March 1st, 2015 Cencosud: Without limits to dream “The Colombian purchase is a unique opportunity we can't let go" -Horst Paulmann, founder and President, Cencosud Carrefour Colombia: An Opportunity Arises Juan Manuel Parada felt restless. As the newly appointed CFO of Cencosud, he had just received a report that could chanGe the course of the company. It contained information on Carrefour, the world’s second- larGest retailer and competitor of Cencosud. LookinG to cut costs and debt, due to the difficult economic situation in Europe, Carrefour was contemplating whether to sell its Colombian operations. Present in Colombia since 1998, Carrefour operates 72 hypermarkets, 16 convenience stores and 4 cash and carry stores in the country. AlthouGh Cencosud had no current plans to grow through acquisitions in Colombia, this deal would allow them to penetrate the market in a way that wouldn’t have been possible via orGanic growth. Furthermore, Carrefour stores share a similar format to Cencosud stores, which would make them a Good fit with Cencosud’s current operations. Juan Manuel worried that disclosinG this information to the board could lead Horst Paulmann, Founder and President of Cencosud, to make a hasty decision. This could be Juan Manuel’s first acquisition and he didn’t want it to be a value-destroying one. Carrefour’s Colombian operations represented a larGe asset that would require Cencosud to undertake more debt than usual. He needed time, to put toGether a valuation but knew he didn’t have much. Since he had this report, it meant that other competitors also did. He needed to reach a conclusion fast or risk Wal-Mart and Falabella beating them to the punch. The Fuqua School of Business at Duke University Competitive Landscape Retail industry and major players in Chile The retail industry in Chile is hiGhly competitive and developed, and has grown siGnificantly in the last 20 years through the consolidation of strong local players and with little presence of international players. Financial services associated to the retail business, including credit cards and loyalty proGrams, are strong in Chilean retail, and have been determinant for the success of local players, and at the same time, have been an important reason of the failure of international players trying to set foot in the Chilean retail industry. Giant retailers JCPenney, Home Depot, and Carrefour are some examples. The Chilean retail industry can be divided into three main cateGories: department stores, supermarkets, and home improvement. The total retail market as of 2011 is valued near $25 billion and has experienced a sharp growth in the past years, motivated by high GDP growth rates, 5.8% and 5.8% in 2010 and 2011, respectively. Market projections show the Growth in food retail to be 7.3% and 3.5% for the apparel retail in the 2013 – 2018 periodI. This is in line with the healthy economy of Chile, which has presented consistent growth in-hand with a stable political environment, wide access to credit, and solid growth projections for coming years. The two dominant retail players in Chile, with activities in all the three retail categories, are Falabella and Cencosud. These two conGlomerates face competition in the department stores and home improvement categories from smaller and local players, with a more focused approach in a particular segment. However, in the supermarket seGment, the two dominant players compete aGainst Giant Wal-Mart. In addition, Falabella and Cencosud face competition from SMU, a group formed from a series of mergers between 12 smaller regional supermarket chains. Please refer to Exhibit 1 that contains a table summarizinG the main characteristics of the larGest retail players in Chile. Chilean Consolidation and diversification The period between the years 1990 and 2005 is referred as the “golden years” for the retail industry in ChileII. LeadinG players developed a consolidation and hiGh Growth strategy that was executed both via acquisitions and organic growth. Big technological improvements made a significant difference in terms of cost efficiency, and positioned the principal players a huge step ahead of the rest of the competitors. The incorporation of code bars and laser readers by 1991 was vital to improve stocking and inventory 2 The Fuqua School of Business at Duke University efficiency, and also the development of distribution centers that solved loGistic issues for the chains that were expandinG within the countryIII. By the mid-90s in the supermarket segment, “Lider”, now Wal-Mart, followed a strateGy leaned to orGanic Growth. Santa Isabel, acquired by Cencosud in 2003, acquired smaller regional chains Multimarket and Marmentini Letelier. By 2004, Falabella entered the supermarket arena by acquirinG Supermercados San Francisco, later on rebranded as Tottus, now with 64 stores in Chile and PeruIV. In the Department Stores segment, Cencosud made a key consolidation move in April 2005. The company acquired Falabella’s main competitor, Almacenes Paris, for $950 million. This acquisition allowed Cencosud to enter the department store and retail financial services businessesV. The home improvement is the most fraGmented of the three segments, however we have seen huge resources devoted by the biG players in order to consolidate their presence in this business. Cencosud formed “Easy” by 1993 and followed an orGanic Growth strateGy with a combination of small acquisitions of some of the Chilean assets of The Home Depot and ProTerra in 2000. On the other hand, Falabella took an aggressive move in 2003 by acquiring Sodimac, the leader in this segment, a transaction valued in $2.5 billionVI. To further consolidate, Falabella acquired Imperial in 2008. As conclusion, in this 1990 – 2005 period we can observe that the larGest Chilean players were filing the market rapidly and diversifyinG their presence in the retail industry to its three seGments. The evident growth strategy in order to continue having such successful rates was to tap other markets in Latin America. However, there they would face other country risk, market dynamics, competitors and particularities from each the markets. Latin American players Argentina Efforts to rebuild credit following the financial and political crises of 1999-2002 had a positive impact on consumer expenditure and, consequently, retail sales in ArgentinaVII. However continuous economic and political issues, and rising inflation rates challenGed the development of the retail sector, especially for foreiGn companies. Nevertheless, three main players in the supermarket seGment, Carrefour, Cencosud and Wal-Mart, are foreign. The total food retail market for 2011 was valued at $33 billionVIII. Both the department store and the home improvement seGments are not well developed in ArGentina due to consumer’s preferences to shop in smaller local and specialized storesIX. Falabella is the only 3 The Fuqua School of Business at Duke University siGnificant department store with an income of $511 million in 2011. The Group is also present with Sodimac and competes against Easy (Cencosud) in the home improvement segment. Brazil Brazil is the world’s third-biGGest Grocery market, next only to America and China, with strong players operatinG in the market, both foreiGn and domesticX. The food retail market in Brazil for 2011 had total sales for $128 billionXI. Global retailers such as Wal-Mart compete against domestic market leaders like Pão de Açúcar. In terms of market share, Pão de Açúcar has of about 18% of the market; the French retailer has about 14.5% and Walmart 12%XII. Competition is expected to intensify in the next few years as the supermarket penetration remains low at 40%, siGnificantly lower than the 70% penetration achieved in Chile.XIII Strong local players such as Casa Bahia, Lojas Americanas, and Companhia Hering characterize the department stores segment in Brazil. The apparel retail market in Brazil had $37 billion in sales for 2011XIV. Colombia Since the beginning of the new century, the Colombian market has been expanding very rapidly. Growth in personal income and chanGes in purchasinG habits led Colombia to become one of the most attractive markets in the reGion.XV Market researchers expect the food retail in Colombia to Grow 6.7% CAGR (see Exhibit 2 for projections) in the 2013-2018 periodXVI. International players mainly make up the retail industry, and Given its high Growth potential market researchers expect this trend to continue. For the coming years, market researchers expect a good environment for international investment in Colombia because of GDP expansions above Latin America’s averaGe, a controlled inflation, decreasinG unemployment rates and a healthy financial system. Grupo Exito, who owns 61% of the market share, dominates the supermarket seGment, Carrefour follows with 19%, Olimpica, with 15%, and La 14, with 5%. Total food retail market was $58.2 billion in 2011XVII. The two main department stores are the Chileans Falabella and La Polar. Finally, Chilean players Falabella and Cencosud, with their respective brands Sodimac and Easy, also dominate the home improvement seGment XVIII. Mexico Mexico is a hybrid country, where new, world-class retail development shares the street with an estimated 2.3 million single-shop stores and traditional markets. Still, it is a very attractive market due to 4 The Fuqua School of Business at Duke University its larGe and GrowinG middle class populationXIX. Food retail in Mexico is a market with total sales of $151 billion in 2011XX with the major players beinG WalMex, OrGanizacion Soriana, Chedraui and ComerciXXI. The department store segment, especially in the apparel component has experimented moderate Growth in recent years, however it is expected to Growth slightly in the 2011 – 2016 period at a 2.9% CAGRXXII. The main department stores players are Liverpool, Suburbia, Sears and El Palacio del Hierro. Peru Retail industry prospects in Peru are very attractive. Real waGes in Peru are expected to Growth twice the average of Latin America’sXXIII.