The sprawling malls of Santiago, Chile’s capital, draw hordes of weekend shoppers to homegrown retailers like department stores Almacenes París, Falabella and Ripley; hypermarkets Jumbo and Líder; and home improvement outlets Sodimac and Easy. None is a household name outside of South America. The retailers you would expect to find here -- U.S. chain stores Home Depot, J.C. Penney and Sears Roebuck, and European supermarket behemoths Carrefour and Ahold -- have all come and gone from Chile. “It just didn’t turn out to be a profitable operation for us,” says Tim Lyons, a spokesman for Plano, Texasbased J.C. Penney, about the company’s 1999 decision to end its eight-year presence in the country.
The biggest retailer on the planet, Wal-Mart Stores, hasn’t even tried to penetrate this 2,800-mile-long string bean of a nation, squeezed between the Andes and the Pacific Ocean.
Why can’t much larger, global champions compete in Chile, given its reputation as the Latin American country most open to trade and foreign investment? “None of them know the credit histories of Chilean clients the way we do,” says Rodrigo Irarrázaval, head of retail financing at Cencosud, a conglomerate of hypermarkets, department stores and home improvement centers with a market capitalization of $5.38 billion. By building up sophisticated and widespread retail financing systems that link credit cards, banking and insurance to store sales, Cencosud and other big Chilean retailers have chased away the global giants.
Voluminous credit data on consumers is gathered on the top floor of every big Chilean retail outlet, in open spaces with clusters of desks where customers are plied with credit cards, bank loans and insurance policies. “The idea is to satisfy as many needs as possible for a client, and all under the same roof,” says Michel Awad, head of retail financing at Falabella, Chile’s largest retail conglomerate, with a market capitalization of $6.33 billion.
Such financing services give the major Chilean retailers a nearly unbeatable edge over local and foreign competitors. Irarrázaval estimates that branded credit cards and in-house bank loans raise margins on earnings before interest, taxes, depreciation and amortization at the big Chilean retailers above 15 percent, compared with the margins of less than 10 percent that a new competitor might expect. Store credit cards account for about 60 percent of sales at Chilean department stores and home improvement centers and 20 percent of supermarket sales. Nonpayment rates on these cards run only about 3 percent, thanks to a long history of credit screening that no newly arrived foreign retailer can match.
The three biggest Chilean retailers are pushing so hard to cash in on a consumer spending boom that they are now entering territory that has traditionally belonged to the country’s established banks and insurance companies. Because they are doing business in a more liberal regulatory environment than in the U.S. and much of Europe, the so-called Big Three -- Falabella, París and Ripley -- have each launched eponymous banks within the past eight years and among them now claim a 12 percent share of consumer lending.
Chile’s older banks grumble that although regulations oblige them to share their clients’ credit background information with rivals, department store banks aren’t required to disclose any information on the credit card holders who receive their loans. “Until now the big retailers haven’t had to play by the same rules as we do, and that doesn’t seem fair,” says Gonzalo Menéndez, a senior bank manager who sits on the board of Banco de Chile, the country’s second-biggest bank after Banco Santander Chile.
Traditional insurance companies have even more reason to complain about incursions by the major retailers. Cencosud (owner of París), Falabella and Ripley essentially act as brokers for life and property-casualty policies on behalf of their millions of clients, splitting the fees with insurers. “We have been reduced to wholesalers because we have to keep dealing with these carnivores,” says the chief executive officer of a leading insurance company, who insists on anonymity. Eduardo Ferretti, an analyst with Feller Rate, a Santiago-based credit rating agency that covers banking and insurance, estimates that “in two or three years, Falabella alone will claim 20 percent of the insurance market.” The retailer now has about a 6 percent share.
Retailers have been able to make these inroads so rapidly because the insurance industry is fragmented: Some 40 companies share a market that garnered barely $2.2 billion in premiums in 2005. ING Insurance Chile, a subsidiary of the big Dutch insurer, led this splintered pack last year with an 11 percent market share. Already, financial services -- credit card, banking and insurance products-- account for 12 to 16 percent of revenues at the Big Three retailers, according to a June 2005 report by Fitch Ratings.
The big retailers’ success at selling both goods and financial services has made their stocks favorites among Chilean fund managers. The stocks are especially popular with the administradoras de fondos de pensiones, or AFPs -- private pension fund companies that manage a massive $70 billion in assets. BBVA Provida AFP, with total assets of $23 billion, holds $473 million in the shares of big Chilean retailers, including a 5 percent stake in Cencosud worth $269 million and a 2 percent stake in Falabella worth $127 million. “Any diversified, relatively liquid portfolio in Chile almost has to include shares from both those companies,” says Julio Morgado, head of equities at Provida. The AFPs fill their portfolios with the stocks of companies around the world and have a reputation for holding on to shares. They pick Chilean retailers because they deem them good long-term investments.
While the retail financing offered by Chilean conglomerates is more extensive and sophisticated than that offered by major corporations in any other Latin American country, similar efforts are under way elsewhere in the world. British supermarket chain Tesco, for example, offers consumers extensive banking and insurance products linked to its credit card operations. In the U.S., however, attempts by Wal-Mart to launch a nationwide banking network have been rejected by Congress because such a network would violate the 1999 Gramm-Leach-Bliley Act, which prohibits commercial concerns from owning banks. But even those U.S. department stores that were allowed to keep banking services started before the 1999 act have been unable to match the uninterrupted growth of the Chilean retailers in financial services.
Cencosud and Falabella have become the two biggest conglomerates in Chile through dramatically different business strategies. Falabella built its empire on department stores: It opened its first store in 1937 in Santiago and now owns 33 in Chile, eight in Peru and five in Argentina. The company reported a net income of $314.5 million on revenues of $3.85 billion in 2005, up from $225 million in net income on $2.88 billion in revenues in 2004. Most of Falabella’s growth has been organic. The Solari family, which has a 67 percent stake in the company, keeps out of the limelight and avoids interfering with corporate management.
By contrast, Cencosud is dominated by its ebullient, high-profile chairman and majority owner, Horst Paulmann, a 71-year-old, German-born Chilean. Paulmann first made his fortune through Jumbo, a chain of giant supermarkets that opened its first outlet in Santiago in 1976. Since 2003, Cencosud has rapidly expanded through five major acquisitions, including last year’s takeover of París, Chile’s third-biggest department store chain, with 25.6 percent of the market. Falabella is the leader, with a 36.6 percent share, whereas Ripley comes in second with 28.0 percent. Cencosud reported net income of $200 million on revenues of $4.75 billion in 2005, up from $90 million in net income on $2.47 billion in 2004.
Until the mid-1980s, Falabella had only three stores, all in Santiago. But the strong economic growth that began in Chile at that time under the right-wing dictatorship of general Augusto Pinochet spurred the store to open new outlets: By 1991 it had a dozen stores nationwide. Then, as economic expansion continued in the 1990s under center-left democratic governments that were more palatable to foreign investors, global outfits like Carrefour and J.C. Penney launched operations in Chile. By that time, Falabella, Cencosud and the other homegrown retailers were ready to take them on.
“The big Chilean department stores and supermarkets had been importing retail ideas for many years,” says Sergio Olavarrieta, director of the University of Chile’s School of Economics and Management, based in Santiago. One key lesson learned abroad was the importance of tracking consumer tastes, which are notoriously fickle. “We are constantly surveying our customers,” says Juan Pablo Montero, corporate manager for all 46 Falabella department stores. “We poll them by phone about what they think of new products and the way they are displayed and sold.”
Foreign retailers weren’t as methodical. Some mistakenly embraced homogenous Latin American marketing approaches that alienated Chileans. Luis Alfredo Lagos, Santiago-based manager for marketing firm Cadem Research International, recalls trying unsuccessfully to dissuade one U.S. department store client from flogging Central Americanstyle guayabera shirts and brightly colored Caribbean dresses in Chile, where most of the 16 million inhabitants live in a temperate, northern Californialike climate. “We Chileans can be chauvinists,” says Lagos. “Just because those things are sold by gringos doesn’t mean we’re going to buy them.”
Even when foreign retailers displayed marketing savvy, says the University of Chile’s Olavarrieta, “they had no idea how to assess credit risks in Chile.” Meanwhile, Chilean retailers were enthusiastically pushing their branded credit cards. Today Falabella claims one quarter of the country’s 8 million active credit cards -- a total that includes those issued by traditional banks and global credit card companies. Many in-store credit cards are handed out to blue-collar or barely middle-class clients who don’t even have bank accounts. Falabella and the other big Chilean retailers charge high interest rates -- up to 3.5 percent a month, compared with the average 2 percent monthly rate charged by traditional banks -- that reflect the risks involved in lending to lower-income people. But delinquency rates remain low, says Rina Jarufe, a Santiago-based analyst for Fitch Ratings, “because this is the only credit source these clients have, and they make every effort to pay the stores back.”
Thus far, few voices have been raised in alarm over the mounting indebtedness of working-class Chileans. “It’s something that may become worrisome if there is a downturn in the economy,” says Paulina Guijón, an analyst with Santiago-based Santander Investment. But with the economy expanding at more than 6 percent in each of the past two years, she adds, “everybody is happy.”
The Superintendencia de Bancos e Instituciones Financieras, the government’s financial industry watchdog, also takes a cautiously sanguine view. In a 2005 study, the SBIF noted that household debt in Chile had risen to 49.5 percent of household disposable income in 2005, up from 32 percent in 1999. This is still low compared with 90 percent in Spain and more than 100 percent in the U.S. and the U.K. “But given the rapid growth in levels of personal debt, it will be necessary to constantly monitor this phenomenon,” the study concluded.
Besides boosting retailers’ earnings, credit cards are reliable detectors of shifting consumer tastes. “They allow us to instantly trace purchases by individual customers and target their preferences,” says Juan Guillermo Espinosa, Falabella’s manager for planning and development. Most important, by offering credit cards and other financial services, Falabella draws clients into long-term relationships that are increasingly profitable for the retailer.
At the Alto Las Condes mall in an upscale eastern Santiago neighborhood, Falabella store manager Betty Mandic offers a tour that traces the future spending patterns of young couples. It begins on the top floor, where a new couple will retrieve the wedding gift certificates bought by relatives and friends. “They will use them to purchase their first set of furniture and kitchenware and to sign up with Viajes Falabella [the in-store travel agency] for their honeymoon trip,” says Mandic. “Then we might convince them to start an account to cover purchases for the baby. And they will keep buying clothes for the children as they grow.” There is plenty for the parents to buy for themselves: Women’s apparel accounts for almost 30 percent of store sales. During the past Christmas season, high-definition television sets and MP3 players, especially iPods, sold briskly.
Falabella credit cards cover 57 percent of sales at the Alto Las Condes outlet and 62 percent of sales at the Falabella store in the nearby Parque Arauco mall. Frequent card use is rewarded with points that translate into discounts on future purchases. But any savings are quickly eaten up by the 2.5 to 3 percent monthly interest rates. Falabella is always looking for credit card customers further down the income scale. The cuenta joven, or young person’s account, offered to university students, allows parents to impose spending limits that average about $300 over a period of up to a year. Falabella will issue credit cards to domestic servants, says Mandic, “if their employers vouch for them.” The employers also set spending limits on such credit cards.
Chilean retailers sometimes choose to partner with foreign companies in other local retail businesses, though only until they have absorbed their expertise. Falabella, for example, formed a joint venture with Home Depot in 1996 but bought out the U.S. company’s operations in Chile in 2001. The ostensible reason for ending the partnership, according to Espinosa, was that Home Depot’s do-it-yourself philosophy was not popular with middle-class Chilean housewives, who prefer to pay others to cart home and install purchases. Today Falabella’s Sodimac chain of home improvement centers boasts 54 stores in Chile alone. There are an additional nine Sodimac outlets in Colombia and two in Peru.
In the past two years, Falabella has cautiously moved into supermarkets: It has ten in Chile as well as two hypermarkets in Peru. The stimulus in this case hasn’t been foreign competition but Falabella’s rivalry with Cencosud, which has used a reverse strategy, advancing into department stores after establishing itself as a major force in food retail.
Supermarkets and hypermarkets remain Cencosud’s bread and butter, accounting for 368 outlets, 121 of them in Chile and 247 in Argentina. Cencosud has pushed the use of its credit cards, which account for 20 percent of the purchases at its food stores. “I never imagined using a supermarket credit card,” says Father Fernando Salas, a Jesuit who buys food in bulk for the priests at a communal residence in downtown Santiago. But a 20 percent discount on card purchases changed his mind. He intends to keep paying his bills on time to avoid interest charges, but the discount ensures his loyalty to the store.
In the past several years, Cencosud has also expanded its Easy chain to include 14 home improvement stores in Chile and an additional 26 in Argentina. But it was only two years ago that owner Paulmann decided to publicly list his holdings, mounting a more direct challenge to Falabella’s retail supremacy.
Through Celfin Capital, a leading Chilean investment bank, Cencosud arranged an IPO in May 2004, selling 20.3 percent of the conglomerate for $333 million. Additional share sales have left Paulmann and his family with a 65 percent stake in Cencosud -- and with a great deal of financial leverage for further expansion projects. “The advantage of the IPO was that it enabled Paulmann to buy the Almacenes París department store chain by using Cencosud shares rather than turning to the banks for loans,” says Jorge Errázuriz, a senior partner at Celfin. Through an $835 million all-stock transaction in November 2005, Cencosud acquired the 21 París stores, along with the retailer’s credit card, bank, insurance and travel businesses. Suddenly, Falabella and Cencosud were competing head-on in every arena.
While the big retailers see themselves as spirited rivals, their aggressive push into financial services is discomfiting traditional banks and insurance companies. Credit cards remain at the heart of the retailers’ expansion into banking and insurance. Department store credit cards are becoming as versatile as cards issued by American Express, MasterCard and Visa. They are used to make payments at gasoline stations, fast-food restaurants, DVD rental outlets, pharmacies and all sorts of businesses that have no connection to the department stores. To help clients keep up with their credit card payments, the department store banks offer them loans. “When a Falabella department store client signs up for a Banco Falabella account and asks for a loan, we can instantly check his credit history,” says Falabella retail chief Awad, who founded the bank in 1998.
Traditional bankers are peeved at their own lack of access to those credit histories. They have been calling on the government -- with no success thus far -- to impose restrictions on the use of branded credit cards outside of the department stores that issue them; they complain that the banks owned by Falabella, París and Ripley should be as tightly regulated as traditional banks. “Falabella and the others are just using their banks as a cheap source of funding to cover the credits they are giving through their store cards,” says Banco de Chile board member Menéndez.
Some shoppers use Falabella’s loans to make big, one-time purchases -- such as high-definition television sets or major house improvements -- that would exceed a credit card limit. Others use loans to cover credit card payments. But what irks the traditional banks even more is that department store bank loans are being used far beyond the stores’ premises to purchase cars, homes and vacation trips. The only credit activity that doesn’t interest the department store banks is corporate lending, because margins aren’t high enough.
At the end of 2005, after just seven years in existence, Banco Falabella claimed 5.5 percent of the consumer loan market. Traditional banks have stepped up their consumer lending, showing a 14 percent growth in this segment in 2004, the last year for which overall statistics are available. But consumer loans by department store banks grew by 24 percent that same year.
The big department stores have made even more impressive strides in insurance. Falabella again leads its peers, collecting revenues on $130 million in insurance premiums in 2005 -- or about 6 percent of a market that totaled $2.2 billion in premiums. The department stores entered the insurance business in the early 1990s by taking out policies for, quite literally, deadbeats: They sold insurance to heads of households so that if they died before paying their store bills, the store would be reimbursed. A decade later the big retailers ventured into automobile insurance. They bundled the policies of thousands of their clients who owned cars and then auctioned them off to the lowest bidding insurance company. “Car owners were delighted to see their rates fall,” says marketing chief Lagos. Meanwhile, Falabella and other retailers split the fees with the insurance companies, with the latter taking responsibility for most of the overhead costs.
Although car policies account for nearly 40 percent of their insurance revenues, the department stores have in the past three years increasingly focused on life insurance. Here again, they bundle thousands of clients, and insurance companies play the role of wholesalers. “We offer policies that individuals could not obtain on their own,” says Irarrázaval, the head of retail financing at Cencosud. A typical policy may include $6,000 in life insurance and have monthly premiums as low as $2. “No insurance company would touch that low an individual policy, because it wouldn’t be worth the administrative costs,” says Irarrázaval. “But our strength is mass marketing, and we can reach those clients -- they are our shoppers.” According to the department stores, the fastest-growing market segment is for $40,000 life insurance policies, with monthly premiums of $10 to $12 -- still too low for traditional insurance companies to manage by themselves. But Falabella, Ripley and Cencosud’s París say they are ready to step up to the next level: the million-dollar life insurance policies sold exclusively by traditional insurers -- until now.
One other rapid growth market for big retailers is commercial real estate development. In this arena, however, they’ve discovered the virtues of collaboration. Despite their battles for shoppers and financial services rivalries, conglomerates tend to locate their stores in the same malls, which they often build and own jointly, thus attracting a critical mass of shoppers. “To a lot of people, it seems strange that Falabella, París and Ripley are at each others’ throats in publicity campaigns yet chose the same locations,” says Cencosud’s Irarrázaval. “But to have a successful mall, you must invite your intimate enemies.”
Kind neighbors? Chile’s retailers look abroad
With their domestic market secured, Falabella, Cencosud and other big Chilean retailers are branching beyond their borders. Together they have invested more than $3 billion, mostly in the past five years, in Argentina, Colombia and Peru. But while growth prospects abroad are enticing, the deep-pocketed Chileans are encountering the same political problems that have bedeviled U.S. and European multinationals -- among them, Ahold, Carrefour, Home Depot and Wal-Mart Stores -- in their attempts to make inroads in the region.
Fear of globalization has been a leading issue in election campaigns that have recently brought left-wing, populist governments to power throughout Latin America. Politicians in those countries have increasingly lumped the big Chilean retailers with the American and European giants as scourges of global capitalism. In fact, it will be a challenge for Chile’s newly elected center-leftist president, Michelle Bachelet, to persuade her South American neighbors that they have little to fear from Jumbo hypermarkets, Ripley department stores and other Chilean enterprises that are sprouting in their cities. “This has to be one of Bachelet’s biggest diplomatic tasks,” says Raúl Sohr, a leading Chilean media commentator on foreign and security issues.
Politics isn’t the only problem big Chilean retailers face. Although they seem set to continue dominating the market at home, there are doubts about their ability to compete abroad, where they face richer global rivals. Chile’s retailers are still midgets compared with Wal-Mart or Carrefour, says Sergio Olavarrieta, director of the University of Chile’s School of Economics and Management. According to a December 2005 survey released by Deloitte Touche Tohmatsu, no Chilean company ranks higher than Falabella (228), among the world’s 250 largest retailers.
The Chileans, however, believe that U.S. and European retailers are too focused on North America and Asia. They are letting the Latin American market slip away, says Juan Guillermo Espinosa, Falabella’s manager for planning and development. “That’s a big opportunity for Chileans. We are world-class retailers, and we have access to capital markets and low-interest financing.”
The big Chilean stores have also been adept at tailoring their vaunted retail financing methods to local circumstances. In Argentina, for example, government regulations prevent retailers from engaging in banking; this means that Falabella doesn’t have the credit data-gathering resources there that it enjoys in Chile. But at the Falabella department store in downtown Buenos Aires, customers are greeted with a prominent sign urging them to sign up for store credit cards co-branded by Falabella and Banco Galicia, one of the largest Argentinean banks, with access to the credit histories of more than 2.5 million customers.
In neighboring Latin American countries, Chilean retailers are exposed to the same risks that Ahold and Home Depot face, but they take them on without the massive assets that would buffer the giants if the local economies seriously faltered. In Argentina, one of the most inflation-prone economies in the region, the government has forced Cencosud and other major food retailers to agree to a 15 percent rollback in prices. And because of recent government measures aimed at slowing the flow of clothing imports from China, the five Falabella department stores in Argentina have had to stock up on locally made products of lower quality and higher cost.
With the retailer’s future abroad uncertain, it’s little wonder that Falabella’s five-year projections show the conglomerate continuing to depend on the Chilean market for at least 75 percent of its income. That’s not a bad bet: According to a 2005 report by the Inter-American Development Bank, Chile has moved ahead of all other Latin American nations economically: Only 18 percent of its population is below the poverty line. The country’s emergence as a fully developed economy seems well within reach over the next generation. -- J.K.
