a vision of value: planting roots in mexico - kristen … · a vision of value: planting roots in...

A Vision of Value: Planting roots in Mexico

Evan Benkert, Kristen Busby, Isa Eugenio Hunter Gray, & Joey Padgett

2

Bottom Line

Approach

Profitably increase market share over 3 year period

Position Prosper Partner

Partner with Calimax Rollout multi-price point stores in the Baja region

Dollar Tree should enter Mexico through a joint venture with Calimax

Dollar Tree could realize profits of approximately $190K and capture 18% of Baja’s discount store market in 3 years, setting up a possible buyout of Calimax

3


Position Prosper Partner

Partner with Calimax Rollout multi-price point stores in the Baja region

Partner Position Prosper

Dollar Tree has experienced successful growth and expansion

4


0

1000

2000

3000

4000

5000

2008 2009 2010 2011 2012

Number of Stores Open

140 Dollar Tree Canada stores 2012 year end

190 Deals stores 2012 year end

Expand into Mexico

Source: Dollar Tree

$0

$20

$40

$60

$80

$100

$120

$140

$160

2009 2010 2011 2012 2013 2014 2015 2016

Bill

ions

of U

SD

5


Retail Industry Growth, ‘09-’16 Hourly Compensation Wages, 2012

Source: USDA Foreign Agricultural Service, 2010

0 10 20 30 40 50 60 70

Philippines

Mexico

Hungary

Taiwan

Estonia

Brazil

Slovakia

Portugal

Argentina

Singapore

United Kingdom

United States

Canada

Germany

Switzerland

Norway

Source: U.S. Bureau of Labor Statistics, International Labor Comparisons, August 2013

Low labor costs & fast retail industry growth makes Mexico attractive for expansion

6

Acquisition JV Greenfield

Gains

Risks Share Profit

Gov. Restriction

Share Risk

Local Knowledge

Initial Investment

Total Control

Source: Deloitte

DT can gain from market knowledge and risk mitigation

in a new environment

JVs can decrease capital requirement

while creating better government

relations


Joint venture presents optimal entry into Mexican market

7

Small to medium size chain

Retail

Consumer products

Industry selection

1.  Convenience stores 2.  Department stores

3.  Grocery stores

Small to medium grocery store chain

Willingness to work with a US Company ì

Grocery store selection

Valu

e di

visi

on o

ppor

tuni

ty


Dollar Tree should Partner with the small grocery store chain Calimax

Source: Team analysis, Company websites

Current Position Within Mexico

Established Brand

Real Estate Knowledge

Supplier Network

Distribution Network

Access to Capital

Economies of Scale

“Dollar” Industry Experience

Infrastructure 8


de “Menos es mas con Valor”

alor

Source: Dollar Tree; Calimax websites

Calimax de Valor adds value by combining strengths of each company

9

Position Partner

Partner with Calimax Rollout multi-price point stores in the

Baja region



Prosper

10

Price products differently to satisfy different preferences

Use precision to reduce perceived cost

Value based costing to reach 3 price points

Eight Case Studies Testing: “Charm” Prices vs. Rounded

Sales 24%

$9.99 $10.00 vs.

Result: “Charm” Prices

9.95

14.95

39.95

13.60

29.60

59.00

Calimax de Valor Waldo’s %

Undercut

27%

50%

34%

Offer multiple price points

More product diversification

Satisfy more customer preferences


Calimax de Valor should adopt a multi-price point strategy

Source: Waldo’s website & Facebook page, Book: Priceless by William Poundstone, Cornell, Bain

20.76% 20.6% 20.5%

24.9%

29.2%

35.5%

15%

20%

25%

30%

35%

40%

1000000

1500000

2000000

2500000

3000000

3500000

4000000

2006 2008 2010 2012 2014 2016

% Supported by M

aquiladoras Baj

a C

alifo

rnia

Pop

ulat

ion

% of Baja Population Supported by Maquiladoras

11

Source:Journal of Borderland Studies, INEGI, CBRE

700+ maquiladoras are Baja’s primary

employers


Baja California’s maquiladora economy offers a large, low income target market

1

5 12

5

5

Tijuana Tecate

Rosarito

Mexicali San Luis Rio

Colorado

San Felipe

Ensenada

1

12


Store allocation to each city determined by

GDP, population, and poverty level

Sources: “International Market Expansion…”, Baja.gov, BajaCalifornia.gov

Dollar Tree should concentrate store rollout in Baja California

13


0

2

4

6

8

10

12

14

16

0

10

20

30

40

50

60

70

2014 2015 2016 2017 2018

Openings St

ores

# of Stores Openings per year

Payless Case Study: 10-20 initial stores allows scalable potential to be investigated

Dollar Tree Growth: Canada is ~30% on average and we assume similar rate

Calimax de Valor Store Rollout

Dollar Tree should utilize high growth with fewer initial stores to test markets

Sources: Dollar Tree, Payless Shoesource, Wright.edu

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Position

Rollout multi-price point stores in the Baja region

Partner

Partner with Calimax Profitably increase market share over 3

year period

Prosper


15 15

Key: Setup

Promotion Execution

TIju

ana

Construction & Hiring

Promotion & Training

Opening

San

Luis

Rio

Co

lora

do, R

osar

ito,

Teca

te, S

an F

elip

e

Ense

nada

&

Mex

ical

i

2014 2015 2016 2017 2018

Re-Evaluate Current Operations Concentrate on Growing

Markets & Consider Calimax buyout

Begin to expand beyond Baja



Opening



Opening

Timing risk of being early adopter: -  More risks and uncertainty -  Potentially higher cost -  source: american Marketing association

Sources: Reuters; Forbes


Dollar Tree should focus on three key location pools in the first five years

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2013 2014 2015 2016 2017 2018

% M

arke

t Sha

re

Waldo's Calimax de Valor Other

Calimax de Valor would hold approximately 30% of the Baja discount market by 2018

16 Source: McKinsey, Waldos, and USDA Foreign Agricultural Service

CAGR: -33.4%

CAGR: 30.0%

CAGR: 3.4%


17 Source: Dollar Tree, CBRE, Bloomberg, CMO Survey

Expected potential NPV in perpetuity of $31M

Expected potential NPV in perpetuity of $16M

Buying out Calimax after three years could provide long-term benefits at short-term costs


$(3,000)

$(2,000)

$(1,000)

$-

$1,000

$2,000

$3,000

$4,000

2014 2015 2016 2017 2018

Net

Inco

me

($10

00s)

Dollar Tree Net Income w/o Buyout

Worst Expected Exceptional $(6,000)

$(4,000)

$(2,000)

$-

$2,000

$4,000

$6,000

$8,000

2014 2015 2016 2017 2018 Net

Inco

me

($10

00s)

Dollar Tree Net Income w/ Buyout

Worst Expected Exceptional

Partner

Grocery Options

Past JV Success in

Mexico

Don’t Acquire Waldo’s

Multinational Suppliers

Payless Partnership

50/50 JV has best chance

JV’s make use of Synergies

JV & Collaboration

Position

Low Income Shoppers

Product Alignment

Walmart Price-Based Costing

Post-Entry Expansion

Speed

McDonald’s Expansion

Speed

Market Entry Failure

Population Concentration

Need for Value Stores

Convenience Shopping

Transportation Infrastructure

Price Point Validation

Prosper

Dollar Tree Growth

Financial Assumptions

Projected Sales

Projected Net Income

Market Share Analysis

Framework

5 Forces: Dollar Tree

SWOT: Dollar Tree

SWOT: Calimax

STEEP: Mexico

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Position

Appendix

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-57 branches -One stop shop

Presence of Food Club and Top Care lines target lower income spenders

-More than 606 stores -Grocery and department retail chain

Emphasizes that it is Mexican-owned

and operated, Mercado Soriana offers low pricing

scheme

-183 stores -Publicly traded Mexican grocery store and department store chain

Family run business, already

has four store formats

-Holding company with 200 stores in Mexico -Owns 50% of Costco de Mexico through JV

Aprecio focuses on providing the best

prices for low purchasing power

consumers through a narrower range of

products

Grocery stores considered for partnership

Source: Company websites

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-  Joint venture with Grupo Axo -  Expect to open 41 stores in

Mexico within first 3 years -  300 stores long-run -  Past success with

partnerships in 10 other Latin American countries

Source: Payless

-  Greenfield venture in Canada -  Joint venture in Mexico with

Home & More -  50% equity holder -  Kept Home & More name for

over 2 years then rebranded stores to Bed Bath & Beyond

Source: Bed Bath & Beyond

Joint ventures in Mexico have proven successful

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Dollar Tree should not

acquire Waldo’s

Government intervention and

regulations

Acquisition of all stores would not allow for

gradual entry

Waldo’s pricing strategy is set at multiple price

points

Would miss out on cultural knowledge from

insiders

Potential for local resistance to Dollar

Tree’s takeover Large capital

investment (~150M, which is 3X the cost of

Canada acquisition)

Dollar Tree should not acquire Waldo’s to enter Mexico

Dollar store shoppers have lower incomes than non-dollar store shoppers

22

30

20

34

28

17

21

8

11

5

7

3

5

3

8

0 10 20 30 40 50 60 70 80 90 100

Percentage

Under $25,000 $25,000 to $49,999 $50,000 to $74,999 $75,000 to $99,999

$100,000 to $124,999 $125,000 to $149,999 $150,000 and above

Non-Dollar store shoppers

Dollar store shoppers

Source: Deloitte 2011 American Pantry Study, n = 4,086 size, survey conducted in November 2011

Shopper’s Household Annual Income

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Calimax de Valor would utilize Dollar Tree’s relationships with multinational suppliers

Source: Dollar Tree and company websites

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Categories with strong growth in

Mexico

Top selling products in US Dollar stores

Products available at Waldo’s

Office/school supplies

Home and garden

Consumer products

Books/magazines

Flowers

Gifts

Greeting cards

Food and drinks

Strong retail segments in Mexico align with popular dollar store products

Sources: US Media Consulting, Waldos, Statista

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•  Capital requirements: must make a large capital investment in order to compete

•  Unequal access to distribution channels •  Restrictive government policies •  Switching costs: products/signs in Spanish

•  Competition coming from Waldo’s/Wal-Mart but aren’t many other value stores

•  US Industry growth rate is high and likely to rise in Mexico affecting industry margins

•  Loyal customers to Mom & Pop shops

•  High growth and opportunity in Mexico increases threat of new entrants

•  International companies looking to enter must have capital requirements

•  Buyers’ propensity to switch is high due to undifferentiated products at Dollar Stores

•  Suppliers size, package and price offerings to make margins

•  Need vendors that have large enough economies of scale

•  Supplier groups don’t rely heavily on Dollar Tree as they have many other customers

Buyer Power Intensity of Rivalries Supplier Power

Threat of New Entrants

Barriers to Entry

•  Industry products are rather standard/undifferentiated

•  Face switching costs in changing vendors/product differentiation if decide to use Mexican vendors

•  Have strong contracts and relations with large US suppliers

Key High

Medium

Sources: Dollar Tree, Team analysis

Analysis reveals high barriers to entry and importance of economies of scale

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Strengths Weaknesses

Threats Opportunities

-  Access to capital resources -  Established supplier relationships -  Large scale and flexibility -  Solid and scalable infrastructure and

distribution centers -  Expanding business model and high

growth rates

-  Highly seasonal demand; inconsistent -  Strong dependence on domestic and

foreign suppliers drives financial performance

-  Profitability is vulnerable to cost increases, thus decreasing margins and effecting profit

-  International expansion -  Increase square footage and capacity of

current stores -  Room to increase number of Dollar Tree

and Deals stores in US and Dollar Tree Canada

-  Broaden customer base & market penetration in the Northeast and West

-  Barriers to entry in certain international markets (resistance and legal/government regulations)

-  Fluctuating economies of suppliers -  Other stores are entering the dollar

market (Target, Wal-Mart, etc. have dollar sections now)

Factors affecting Dollar Tree internally and externally

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Strengths Weaknesses

Threats Opportunities

-  Access to capital resources -  Established supplier relationships -  Well known, middle-tier brand -  Solid and scalable infrastructure and

distribution centers -  High growth rates within the Baja

region

-  Constrained to Baja Region -  Unable to reach “value-centric”

customers -  Limited network with single distribution

center

-  Tapping into “value-centric” market by creating low cost standalone store

-  Expand geographically to further penetrate current region

-  Partner with experienced, international firms to raise growth rate

-  Government stability is a concern in the future

-  Corruption exists in Mexico as a whole, impeding growth and innovation

-  Being beat by lower prices of competition; who have the scale to offer value

Factors affecting Calimax internally and externally

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SDlskd

Key Issues Government regula2ons Mexican na2onalism Distribu2on channels

Technological • Mobile telephone use 13th in world

• Strong broadcast media •  Increasing technological standards

Environmental • Extreme popula2on levels produce polluted urban areas

• Contaminated water •  Improved infrastructure • Natural disasters

Economic • GDP: $1.7 trillion • Highly unequal income distribu2on • More than 90% of trade under FTAs • GDP

Poli2cal •  Intensified security at US border • Major drug-‐producing and transit na2on; related crime

• Free trade agreements with over 50 countries

Social • High context culture • Family 2es important in business

• Nepo2sm desirable

Factors suggest greenfield entry into Mexico is not ideal

Social: High Technological: Med Economic: High Environmental: Med Political: High

Key issues determine optimal entry strategy for Mexico

Source: http://countrystudies.us/mexico/ Statista, http://www.heritage.org/index/country/mexico

Walmart’s Pricing Model does not reflect consumer’s ability to pay

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-100.00%

100.00%

300.00%

500.00%

700.00%

900.00%

1100.00%

1300.00%

Percent Change in Hours of Work Needed to Purchase Product

Percent Increase in Price

Source: University of Massachusetts- Lowell, 2004

Walmart is failing to capture its

maximum value by setting prices too high

2. Number of prior entrants and competition level

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1. Country-specific or general international experience

3. Where a company lies relative to “status quo”

1.  Table with all the country specific info

Source: “Strategies of Post Entry Expansion: Speed-up or Slow-down” (2012)

Several factors affect the speed of post-entry expansion

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Number of stores is highly correlated with market potential

High competition increases the target; suggests that McDonalds’s sees the presence of its competitors as a sign of high market potential

GDP and and population are other important factors

Negatively correlated to corporate tax rate

Source: “Beyond Entry: Examining McDonald’s Expansion in International Markets” (2004)

+ +

+ _

Case study: McDonald’s and speed of post entry expansion

32

Source: transparency.org Prnewswire.com

-  In Colombia with very similar corruption level; says government has completely supported this initiative (due to it being partnership)

-  10 stores in first year to test market

Payless Case Study: Start small by partnering to test market and potential

33

Market Entry

Failure

Low spacial-coverage or

“relative entropy”

Lack of store

density

Failure to gain

foothold in first 7 years

Partnerships offer “Way to limit risks in high uncertainty markets and an opportunity to quickly reach a suitable relative entropy level and brand penetration in a host country”

Source: International Market Expansion of Retail Networks: Determinants of Market Entry Failures” (2013)

Leading factors of market entry failure support joint venture as a winning strategy

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49%

30%

15%

6%

Tijuana Mexicali Ensenada Other

Source:bajacalifornia.gov.mx

* Data as of 2010

The vast majority of Baja California’s population reside in three cities

35

Popula'on GDP Tijuana 1,559,714 $17.4 billion Mexicali 936,145 1.6 billion Ensenada 466,727 1.1 billion San Luis 159,089 n/a Tecate 100,968 n/a Rosarito 90,620 n/a San Felipe 16,702 n/a

Demographic Statistics of Target Markets “ Tijuana is a magnet for low-income population

”

Source: baja.gob

Target market demographics highlight need for value

36 $-

$1,000

$2,000

$3,000

$4,000

$5,000

$6,000

$7,000

$8,000

2007 2008 2009 2010 2011 2012

Dollar Tree Net Sales (million USD)

$-

$20

$40

$60

$80

$100

$120

$140

$160

$180

$200

2007 2008 2009 2010 2011 2012

Dollar Tree Sales per sq. ft

Dollar Tree is experiencing increased sales per square foot and steady growth overall

37

“Probability of JV success is 80% in more developed areas”

“Overall, there is a general 60% chance of failure”

“78% of JVs end in an acquisition”

“Equal ownership JVs are the most likely to succeed”

JV’s are risky, but a 50/50 JV is the most likely to succeed

Source: M&A Coursepack

38

Synergies are what make joint ventures successful

Source: KaufmanHall

39

Collaboration and cooperation is important in forming a joint venture with Calimax

Source: KaufmanHall

40

Baja has highest rate of convenience shopping because weekday shopping requires convenience

Source: Nielsen

41

Transportation infrastructure in Baja would help reduce overall costs

Source: CBRE

42

Financial Assumptions

•  SG&A = 60% of Sales •  Marketing = 10% of Sales •  All items under Income from Continuing Operations maintain the same

percentages as Dollar Tree’s Income Statement •  Sales in any given store could related to a certain percentage of average US

stores sales based upon number of years in operation: •  1st year: 10% •  2nd year: 15% •  3rd year : 25% •  4th year: 40% •  5th year: 50%

Financial Sources: Dollar Tree, CBRE, CMO Survey

43

Store Size (sq. ft) 11,000 Price per sq. ft $9.30 Real Estate cost/store $102,300 Average DT Sales per sq. ft $190 Distribution

9.95 $0.77 50% 14.95 $1.15 25% 39.95 $3.07 25%

CMV sales per sq. ft $273.60 Ideal CMV sales per store $3,009,600

DT sales per sq. ft CMV sales per sq. ft Ideal CMV per store 2013 197 $283.68 $3,120,480 2014 203 $292.32 $3,215,520 2015 210 $302.40 $3,326,400 2016 218 $313.92 $3,453,120 2017 225 $324.00 $3,564,000 2018 233 $335.52 $3,690,720

Year # Stores New Openings Total Predicted Sales In Thousands 2014 20 $6,431 2015 26 6 $11,975 2016 34 8 $23,136 2017 45 11 $42,055 2018 59 14 $64,403

Expected sales calculation

Source: Dollar Tree, Statista, Team analysis

44

2014 2015 2016 2017 2018 Revenues $6,431 $11,975 $23,136 $42,055 $64,403 Cost of Revenue $4,132 $7,695 $14,866 $27,023 $41,383 Gross Profit $2,299 $4,280 $8,270 $15,032 $23,020 Operating Expenses

SG&A $1,286 $2,395 $4,627 $8,411 $12,881 Marketing $643 $1,198 $2,314 $4,206 $6,440 Buildings $2,046 $614 $818 $1,125 $1,432

Total Operating Expenses $3,975 $4,206 $7,759 $13,742 $20,753 Operating Income $(1,677) $74 $511 $1,290 $2,267

Income from Continuing Operations Total Other Income/Expenses Net $19.96 $37.17 $71.80 $130.52 $199.88 Earnings Before Interest and Taxes $(1,657) $111 $582 $1,421 $2,467 Interest Expense $(1) $(3) $(5) $(9) $(14) Income Before Tax $(1,658) $109 $577 $1,412 $2,453 Income Tax Expense $57 $105 $204 $370 $567

Net Income from Continuing Ops $(1,715) $3 $374 $1,042 $1,886

Expected net income calculation

45

Mexico Number of New Discount Stores 2009-2011 825 Waldo's Calimax de Valor Other CAGR of General Retail Market 2009-2011 8% 2013 5% 0% 95%

Number of Discount Stores in 2009 4,894 2014 5% 0% 95%




Number of Discount Stores in 2013 in Baja California

193 2018 7% 1% 92%

Baja California Number of Waldo's Stores in 2013 297 Waldo's Calimax de Valor Other Number of Waldo's Stores in 2013 in Baja California 29 2013 15% 0% 85%

2014 16% 10% 74% Number of Calimax de Valor Stores 2013 0 2015 17% 13% 70% Number of Calimax de Valor Stores 2014 20 2016 17% 18% 66% Number of Calimax de Valor Stores 2015 26 2017 17% 23% 60% Number of Calimax de Valor Stores 2016 34 2018 17% 31% 52% Number of Calimax de Valor Stores 2017 45 Number of Calimax de Valor Stores 2018 59

CAGR Waldo's 0.034 CAGR Calimax de Valor 0.3 CAGR Others -0.334

Market Share Analysis

Source: McKinsey, Waldos, USDA

Calimax de Valor undercuts Waldo’s pricing and offers more quality import products

Waldo’s Pricing Calimax de Valor’s pricing •  Undercut 13.60 pesos

price point by setting at 9.95 (27% savings for customer)

•  Undercut 29 peso price point by 50% à set at 14.95 for Calimax de Valor

•  Undercut 59 peso price point by 34% à set at 39.95 for Calimax de Valor

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a vision of value: planting roots in mexico - kristen … · a vision of value: planting roots in...

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