Grocer Pao de Acucar Turns Landlord With Low-Rent Malls

After a surge in Brazilian real estate prices, Cia. Brasileira de Distribuicao Grupo Pao de Acucar is carving a niche as a landlord. The nation’s biggest food retailer is investing $500 million to build mini malls around its supermarkets.

The gambit, borrowed from French parent Casino Guichard-Perrachon SA, is intended to help drive traffic to Pao de Acucar’s grocery operations. The lure for shoppers: offerings such as gyms and baby-goods stores in settings smaller and more intimate than typical malls and safer than outside streets.

“We see a huge opportunity to increase what we already have,” said Alexandre Vasconcellos, president of GPA Malls & Properties, the mall unit of Sao Paulo-based Pao de Acucar. “This operation is meant to meet the demands of consumers, generate good margins and help our food retail business.”

Pao de Acucar began blending the landlord and retailer roles in Rio de Janeiro with the Conviva Americas mall, which opened in June. Commercial property in the Barra da Tijuca neighborhood there has doubled to 10,754 reais ($4,508) a square meter since 2008, according to ZAP, the web-based marketplace for media company Organizacoes Globo.

Mall rents should reach about 400 million reais annually in three years, Vasconcellos said in an interview at Pao de Acucar’s headquarters in Sao Paulo.

Casino, Carrefour

While building malls to support supermarkets is a novelty in Brazil, Casino has used that approach in Asia, where real estate is more expensive. The Saint Etienne, France-based company has market-mall combinations in Thailand and Vietnam. France’s Carrefour SA has also built malls in China because food sales alone don’t generate enough revenue, according to Charles Allen, a Bloomberg Industries analyst.

“The price of the land is so high you need the rental income to contribute to make sure that the capital can be paid back,” Allen said by telephone from London. “You need to think ‘What can I do to get as much sales out of that as possible?’”

At 12,540 square meters (135,000 square feet), Conviva Americas is less the half the size of the 30,041-square-meter average for malls opening in Brazil this year, according to the country’s mall trade group, known as Abrasce. Tenants include a fitness center, sporting-goods store and pet-products retailer, along with a supermarket.

Sales, Rents

If Pao de Acucar’s goal is to corral more shoppers for its own markets, “that would be different from regular malls where the focus is on store rents as revenue,” said Tales Paes, a Banco Fator analyst in Sao Paulo who covers mall companies.

In the next three years, Pao de Acucar will invest about 1.2 billion reais in malls and about double its gross leasable area to 500,000 square meters as it builds centers on existing property and anchors them with its stores, Vasconcellos said.

With revenue from its food outlets as well as from tenants, Pao de Acucar can undercut other landlords, he said.

“We are offering total operating costs that are inferior to those at traditional shopping center operators,” he said. At some malls, costs are reaching 15 percent to 17 percent of tenants’ sales, squeezing retailers because they typically can’t pay more than 10 percent, said Vasconcellos, who wouldn’t give details on Pao de Acucar’s pricing.

‘Very Stable’

Conviva Americas produces “very stable” rent, cushioning against any potential slowdown in consumer sales, Casino Chief Executive Officer Jean-Charles Naouri told analysts on a July 25 conference call.

Asia mall income “remains very positive,” Casino said in a filing that day, without giving details. Carrefour, based in Boulogne-Billancourt, France, declined by e-mail to discuss its China mall business.

Brazil’s retailers are feeling a pinch in an economy that will only expand by 2.2 percent in 2013, according to the Aug. 23 weekly survey of economists by Brazil’s central bank. Six months earlier, the estimate was 3.1 percent. Second-quarter sales for 14 retail chains rose 10 percent, down from 18 percent a year earlier, data compiled by Bloomberg show.

That slowdown is converging with a surge in mall openings, to a record 42 this year after 2012’s 27, according to Abrasce, the trade group.

“The capacity of retailers to supply all of these new mall projects coming up is in doubt,” Banco Fator’s Paes said.

Shares of Pao de Acucar rose 8 percent this year through Aug. 30, beating the 18 percent decline for the benchmark Ibovespa index. Casino fell 0.7 percent after reaching a 12-year high in March. The Bloomberg Industries Global Food Retailers Competitive Index gained 9.6 percent. Pao de Acucar rose 1.3 percent to 99.00 reais at 1:14 p.m. in Sao Paulo trading.

Profit Margins

While the expected revenue from mall rents is a fraction of Pao de Acucar’s food division annual gross sales of 31 billion reais, margins from the mall business are much higher. Vasconcellos said earnings before interest and other items at Pao de Acucar’s mall business are projected to reach 70 percent of revenue by 2016 from about 40 percent now. That would trounce a companywide margin of 4.5 percent in the second quarter.

“We will never be a business that will have the kinds of sales of food retail,” Vasconcellos said. “But in terms of margins, we’ll have very interesting figures.”

One challenge for Pao de Acucar will be finding good locations amid mall saturation in some Brazilian cities, according to Daniela Ribeiro Martins, a Concordia SA retail analyst in Sao Paulo.

Risky Bet?

“I don’t think Pao de Acucar will be able to open many malls right now as we’re seeing retailers suffer a bit because of economic deceleration and they might start to tighten their belts,” Martins said in a telephone interview. “The moment for this sector isn’t so propitious, it’s risky to do this today.”

To succeed, Pao de Acucar will have to identify new markets and smaller cities that lack the traffic for big malls, said Martins, who has no recommendation on the stock now and views it favorably. Of 467 malls in operation in Brazil, 213 are in Sao Paulo and Rio states, according to Abrasce.

Vasconcellos, the Pao de Acucar malls executive, said the company’s strategy of building around existing supermarkets is flexible enough to adapt to any business slowdowns.

“If there is an economic bump and we have to put on the brakes, we can extend our projects to not invest as much,” Vasconcellos said.

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