“If the first thing [stakeholders] do after getting up in the morning is look at the price of their shares on the stock exchange, I tell them politely that they are acting like fools.” That comment was made by Laurence Golborne, the (outgoing) chief executive of Cencosud, the biggest player in Chile’s supermarket sector, a few days after the global financial crisis broke out. Golborne’s statement was a clear signal that both Cencosud and its local rivals should forget about their short-term losses and reassert their business plans.

The crisis began just at the moment when Chilean retailing — which comprises supermarkets, clothing stores, home furnishings and high-tech products — was undergoing a promising period of expansion in Latin America. That was especially true in Peru, where Cencosud, Falabella and Ripley racked up total sales of $2.1 billion in 2007. That same year, large-scale Chilean retailers operated 1,254 shops in the region, including stores in Mexico, Brazil, Colombia, Argentina and Peru.

Financial analysts have been forecasting hard times for the economies of Latin America in 2009, predicting economic growth of around 3.1%, down from the 4.7% growth forecasted by the Economic Commission for Latin America (ECLA), a regional research center, before the crisis erupted.

Alvaro Escobar, professor of economics and administration at the University of Concepción in Chile, agrees with the revised figures. “The regional trend is for purchases of goods and services to decline next year compared with 2008, because consumers will behave more cautiously,” he said.

Augusto Castillo, a professor at the business school of Adolfo Ibáñez University, notes, “Those retailers who meet basic consumer needs, such as food, will be less affected [by the crisis] than those companies that are focused on clothing, appliances and high-technology items, since consumption of those sorts of products can more easily be postponed.”

The Chilean retailers’ formula for success in foreign markets has been based on the fact they provide attractive credit terms for consumers to enable them to acquire goods and services. But experts say that expectations of attractive profits have practically disappeared because Latin American consumers will be more reluctant to take on debt in 2009.

Consumption Propelled by Substitutes

Guillermo Bilancio, a member of the business school faculty at the Adolfo Ibáñez University, agrees that consumption will slow down in 2009. Nevertheless, he says, “Purchasing power in times of crisis also depends on the supply of products and services that are alternatives. For example, Argentina underwent a similar crisis to this one between 2001 and 2002, perhaps in a much more dramatic form. And while consumption was especially affected, new alternative products appeared that brought back confidence to the Argentine consumer.”

In 2002, Argentina underwent a severe economic depression, the result of the government’s mismanagement of the economy. In his report, “The Argentine Economic Crisis: Causes and Remedies,” Jim Saxton, chairman of the Joint Economic Committee of the U.S. Congress, wrote that this recession led to a strong devaluation of the local currency. The Argentine peso lost 80% of its value versus the U.S. dollar. The crisis also sparked an annual inflation rate of 41% and an unemployment rate that rose as high as 27.6%. All of that significantly reduced the purchasing power of Argentines.

ACNeilsen, the U.S. marketing information company, noted in a 2004 report that Argentina’s severe recession changed people’s consumption habits and reduced the market share of certain kinds of products, while strengthening the appeal of substitute products. “The best example was the increased market share of cookies (both sweet and salty), to the detriment of manufactured breads.”

Much the same way, the overall supply of clothing will now continue along its normal course, with various brands competing to satisfy different kinds of needs, Bilancio said. “In contrast, home furnishings and high-tech products, among other sectors, will depend directly on the expansion of credit and on the way that the current consumer panic is managed.”

Opportunities with Credit

According to Castillo, the consumer financing Chilean retailers offer the public represents an important opportunity during the global economic slowdown. “In the current situation, where financial institutions around the world are restricting the amount of credit they provide, we can anticipate that these kinds of retailers will be the winners.”

Escobar agrees, noting that “credit cards are very important for retailers. What’s more, the financial side of the business in many cases winds up being more significant than the actual retail business. For that reason, retailers must find specific ways to maintain this [financing] activity, and to avoid creating barriers for those customers who want to use financing, such higher and higher rates for the management and use of their cards.”

Castillo adds that retailers face the formidable challenge of supplying credit to consumers on more competitive terms, such as by stretching repayment periods and reducing interest rates. He recommends that retailers take a fresh look at their policies for granting credit, and expand the purchasing limits they provide to customers.

Bilancio believes that they also have to “avoid drowning consumers; they need to treat them as customers and not as hostages. In short, they need to give them some relief. That is the best formula that retailers can apply nowadays to keep their credit business on a strong footing.”

A More Cautious Expansion

A few days after the global economic meltdown led to the sudden collapse of Latin American stock markets, Ripley, the third-ranked Chilean department store chain, decided to postpone its plans to invest an estimated $400 million in Mexico during 2009.

Andrés Roccatagliata, general manager of Ripley Chile, explained the decision to local media in the following way: “Mexico is closely linked to the ups and downs of the U.S. economy, so it makes a lot of sense for us to reevaluate any projects we conceived before the crisis. However, we are going to be watching carefully to see when the right moment comes along for opening new stores [in Mexico].”

According to Castillo, that comment reflects the cautious approach of Chilean retailers today, since expansion projects become riskier whenever consumption stagnates. “Above all, [that sort of caution occurs when] such initiatives cannot be financed entirely by companies’ own capital. At the moment, banks are awarding credit on less favorable conditions, and the higher interest rates on both bonds and shares [of stock] today make those financing instruments unattractive [for retailers].”

On the other hand, D&S, a prominent Chilean supermarket chain, has decided to continue its globalization plans in Peru. Next year, D&S plans to open new stores there, but with a format oriented toward low prices. This approach will require less investment, but it will have a positive impact on sales, D&S told the Peruvian media.

“Given the current economic situation, retailers must segment their markets and analyze each country in its own special way,” Escobar notes. “The realities of each country are very different from each other.” Peru continues to be the first country on the list of priorities for Cencosud, Falabella (Chile’s second-ranked department store chain), Homecenter Sodimac (which supplies items for the home and construction materials), as well as for Ripley.

“Peru is experiencing very high growth, which is the reason prospects are very encouraging for that market,” Escobar says. Peruvian monetary authorities recently announced that the country’s Gross Domestic Product in 2008 will grow by nearly 6.9%. Before the crisis began, their growth forecast went as high as 9%.

Falabella is another retailer that will dare to continue its regional expansion strategy in 2009. It has not changed its plans for Colombia, where it will lease the shops of the Casa Estrella chain, renowned locally for their clothing and house wares, in both Cali and Bogotá. According to Natalia O’Byrne, an analyst at Duff & Phelps de Colombia, the financial advisory company, “The best thing about this deal is its location, since it will enable Falabella to have a presence in strategic areas of Bogotá.”

For Bilancio, the game is all “about the level of risk aversion.” He notes that “the risks stem from the fact [retailers] may lack enough flexibility to identify other alternatives to make money and take a chance on them.” Bilancio disagrees with Castillo’s view that these sorts of expansion projects are riskier now. “Opportunities are being presented to retailers that they cannot fail to take advantage of. They must invest and create value for the future.”

Preparing for an Austere Christmas

In the midst of all this, retailers are approaching their annual trial by fire. Christmas is nearly here, and this is time of the year when they are used to recording attractive sales numbers — but not this year, when all forecasts point to consumers behaving with greater austerity.

Given the situation, Escobar says, “for a day as important as Christmas, retailers should be very cautious and conservative, which means guaranteeing their sales volumes so they don’t wind up over-stocked with products [after the holiday]. It is better to obtain lower margins [on sales] but achieve a higher rotation of their stock [by selling a higher volume of products.]”

“Once again, it appears that willingness to grant attractive financing is going to be the key to avoiding a possibly precipitous drop in consumption,” notes Castillo. “Credit can be [granted to consumers] on more attractive terms; they can have longer periods for repayment; can include grace periods, and can even offer better interest rates for consumers.”

At the end of 2000, Chilean retailing successfully dealt with an incoming wave of major global retailers, including JC Penny, Home Depot and Carrefour. However, those retailers all had to leave the Chilean market eventually. They could not compete with Chilean retailers when it came to offering a flexible supply of products in a single location (including merchandise, loans, insurance and travel services). Nor could they offer the same superior level of service, strong relationships with suppliers, and the high degree of empathy that local retailers had established with local Chilean consumers.

In light of this, Bilancio proposes that retailers take a strategic view. “You have to return to the basic items that cover both the functional and symbolic needs [of consumers]. That means making available to customers the kinds of products that are simple, necessary and long-lasting.”

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