Categories Earnings, Retail

Walmart’s Brazilian strategy appears to be on the right track

Walmart Inc. (WMT) is on a roll. The company, in its competitive efforts against Amazon (AMZN), is striking strategic deals left, right and center. The most recent one is the sale of its majority stake in its Brazilian operations to private equity firm Advent International. Walmart agreed to sell 80% of its stake in its Brazil unit to Advent for an undisclosed amount while retaining the remaining 20%.

Walmart said it would record a non-cash net loss of $4.5 billion in its second quarter due to this transaction. The majority of the loss is expected to be driven by foreign currency translation while fluctuations in exchange rates are likely to cause changes in the final amount of the loss.

This amount is said to be close to the value of the Brazil business which suggests that Walmart did not receive any payment for the deal. It is also estimated that Walmart could get up to $250 million from Advent based on the unit’s performance going forward despite the absence of any payments at present.

This is Walmart’s third deal in the past two months. In April, Walmart sold its UK unit Asda to J Sainsbury while picking up a minority stake in the combined entity. Last month, the retailer agreed to purchase Flipkart in a much-hyped acquisition. The Brazil deal shows that Walmart is playing its cards very carefully.

Flipkart, a leading Indian e-commerce company, provides an avenue into a market with huge growth opportunities. Walmart is optimistic with regards to the potential in this market and its chances to grow in India even though Amazon has already carved out its own niche here.

Meanwhile, the UK and Brazil businesses were struggling, and Brazil was said to be troublesome, in particular, due to the lack of growth coupled with the economic and political issues in the country. By shedding both these business units, Walmart is cutting flab and focusing on regions which are likely to provide good growth in the long term. By holding a small stake in the businesses, it is also able to reap a portion of any available benefits.

Walmart had been trying to expand in Brazil for several years but failed to keep up with rivals like Carrefour SA

Walmart had been trying to expand in Brazil for several years but failed to keep up with rivals like Carrefour SA. Although Walmart made some good acquisitions during its early years, it failed to maximize its opportunities in the market and reap significant gains. Unlike in the U.S., the company’s pricing model failed to pick up in Brazil.

Walmart attempted to regain its footing through store closures and remodels as well as by trimming down its e-commerce operations. It also made changes to its management team. However, none of this helped improve its performance in the country which is also reeling from a recession.

Advent is looking to take a different path and pursue a wholesale strategy which has proven to be more beneficial in Brazil and has driven growth for other players in the market. Advent will continue to invest in the business which is likely to provide Walmart benefits going forward. This deal will not only allow Walmart to exit one of its most troubled geographies, but it will also pave the way for the retailer to focus on areas that are likely to bring significant growth in the future.

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