Walmex To Perform Better Over Q2-Q414 As Economy Improves
Walmart's Mexican business Walmex is the largest retailer in Mexico by some distance. With annual sales of more than USD32bn across more than 4,500 stores and a number of formats, it is little wonder why Walmex is seen as a major bellwether for consumer spending. However, it has not fared well over the past year or so, with sales at stores open for more than 12 months (same-store sales) having declined for three successive quarters. The latest setback has been reflected by the 2.4% year-on-year decline for the first-quarter period to end-March 2014.
The main drag on performance has been a slowdown in consumer spending growth, which appears to have disproportionately affected the retail sector. Data from BMI's Americas team show Mexican real private consumption growth slowed to 2.5% in 2013; this is a marked comedown from a 2010-2012 average of 5%. We believe that a lukewarm job market has been a key factor here, although improving sentiment as judged by consumer spending indicators over the past few months suggest that the tide may be turning.
The comparables over the Q2-Q414 period are likely to be easier given the same-store declines in 2013. This, together with a brighter outlook for private consumption in 2014 (as reflected by forecast 3.1% growth in real private consumption), suggests to us that the retail sector, led by Walmex, will perform much better over the remaining three quarters of 2014.
|Mexico And Colombia Look The Best|
|Latin America - Average Real Private Consumption Growth, %|
As the chart shows, Mexico and Colombia are the only two major Latin American economies where the outlook for private consumption is decidedly better over the 2014-2018 period than the performance in 2009-2013. This bodes well for the retail sector and Walmex in particular, given its dominance. We believe there is room for the sector to further formalise and for less-developed channels like convenience stores to flourish as growth and investment into big-box hypermarkets slows down. To further illustrate why we are upbeat about Walmex's growth prospects over the next four or five years, we will put it through Porter's Five Forces analysis framework - this is a tool that is often used for industry and company strategy analysis to gauge where the economic power lies between producers, customers and suppliers in particular.
Applying Porter's Five Forces To Walmex
1.) Threat of new entrants
Very limited. Walmex is the dominant retailer, with sales of more than USD30bn per year, and is owned by Walmart, which is the leading global retailer by sales. Therefore, entry barriers are very high and Walmex has an enormous cost advantage.
2.) Bargaining power of suppliers
Due to its large size, Walmex is able to exercise considerable power over its suppliers. This is very good for its margins, which are in fact higher than for its parents. Walmex's operating margin in FY2012 was 7.8%, which compares with 5.9% for Walmart.
EM-based food retailers with a lot of market power often have stronger margins than developed world retailers, where competition is much firmer. Another example is Magnit of Russia.
Given our positive outlook for retail sales growth over the mentioned horizon, the bargaining power enjoyed by Walmex bodes well for earnings growth.
3.) Bargaining power of customers
The buyers are the Mexican consumers. Those that shop at formal retail stores have relatively less choice to switch over to other stores given the size and scale of Walmex, which has more than 4,500 stores.
The main challenge is likely to come from consumers beginning to prefer convenience stores compared with large stores. This would effectively mean consumers would visit smaller stores on a more frequent basis, rather than visiting larger stores on a less frequent basis.
A slowdown in consumer spending as seen over the past year in particular is of course a major challenge. However, we see this as unlikely given our economic outlook.
4.) Threat of substitute products
Not easy to substitute hypermarkets, which are Walmex's main formats in Mexico.
5.) Degree of competitive rivalry
Market power of Walmex dictates that there is not too much competitive pressure from its rivals. This again bodes well for its margins, as it does not have to enter into price wars.