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OWNERS, RETAILERS ADAPT TO CRISIS IN ARGENTINA

By Susan Thorne

Patio Bullrich, in downtown Buenos Aires, has seen tourism rise, at least.

It has been a terrible year for Argentina since the onset last December of an economic and banking crisis. But while the retail industry has suffered too, some segments have proved adept at surviving by adapting their strategies.

Argentina, a country of 37 million inhabitants, has 50 shopping centers, totaling 1.1 million square meters (11.8 million square feet) of gross leasable area, according to Cámara Argentina de Shopping Centers, or the Argentine Council of Shopping Centers. Sales dropped 13 percent in 2001 as a whole, with the crisis hitting during the all-important Christmas season, the organization reports.

“Last year, all our tenants were waiting for the Christmas season so they could have good business,” said Eduardo Goilenberg, manager for new business at Buenos Aires-based Alto Palermo Centros Comerciales, a leading shopping center development and management company. Alto Palermo is a subsidiary of Inversiones y Representaciones, Argentina’s largest real estate developer, which owns seven enclosed malls, six of them in the Buenos Aires area. “They were more anxious than in other years, because 2001 was really bad for shopping centers in Argentina,” he said. Though the number of centers grew considerably during the 1990s (there were only 11 in 1991), persistent recession and low sales have troubled the retail sector since 1998. Total sales at shopping centers grew by less than 2 percent in 2000 compared with 1999.

But instead of a Christmas sales boost, December brought chaos. A $95 billion debt default, fiscal mismanagement and political instability created a loss of investor confidence that triggered a plunge in the value of the national currency and the collapse of the banking system. The peso, formerly pegged to the U.S. dollar at 1 to 1, dropped to about 25 cents, and banks moved to protect their cash supplies by limiting customers to a maximum withdrawal of 300 pesos ($80) per week from their accounts. Though it once boasted South America’s highest per capita income level, Argentina now has an unemployment rate of about 22 percent, according to the Buenos Aires office of Jones Lang LaSalle, the international property consulting firm; many Argentineans are surviving by bartering and selling their possessions.

The effect on retail was devastating, at least at first. Sales dropped by 30.5 percent in the first six months of 2002, with electronics and home goods most affected, according to Instituto Nacional de Estadística y Censos, the Argentinean government census and statistics agency.

Marco Viola, president of the 140-store EKI Descuento hard discount chain, an international retail venture of Bank of America, says the crisis has pushed his company to the edge of bankruptcy. EKI’s small stores (about 350 square meters), selling basic groceries and located mostly in working-class neighborhoods, were hit hard. Looters ransacked 45 stores and a warehouse during the most chaotic days, from December 19 to 21, resulting in over $10 million in losses, most of it uninsured.

At the same time, credit evaporated; instead of 70 days to pay its suppliers, EKI could get only seven to nine days.

“By January we were paying with cash or precleared checks,” Viola said. Unemployment has badly hurt the chain’s lower-class customer base, cutting its buying power for even essential food products. As a result, EKI, which reported $140 million in sales in 2001, expects only $34 million this year. The company began preparing to declare bankruptcy in January. “Most people thought we wouldn’t recover,” Viola said.

Yet EKI has managed to survive in a downsized form. Viola and other managers worked hard to renegotiate debt and keep staff motivated. Though some of the looted stores will remain closed indefinitely, 27 have reopened. Now he is working on getting better payment terms from suppliers.

Many other businesses are also clawing their way back. For instance, some shopping center landlords moved deftly to limit the damage. To attract Christmas spending last year, for instance, Alto Palermo launched its “Alto Check” marketing campaign, offering shoppers 150 pesos’ worth of merchandise for just 100 pesos. As a result, center sales dropped by only 10 percent in December, reported Goilenberg. The company provided its tenants further relief by reducing their rents when sales decreased by an additional 20 percent from January through April.

“We divided the job among our center managers, and one by one we individually renegotiated rents with every one of about 1,000 tenants,” Goilenberg said. There were no staff cuts at the management level, he noted, and for the most part retailers kept their staff too, though a reduction in opening hours has helped tenants cut salary expenses slightly.

The biggest relief to landlords and retailers alike, however, has come from a tourist shopping boom generated by Argentina’s currency decline. Shoppers from neighboring South American countries, principally Brazil, Chile and Uruguay, poured into Argentina over the summer in search of bargains, showing particular interest in leather coats, dresses, shoes and other apparel. Alto Palermo’s centers are well-positioned for this trend, with a high-fashion tenant roster that includes such names as Christian le Croix, Kenzo and Versace. Patio Bullrich, a leading downtown Buenos Aires mall, has particularly benefited, with July sales that were 80 percent higher (in pesos) than in July 2001. And some of these shoppers are spending big. Goilenberg tells of a male customer at one of his mall’s men’s wear outlets who purchased all the Lacoste shirts in the store, now priced at about $20 instead of last year’s $60.

Consequently, in August year-over-year sales were 35 percent higher for Alto Palermo’s mall portfolio as a whole, while the vacancy rate stood at less than 1.5 percent. With its tenants recovering, Alto Palermo has renegotiated most rents upward to original contract levels and is now pitching its marketing to tourists. “Sales are better and better every month,” Goilenberg reported.

Upscale fashion retailer Giesso, based in Buenos Aires, has benefited similarly from the tourist boom. Giesso’s Buenos Aires stores previously specialized in fine apparel imported from Spain, Italy and France, but such merchandise became prohibitively expensive after devaluation. Instead, Giesso found Argentinean suppliers that could produce items of acceptable quality.

Factories can no longer give credit, so the retailer has coped by buying small amounts of merchandise with available cash — a sort of just-in-time system brought on by necessity, explained Mariano Rodriguez Giesso, the company’s president. Instead of planning ahead for a six-month fashion season, the company now revises sales monthly and plans just two months in advance. The company’s ownership partners have personally contributed funds this year to pay off debt, because financing debt has become very costly. Despite these difficulties, the company has only had four months of poor sales performance (January through April) and is now ringing up 50 percent more sales in pesos than last year.

Location plays a big part in the shopping revival. Stores near such tourist attractions as Buenos Aires’ Florida Street are doing very well, said Giesso, though he noted that the highest rate of return among his stores comes from a shop selling primarily to Argentinean executives — clients who used to travel abroad to shop but cannot afford to do so now.

Goilenberg said that people are shopping more in enclosed malls than before, because of customers’ heightened security concerns since the onset of the crisis. Tourists in particular prefer to buy in malls, not Main Street, he said, and when retail chains are forced to downsize today, they close a Main Street store rather than one at a mall.

“The situation is good for our industry,” Goilenberg said. “The last three months have been good for shopping centers, but not for the economy in general.”

Some Main Street locations are nevertheless doing well. The Giesso company, which has about half its 15 Buenos Aires stores in malls, has seen some of its strongest sales at stores located on downtown streets. Argentina has a strong tradition of Main Street shopping, and today only 20 percent to 30 percent of retail activity is in shopping centers, observed Leo Zaietz, vice managing director at the Buenos Aires office of Jones Lang LaSalle. Street retail locations have done well in suburban locations too, where shoppers are afraid to leave cars in shopping center parking lots, Zaietz said.

Some mall owners have found other ways to bolster their positions during the crisis. Zaietz said such companies as Inversiones y Representaciones have been increasing their Argentinean holdings this year.

But a high percentage of the country’s shopping centers are hypermarket-anchored facilities that have not shared in the sales boom of the fashion-oriented malls. Alberto Lipare, general manager of the Argentine Council of Shopping Centers, said that, generally speaking, centers throughout the country have suffered lower revenues. This has forced them to reduce staff and renegotiate salaries, even though they have generally maintained a good tenancy level (less than 1 percent of retail stores have closed since December 2001, according to information from the council). Alto Palermo is suspending plans to open malls at four sites it owns, and Cencosud, the biggest Argentinean mall developer, is reportedly putting its future projects on hold as well.

Nevertheless, Lipare and Giesso opined that the worst of the crisis has passed.

“I think we’re going to have a great 2003,” said Giesso. “We will have a more stable political environment and elections in March.”

Others, however, are less sanguine. The government has assumed a 3 percent economic growth rate in its spending budget, which most economists say is too optimistic. And though the government has tightened capital controls to keep hard currency at home while the central bank has maintained a tight fiscal policy, some fear that Argentina’s hardships will bring a populist government to power in March. This new government may be unwilling to administer the fiscal medicine that economists see as vital for recovery. If that happens, the only ones to benefit may be the tourists.

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