Business | Retailing in South America

Cautious conqueror

Falabella is expanding steadily in a region of economic turbulence

A bright spot in a gloomy region
|LIMA

CHILE is often described as the Germany of South America. Its budgets are balanced, roads decent and trains punctual. Alongside Argentine histrionics or Brazilian flamboyance, life tends to be Teutonically staid. Successful Chilean businesses often exhibit cautious conservatism as they look beyond their puny home market of 18m people. Take Falabella, a 126-year-old department-store chain, which now employs 100,000 people across the continent and flogs everything from handbags to hand tools.

Retailers across South America should be having a miserable time. Growth has either slowed or gone into reverse, as global prices of the region’s plentiful raw materials have plunged. Unemployment is up, and high inflation is eating into wages. Sliding currencies—the Chilean peso has fallen by one-third against the dollar since the start of 2013—make imported wares costlier. All this is making the continent’s shoppers think twice before splurging.

Against this backdrop Falabella’s performance has been positively perky. On November 10th it announced net profits of 95 billion pesos ($136m) in the third quarter, up by 16% on a year earlier. Revenues were up by almost 13%. Analysts dialling in to its previous earnings call, in August, all prefaced their questions to Sandro Solari, the chief executive, by congratulating him. Earlier that month, amid a sea of corporate downgrades in the region, Fitch had raised the company’s investment-grade credit rating by a notch, to BBB+.

The reason for Falabella’s resilience is its assortment of businesses, spread judiciously across six countries. Besides its 101 department stores, it runs 102 supermarkets; together these generate about half of the group’s retail revenues. The other half comes from 246 big-box DIY shops (the result of a merger with Sodimac, another Chilean firm, in 2003). The fortunes of the three do not overlap exactly, helping to smooth sales over the cycle.

Falabella also runs 39 shopping centres, where its shops are the “anchor” tenants. And as customers flit between a Falabella department store and a Falabella-owned supermarket, they can pay with a Falabella credit card or draw cash from one of Banco Falabella’s ATMs. The financial-services arm, with reams of data on customers’ spending habits, is considered one of the region’s most sophisticated lenders. Its $5.7 billion loan book is “impeccable”, says Joaquim Ley of Itaú BBA, an investment bank. It also enjoys cheap finance, thanks to Chile’s low interest rates and the firm’s good rating.

Falabella’s focus on the market-friendly Andean economies, which continue to grow, rather than on stodgy, interventionist places like Brazil, has helped, too. Chile, Peru and Colombia (where it ranks first in both department stores and home improvement) account for 52%, 24% and 14% of sales, respectively.

The rest comes from Argentina and Brazil, where a larger Chilean retailer, Cencosud, has expanded more enthusiastically and has good reason to regret it. Argentina and Brazil contribute no net profit to Falabella at the moment. But, as Mr Ley points out, together they have 250m consumers, so it is worth having toeholds there, which could be scaled up if and when prospects brighten. (Argentina’s would if, as seems likely, it elects a market-friendly president later this month.)

What’s a hammer?

Jordi Gaju, Falabella’s chief development officer, attributes his firm’s success to its understanding of shopping habits, which can vary enormously from country to country. Gisele Bündchen, a Brazilian fashion model, is the face of Falabella department stores across the region. But there was no point launching one in her native land, where this sort of retail format is practically non-existent and trend-conscious consumers prefer dedicated purveyors of fast fashion. In Chile, the group’s Sodimac hardware stores are aimed at middle-class DIYers. Their counterparts in Brazil would not dream of lifting a hammer, so branches there are designed to appeal more to builders, plumbers and the like.

When Falabella does expand, it never rushes in. Sometimes, after entering a country and getting a feel for it, it will buy a local firm and combine it with its own branches, to cut costs and tease better deals from suppliers. Last year, for example, Sodimac’s Peruvian business was merged with Maestro, a local DIY chain.

Apart from the macroeconomic climate, Falabella’s biggest challenge may be the growing sophistication of the region’s shoppers. It plans to invest $1 billion by 2018 in computer systems and logistics, to boost its e-commerce business as the region’s consumers get used to buying online. For now, many still relish bricks-and-mortar one-stop shops like Falabella’s department stores—but so did Americans and Europeans until they began turning to specialist shops, and then migrating online. In this regard, Latin America “is 15-20 years behind advanced economies”, notes Esteban Bowles of A.T. Kearney, a management consultancy. That gives the cautious Chilean firm plenty of time to adjust.

This article appeared in the Business section of the print edition under the headline "Cautious conqueror"

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