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October 20, 2005

"The Wal-Mex Phenomenon": Fletcher Students Tackle the Impact of the Globalization of the Retail Sector in the Mexican Economy

What could be the long-term impact of the liberalization of the retail sector on a developing country such as Mexico?

Professor Chris Tilly of the University of Massachusetts at Lowell asked such a question of Fletcher students on October 17 during the seminar entitled “Wal-Mart in Mexico: The Limits of Growth", the first in a series on the Mexican political economy to be held at the Fletcher School this fall.

Tilly stressed the importance of studying the retail sector within this context. “The retail industry is one of the biggest employers and is a key channel for the sale of domestic and imported goods. Retail establishments also form part of the community fabric. It is a dynamic industry and is rapidly changing,” he said.

Tilly said that from the time U.S. retail giant Wal-mart first entered Mexico in 1991 by way of a joint venture with Mexican company Grupo Cifra, its operations have since grown to 729 stores.

Tilly explained that Wal-mart was able to successfully penetrate the Mexican market primarily because of its joint venture with Cifra, which already has an established hold in the domestic retail market. The joint venture also took advantage of Wal-mart’s Texas-based automated distribution center, large supply network and advanced procedures, thus increasing its efficiency and enabling it to keep its goods at “everyday low prices”, he added.

Tilly said the combination of these factors placed tremendous pressure on Wal-mart’s competitors to reduce their prices, which they were not able to sustain in the long-run, forcing them to downscale or close their operations.

Wal-mart’s sales account for more than the combined total sales of three Mexican retail companies—Grupo Gigante, Comercial Mexicana and Solea, Tilly added.

Shayna Ferullo, a first-year MALD student, inquired as to the percentage of Wal-mart’s sales which goes back to Mexico’s gross domestic product.

Tilly replied that imports as a percentage of total sales account only for 30%. “Thus, a big chunk of the total sales does go back to the Mexican GDP,” he said.

Fletcher student Renato Mazzola of Brazil also compared Wal-mart’s experience in his country, where it was not able to enjoy the same degree of success it did in Mexico.

“The two leading retail companies in Brazil--Carrefour and CBD--already have established operations when Wal-mart entered in the late 1990’s. They both have their own store brands which they sold at lower prices. Brazilians also resisted buying imported products, preferring to buy the local goods they have long been used to purchasing,” Mazzola said.

However, Tilly noted that there are several limits to the growth of Wal-mart’s operations in Mexico.

“Wal-mart’s problem is that the rich and poor don’t shop in their stores. The rich can afford to shop in better stores, while the poor still prefer shopping in tianguis, which are the mobile markets along the streets that sell goods at much lower prices,” he said.

Tilly said that Wal-mart’s primary target market—the middle class—is declining in size, raising the issue of whether it can sustain its growth in sales in the long-term.

As a major employer in Mexico, the salary scale in Wal-mart is at par with that in the U.S., Tilly said. He added, though, that while there are union contracts in all Wal-mart stores, “retail unions in Mexico are weak.”

“The impact of Wal-mart in Mexico demonstrates to us the effect of a liberalized retail regime—there will be a flood of cheap imports, thus squeezing local suppliers and industries,” Tilly said.

Tilly said the situation in Mexico essentially boils down to the following issue: “Is the problem Mexico, or Wal-mart in Mexico?”

Article by Sharon R. Rivera, MALD '07

Posted by jessica at October 20, 2005 10:58 AM