Chile's retailing landscape is littered with the corpses of foreign invaders. Sears, Roebuck & Co. called it quits in the 1980s. Muricy of Spain gave up soon after. The latest casualty is J.C. Penney Co., which departed late last year. Pablo Turner, CEO of Falabella, the country's top department-store chain, will tell you it's not easy to keep Chile's shoppers faithful. "You have to fear the market," he says.
If customer loyalty is what it takes to make it in Chile, then Falabella has it in spades. The century-old chain commands an enormous 40% share of the market, with sales of $700 million last year. The middle-market retailer has successfully resisted one Yanqui incursion after another. However, Turner has another enemy as well: an economy that's moving onto a slower track. Chile is pulling out of a recession, but analysts say it could be months before consumers regain their confidence. Little wonder, then, that Falabella's blue-chip shares have taken a beating on the Santiago exchange this year.
CROSS-BORDER PUSH. But Turner is not worried. He's counting on diversification to deliver higher profits even as growth in Chile cools. Turner, who managed Falabella's department stores before he took the helm in January, has helped to steer Falabella into an assortment of new businesses, including real estate, banking, travel, and bridal services. In a riskier move, he also is pushing into other Latin markets.
Falabella prospered during the late 1980s and most of the 1990s, when Chile's economy posted annual growth of 7% or better. But the coming decade looks less rosy. Growth was negative in 1999 and will be not much higher than 5% a year through 2005, say analysts.
That means it's time for Turner to put the brakes on bricks-and-mortar expansion. There are 28 department stores in Chile, plus five in Argentina and four in Peru. "We probably won't grow outside of Chile this year, and we'll build only two stores in Chile," says Turner.
Instead, Turner will concentrate on building up Falabella's consumer credit operation. The in-house credit card, which goes by the name CMR, contributed about half of the company's $84 million in earnings last year. Falabella's card is also welcome at Home Depot Inc.'s four stores in Chile, thanks to a partnership struck between the two retailers back in 1997. And it's also good at Farmacias Ahumada, a local pharmacy chain in which Falabella owns a 20% stake.
With its monthly interest rate of 2% to 3% a month, Falabella's is the card of choice for Chile's middle-class consumers, who cannot afford the 5% to 6% rates on cards issued by banks. Falabella also offers a limited range of financial services--such as CDs and auto loans--at minibanks within its stores.
Falabella has also branched out into real estate. A 1990 joint venture with Grupo Plaza, a local builder, has produced six malls so far. The venture's towering achievement is the $60 million Mall Vertical in Santiago, which opened in late 1999 and features a Carrefour supermarket and a Home Depot store.
All in all, the new ventures contributed $21.4 million to Falabella's bottom line last year. But investors remain wary: Shares are 20% off their February high. Some analysts worry that Falabella could run into trouble as a result of its foreign expansion. The retailer's international operations posted a net loss of $30 million in 1999. The company is most vulnerable in Argentina, which is in recession. Besides, urban shoppers there tend to frequent boutiques rather than large U.S.-style malls. "It's not an easy bet," says Catalina Le Blanc, an analyst at Santander Investment Chile.
Falabella's CEO is not daunted, though. "Once you get out into the suburbs, people are department-store buyers like anywhere else," he says. Turner had better be right--or Falabella, a success at home, could yet face a comeuppance on foreign turf.