in the south, but its sales have suffered as it has tried to convert them to its trademark “everyday low prices”.

Walmart’s unchanging cheap prices contrast with the more dynamic “high-low” strategy of yo-yoing discounts and mark-ups – and Brazilians have not got used to the American way. Walmart’s like-for-like sales fell 8 per cent in the quarter to April 30 and its gross profit margin declined too.

Mike Duke, Walmart’s chief executive, said at its last earnings: “I believe that the transition under way [to everyday low prices] is right for our customers, though it will take time to shift the culture and improve the profitability.”

While Carrefour’s 236 stores could help to raise Walmart’s profitability and broaden its presence in São Paulo and the south, it could also aggravate its difficulties by requiring another tough transition to Walmartism.

Neil Currie, global head of consumer research at Dahlman Rose & Co, says: “Retailing is littered with acquisitions that made a lot of sense on paper and then failed in the execution.”

But Walmart needs big emerging economies to offset stagnant growth in the US, where analysts expect it to report a ninth-consecutive quarter of falling like-for-like sales on Tuesday.

If Carrefour did put its Brazil business up for sale, another incentive for Walmart to buy would be simple obstructionism: it would prevent a multinational rival such as Tesco – which does not have a presence in Latin America – from buying a new vehicle to compete against it.