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Should Wal-Mart Acquire Amigo?

What are the pros and cons of this year’s most talked-about local business transaction


November 21, 2002
Copyright © 2002 CARIBBEAN BUSINESS. All Rights Reserved.

Will the retail giant’s further entry hurt or help?

Weeks of biting debate, both pro and con, over this year’s most talked-about local business transaction may soon come to an end.

Yet the average consumer and many businesspeople are still unclear as to whether the intended sale of the largest locally owned supermarket chain, Amigo, to the world’s largest retailer, Wal-Mart, would be good or bad for them.

The highly publicized dispute over the proposed sale has been going on for months now. While a coalition of local retailers and wholesalers is firmly against the sale, groups of manufacturers are for it, and every party in the debate has his or her own reasons for supporting or rejecting the sale.

Sources in the public relations and advertising industries say focus groups conducted to study consumers’ perceptions and opinions on the sale show that shoppers are more confused than ever since a flurry of full-page ads for and against the sale have been published regularly in daily newspapers.

The basic issues in this debate are many. The pros and cons revolve around market concentration, the effects of Wal-Mart’s planned distribution center, the terms and conditions for suppliers, the potential for exporting local products, the amount of products the megaretailer buys from local companies, and more.

Meanwhile, as of press time Monday, the transaction was still being evaluated by both the Federal Trade Commission (FTC) and the Antitrust Office of the local Department of Justice.

The sale of the Amigo chain–with 37 supermarkets and an estimated $600 million in revenue–is bound to happen, even if Wal-Mart isn’t the buyer, according to Jose Revuelta, the chain’s president. He told CARIBBEAN BUSINESS that the reason he was brought to Amigo about two years ago was precisely to sell it.

This sale transaction is said to be worth $225 million.

Market concentration issues

Opponents of the sale are represented by a coalition formed by the Food Marketing, Industry & Distribution Association (MIDA by its Spanish acronym); the Puerto Rico Wholesalers Chamber of Commerce (PRWCC); the United Retailers Association (CUD by its Spanish acronym); the Puerto Rico Farm Bureau; the Industrial Bakers Association, and the Puerto Rico Community Pharmacies Association. The coalition argues that if the purchase of Amigo by Wal-Mart comes to fruition, the latter’s market share will increase to 29%. Other retail industry sources estimate that if the transaction goes through, Wal-Mart could have a 50% market share in about five years, which could eventually create a monopoly.

The 29% figure is obtained from a market study performed by local firm Estudios Tecnicos and includes Sam’s Club, a subsidiary of Wal-Mart, in the equation.

A written statement sent to the media in October by the coalition, based on Estudios Tecnicos’ findings, says, "The purchase of Amigo by Wal-Mart would destabilize Puerto Rico’s economy." It goes on to say the market share the merger would give Wal-Mart would be stronger in some geographical areas and would "represent a clear reduction in competition, which in the long run will result in higher prices to consumers." The coalition also wrote that the approval of this transaction could threaten the existence of local distributors, importers, and wholesalers.


Some who either support or who haven’t opposed the transaction say they will maintain this position as long as the transaction passes muster under local and federal antitrust laws and Wal-Mart follows through on promises to help local businesses export their merchandise internationally. "We have no objection to the acquisition of Amigo by Wal-Mart because we believe in a free market, in which acquisitions occur and are natural and healthy," said William Riefkohl, executive vice president of the Puerto Rico Manufacturers Association (PRMA).

Local economist and retail industry specialist Vicente Feliciano, managing partner of Advantage Business Consulting, was more emphatic. "This transaction is positive for both the economy and consumers and will require the competition to go the extra mile," he told CARIBBEAN BUSINESS. "However," he added, "it is important that regional markets remain competitive, which is why some Amigo supermarkets will have to be sold so consumers’ choices won’t be impaired."

Rolando Avila, president of the Puerto Rico Products Association (PRPA), said he expects Wal-Mart’s market share will eventually increase to 40% as a result of the sale.

In a hearing before the local House of Representatives, Amigo President Jose Revuelta and Chairman Steven Lausell explained why the acquisition of their company by Wal-Mart wouldn’t constitute a monopoly, regardless of which market segment is used to do the analysis.

"Let’s talk about the possibilities of this sale creating a monopoly. The truth is we must first define what market we are going to evaluate. It could be the supermarkets, the retail food market, or the total supermarket product market," said Reveulta.

"If we were to base our evaluation on supermarkets, then Amigo has $600 million in sales, while the only local Wal-Mart Supercenter supermarket’s sales represent $31 million. After the sale, the companies’ combined sales would total $631 million. This represents 18.5% of the $3.4 billion in sales in the entire supermarket segment in Puerto Rico."

The executives also said that if the entire retail food market were taken into consideration, Amigo’s sales would be estimated at about $516 million, and Wal-Mart & Sam’s are $185 million. Combined, the three will have sales of $701 million. This, they say, is only 17% of the local retail food market, which is said to generate sales of $4.2 billion.

If the entire supermarket product market were used in the evaluation–which includes food items and nonfood items not usually found in a supermarket–Amigo sales are $600 million. Wal-Mart & Sam’s are $310 million, making the combined sales total $910 million. This would represent 19% of the total market sales, which are estimated at $4.8 billion.

Lausell and Revuelta told the legislators that market shares between 17% and 19% don’t constitute a monopoly. If they did, then Coca-Cola, Pepsi Cola, Pampers, Charmin, Coors Light in Puerto Rico, and others would also be monopolies.

The effects of the proposed distribution center

Coalition member Fernando Bonilla, vice president of Pueblo International LLC, said Wal-Mart’s planned 800,000-square-foot distribution center in Vega Alta will be used to import merchandise, bypassing local distributors, a belief shared by many others in the industry.

The coalition has said that a distribution center of such magnitude isn’t economically viable if it is to be used only to repackage merchandise bought from local distributors. "It would be feasible to use it to bring large volumes of products from outside to distribute them in its local stores," the coalition stated. Many have also expressed fears that Wal-Mart will charge suppliers to use the facility.

"This distribution scheme will bring about the total collapse of Puerto Rico’s current distribution system," the coalition warned. "Local manufacturers will be left without a large part of the market to sell their products to and importers will have to charge higher prices to their retail clients…. This will result in an inability of these groups to compete."


Wal-Mart’s director of corporate affairs, Federico Gonzalez Denton, said the planned distribution center will measure only 355,000 square feet and not 800,000, as claimed by the opposition.

Despite the oppositions’ fears that the new distribution center will be a mechanism for Wal-Mart to cut local distributors and importers out of the picture, Gonzalez Denton has said that there is no intention to stop purchasing products from local businesses.

"Wal-Mart’s distribution center will only measure 355,000 square feet, and this can be seen in the application we submitted to the Planning Board. Of that area 300,000 square feet will be devoted to distribution operations, 50,000 to office space, and 5,000 to vehicle maintenance," he explained.

So where did the 800,000 square feet issue come from? According to Gonzalez Denton, the opposition was apparently confused with information Wal-Mart submitted to the Planning Board regarding the environmental impact of the construction of the center. "When Wal-Mart submitted its plans for the distribution center, the Planning Board asked us to submit information on the potential impact that could be caused by possible future expansions, so we considered an area of 800,000 square feet. However, this doesn’t mean we have any plans to actually expand to 800,000 square feet."

Gonzalez Denton also said the construction of this distribution center doesn’t mean local suppliers will be boxed out. "This will improve efficiency. It doesn’t mean we will bypass local suppliers to bring merchandise from the mainland U.S., because we could already do that if we wanted. Wal-Mart has distribution centers in the States.

"What this distribution center will achieve is that instead of having suppliers deliver merchandise to each of our 19 stores, they will only have to deliver it all to the distribution center. This will actually save the suppliers money and simplify their deliveries," explained Gonzalez Denton.

He also said Wal-Mart won’t charge suppliers anything for using the distribution center. "The suppliers will save money by only delivering to one place. We only ask them to pass those savings to us. This is what is called a distribution center allowance."

Terms and conditions for suppliers

One of the arguments the coalition makes against the sale of Amigo to Wal-Mart is based on experiences some members have had as suppliers to the megaretailer. A letter the group sent to the FTC’s Bureau of Competition in September said, "Wal-Mart currently demands concessions from suppliers and distributors which have the effect of raising costs for the distributors. These concessions include demands that suppliers extend the lowest prices offered to competitors of Wal-Mart, thereby affecting price competition."

"Wal-Mart’s contracts allows the company to impose penalties on suppliers that can’t meet Wal-Mart’s supply demands," the letter continued. "Puerto Rico being an island, it is often difficult for local distributors to meet customer orders perfectly. The weather, strikes, bureaucratic problems at piers, and many other situations cause delays in the delivery of merchandise. Wal-Mart’s requirements coerce distributors into giving it preferential treatment over other retailers out of fear of being penalized and even losing the megaretailer’s business." The coalition said Wal-Mart’s vendors’ agreement imposes a 10% deduction on each order that isn’t delivered on time.

In fact, a local industry executive told CARIBBEAN BUSINESS that Sam’s Club was demanding merchandise below cost. Another executive said the megaretailer demanded that he, as the supplier, take back products that didn’t sell and that he not charge the megaretailer for them.

Apparently, the same impositions are made by the megaretailer in other countries. According to information offered by the local government, based on a report by PricewaterhouseCoopers, Mexican suppliers declared that Wal-Mart demands lower prices than those offered to other chains.


According to Gonzalez Denton, Wal-Mart does expect its suppliers to keep promises regarding delivery deadlines. Not doing so can adversely affect the company’s operations and consumer satisfaction.

"There are some circumstances in which we must impose a 10% penalty for merchandise that isn’t delivered when promised, but this is only for those suppliers who have a record of not delivering on time, and it only happens at Sam’s Clubs," Gonzalez Denton said. "We don’t impose this penalty on suppliers that have delivered late or incomplete shipments for the first time. In Sam’s Clubs we only carry one or two brands of each item, and suppliers must deliver on time so we can avoid out-of-stock problems. At Wal-Mart we have many brands for each item and we don’t impose this penalty there."

He also countered that the company’s vendors’ agreement requires suppliers to offer Wal-Mart the same prices offered to other clients. "We don’t want suppliers to give preferential treatment to other clients, we are asking for equal business conditions."

Exporting products manufactured locally

Although Wal-Mart has received a lot of publicity for the help it has offered local manufacturers in exporting their products, the coalition has saidthis help is subject to harsh conditions.

"One of the manufacturers Wal-Mart has used extensively as an example of how it is helping local companies has had problems with Wal-Mart because of its quality requirements," one source reported. "Wal-Mart even stopped one of the manufacturer’s shipments."

One local wholesaler added his perspective to the deal Wal-Mart struck with Campofresco. "It only entails a small amount of merchandise; no big deal. In one week I can sell orders worth $100,000 right here." But Campofresco executives said it was its decision to start small and then further expand exports.


PRMA’s Riefkohl said Wal-Mart has already demonstrated a commitment to local businesses by exporting products made locally by Vasallo and Pan American Grain.

Meanwhile, Avila said, "We have decided to endorse the move because our members, manufacturers, see it as a positive thing for their businesses. A survey we performed among our members showed they are all willing to do business with Wal-Mart, and some already do."

PRPA’s Avila pointed to Thom-Tex, which produces notebooks. "Thanks to Wal-Mart, Thom-Tex will soon begin selling the notebooks it manufactures here on the mainland U.S," he said.

Earlier this month, Campofresco made its first shipment, valued at $100,000, to Central Florida and plans to do more exporting thanks to Wal-Mart.

Pan Pepin is next in line. According to a written statement by Wal-Mart, Pan Pepin will be developing the megaretailer’s private brand of hamburger and hot dog buns, known as Great Value.

Local purchases by Wal-Mart

Wal-Mart’s allegation that it currently buys 83% of its merchandise locally isn’t necessarily rejected by those who oppose the sale. Instead, what the coalition members fear is that once the sale goes through and Wal-Mart acquires critical mass and completes the construction of its distribution center, it will greatly reduce local purchases because it will become more feasible–and cheaper–to buy directly from the manufacturers.

Sources within the opposition also said they worry that once the sale is a done deal, local distributors still doing business with Wal-Mart will be expected to drop prices offered to the megaretailer, as it will be able to buy in larger volumes.


Gonzalez Denton said that in 2001, Wal-Mart bought 78% of its supermarket items locally and this year the amount has jumped to 83%. "The 83% figure represents only the supermarket-type products, such as vegetables, detergents, fruits, etc." He also pointed out that when Wal-Mart says it purchases from 300 different local suppliers, it is referring to something other than the 83% mentioned above.

"We do business with more than 300 local suppliers. But we buy much more than just supermarket-type items from them. While 83% of our supermarket-type purchases are from local suppliers, we buy from more than 300 local suppliers for Wal-Mart’s total purchases," said Gonzalez Denton.

What’s the local government’s analysis?

Puerto Rico’s Economic Development & Commerce Secretary Ramon Cantero-Frau recently spoke on the executive branch’s position about the sale. The government’s principal concerns are that if Wal-Mart becomes a monopoly, it will stifle the profit margins of local suppliers and distributors; it could establish a discriminatory market pricing policy; it may limit or eliminate the local agricultural industry (Amigo’s local agricultural purchases reached 56% between 1999 and 2001); and small and midsize supermarket chains, particularly those in urban centers, could disappear as a result of the pricing and marketing competition.

Last week, an Appeals Court gave a group of retailers until tomorrow (Nov. 22) to present evidence that they will suffer if the purchase is finalized. The group filed a lawsuit in local courts last month against the acquisition, which Wal-Mart’s attorneys asked the court to dismiss. When the San Juan Superior Court declined the dismissal, Wal-Mart appealed the ruling.

Where is the FTC’s investigation?

The evaluation of the sale transaction on the federal side is being performed by the FTC’s Northeast Regional Office in New York. Michael Bloom, the office’s senior counsel, told CARIBBEAN BUSINESS he can’t comment on anything regarding the evaluation. However, he did say that, generally speaking, an attempt at market monopolization could be defined as having 50% or more market share.

Rumors are circulating that the FTC’s evaluation is in the final stages. "The FTC hasn’t yet approved the transaction; it is still being analyzed," Gonzalez Denton and Revuelta told CARIBBEAN BUSINESS. Gonzalez Denton added, "A decision is to be announced soon."

This Caribbean Business article appears courtesy of Casiano Communications.
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