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Walmex trumps the wall

Home / Press Centre / Walmex trumps the wall

Gary Greenberg, Head of Hermes Emerging Markets

Although the popular consensus is that President Trump’s election will damage the Mexican economy, recent comments from his administration suggest these fears may have been overblown. The sell-off in stocks after his election therefore presents an attractive opportunity to buy companies at appealing prices. Gary Greenberg, Head of Emerging Markets, and Yasmin Chowdhury, Senior Investment Analyst discuss Walmex, whose domestically-focused business and strong strategic vision suggest a positive trajectory for the business in the coming years.

Walmart de Mexico SAB, or Walmex, is Walmart’s largest subsidiary outside the US and is exemplifying the successful implementation of an advanced business model in an emerging economy. It is the largest retailer in Latin America, dominating its domestic market with more than 50% market share. It primarily sells food and other consumables, and is therefore defensive in nature. More importantly, as it does not export products and 95% of the costs of sourcing and producing goods are incurred locally, it has limited exposure to weakness in the peso or trade with the US.

We attended Walmex’s analyst day in Mexico City, where it reiterated its focus on increasing the price gap with its peers to gain further market share. Over the last few years, the company’s earnings have only grown marginally, a circumstance the management is actively working to address with the goal of doubling its 2014 sales by 2024. Although it already has best-in-class margins and return on invested capital (ROIC), the company is introducing new initiatives to increase its appeal to customers and improve shareholder returns. It is achieving this by implementing innovative technologies that are improving its productivity.

Exemplars of excellence
Central to Walmex’s transformation is its ‘centers of excellence’ (COEs) initiative, which uses new stores as models for integrating new technologies and processes. Store managers use apps to manage their premises and even train their employees, with the aim of making operations paperless. Kiosks have also been set up in store to allow customers that don’t have access to the internet to shop online and browse a broader product range.

These initiatives have increased efficiency, reduced costs and improved customer experiences. Shoppers are asked to review their experience on a tablet at each cashier point, with the results reviewed monthly and acted on where needed. There is a direct correlation between high-scoring stores and high same-store sales, and the evaluation process is fundamental to the success of the COE initiative.

Fresh upstream operations are another feature of the COEs. Instead of processing fresh meat within each store, Walmex has created a centralised meat centre, which has standardised meat offerings and reduced costs for 200 stores it serves, while reducing the space required for new shops.

The results of the COE initiative are impressive. Sales at COEs outpaced the rest of Walmex stores by 3% in the last quarter of 2016. The initiative has also lowered the capital expenditure and space requirements for each new store by 8%. Walmex aims to implement the COE programme company-wide by September 2017 and have meat centres serving 99% of stores in four years.

Capex: digital and distribution
Walmex was an early adopter of ecommerce compared to its domestic rivals and this is a key driver of its growth. The company invested heavily to improve its digital platforms, expand its online coverage and introduce better delivery models. Now the business is beginning to benefit from this spending. Its conversion rate from browsing to purchasing online hit a record high at 3.7% during 2016. Walmex’s new Facebook presence has already gained 6.1m followers, increasing engagement with customers five-fold. These initiatives have enabled the company to gain greater insight into its customers’ habits, enabling it to market more intelligently and build strong relationships with its next generation of customers.

Walmex recently announced a $1.3bn investment programme to improve its logistics and distribution operations, which should reduce weighted average distances travelled by 40%, enable access to 400 potential store locations and reduce working capital by nine days, thereby improving efficiency. While capital expenditure has increased 19% year-on-year, it is being dispensed more efficiently per square metre.

Pressing play on performance
Over the last few years, Walmex’s stock price has been strong, beginning to discount its true potential. If the business successfully implements these new initiatives across its stores and delivers on its capital expenditure plans, it should survive and thrive in post-Trump Mexico. Its management’s 10-year goal to double sales by 2024 may even be surpassed. This carefully designed and sector-leading strategy should reignite this stock’s strong long-term performance.


Figure 1: Walmex share price


Source: Bloomberg



The above information does not constitute a solicitation or offer to any person to buy or sell any related securities or financial instruments. The views and opinions contained herein are those of the author and may not necessarily represent views expressed or reflected in other Hermes communications, strategies or products.


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Gary Greenberg Head of Hermes Emerging Markets Gary Greenberg joined Hermes in September 2010 in the Emerging Markets team. Previous to this, he was Managing Partner at Silkstone Capital and Muse Capital, both London-based hedge funds he co-founded and managed in 2007 and 2002, respectively. From 1999 through 2002 he was Executive Director at Goldman Sachs in New York and London, where he co-headed the Emerging Markets product for GSAM, and served on the global asset allocation and European stock selection committees. From 1998 to 1999 he was Managing Director at Van Eck Global in Hong Kong and New York, where he was the lead portfolio manager for International Equities and ran the Hong Kong Office. From 1994 through 1998 Gary was Chief Investment Officer at Peregrine Asset Management in Hong Kong, managing and supervising global and regional equity, plus fixed income funds. In the early years of his career he was a Principal of Wanger Asset Management in Chicago, where he co-founded and co-managed the Acorn International Fund, which grew to $1.4 billion under his tenure. Gary holds an MBA from Thunderbird School, a BA from Carleton College and is a CFA charterholder. In 2017 Hermes Global Emerging Markets was named best emerging markets fund for the second year in a row at the Fund Manager of the Year Awards and best emerging markets group by Citywire Deutschland, and Gary was named best manager for emerging markets equity by Citywire UK.
Read all articles by Gary Greenberg

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