A Vision of Value: Planting roots in Mexico Evan Benkert, Kristen - - PowerPoint PPT Presentation

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A Vision of Value: Planting roots in Mexico Evan Benkert, Kristen - - PowerPoint PPT Presentation

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A Vision of Value: Planting roots in Mexico Evan Benkert, Kristen Busby, Isa Eugenio Hunter Gray, & Joey Padgett Dollar Tree should enter Mexico through a joint venture with Calimax Approach Partner Position Prosper Profitably increase

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SLIDE 1

A Vision of Value: Planting roots in Mexico

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

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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

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3

Profitably increase market share over 3 year period

Position Prosper

Partner

Partner with Calimax

Rollout multi-price point stores in the Baja region

Partner

Position Prosper

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SLIDE 4

Dollar Tree has experienced successful growth and expansion

4

Partner

Position Prosper

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
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SLIDE 5 $0 $20 $40 $60 $80 $100 $120 $140 $160 2009 2010 2011 2012 2013 2014 2015 2016 Billions of USD

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Partner

Position Prosper

Retail Industry Growth, ‘09-’16 Hourly Compensation Wages, 2012 Source: USDA Foreign Agricultural Service, 2010 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

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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

Partner

Position Prosper

Joint venture presents optimal entry into Mexican market

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SLIDE 7

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

Value division opportunity

Partner

Position Prosper

Dollar Tree should Partner with the small grocery store chain Calimax

Source: Team analysis, Company websites
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SLIDE 8 Current Position Within Mexico Established Brand Real Estate Knowledge Supplier Network Distribution Network Access to Capital Economies of Scale “Dollar” Industry Experience Infrastructure

8

Partner

Position Prosper

de

“Menos es mas con Valor”

alor

Source: Dollar Tree; Calimax websites

Calimax de Valor adds value by combining strengths of each company

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SLIDE 9

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Position

Partner

Partner with Calimax

Rollout multi-price point stores in the Baja region Partner

Position

Prosper

Profitably increase market share over 3 year period

Prosper

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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 Partner

Position

Prosper

Calimax de Valor should adopt a multi-price point strategy

Source: Waldo’s website & Facebook page, Book: Priceless by William Poundstone, Cornell, Bain
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SLIDE 11 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 Maquiladoras Baja California Population

% of Baja Population Supported by Maquiladoras 11

Source:Journal of Borderland Studies, INEGI, CBRE

700+ maquiladoras are Baja’s primary employers

Partner

Position

Prosper

Baja California’s maquiladora economy

  • ffers a large, low income target market
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SLIDE 12

1 5 1 2 5 5

Tijuana Tecate Rosarito Mexicali San Luis Rio Colorado San Felipe Ensenada

1 12 Partner

Position

Prosper 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

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13 Partner

Position

Prosper

2 4 6 8 10 12 14 16 10 20 30 40 50 60 70 2014 2015 2016 2017 2018

Openings Stores

# 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

Partner Position

Prosper

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15 15

Ke Key: Setup Promotion Execution TIjuana Construction & Hiring Promotion & Training Opening San Luis Rio Colorado, Rosarito, Tecate, San Felipe Ensenada & Mexicali 2014 2015 2016 2017 2018 Re-Evaluate Current Operations Concentrate on Growing Markets & Consider Calimax buyout Begin to expand beyond Baja Construction & Hiring Promotion & Training Opening Construction & Hiring Promotion & Training Opening Sources: Reuters; Forbes

Partner Position

Prosper

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

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SLIDE 16 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% 2013 2014 2015 2016 2017 2018 % Market Share Waldo's Calimax de Valor Other

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

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Source: McKinsey, Waldos, and USDA Foreign Agricultural Service

CAGR: -33.4% CAGR: 30.0% CAGR: 3.4% Partner Position

Prosper

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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

Partner Position

Prosper

$(3,000) $(2,000) $(1,000) $- $1,000 $2,000 $3,000 $4,000 2014 2015 2016 2017 2018 Net Income ($1000s)

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 Income ($1000s)

Dollar Tree Net Income w/ Buyout

Worst Expected Exceptional
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SLIDE 18 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
  • f 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

18 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
  • ffers 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
  • ver 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

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

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30 20 34 28 17 21 8 11 5 7 3 5 3 8 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
  • n 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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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
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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
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  • 2. Number of prior

entrants and competition level 30

  • 1. Country-specific or

general international experience

  • 3. Where a company

lies relative to “status quo”

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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31 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

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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

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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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SLIDE 34

34 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

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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

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$- $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

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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
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Synergies are what make joint ventures successful

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

Source: KaufmanHall
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Baja has highest rate of convenience shopping because weekday shopping requires convenience

Source: Nielsen
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Transportation infrastructure in Baja would help reduce overall costs

Source: CBRE
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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
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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
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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

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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 2011 5,291 2015 6% 0% 94% Number of Discount Stores in 2012 5,719 2016 6% 1% 93% Number of Discount Stores in 2013 6,183 2017 6% 1% 93% 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 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
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SLIDE 46

Calimax de Valor undercuts Waldo’s pricing and

  • ffers 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 à set at 14.95 for Calimax de Valor

  • Undercut 59 peso price

point by 34% à à set at 39.95 for Calimax de Valor

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