A New Contender From Chile Shakes Up Mexico’s Hot Retail Market

  • Home-improvement market valued at $30 billion: Credit Suisse
  • Retail sales up at least 10 percent in eight of past 12 months

Mexico’s retail market is getting a jolt as Chile-based retail giant SACI Falabella reaches northward to grab a piece of an expanding consumer market.

South America’s largest department store chain, which sells everything from power tools to women’s clothes and treadmills, is making headway in Mexico as consumption drives a better-than-expected expansion in the country. The company is planning to invest more than half a billion dollars along with grocer Organizacion Soriana SAB to open its do-it-yourself format stores in Mexico in the next five years.

Shoppers have benefited from a slowdown in annual inflation, while a weaker peso has boosted remittances from abroad, pushing retail sales growth up at least 10 percent in eight of the past 12 months. Santiago-based Falabella could get even more of a foothold in Mexico as a potential for Wal-Mart de Mexico’s SAB Suburbia apparel unit, which could be sold as soon as this year.

“Strategically, it makes all the sense in the world for Falabella to enter Mexico,” Joaquin Ley, an analyst at Itau BBA who recommends buying the shares, said from Mexico City. “Given the underpenetrated home-improvement sector, to enter first through this format and with a local partner, it fits well.”

Mexico is Falabella’s seventh market in Latin America, where the company also operates department stores, supermarkets and malls. First opened as a tailor shop in Santiago in 1889 by Italian immigrant Salvatore Falabella, the company has been using the Sodimac brand to spearhead its most recent expansion and profit from a growing middle class in the region.

Falabella declined to comment about its expansion plans in Mexico, according to an outside press representative. Shares of the company, which have gained 8.2 percent this year, fell 0.3 percent to 4,887 Chilean pesos Wednesday in Santiago.

The move comes at a time when investors are concerned about Falabella’s other markets, such as Argentina, where inflation is soaring and the economy is stuttering, and Brazil, where unemployment is on the rise. The company’s sales in Brazil, Latin America’s largest economy, dropped 19 percent in the first quarter to $53.4 million. 

The company and Soriana, Mexico’s second-largest grocer, said in April they plan to open 20 Sodimac stores in the next five years. Home Depot Inc. and Lowe’s Cos., the U.S.-based chains with 115 and 10 stores, respectively, in Mexico, will be Sodimac’s biggest competitors on the home-improvement side.

‘More Robust’

“It’s a reality that today’s Mexican consumer is more robust, with better access to credit and stable job creation,” Luis Willard, a Corporativo GBM SAB analyst in Mexico City, said in an interview. “We’ve seen real estate development and shopping centers that favor the creation of big department stores.”

Falabella has room to grow in Mexico, where the informal market and mom-and-pop shops account for the majority of all DIY sales, Willard said. While the home-improvement market in Mexico is valued at about $30 billion, more than 2 1/2 times the size of Chile’s market, sales lag way behind -- reaching $248 per capita in Mexico, well under Chile’s $620, Credit Suisse said in an April note.

At the same time, Sodimac could face setbacks in Mexico, where labor costs are generally cheaper, so do-it-yourself models aren’t as common.

Falabella, along with Puerto de Liverpool SAB and Carlos Slim’s Grupo Sanborns SAB, are among seven companies shortlisted to bid for Wal-Mart de Mexico’s Suburbia, Excelsior columnist Dario Celis said last month, without saying where he obtained information.

Acquisition Risk

Acquiring Suburbia could also pose risks. While the move would make strategic sense, Suburbia stores are almost half the size of the average Falabella in Chile, meaning the company would have to rethink its sales floors as well as start a credit business from scratch, Itau’s Ley said. It would also face established competitors such as Coppel SA and Slim-operated Sears stores, as well as higher-end brands such as Liverpool and Palacio de Hierro.

Wal-Mart de Mexico is planning to invest more in e-commerce and sell non-core businesses such as Suburbia. The sale process is moving ahead as planned, Walmex spokesman Antonio Ocaranza said in an e-mail. He declined to comment on whether Falabella is among the bidders.

“Falabella’s entrance into the Mexican market provides important growth opportunities,” Credit Suisse’s Antonio Gonzalez wrote. “However, we would be cautious to be extremely optimistic.”

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