Wal-Mart to Buy Mexico’s No. 1 Retailer
Wal-Mart Stores Inc. said Tuesday it will pay $1.2 billion for a controlling stake in Mexico’s No. 1 retailer, Cifra, placing a major bet that this country’s beleaguered consumers will finally start feeling the economic recovery.
The move--the largest U.S. investment to date in Mexico’s retail sector--will turn this country into Wal-Mart’s biggest foreign market, with 373 stores. Previously, Wal-Mart had run 145 stores here in a joint venture with Cifra.
“You could call it some kind of vote of confidence in the Mexican economy,” said Sebastian Barry-Taylor, a retail analyst at ING Barings in Mexico City. “I’m talking long-term,” he quickly added.
The retail industry has been among the hardest-hit in Mexico’s severe crisis, with supermarket and small-store sales down at least 16% compared with two years ago. While the economy formally emerged from recession last fall, consumer demand still hasn’t bounced back. Shrunken by inflation, salaries are expected to start recovering only later this year or in 1998.
Mexico’s government on Tuesday said it expected the economy to expand more than 5% on average in the next three years. But the major spurs for growth will likely be exports and investment, with consumer spending recovery gradually, said officials presenting their economic plan through 2000.
“The drop in salaries has been brutal,” admitted Finance Minister Guillermo Ortiz.
The stagnation in the retail market has prompted several U.S. department-store chains to put expansion plans here on hold. Other companies, such as Sears, Roebuck & Co. and Kmart Corp., have sold their Mexico operations.
But Wal-Mart and Cifra have grown in recent years and managed to make money during the crisis. The companies first set up a partnership in 1991 to run Wal-Mart and Sam’s Club stores. A year later, they expanded their joint venture to also operate Superama and Aurrera supermarkets; the Suburbia department-store chain; and Vip’s cafeterias.
Les Copeland, a Wal-Mart spokesman, said the Mexican joint-venture stores were profitable last year despite the crisis, although he declined to be specific.
He said the Bentonville, Ark.-based retailer is joining up with an “outstanding retailer” that will give it experience in selling abroad--an increasing priority for the chain, which has thoroughly Wal-Marted the U.S. “One neat thing is that Cifra’s concepts have broad applicability to other emerging markets in smaller population centers,” he said.
Analysts noted Cifra also has strong cash flow that will enable the Mexican Wal-Mart to expand aggressively without financial help from Arkansas. Cifra’s cash cushion comes from good management of working capital, quick inventory turnaround, and careful financial management, they said.
Cifra posted a 2.4% rise in earnings last year even though its sales plummeted nearly 10%. The company was especially hurt because of its heavy concentration in central Mexico, which was clobbered by the economic crisis.
Cifra had net profits of $253 million last year on sales of $2.9 billion.
Wal-Mart shares rose 50 cents to close at $30.875 on the New York Stock Exchange on Tuesday.