Cracks in the Armor.

Chile's small food retailers blossom despite hypermarket madness.

NOWHERE IS THE BATTLE FOR SUPRE-macy in Chile's half-billion-dollar supermarket business more cutthroat than in the affluent eastern neighborhoods of Santiago, where high-volume discount hypermarkets financed by deep-pocketed investors have laid some local chains low.

Marta Zarate couldn't care less. She's been buying for her family from the corner store--a converted house on the same block--since owner Daniel Rubilar's mother, Ester Casares, founded it 23 years ago. Part of the reason is, like many Chileans with limited incomes, Zarate would rather not part with the roundtrip bus fare to shop at some 50-register extravaganza. "The prices here aren't that much higher, and everything is fresh," says Zarate. starting the 100-yard march home, plastic bags in each hand. It doesn't hurt that Rubilar's shop is open as late as midnight, nor that it sells a bit of everything, from french fries to aspirin to school supplies.

The supermarket boom in Chile's capital city got underway in the 1980s, when local chains like Unimarc broke away from the traditional butcher shops and vegetable stands to build U.S.-style stores with aisles and fluorescent lighting. Things heated up in the mid-1990s, when local and foreign firms floated shares on Wall Street to take advantage of rapidly improving Chilean incomes, up from around US$1,360 a year on average in 1985 to just under $5,000 today. Sales rocketed up with incomes, to $4.39 billion in 1999, almost half of that in the capital.

But growth hasn't squeezed out the mom-and-pop shops. Offering convenience and speed--and fighting hard to keep costs down--they have been able to keep their heads above water, and even thrive, in the midst of giants.

Chilean chain Agas in 1995 joined forces with five other small chains to take advantage of the kind of power buying enjoyed by hypermarket leaders French chain Carrefour and local powerhouse D&S. But that wasn't nearly enough, says Carlos Alcaino, manager of the Vitacura community Agas. The chain had to widen its appeal by adding high-margin impulse items like magazines and video rentals. Agas also had to slash operating costs 30% or lose its shirt to the big chains.

Do or die. Agas saw its operating margin shrink from as high as 16% to around 8% or 9%, the margin the hypermarkets live on, says Alcaino. Workers were trained for double duty, cutting meat in the mornings and bagging bread in the afternoons during the rush. As part of the strategy, Agas grew from nine to 17 stores. Customers who sign up for client cards are offered discounts and even taxi fare to get home with their groceries. "We get the spillover from the Lider," a D&S hypermarket, says Alcaino whose store would fit in the far corner of his competitor's parking garage. "People know if they come here they can be in and out in 10 minutes. If you go into the Lider you can't get out in under an hour."

Speed is key but so is location. Sergio Musalem, owner of the Natural Fresh market in the Las Condes neighborhood, is within spitting distance of at least three hypermarkets. But his target market arrives on foot--the army of maids who shop and cook for Chilean professionals. Musalem says he wants to have 10 stores in the area in three years, sticking close to a sales strategy based on crisp fruits and vegetables, frozen seafood and farm-fresh eggs.

"The truth is, if you offer quality, it sells," says Musalem. Only a month in operation, he's confident his business model will draw customers. After all, there's nothing more Chilean than a nana pushing a stroller with a baby inside and ingredients for cazuela--a traditional stew--loaded into the bottom.

The hypermarkets have even been a boon of sorts to Chilean mom-and-pop shops. "Sometimes we can do better buying at the hypermarkets than from our own distributors," says Rubilar, slicing meat as the early evening dinner rush fills his tiny Almacen Ester Casares. "A two-liter bottle of Coca-Cola we sell for 700 pesos we would pay 620 to get from the distributor. But I can sometimes find it in the hypermarket for 590."

This market knows no boundaries. As rush hour traffic roars down Kennedy Avenue by Santiago's million-dollar high-rises and upscale malls, Mauricio Alvarez, 23, dodges cars and cops to sell bananas, artichokes and oranges by the bag. His employer, an uncle, buys in volume from Santiago's huge downtown farmer's market, La Vega, then lets Alvarez hawk the produce at 1,000 pesos a bag. The price, for the weight, reflects a 30% to 50% discount from even hypermarket prices.

"People know us," says Alvarez, who works as an electrician when times are better. "They come by with the luquitas [1,000-peso notes] in hand." Still, it's a tricky business. Alvarez keeps 300 pesos for each bag he sells, making US$25 on a good day, but his trade is technically illegal. "Here comes a police van," murmurs his partner, as the two vendors scurry around the corner. The cop will hang around till he gets cold, then Alvarez will be back in business.