04 April 2012
Carlos Hernandez

Chilean retailers Cencosud and Falabella have posted good 2011 results, boosted by a stronger local market following the earthquake in 2010 and fast-growing overseas operations. Both are relentlessly expanding their international ventures, capitalising on South America’s prolonged economic growth.

Cencosud and Falabella have ambitious investment plans. The former is to invest USD2.3 billion between 2012 and 2013 to grow its operations across South America, representing the largest organic expansion programme in the group’s history. As for this year, Cencosud will invest USD1.29 billion in the region, opening a total of 100 new stores and three shopping centres including Costanera Center, a macro project in the capital of Santiago which includes the construction of South America’s tallest building. Meanwhile, Falabella is accelerating its growth plans and now aims to invest USD3.34 billion between 2012 and 2015 to open 204 new stores and 16 new shopping centres in South America. This year, Falabella will invest USD888 million in launching 45 new stores and three shopping malls.

Full year highlights

Cencosud reported a 22.2% rise in net sales to CLP7.57 trillion (USD15.7 billion) in 2011, mainly due to double-digit sales growth in its five business divisions. However, net profit dipped 2.6% to CLP298.4 billion (USD620 million) primarily as a result of an increase in financial costs as a result of less cash, higher financial debt used to fund the growth of the company and higher variable interest rates, partially offset by stronger operating results. The supermarket business registered an uplift in sales of 25% compared to 2010, boosted by a sales rise in Brazil, the consolidation of the Bretas chain and double-digit like-for-like sales increases in Argentina. The DIY division posted a 16% uplift in sales with double-digit sales growth in Argentina and Colombia. Department stores and shopping centres experienced a sales rise of 11% while sales at the financial services division climbed 22% compared to the previous year.

Implications

•    Walmart, Casino and Carrefour are the retailers’ biggest threats. More funding is needed to compete in equal conditions.
•    A listing in the US is likely so to access additional funding.
•    Financial services are key to both retailers’ growth strategies at home and abroad.
•    M&A activity will continue to accompany Cencosud’s organic expansion.
•    Falabella is bound to expand to a fifth country - possibly Brazil.

Falabella’s sales in 2011 reached CLP5.16 trillion (USD10.7 billion), up 17.7% on the previous year while net profit rose 2.4% to CLP423.1 billion (USD878.6 million). Excluding the effect of the sale of its stake in pharmacy chain FASA in October 2010, net profit increased by 9.8%. Sales in Chile grew 13%, fuelled by double-digit sales growth in all divisions including department stores, DIY outlets and supermarkets but particularly the financial services and shopping centres divisions which posted sales uplifts of 19% and 16% respectively. Again, sales growth in its international operations made a substantial contribution to Falabella’s expansion with revenues in Peru and Argentina growing 24%, driven by an increase in consumption in these two countries and the full consolidation of stores opened in 2010. Meanwhile, in Colombia Falabella increased its sales by a staggering 45% thanks to the consolidation of recently opened department stores and the growing acceptance of the format by Colombian consumers.

Planet Retail's take

The latest set of results posted by Cencosud and Falabella confirm their strong position in the retail market in South America. The companies rank as the fourth and fifth-largest retailers respectively in the region, just after the 'big three' international players - Walmart, Casino and Carrefour - running a successful business operation in Chile based on five sectors: grocery stores, DIY outlets, department stores, financial services and shopping centres. As opportunities for expansion are increasingly scarce at home, more and more the goal is to replicate this business model abroad. While Falabella has largely followed the path of organic growth, Cencosud has pursued an aggressive acquisitions strategy. Just last year the company took over supermarket operator Prezunic in Brazil for BRL875 million (USD508 million) while in Chile Cencosud acquired department store chain Johnson's for CLP51.5 billion (USD110 million).

What’s more, this year the retailer is taking its Paris department store banner to Peru - where it also launched the Banco Cencosud bank last year - in line with the company’s intentions highlighted above; to export its different business divisions abroad. According to Cencosud CEO Daniel Rodriguez, the retailer will likely focus its international growth strategy on Brazil and Peru - the company is not currently looking to expand beyond the five countries in which it operates. In fact, Cencosud is currently negotiating the acquisition of DMA Distribuidora. With approximately 100 stores, the latter runs one of the largest supermarket operations in the Brazilian states of Minas Gerais and Espirito Santo. On the other hand, Falabella which although just dismissed rumours of a market entry in Mexico is keen on building up its regional presence beyond its existing operations in Chile, Argentina, Peru and Colombia. The companies’ bold expansion plans means they constantly needs to find resources to fund their growth. Thus, last year Cencosud approved a capital increase of up to USD2 billion, equivalent to 13% of the company's market capitalisation, to be completed within a three-year period. In fact, this need for funding might lead to both retailers listing their shares in the US.

In this context, financial services are becoming ever-more important in the expansion strategy of both players and, actually, sales growth in the sector last year exceeded that of most other divisions. Without a doubt, the good economic momentum that South America is experiencing is enabling a considerable segment of the population to access a range of financial products, notably credit cards, something which a decade ago was solely reserved for higher earners. Cencosud and Falabella have understood that giving access to credit expands their customer base and has a direct effect on increasing sales and margins. In line with this strategy, Cencosud is currently combining all the credit cards it offers in South America under the Cencosud brand name. Meanwhile, last year Falabella launched Banco Falabella bank - already present in Chile and Peru - in Colombia.

Falabella and Cencosud’s flourishing geographic diversification is undoubtedly positive, giving both retailers great scope for expansion - particularly in fast-growing Brazil and Peru - and reducing the risk of a downturn in a region known for having volatile economies. Cencosud and Falabella’s reliance on its home market has diminished continuously over the last few year and Chile now accounts for 42% and 67% of sales respectively, a good thing given its mature market of just 17 million people.

However, not all this is good news for Chileans as the 'big three' of Walmart, Carrefour and Casino are all deepening their involvement in the region. While Walmart entered Chile in 2008 via the acquisition of grocer D&S in a market with no foreign players at the time, Casino and Carrefour continue to plunge resources into the region, particularly Brazil which is already their second-largest market after France. These competitors have greater financial resources than Cencosud and Falabella and pose a real threat to their financial condition and competitive position.

Fonte:  Planet Retail