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 Business News | May 2007 
Slowing Economy Casts Shadow Over Mexican Wal-Mart
 Cyntia Barrera Diaz & Gabriela Lopez - Reuters
Mexico's slowing economy has started to take its toll on Wal-Mart de Mexico as sales of the country's leading retailer shrink despite rising traffic at its stores and new marketing campaigns to encourage shopping.
Analysts believe the second quarter of 2007 will be difficult for Walmex, but indicators like consumer credit and job creation suggest there is room for recovery.
According to a Reuters survey, Mexico's economy is expected to have grown 2.96 percent in the first quarter of this year, compared with a robust 4.30 percent in the October-December period of 2006.
Walmex's most recent sales report, its weakest reading in over two years, disappointed analysts and investors, sending its shares down 1.77 percent on Thursday. The share price recovered 0.74 percent on Friday morning to 42.45 pesos.
The company's April same-store sales rose only 0.5 percent, below market consensus and a far cry from the 9.9 percent jump reported in the same month of last year.
"The numbers were undoubtedly influenced by paydays and Easter week, but nevertheless reflect a softening of demand," Citigroup said in a report. Walmex, a unit of the world's biggest retailer Wal-Mart Stores Inc, had a difficult April comparison.
Last year, the retailer had aggressive marketing campaigns ahead of the World Cup soccer tournament that prompted purchases of expensive goods such as televisions or DVD players which were not repeated this year.
"We were already expecting a tough second quarter, but we now believe that there are negative surprises in store for the next two months," said analyst Rafael Shin with Credit Suisse. "However, we maintain our full-year same-store sales growth forecast of 4 percent."
Same-store sales are recorded at outlets that have been open for at least 12 months and are seen as the most reliable indicator of a retail company's operating performance. As of the end of last month, Walmex had 913 stores across Mexico.
In April, the store format that reported the best performance was Superama, which caters to high-income consumers. Traffic at all its stores rose, but the average ticket was lower than the previous month.
This means that Walmex is not losing market share to competitors like Soriana or Comercial Mexicana, but the working class - the bread and butter of its operation - have less money to buy groceries.
"You can see the slowdown in the type of products sold
(during April): Groceries reported the strongest rise while general merchandising and other products, which are not of basic consumption, declined," Shin said.
REMITTANCES AND MARKETING
Analysts also mentioned a weaker flow of money sent home by Mexican workers in the United States as another factor hurting spending patterns of Walmex customers.
With the U.S. economy also cooling, remittances grew at an annual rate of 3 percent in the first quarter, down from a 28 percent rise during the same period last year. Money sent from abroad is Mexico's second-biggest source of foreign currency.
Santander analyst Joaquin Ley said cautious consumption in Mexico due to weaker remittances during the first quarter likely carried over into the second quarter.
Walmex has been working in new ways to bolster sales. It rolled back prices in at least 7,500 staple products in February and recently relaunched 18-month, interest-free credit at its Sam's stores.
The company is also cutting prices at its Suburbia clothing stores and introduced a new line of low-priced generic drugs available at most of its store formats.
With consumer credit up 32 percent as of March, a slight rise in salaries and more jobs with social security created last month, Walmex's chances or regaining momentum are good, analysts said.
"Walmex is still the dominant player in the Mexican food retail segment and we continue to believe that it is best able to tackle a slowing business environment," Citigroup said. |
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