A Case Analysis of the Walmart De Mexico

Abstract

This paper is to provide a case analysis of the Wal-Mart de Mexico and explains how the implementation of NAFTA affected Wal-Mart's success in Mexico. The paper will tell how much of Wal-Mart's success is due to NAFTA, and how much was due to Wal-Mart's inherent competitive strategy. Additionally, this paper will discuss Comercial Mexicana S.A., called Comerci, attempt to remain competitive. Further, the analysis will examine the advantages, challenges and the perspective on the effectiveness of the strategy.

Overview

Wal-Mart attained significant growth internationally in countries such as Brazil, Canada, China, Germany, Mexico and Puerto Rico to name a few. Daniel & Sullivan (2007) stated "Wal-Mart achieved incredible success, but struggled in Germany and Argentina" (p. 298). Realizing its weaknesses, the company adapted to the cultures, and learned partnerships strategies. Wal-Mart, known for the slogan "Every Day Low Prices" accounts for 55 percent of the market share in Mexico's supermarket sector with $11.7 billion in sales and $585 million in profits. In comparison to Comerical Mexicana S.A. known as Comerci, the company realized $3.1 billion in sales and $93 million in profits. Daniel & Sullivan (2007) indicated that "Comerci's market share dropped 15 percent" (p. 298).

In the case of Wal-Mart de Mexico, Wal-Mart's aggressive operational approach created many difficulties for Comerci to compete in the retailer market. The difficulties became evident after the signing of the North American Free Trade Agreement (NAFTA); which represented more challenges to the Mexico companies specifically Comerci. Ruiz (2009) indicated that as a result of NAFTA companies became pressured to achieve at higher levels than before, which means being more competitive" (p.51). The signing of NAFTA, objectively eliminated tariff and non-tariff barriers, and created opportunities of expansion for foreign investments to Mexico. Daza & Juarez (2007) noted the signing of the NAFTA determined the structural changes" (p. 32). Those changes extended into Mexico's improvement of its inadequate infrastructure in areas such as transportation and roads. Consequently, the effect of NAFTA was the outgrowth of Wal-Mart's dominance in the Mexico retailer market. Wal-Mart strategized and developed its business infrastructure by building manufacturing plants, and utilizing the savings on import tariffs to produce cheaper products. In essence, Wal-Mart minimized cost and maximized savings to consumers through reduced prices on goods.

How has the implementation of NAFTA affected Wal-Mart's success in Mexico?

The implementation of NAFTA was beneficial to Wal-Mart and its competitors. Daniel & Sullivan (2007) indicated that "the benefits of NAFTA, like lower tariffs and improved infrastructure, helped not only Wal-Mart but also its competitors such as Comerci" (p. 300). Wal-Mart was significantly successful in Mexico. Prior to the trade agreement, Wal-Mart was faced with significant challenges; one in particular, was the result of imports charges on many of the goods from America. Such charges prevented the company from being able to offer its "Every Day Low Prices". Consequently, after the implementation of NAFTA, Mexico, U.S and Canada became free trade zones, which allowed Wal-Mart to reduce the tariffs on American goods sold to Mexico from 10 percent to 3 percent. From this perspective, companies as Wal-Mart achieved decreased cost for their products. However, companies encountered logistical problems because the transportation in Mexico was really poor. Due to the poor road and scarcity of delivery trucks this factor contributed to the high logistics cost. For these conditions, the implementation of NAFTA improved Mexico's transportation infrastructure hence, the logistical cost was lowered; and NAFTA opened the gates wider to foreign investment to operate in Mexico, which also contributed to the reduction to human cost. Essentially, Wal-Mart took advantage of the cheap labor and build manufacturing plants in Mexico, and as companies began to build manufacturing plants in Mexico, Wal-Mart was able to buy its products without paying the high import tariffs. The lower human cost made lower import tariffs and resulted to cheaper products for Wal-Mart.

How much of Wal-Mart's success is due to NAFTA, and how much is due to Wal-Mart's inherent competitive strategy? In other words, could any other North American retailer have the same success in Mexico post-NAFTA, or is Wal-Mart a special case?

Wal-Mart's successes were not merely because of the implementation of NAFTA, but due to its competitive advantage, the company savvy business approach. Clearly, NAFTA helped solved most of the growth difficulties that Wal-Mart faced during its earlier years, but Wal-Mart success was attributed to its own superiority. The company's competitive advantage points were the capacity to maintain its "every day low price", and Wal-Mart's influence reflected in larger negotiating power over its competitors. Daniel (2007) explained that "Wal-Mart's utilization of its central distribution center to negotiate lower prices with suppliers was achievable in general due to its large purchasing volumes" (p. 299). Wal-Mart lowered its cost through negotiation with suppliers to drop prices, because the company can buy the absolute size of supplies.

Presumably, there are other U.S. retailers such as Whole Foods, who can compete with Wal-Mart but who have differentiated themselves to be successful. The lowering of prices would be insufficient to compete with Wal-Mart. The company unique business strategies were the driving force. Daniel