Chilean retailing is full of paradoxes. Largely comprised of clothing shops, supermarkets and companies that provide home furnishings and construction materials, the sector has repeatedly seen its greatest international competitors arrive in the country with expectations of indisputable success. Yet, little by little, these competitors have had no alternative but to leave Chile because of imminent losses.


That’s what happened to JC Penney, the largest department store chain in the United States. It has about 1,000 stores in the U.S. and Puerto Rico. JC Penney arrived in Chile in 1995, opening two stores in Santiago. After five years of operating in the red, JC Penney felt obliged to sell its assets to its local competitor, Almacenes Paris, according to “Foreign Investment in Latin America and the Caribbean,” a study published by the Economic Commission for Latin America and the Caribbean (ECLAC) In 2005.


Another typical case was Carrefour, the French multinational, which has 50 years of experience in the supermarket sector. It came to Chile in 1998 but suffered results that were so poor that they put its entire business at risk. By 2003, Carrefour had no alternative but to sell its stores to D&S, its local competitor. The list of such cases keeps on growing, and it includes Home Depot. The largest U.S. retailer of hardware, Home Depot launched its first Chilean store in 1998, thanks to a strategic alliance with Falabella, its Chilean partner. In desperation, Home Depot decided to sell the seven stores it wound up operating in Chile within less than four years of its arrival.


Other foreign retailers that have failed to penetrate the Chilean market include Muricy, a Brazilian home furnishings chain; Gala Sears, a U.S. department chain; two companies from Argentina — Musimundo, a music retailer, and Freddo, an ice cream store chain — and Royal Ahold, a Dutch supermarket chain. Why have the plans of all these outstanding retailers failed to take off?


According to Constanza Bianchi and Enrique Ostale of the Aldolfo Ibáñez University in Chile, one reason is that “managers of these companies were not able to connect with the local market, nor understand the variables that affect their businesses.” The two professors made that comment in their study, “Challenges to the Globalization of Retailing: The Mistakes of International Companies in Chile.” Nevertheless, there are some more profound reasons that explain the situation.


The Competitiveness of Chilean Retailing


The main reasons why global conglomerates first targeted Chile were the strong performance of the Chilean economy, the competitiveness of its retail sector and the high level of professionalism in that country, says Franco Parisi of the University of Chile’s department of administration and business. “The development of capital markets in the country has democratized credit. If we add the permanent growth in per capita income, we can obviously see why Chilean retailing is growing. Strong economies of scale have added value, triggering development and competitiveness in the industry. It’s also important to emphasize the high level of professionalism that has been achieved, considering that only a few years ago these companies were family owned,” he says.


For his part, Pedro Hidalgo, from the same department of the University of Chile, emphasizes that “the introduction of technology has made it possible for the sector to manage large databases. In addition, the many free-trade agreements signed by Chile have made it possible for retailing to become competitive and to develop a broad base of suppliers.”


According to Gerardo Zamora Lira, general manager of Tamegal-Factomet (which makes warehouse management software and point-of-sale equipment), “Chile is the only country in the world where huge corporations such as JC Penney, Home Depot and Carrefour enter, and when they realize the high level of competitiveness they decide to get out and move into other markets…. Retailing here is very competitive; it generates very low margins, high levels of service and a strong supply of quality products. Multinationals ultimately find all of that unattractive, considering that Chile is a small market, so they commit themselves instead to [larger markets such as] Brazil, Chile, the U.S. and Europe.”


Another factor behind the consolidation of retailing in Chile is the way retailers have expanded the array of products they offer under one roof (banking services and insurance, as well as travel services). The rise of companies that are publicly traded, both in Chile and overseas, is also a key. Nowadays, one of the main attributes of retailers is that they supply consumer loans through their own financial institutions, such as Banco Falabella (1998), Banco Ripley (2003) and Banco Paris (2004). Each of these banks belongs to one of the three main retail chains in the country. They have become an essential component of the retailers’ efforts to achieve profitability.


According to Parisi, “The small size of the Chilean market – where local players have gradually exhausted their potential for growth – combined with managerial know how, have been the formula for the natural expansion of retailers into other countries of Latin America.”


The Successful Incursion into Peru


Cencosud, the leading Chilean player in the local supermarket sector, was a pioneer of globalization, moving into Argentina in the 1980s. At the same time, another group of retailers saw Peru as an attractive place to develop their businesses. Gradually, starting in 1995, Falabella, Ripley and Homecenter Sodimac (which provides home furnishings and construction materials) all became major players on the Peruvian scene, opening many stores, especially in Lima. They have enjoyed rising profits.


“The key to Chilean retailers’ successful expansion [into Peru] is that Chilean retailers developed a competitive culture and business model. They are oriented toward the consumer, and try to understand his or her needs and desires. They offer low prices and a mix of high-quality products,” says Hidalgo. As a result of their sound operational management, skill at supply management and the scarcity of retail development in Peru, Chilean companies “did not have to confront entry barriers.”


Paulo Cavada, managing director of Mecalux Chile, a subsidiary of the Spanish manufacturer of industrial warehousing systems, agrees that Peruvian industry was very poorly developed before the arrival of Chilean companies. “Peru was very far behind when it came to retailing. They had no malls and there were only small shops and supermarkets that belonged to family-owned chains that did not innovate.”


Another factor behind the strong results of Chilean retailers is the sound economic growth that the Peruvian economy has experienced in recent years. Parisi suggests that “economic stability, added to low interest rates and low risks, have been the cocktail that generates value for [Chilean] businesses. It is also important to note the role played by investors through capital markets, which have raised money in Chile that is used in Peru.”


The Strategic Role of Credit in Peruvian Consumption


Cavada believes that supplying credit cards to Peruvian consumers has made a key difference for Chilean retail managers in that country. “Peru was a market that didn’t have consumer credit. In fact, local banking institutions did not provide any loans to the middle class for the purchase of goods and services. With today’s availability of credit, local consumers now have an opportunity to acquire products, no matter how large and deluxe. Peruvian consumers have made using these cards a priority over acquiring other basic necessities. It’s gotten to the point where middle class consumers prefer the benefits of having a credit card to stuffing their refrigerators full of food,” says Cavada.


As a result, Peru– especially Lima– has become a very attractive market for Chilean companies. Peru’s 28 million people are strongly attracted to consumer spending, notes Cavada. Long-term forecasts are also positive. Parisargues that “the political stability that characterizes Perutoday will make it possible for companies to expand. The turbulence that takes place in the short term will not affect the vision of Chilean companies.”


In that sense, it is interesting to note that the expansion of retailing in Peru has inspired Chilean companies in other industrial niches, such as industrial warehousing systems, to enter Peru in pursuit of attractive opportunities and ways to globalize its supply chain.


The Influence of the Chilean Retailers


Thanks to the strategic alliance it signed with Homecenter Sodimac in 2003, Tamegal-Factomet, which provides business and industrial warehousing, has entered Peru in full force. At the end of the year, the company will have completed seven shops for Sodimac – four in Lima and three in the rest of the country. They include its subsidiary, Tamegal Peru.


Mecalux Chile, which also provides warehousing and storage, is another local player that has enjoyed excellent results. It has been in Peru since 2000, working through a direct representative. Among other projects, Mecalux has set up one of Ripley’s distribution centers. Acero Rack — a manufacturer and installer of steel equipments in shops and retailing outlets — is another leading Chilean player attempting to strengthen its product offerings in Peru. It plans to work with an important logistics service provider to set up its own retail supply chain in that country, according to Eduardo Zambon, business manager of Acero Rack.


These companies are the pioneers in their sectors, but they are not the only Chilean companies that are active. Chilean retailers have managed to bring along other industrial firms into Peru, notes Parisi. Chilean providers of services and computer systems have also entered Peru through strategic partnerships.


Obstacles to Globalization, and Future Strategies


Nevertheless, Chilean retailers have not been immune to problems in their expansion efforts in Peru. At the beginning of 1998, the Peruvian economy began to deteriorate. This affected Peruvian business results of the subsidiaries of Ripley and Falabella, forcing them to rethink their strategies. “This phenomenon had its roots in the collapse of per capita income but it did not have any greater implications. The most troubling moment came in 2003 when the government of then-president Alejandro Toledo changed a local law governing revenues from capital investments.  Chilean companies found it harder to manage their operations, and it changed their capital structure. That led to lower profits,” Parisi says.


With the exception of those episodes, Chilean companies have proceeded aggressively in Peru, according to Hidalgo. “They have entered Peru thanks to alliances with local Peruvian players, either with these same retailers or with local investors, which is a more suitable and modern strategy.” When you arrive with a domestic partner, Parisi adds that “you eliminate hostility, make the investment process easier and level the playing field. From a geopolitical viewpoint, setting up a foreign company in that country [Peru] can be seen as aggressive behavior [as a result of the political bad blood between Chile and Peru that has continued to exist ever since the Pacific War in 1879]. You need to follow that principle.”


Establishing a Chilean retail location in Peru has an impact on both countries, notes Hidalgo. “Remember that in the 1990s, Chilean industry moved into Argentine electricity generation and distribution. The same thing happened in Argentine banking. This phenomenon results from the limitations on continued growth in Chile and the saturation of the market there, which impels companies to move into other countries. Peru is now a target because of the strong growth it is experiencing. Colombia will be the next country to provide rosy forecasts that attract Chilean companies. Once Ecuador, Uruguay and Paraguay stabilize themselves a bit more, those countries will also, without doubt, become obligatory locations for the development of new businesses” by Chilean companies.


According to Hidalgo, Mexico and especially Brazil are the next markets that Chilean retailers should tackle. “Brazil is an economy that, because of its [large] size, is quite closed and presents a series of restrictions tied to taxes; to its potential for petroleum and bio-fuel production; and its high level of industrialization in some areas. However, Brazil should be on its way toward becoming a nation with a high level of income and demand. As a result, it is another market where we want to be,” he concludes.