Over the last year and a half, a wave of mergers and acquisitions has shaken up Chile’s retail sector. The major supermarket and consumer retail chains have expanded their businesses and diversified through a process of consolidation that leaves little room for them to grow internally. Chile has experienced decades of internal growth, and Chilean chains are proud of practically having forced such major players as Sears, JC Penney, Ahold, The Home Depot and Carrefour to leave their country. Such Chilean chains as Falabella, Jumbo, Ripley and Sodimac have become familiar to consumers of clothing, appliances and food in Argentina, Peru and Colombia.
Their secret for winning markets has been an ability to combine the best practices of global leaders with knowledge of the local market. To win in an extremely competitive market, Chilean firms also provide a diversified line of products, including banking services.
Unlike the usual case in Latin America, the Chilean retail sector is controlled by local firms. These firms almost always focus entirely on the retail market, where they have displaced traditional neighborhood shops and specialized stores. The two leading players in the supermarket sector, Líder and Jumbo, share a combined 90% of all revenues. Among department stores, three firms control the lion’s share in clothing and appliances – Falabella, Almacenes París, and Ripley. A similar trend can be found among pharmacies, where three locally owned companies (Fasa, Cruz Verde and Salcobrand) control more than 90% of pharmaceutical sales. The great majority of these companies have yet to cross the country’s borders.
Growing With Knowledge
Last March, the Cencosud Group, run by Horst Paulmann, a Chilean-German, became the largest holding company in the country thanks to the rapid growth of Jumbo in the supermarket sector of Chile and Argentina, and the expansion of Easy, Cencosud’s home-furnishing chain. After months of hard bargaining, Cencosud acquired a controlling ownership of Almacenes Paris, an old-fashioned department chain. It was the fifth company Cencosud acquired over the past two years. The deals mean that Cencosud’s annual sales now exceed $3.2 billion.
Cencosud’s sales also now exceed those of the Falabella-Sodimac chain of department stores, which recorded revenues of $2.885 billion in 2004, and those of the Líder supermarket chain (which belongs to the family-owned D&S group), which booked $2.586 billion in sales last year. Having achieved integration and knowledge of the Argentine market through its acquisition of the Jumbo hypermarkets, Cencosud will add the retail outlets of Disco, which it recently acquired, and those of Ahold, the Dutch multinational. Little doubt remains that Cencosud will expand the Almacenes Paris network and launch its first international venture in Argentina.
That was the path into foreign markets taken by Falabella-Sodimac, which is controlled by the Solari and Cúneo families. In 2004, Falabella merged with the Del Rio group, which owns the Sodimac chain, focused on home improvement products. Back in 1993, Sodimac opened its first store in Buenos Aires; today, it operates nine. In 1995, Sodimac expanded into Peru. Its next goal is to enter Colombia. At the beginning of 2006, the chain expects to launch its first retail store in Bogota, in cooperation with a local company called Corona. Together, the two firms expect to open between six and seven Falabella shops within four years. All indications are that things will go well for Falabella-Sodimac. The format they are using has become extremely widespread in Colombia, and they should be able to repeat their success in Peru, where Falabella has positioned itself as the first large retail store in the market.
Sergio Olavarrieta, director of the University of Chile’s school of economics and management, believes that Chilean holding companies’ drive towards mergers and acquisitions stems from their need to achieve a greater scale of operation so they can compete both at home and throughout Latin America. “If they become large enough, they can achieve levels of efficiency that make them competitive on a global level. Ultimately, they will pass those efficiencies along to Chilean consumers.”
In the case of Jumbo, Easy, and such firms as LAN airlines – which has a presence in Ecuador and Peru and is preparing to launch a flight from Argentina – it is not simply about achieving economies of scale, Olavarrieta says. It is also a question of “proximity of local markets (in Argentina and Peru), and acquiring the knowledge they need in order to operate there. They are creating another sort of expertise. If Jumbo is competitive, it will carry over to the other players in the sector. Generally speaking, people who work at Jumbo and then move on will bring their culture to other companies.” According to Olavarrieta, this will generate a “spectacular” competitive impact within the [Chilean] economy.
Good Imitators Who Adapt to the Markets
Clearly, it is critical for companies to expand their knowledge of local consumers and their tastes. Achieving that goal is perhaps the great strength of Chilean retailers. Constanza Bianchi, who teaches at the Adolfo Ibáñez University, notes in a research report that Chilean retail firms are managed by Chilean professionals who have achieved success in confronting foreign competition by deploying a special strategy: They observe and imitate the best practices of foreign competitors. To that, they add a ‘local touch’ that comes from knowing their market. “This formula has been successful for most operations in Chile, and it has resulted in a greater supply of products and services for Chilean consumers.”
After several years of recording losses, Sears, JC Penney, Ahold, The Home Depot and Carrefour all withdrew from Chile. Most likely, that explains the reluctance of global chains like Wal-Mart and Casino to enter Chile, despite the fact these chains operate in neighboring countries.
Luis Alfredo Lagos, managing director in Chile of Cadem Research International, a marketing firm, recalls that JC Penney, the U.S. chain, arrived in Chile during the 1990s with the attitude that, “We are going to change people’s habits.” “They thought they were going to be able to introduce new styles and product lines, but nothing worked out.” As a result, Lagos advises that the most fundamental thing for anyone who wants to develop a product or brand is to acquire enough knowledge of the local market and its peculiarities. “You cannot overlook the idiosyncrasies of the local population.”
Among major retailers, Falabella is an icon, according to Lagos. “It is a company that has worked hard to connect with its customers, and it succeeds in every category.” Years ago, companies developed products and brands, brought them onto the market, and wondered if people would like them. Nowadays, it is much harder to succeed because markets are more competitive and people are bombarded by alternative products. “The approach is different now,” Lagos says. “The idea now is, ‘First we are going to the market, to find out what people need. And only after we find that out will we develop our plans.’”
Falabella takes precisely that approach, Lagos notes. “The chain has a permanent program of contacting consumers, getting to know them in depth, and then adapting their supply of products. This doesn’t take place by chance; it is not a question of whether someone has good taste in clothing, for example. My perception is that the other chains – Almacenes París and Ripley – are admiring this ‘benchmarking’ approach, and they have replicated this model.”
Diversifying Supply, and Hooking Business with Credit
According to Bianchi, Chilean retailers are also using more and more products and services to win over consumers. All of the retailers offer store-branded credit cards. In addition, supermarkets have broadened their offerings with aisles selling garden supplies, furniture, consumer electronics and clothing. The large shops have added bookstores, beauty salons, travel agencies and cafeterias.
One of the most significant peculiarities of Chilean department stores is that they provide financial services. Falabella alone has three million credit-card holders. Providing credit cards is a core of its business, generating 40% of the holding company’s revenues in 2004. This segment has been so successful that the three largest companies in the sector have entered the banking business in recent years, creating their own banks — Banco Falabella, Banco Ripley, and Banco Paris.
Retailers from the United States had used this strategy in Chile, according to Rina Jarufe, an analyst for Fitch Ratings. The results were quite positive because the large chains were targeting lower-income consumers. “Clearly, this was a market segment that Chilean banking did not cover. Now, this space has been taken by the banks of Paris, Falabella and Ripley.”
Another characteristic of Chilean retailing is its high degree of concentration. The major supermarket and department chains control about 80% of all sales; the overwhelming majority of products in the typical family’s shopping cart. “In Argentina, Brazil, and even Europe, retailers do not have as massive and dominant a presence as they do in Chile. It is a really hard market, and this has limited the arrival of global giants such as Wal-Mart,” argues Lagos.
Despite the sophistication of their approach, Lagos warns that Chilean supermarkets are still unable to go beyond offering basic products – that is, perishable and non-perishable foods. They have yet to enter other areas the way Wal-Mart has. “So it is not merely by chance that Cencosud has acquired Almacenes París, if you look at the development of supermarkets elsewhere.” The items that Chilean supermarkets are selling occupy only one-third of total shelf space in the United States and Europe. In those countries, the rest is occupied by electronics, clothing, and a more complete line of other products. “Here, supermarkets have focused on the idea of low prices, and that doesn’t work over the long haul. The challenge is to offer more added value and to abandon their orientation toward supplying basics. I believe that they are focusing all their attention toward moving in that direction.”
