PriceSmart and the Anti-Wal-Mart Alliance
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PriceSmart (NASDAQ: PSMT) and Wal-Mart (NYSE: WMT) both decided that supermarkets in Central America lacked the resources to effectively compete with large American discounters. Both chains have been able to add stores and attract shoppers over the last few years as they obtain cheap products from their own suppliers by buying in large volumes. Several other American stores, including convenience stores and gas stations, also entered Central American markets themselves. Central American supermarkets and smaller merchants responded by setting up a new organization called Super Markets of Central America and Panama, or SUCAP.
Costa Rica Pages reported that 16 supermarkets joined this alliance when it formed in 2008. The alliance would allow all of these supermarkets to merge their resources to improve their supply chain systems, while giving smaller grocery stores in nations such as Costa Rica and El Salvador much stronger negotiating power. Although Wal-Mart would still have more stores than all of the SUCAP chains combined, the new alliance would significantly reduce Wal-Mart's economy of scale advantages.
When the alliance formed, the Central American supermarkets were aware of PriceSmart, which operated warehouse stores in several countries. Although the alliance helps SUCAP members compete against all American retail chains, SUCAP clearly identifies Wal-Mart as the main competitive threat. Wal-Mart not only had negotiating leverage, it also had enough cash to buy Central American supermarket chains itself, even large ones. PriceSmart, like Costco, (NASDAQ: COST) can serve as a wholesaler instead of a direct competitor with supermarkets, although PriceSmart's Central American stores aren't as big as Costco's stores in the United States.
Auto Mercado, a Costa Rican supermarket chain, is a SUCAP member that has 14 stores, according to its Spanish language website. The Auto Mercado website displays the store's specialties, the store magazine, and some cooking recipes, and mentions that high end imported products, including natural and organic foods, are available at its stores. Auto Mercado seems fairly upscale, so it might also be able to compete on service with Wal-Mart or PriceSmart, but Auto Mercado could obviously use SUCAP's negotiating power to pay less for luxury food from other countries, such as the imported gluten free food Auto Mercado mentions on its website.
The USDA FAS Gain report mentions that local importers handle most of the food imports in El Salvador for smaller stores, although a larger supermarket chain, Supermercados Europa, went around these importers and made its own deals with suppliers. Wal-Mart and PriceSmart are both big enough to deal with suppliers themselves. Texaco, Shell, and Exxon convenience stores in El Salvador and other nations provide additional motivation for smaller, local chains to join up with SUCAP.
Although Costco beat earnings estimates last quarter, PriceSmart missed on its own earnings. Investors sold off PriceSmart's shares afterward, although PriceSmart's share price has risen back up above $70. PriceSmart's 3.2 percent profit margin does beat Costco and some other traditional United States supermarkets, even though PriceSmart follows Costco's management philosophy of low prices and high wages, which could limit its margins. PriceSmart is also considered a growth stock, and it invests much of its income into adding new stores as well.
A more recent Spanish language article by Sergio Arce A. in La Nacion explains that SUCAP has grown larger since 2008, picking up additional supermarket chains, although Wal-Mart still has twice as many Central American stores as the alliance members combined. Walmart also plans to keep adding stores in Central America. The alliance seems to still be paying more attention to Wal-Mart than other American retailers, which could be good news for PriceSmart, as small grocers may consider PriceSmart a supplier instead of a competitive threat. Nevertheless, PriceSmart investors should still pay attention to SUCAP, as local competition in Central America could become tougher than American chains expect.
enovinson has no positions in the stocks mentioned above. The Motley Fool owns shares of Costco Wholesale. Motley Fool newsletter services recommend Costco Wholesale and PriceSmart. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.