SAO PAULO, Brazil (FNS) -- Wal-Mart's entry into Brazil, marked by a $200 million investment to open three Sam's Clubs and two supercenters, has been a costly trial-and-error endeavor, racking up net losses exceeding $30 million in the past 16 months.Several retail analysts said Wal-Mart's main errors were in underestimating its competition -- primarily the French-owned Carrefour hypermarket chain

SAO PAULO, Brazil (FNS) -- Wal-Mart's entry into Brazil, marked by a $200 million investment to open three Sam's Clubs and two supercenters, has been a costly trial-and-error endeavor, racking up net losses exceeding $30 million in the past 16 months.

Several retail analysts said Wal-Mart's main errors were in underestimating its competition -- primarily the French-owned Carrefour hypermarket chain -- and its unfamiliarity with the local market and culture.

Wal-Mart decided to take on Carrefour full-force by opening its first five stores in Sao Paulo, South America's biggest city, where more than a dozen of Carrefour's 41 Brazilian hypermarkets are located. Wal-Mart set up its first South American store, a Sam's Club, in May 1995, a block away from a Carrefour hypermarket in the Sao Paulo suburb of Sao Caetano. A Sam's Club and a supercenter opened in the suburb of Santo Andre in late fall 1995, with the latter store less than two miles from a Carrefour hypermarket.

So when Wal-Mart opened a Sam's and a supercenter in the Sao Paulo suburb of Osasco in November 1995, Carrefour parried by opening a hypermarket next door. In Osasco, only a fence and a narrow strip of asphalt separate the neighboring stores.

The war between Wal-Mart and Carrefour was more than geographic, however, with both competitors undercutting the other's prices on a daily basis. Cellular-phone-armed price monitors from each retailer phoned-in price changes daily from the competitor's salesfloor. Then, when Wal-Mart began selling some items well below cost, Carrefour and other hyper/supermarkets began threatening to boycott common suppliers, according to industry sources.

Michael O'Connor, a Wilmette, Ill.-based retail consultant with clients in Brazil, called the Wal-Mart vs. Carrefour battle in Brazil "the single most important event in world retailing ever, with the world's largest retailer [Wal-Mart] attacking Europe's largest retailer [Carrefour]." He added that first-round results showed "Wal-Mart clearly underestimated its major competitor in Brazil."

That error is a large reason Wal-Mart's five Brazilian stores lost $30.2 million, according to figures provided by the Lojas Americanas retail chain, a 40% minority partner with Wal-Mart in Brazil. Lojas Americanas' 1995-96 financial statements show that the Wal-Mart stores lost $16.2 million in 1995 and $14 million in the first six months of 1996, figures verified by Marcio de Souza, Lojas Americanas' financial director.

"Our 1995-96 losses in Brazil didn't come from poor store sales, but from heavy up-front operating costs common in the initial phases of such a venture, such as the building of an administrative headquarters in Sao Paulo designed for a large chain of Wal-Mart stores," said Gerardo Ruiz, a spokesman at Wal-Mart's Bentonville, Ark., headquarters. He added, "Our supercenters in Brazil are doing three times the volume they do in the United States."

But at what price? Wal-Mart began operating by selling some items well under cost or at prices that allowed no net profit margins once operating costs were factored in, according to observers. So it wasn't hard for Wal-Mart, offering giveaway prices, to register large sales volumes.

Wal-Mart's practice of selling below cost also angered suppliers, who are under pressure from Wal-Mart's competitors. In November 1995, Roland Meyes, president of Nestle's Brazilian subsidiary, reportedly accused Wal-Mart of "dumping" because it was selling some products at up to 40% below cost.

"Nestle, under boycott threats from Carrefour and other buyers, threatened to stop supplying Wal-Mart unless it boosted the sales price of Nestle products," said Rodrigo Barcelar, a retail sector analyst at Banco Pactual, a Rio de Janeiro-based investment bank. "Wal-Mart apparently agreed to do so."

Since Wal-Mart, new in Brazil, didn't have the buying clout to threaten back suppliers, it buckled and started readjusting prices. Analysts said it now is selling most goods above cost and 5% to 10% lower than most of the competition.

Another early error in Brazil by Wal-Mart was allocating too little floor space for food, analysts noted. In Wal-Mart's two Brazilian supercenters, where food accounts for 60% to 65% of sales, food initially took up less than under 40% of the floor space (vs. about 50% in U.S. supercenters), giving the food section a cramped feeling. Realizing the mistake, Wal-Mart has increased the floor space for food in its two Brazilian supercenters, Wal-Mart's Ruiz said.

Parking space at supercenters also is too small, said Antonio Carlos Ascar, a consultant for Abras, a Brazilian supermarket association. Wal-Mart did not realize that most Brazilian families have just one car and, thus, most Brazilian women save shopping for the weekends, when they use the family car -- and so the two Sao Paulo supercenter parking lots often fill to capacity quickly, he explained. Parking was further cramped at the Osasco supercenter after Wal-Mart temporarily erected a huge tent to store excess dry goods at the end of 1995. Some of that merchandise reportedly was lost or damaged under the makeshift storage arrangement.

Wal-Mart's stock situation at its Osasco and other Brazilian stores was aggravated because its ordering systems were out-of-sync with supplier delivery systems. Most of Wal-Mart's Brazilian suppliers don't have electronic data interchange, so Wal-Mart was unable to program just-in-time deliveries, observers said. Instead, Wal-Mart ordered much more stock than it needed immediately so it could have it readily available. And given the initial consumer demand for some of its below-cost items, Wal-Mart initially needed lots of backup stock.

"When Wal-Mart couldn't get clients to adapt to EDI, instead of rethinking its ordering process to take into account suppliers' handicaps, it decided to stock up to the hilt," Banco Pactual's Barcelar said. "This is why Wal-Mart had to put up the circus tent in the Oscasco supercenter's parking lot."

Wal-Mart spokesman Ruiz, however, said, "We had to put up a circus tent at the Osasco store because our initial sales volumes there were so high there, it was difficult to stay in stock. You might call the tent a temporary solution to a pleasant problem."

Product mix at the Brazilian stores, virtually the same as in the U.S. units, has been a nagging problem as well, analysts said. When Wal-Mart opened its Sao Caetano Sam's Club in May, it was spring in the United States and fall in South America. Yet Wal-Mart stocked the Sam's with a big supply of electric fans.

In supercenter perishable sections, mix was particularly difficult. Wal-Mart modeled its Brazilian supercenters after its U.S. units, offering a far less varied mix of fruits and vegetables than at most big Brazilian retailers -- especially Carrefour hypermarkets. Most Brazilians buy a lot of produce at supermarkets because they eat only a small amount of canned and frozen foods, and buying produce at local street fairs is more dangerous and more time-consuming. With its EDI-based ordering system, Wal-Mart also had a tough time coordinating produce supply.

"Wal-Mart's applying its U.S. model to its Brazilian supercenter perishable section is an example of how it failed to consider local buying habits before setting up shop here," said Marcelo Vainstein, an analyst at Deutsch Morgan Grenfell's Sao Paulo office. "Wal-Mart's mistakes are an example of the learning curve you must master before being successful in a new market."

Wal-Mart's biggest near-term challenge will be to withstand Brazilian expansion by Carrefour. The French retailer plans to add up to 10 hypermarkets this year (as of Aug. 31, three were open), including three in Sao Paulo. Roughly a dozen new stores are planned for Sao Paulo in the next three to four years, Carrefour's biggest one-city expansion in Brazil. By the year's end, Carrefour expects to open its first unit in northeastern Brazil, in Recife.

"Carrefour's aggressive expansion program shows it is a highly capitalized company which has decided to take Wal-Mart's challenge very seriously," analyst O'Connor said.

At a global investment conference in New York late last month, Herve Defforey, Carrefour's chief financial officer, said competition has risen "just a bit" in Brazil, which accounts for 11.7% of the retailer's sales. "In Brazil, we have been able to increase our market share and margins," he said, noting that volume, however, has dipped.

Wal-Mart has no other expansion planned for this year. Bob Martin, president of Wal-Mart's international division, is slated to visit Brazil this month or early November to announce the retailer's 1997 expansion in Brazil, reportedly three new stores. Wal-Mart clearly will set up shop in other major Brazilian cities where Carrefour has stores, such as Rio de Janeiro and Porto Alegre.