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KINGS OF COMMERCE

Unlike their U.S. peers, department stores in Chile still dominate retail sales

By María Bird Picó

American department stores, many of which have struggled with declining sales and profits for years, could be forgiven for looking wistfully at their counterparts in Chile. In that country, department stores are on top of the retail game.

Chile’s big three department stores in particular, long the kings of retail in their home country, are determined to stay on top. They are exporting their success elsewhere in Latin America as part of a multipronged effort to fend off competition from other sectors.

Falabella, Chile’s biggest chain, continues to expand in Argentina and Peru and says it expects to open its first store in Colombia next year. Ripley, the No. 2 player, has also announced plans to bulk up its presence in Peru, where it currently operates seven stores. And in March CencoSud, the dominant mall developer in Argentina and Chile, bought third-ranking Paris, making it likely the chain will enter Argentina, a country short of department stores, as an anchor in CencoSud’s malls there.

“CencoSud has secured itself an anchor for its shopping centers in Chile and Argentina,” said Salvador Arenas, senior retail analyst at Larraín Vial, an investment brokerage based in Santiago, Chile’s capital. “It’s a smart move for them.”

In all, the Chilean retail sector’s foreign investments last year totaled $535 million, 34 percent of the total invested abroad by Chilean companies, according to Santiago’s Chamber of Commerce.

Foreign expansion is just one of several strategies that Chile’s department stores are employing to stay on top of their game. Historically, there have been few specialty retailers or discount stores in Chile, making department stores the primary destination for clothing, furnishings and electronics. Falabella, Ripley and Paris, along with La Polar, a small but growing chain, racked up combined sales of $2.6 billion last year. Total retail sales in Chile last year amounted to $23.7 billion, of which 11.8 percent were rung up by department stores, says Santiago’s Chamber of Commerce.

“Department stores are highly competitive in our retail industry,” said Pablo Castillo Prado, general manager of Paris. “All, including the smaller players, are growing and are investing significant amounts.”

But with competition from hypermarkets and supermarkets growing — they cornered 25 percent of total sales in Chile last year — department stores know they must not sit on their laurels. Hypermarkets are putting a lot of effort into selling nonfood items, particularly electronics, appliances and family fashion. These are niches in which department stores have long acted as category killers, says Juan Guillermo Espinosa, Falabella’s planning and development manager.

“Hypermarkets are transforming into mixed-product convenience stores here,” said Andres Roi, director of Roi & Associates, a Santiago-based real estate consulting firm. “As department stores feel the heat, they will have to evolve to remain competitive.”

And that is what they have been trying to do through a variety of initiatives. Last year Falabella bought the eight-store San Francisco supermarket chain, for instance, giving it entry in a sector currently dominated by hypermarket chains D&S and Jumbo, the latter a hypermarket chain owned by Chile-based shopping center development firm CencoSud. Also last year the company unveiled in Peru its first Sodimac, a home improvement store that sits next to Tottus, part of the chain of hypermarkets that Falabella owns in Peru.

Ripley, for its part, until now the only one of the Big Three solely in private hands, is raising capital through a public stock offering of 270 million shares that will give the public a 15 percent stake. The estimated $230 million to $260 million raised by the offering will be used to expand into northern South America — possibly Ecuador, Venezuela or Colombia — over the next three years.

The Big Three have also been busy over the past decade branching out into other types of business, most notably banking. In addition, Falabella is in travel and insurance, and owns half of Mall Plaza, landlord of eight shopping centers in Chile. Besides Ripley’s bank — Banco Ripley — Ripley owns several shopping centers through its Ripley Corp.

Banking became a natural expansion for department stores following the enormous profitability of their credit card operations. The three chains have some 6 million in-house credit card holders, more than double the number of cards issued by Chilean banks, and this has been a cornerstone of their success. At a time when consumers had few credit options, if any, Falabella rolled out the CMR Falabella credit card in 1980 for its clients. The company struck gold, and the other chains soon followed suit.

Chilean commercial banks seek low-risk customers, but the department stores are willing to go after all the others, retail executives say, and that is no insignificant market portion. “The banks fight over 10 percent of the market, leaving us the rest,” said Castillo. “Of course, like in any business, there is risk, but there is also opportunity.”

This willingness of the department stores to extend credit to an otherwise marginalized sector is clever marketing, says Luis Alfredo Lagos, president of International Research Cadem, a Santiago-based marketing research firm. “Eighty percent of Chilean consumers have a department store credit card,” said Lagos. “Store loyalty among these consumers is understandably very high.”

But competition is heating up as hypermarkets start to adopt the same strategy.

At Paris 70 percent of sales volume is conducted by means of its credit card; the rest is divided equally between bank-issued cards and cash transactions. Ripley’s in-house credit card accounts for 63 percent of sales, and Falabella’s card carries 67.2 percent of sales.

Besides generating profits, in-house cards render other benefits. “They are also a loyalty card and provide a valuable database of our clients, something that would not be possible if the cards were not issued in-house,” said Falabella’s Espinosa.

These cards carry a much higher interest rate than regular credit cards. Falabella’s, for instance, bears an average monthly rate of 2.5 percent, and that happens to be among the lowest for in-house retailing cards in Chile. Some Visa cards offer monthly interest rates as low as 1.25 percent. But with few borrowing options, consumers are willing to pay a premium.

“[Department stores] often make more money out of the interest on credit purchases than from the sale margin from selling products in their stores,” said Phillip Hordern, an independent retail consultant working in Chile since 1980. “Their in-house credit cards have more marketing strength than the banks-operated Visa or Master Card equivalents.”

Sweetening the deal for retailers is that store-brand credit cards are not government-regulated, so their lending practices can be more lax. The issue of regulating these cards does arise periodically, but this does not seem to faze the department stores. “It has been discussed for the past 10 years,” quipped one retail executive.

Leveraging their credit cards further, the three chains have entered into alliances that allow customers to use them with other retailers and even banks. Ripley has an arrangement with Banco de Chile that allows Ripley cardholders get cash advances from the bank’s automated teller machines. In Colombia Falabella has already introduced its CMR Falabella credit card, laying the ground for the department store it will open there next year. (Its Sodimac chain is already there.)

Nevertheless, selling apparel, home goods and electronics continues to be the core of department store business, and Falabella, Ripley and Paris compete fiercely with one another. Through aggressive marketing, Ripley managed to tumble Paris from the No. 2 slot in 2002 and has since spent $508 million on renovations and building new stores in Chile and Peru. By year-end, Ripley says, it will have 31 stores in Chile and eight in Peru.

Once regarded as the industry’s sleeping beauty, Paris is no longer taking the competition lying down. The 22-store chain dropped “Almacenes” from its name last year as part of its strategy to modernize its image. The chain plans to build six new stores in new markets throughout Chile. Second stores are on the agenda in three existing markets, says Castillo. In Temuco, in Chile’s southern region, CencoSud will open a new mall, Portal Temuco, to be anchored by Paris. It will be the second Paris in that city.

To maximize profits, Paris is stressing its private labels and favoring Asia over Europe as a more economical merchandise source, a move analysts say was long overdue given Chile’s price-sensitivity. Ripley and Falabella have been sourcing in Asia for some time and have opened offices in Hong Kong and Shangai, respectively.

Paris is targeting women 25 to 45 — the main decision makers regarding household purchases, Castillo says.

Ripley officials did not respond to requests for an interview. But in its stock sale prospectus, Ripley Corp. says it will open 11 stores in Chile and nine in Peru over the next four years. The company also plans to build a mall in Chile in 2007.

Falabella is not about to cede its position at the top, though. With 33 stores in Chile, Falabella is hatching expansion plans of its own. The company says it will open two stores this year in Santiago, which will bring its total in that city to 10. The holding company has integrated its retail operations into one distribution center (it used to have three).

The company bought the exclusive rights in Chile to sell the De Longhi, Diadora and Mango fashion brands, giving customers three more reasons to ignore hypermarkets.

Looking south, U.S. department stores can only wish they retained such influence over consumers, many of whom were won over long ago by other retail formats.

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