IJVs Lessons Learned – The Home Depot Experiment in Chile

In this post, we highlight a well-publicized IJV failure in Latin America -- the case of Home Depot’s expansion into Chile through a partnership with a major local retailer, Falabella – as a means to explore some basic do’s and don’ts when considering IJVs.

(For a broader discussion of IJV strategies and the factors that companies typically consider when evaluating this strategy, please read our earlier post here)

As set forth in great detail in the business case study “Lessons learned from unsuccessful internalization attempts: Example of multinational retailers in Chile” (Bianchi and Ostale, 2006). See the full report. ] Home Depot entered the Chilean market with aggressive growth expectations based on the assumption that its high volume US model would work essentially “as is” abroad. According to the researchers, when sales failed to meet expectations, Home Depot attempted to force the issue by adopting an “arrogant” negotiating style with suppliers and turning away Falabella’s efforts to provide advice on corrective measures.

“Falabella was very unhappy with Home Depot’s performance and attempted several times to participate in their decision-making, but without any result. Home Depot constantly reminded their partner that they were the best home improvement retailer in the world, and that management decisions should be taken by them.”

(Bianchi and Ostale, page 12).

Remarkably, as the case study goes on to describe, Home Depot became so insular in its decision-making that it decided to hold private board meetings that excluded Falabella from participating altogether. Eventually, facing three years of consistent and deep losses, Home Depot abruptly exited the Chilean market by selling its 66% stake in the IJV to Falabella.

While the Home Depot/Falabella case study provides several international expansion lessons, perhaps the most important IJV lesson is this: if you are going to enter a market with an experienced local partner, you need to make the most of the partner’s local expertise. While it appears that Falabella was brought to the partnership primarily because it gave Home Depot access to Falabella’s two million credit card customers, it is notable that, having the skin of one of Chile’s most successful companies in the game, Home Depot took so little initiative to obtain the local market expertise of its “partner.” Had it taken a more inclusive approach, Home Depot would have likely stood a better chance of obtaining strategic benefits including: more accurate data on purchasing patterns of Chileans, access to local management, information about competitors, and better supplier management practices.

In retrospect, assuming the insular approach Home Depot took in Chile reflects a broader corporate approach to expansion, it comes as little surprise to us that Home Depot has failed in each of its efforts to expand outside North America, having shut down prior efforts to open stores in Argentina, China, as well as Chile (its only non-US stores are in Canada and Mexico).

Recent reports suggest that Home Depot may, however, still have an appetite for expansion into Brazil. If that turns out to be the case, it will be interesting to see if they choose the ISV path and, most importantly, if they give their prospective partner an effective voice. We will stay tuned to these developments.

For a printable PDF version, click here

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Andres Snaider is a founding partner of Nextant, a consulting firm specializing in assisting companies expand their businesses in international markets, with a strong focus on Latin America. With a degree in law and experience working as an international attorney and businessman, Mr. Snaider has advised clients on a range of commercial matters and investments across the Americas. He is a graduate of the Harvard Law School and currently lives and works in Boulder, Colorado.

Email Andres at : asnaider@nextant.com

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Nextant has extensive experience in assisting leading clients through its Market Expansion and Business Optimization services. For more information on how Nextant can assist your company in socializing a market entry and initiating sales, please visit our website at http://www.nextant.com