Don't Cry for Wal-Mart in Argentina

Displaying ignorance of economics, but also an otherwise astute political calculation, Argentine President Cristina Kirchner is imposing fines on retailers for failing to keep in stock enough goods on which she had imposed price controls.

First she devalued the country's currency, which sent Argentineans racing into retailers to buy up, while they could, any goods that were forcibly being kept below their market price. Then she blamed retailers such as Wal-Mart (NYSE: WMT  ) , Carrefour (NASDAQOTH: CRRFY  ) , and a handful of other companies for the shortages she created. By deflecting blame from her policies to the retailers, she is able to blame the symptom instead of the cause.

It's not as if Kirchner's history as her country's economic overlord hasn't been rife with similar episodes. Following in the footsteps of her late mentor, Venezuelan strongman Hugo Chavez, Kirchner nationalized Spanish oil giant YPF because it didn't spend enough money in the country. Last year, as a result of her disastrous monetary policies, mining giant Vale (NYSE: VALE  ) chose to abandon its Rio Colorado potash project rather than continue operating under her economic interventionism. 

It was Chavez who set the wheels of confiscation in motion by seizing the assets of oil giants such as ExxonMobil and Chevron, oil and gas industry services provider Superior Energy Services, steelmaker Ternium, and companies in industries as diverse as telecommunications, cement, and power generation. Of course, the oil companies were jumping right back into his lap a few years, later suggesting they get what they deserve. 

So the companies that continue to do business in countries like Argentina or Venezuela that have shown a capricious lack of respect for property rights shouldn't be surprised when it turns around and bites them. Whether their shareholders deserve it is another matter, and whether they should tolerate it is a good question, too.

At the end of Wal-Mart's last fiscal year, it had just 94 stores in Argentina, representing 7.5 million square feet of floor space, one of the smallest components of its far-flung international operations -- ahead of only India, which had just 20 stores for 1.1 million square feet of floor space. (In comparison, its largest market, the U.K., had 565 stores for 34.8 million square feet.)

That comes out to about 2.2% of the retailer's total international square footage. Wal-Mart averages about $416 of sales per square foot over its entire company, though it's a little lower, about $388 per square foot, in its international stores, which ought to give it between $2.9 billion and $3.1 billion in Argentina. Since it was fined 604,000 pesos by the government, or about $77,000, the risk of incurring Kirchner's wrath just might be worth the trade-off.

Even so, it's foolhardy to continuously pursue these options and waste resources, because there's no knowing when the next set of confiscatory policies will be implemented next. Coupled with inflationary monetary policy, Wal-Mart and other retailers are also paying a high price when they have to translate those currencies back into dollars. All told, Wal-Mart says net sales were affected by approximately $1.6 billion from currency exchange rate fluctuations last year.

There are trade-offs no matter where a company locates, as Wal-Mart has found when it's wanted to open stores here in the U.S. only to come face to face with local opposition. Still, it seems unduly risky to go to countries where the dangers are obvious and recurring. While the people pay for the folly of their politicians, and pulling out of such markets only harms them more, there's no need for shareholders to shoulder the burdens, too.

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