Could Bribery Scandal Hobble Wal-Mart’s Overseas Operations?
The bribery scandal in Mexico has cast a pall over Wal-Mart Stores Inc.’s (NYSE:WMT) international operations, its south-of-the-border subsidiary likely to face the brunt of the investigation backlash.
Mexico has delivered the lion’s share (21 percent) of Wal-Mart’s growth from international businesses, and was the scene of a highly successful experiment with small format stores. The 1250 odd Bodegas Aurrera stores were so popular with Mexicans that the company was prompted to repeat the format in the U.S. and Latin America. Another successful Mexican experiment was lining up several retail concepts on one property, such as Sam’s Club, Suburbia apparel and a VIPs restaurant, all sharing one parking lot.
Wal-Mart’s clean-up on the bribery scandal includes the creation of an executive ‘watcher’ responsible for compliance with the U.S. Foreign Corrupt Practices Act, adding bureaucracy to overseas operations that are not doing as well as expected in regions other than Mexico.
In China, the company has been facing flak from the government for incidents of mislabeling and selling perishable items beyond expiration dates. In India, the government made a volte-face on regulations designed to ease the entry of foreign retailers in the country. In Brazil, Wal-Mart is yet to make a cultural fit in terms of marketing, and is hamstrung by the lack of the kind of pricing power it enjoys in the United States. It also has to renegotiate longer-term purchase contracts if it has to launch its popular EDLP strategy (‘Every Day Low Price’). This problem of scale and pricing power also exists in China.
At home, Wal-Mart’s maturing business is facing competition from e-commerce sites like Amazon (NASDAQ:AMZN), who are nipping its heels with their promises of low prices and convenience.
In this scenario, Wal-Mart can ill-afford the bribery scandal that has engulfed its Mexican subsidiary, the star of its overseas operations.
“Mexico is a cornerstone of their international presence and it has been very successful,” says Bryan Gildenberg, an analyst with London-based Kantar Retail. “It would be unfortunate if the single biggest memory of Wal-Mart de Mexico is this issue.”